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United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

For the Quarterly Period ended March 31, 2005

or

For the Period              to             .

Commission file number 0-23256

JAMESON INNS, INC.

(Exact name of registrant as specified in its Articles)

8 Perimeter Center East, Suite 8050

Atlanta, Georgia 30346-1604

(Address of principal executive offices including zip codes)

(770) 481-0305

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

Applicable Only to Corporate Issuers

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date – Common Stock, $0.10 par value – 57,116,390 shares outstanding as of May 9, 2005.

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JAMESON INNS, INC.

INDEX TO FORM 10-Q

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Part I

ITEM 1. FINANCIAL STATEMENTS

Jameson Inns, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

See accompanying notes

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Jameson Inns, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

See accompanying notes

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Jameson Inns, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

See accompanying notes

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Part I

ITEM 1. FINANCIAL STATEMENTS (CONTINUED)

JAMESON INNS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2005

1. Business and Basis of Financial Statements

Jameson Inns, Inc. (the “Company”) develops, owns, operates and franchises limited service hotel properties (the “Inns”) operating under the trademark “The Jameson Inn®” in the southeastern United States. In addition, the Company owns and operates Inns under the trademark “Signature Inn®” in the midwestern United States. The Company also receives rental revenues from the sale of advertising to third parties on owned billboards.

At March 31, 2005, the Company owned and operated 90 Jameson Inns, 23 Signature Inns, and franchised the use of Jameson brand to the owners of 12 other Jameson Inns.

On January 2, 2004, the Company acquired Kitchin Hospitality, LLC and relinquished its status as a real estate investment trust (“REIT”), becoming a taxable C-corporation effective as of the beginning of 2004.

Certain amounts in the 2004 financial statements have been reclassified to conform to the 2005 presentation.

The accompanying unaudited condensed consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated balance sheet at December 31, 2004 has been derived from the audited consolidated financial statements at that date. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005, or any other interim period. The hotel industry is seasonal in nature. The lodging revenues recognized are generally greater in the second and third quarters than in the first and fourth quarters.

2. Acquisition of Kitchin Hospitality, LLC

On January 2, 2004, the Company acquired Kitchin Hospitality and relinquished its status as a REIT. The Company and the owners of Kitchin Hospitality reached a definitive agreement on September 10, 2003. The transaction was approved by the Company’s shareholders on December 19, 2003. The Company has included Kitchin Hospitality’s operating results in its consolidated financial statements from January 2, 2004.

Under the applicable tax rules, a hotel REIT is not permitted to operate its hotel properties. After closing the acquisition, the Company began operating its owned hotels and relinquished its election to be treated as a REIT for tax purposes. The acquisition accomplished the Company’s goals to (a) become a fully integrated hotel company with the ability to operate its hotels without any REIT restrictions; (b) eliminate the perceived conflicts of interest in its prior relationship with the owners of Kitchin Hospitality; (c) retain future earnings and cash flow to pay down debt and for future development activities; and (d) pursue other business activities not permissible for the Company as a REIT.

The Company paid consideration of 2,153,366 shares of Company stock and $1.3 million in cash to the former owners of Kitchin Hospitality, Thomas W. Kitchin and other members of his immediate family. The acquisition was accounted for as a purchase; accordingly, the purchase price was allocated to reflect the estimated fair value of the assets acquired and the liabilities assumed. Under this method, the acquired assets and assumed liabilities were recorded on the Company’s balance sheet at their fair market value as of January 2, 2004. The value of goodwill and trademarks on Kitchin Hospitality’s books was eliminated, and the trademarks were revalued at $75,000 in aggregate, which represents the contract price that the Company would have been able to purchase the trademarks from Kitchin Hospitality at the expiration of the master lease agreements.

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The purchase consideration of the acquisition of approximately $7.3 million, together with the excess of liabilities assumed over assets acquired of approximately $1.7 million, was expensed in January 2004 as lease termination costs. The acquisition cost of the shares of Company stock was based on a price of $2.77 per share, the stock price of the securities over a period of two days before and two days after the terms of the acquisition were agreed upon and announced.

3. Trust Preferred Offering

On March 15, 2005, the Company completed a private offering of approximately $26.3 million trust preferred securities through Jameson Inns Financing Trust I, a Delaware statutory business trust sponsored by the Company.

Jameson Inns Financing Trust I used the proceeds of the private offering, together with the Company’s investment of $812,000 in the Jameson Inns Financing Trust I common securities, to purchase approximately $27.1 million aggregate principal amount of the Company’s Junior Subordinated Notes with payment terms that mirror the distribution terms of the trust securities. The Junior Subordinated Notes have a fixed rate of 8.46% per annum through March 2010, and thereunder at a variable rate through March 2035, the Notes’ maturity date.

The proceeds from the private offering, net of costs were approximately $25.5 million. The Company used the proceeds from the Junior Subordinated Notes to retire existing debt and for general corporate purposes. The accounting treatment for these events following guidance discussed in Note 4.

4. Recent Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (the “FASB”) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”). The trust is a variable interest entity pursuant to the Interpretation because the holders of the equity investment at risk do not have adequate decision making ability over the trust’s activities. Because the Company’s investment in the trust’s common stock was financed directly by the trust as a result of its loan of the proceeds to the Company, that investment is not considered to be an equity investment at risk pursuant to the Interpretation. Because the preferred stock holders do not have voting or similar rights, they lack the direct or indirect ability to make decisions about the trust’s activities and, accordingly, the trust is a variable interest entity. Since the Company’s common stock investment in the trust is not a variable interest, the Company is not the primary beneficiary of the trust. Therefore, the Company will not consolidate the financial statements of the Jameson Inns Financing Trust I into its condensed consolidated financial statements. Based upon the aforementioned accounting guidance, the condensed consolidated financial statements present the notes issued to the trust as a liability and the investment in the trust’s common securities as an asset. For financial reporting purposes, the Company records interest expense on the corresponding notes to Jameson Inns Financing Trust I on its condensed consolidated statements of operations.

In December 2004, the FASB issued SFAS No. 123R (Revised 2004), Share-Based Payments (“SFAS 123R”). SFAS 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on the fair value of the equity or liability instruments issued. SFAS 123R will require the Company to apply fair value recognition provisions to all unvested equity awards effective January 1, 2006. The Company has begun an evaluation of the effects of SFAS 123R and expects to complete the analysis prior to the end of 2005.

In March 2005, the FASB published FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations (“FIN 47”). FIN 47 clarifies the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations. FIN 47 will result in (a) more consistent recognition of liabilities relating to asset retirement obligations, (b) more information about expected future cash outflows associated with those obligations, and (c) more information about investments in long-lived assets because additional asset retirement costs will be recognized as part of the carrying amounts of the assets. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not believe the adoption of FIN 47 will have a material impact on its financial statements.

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5. Mortgage Notes Payable

As of March 31, 2005, outstanding debt consists of the following:

The Company’s plan to sell eight Signature Inns is expected to result in the payoff of the related mortgage debt. The total amount of mortgage debt at March 31, 2005 related to the Company’s eight Signature Inns held for sale is approximately $15.6 million.

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At March 31, 2005, the interest rates of the total outstanding mortgage notes payable are as follows:

As of March 31, 2005, the mortgage notes payable were collateralized by 107 of the 113 owned Inns.

The weighted average interest rate on debt was 5.6% and 5.2% during first quarter 2005 and 2004, respectively.

In May 2005, we received waivers from a lender for technical violations of several covenants at March 31, 2005 related to one loan secured by three Inns aggregating approximately $8.3 million and which is a part of the current maturity.

In March 2005, the Company deposited approximately $6.0 million in an escrow account to redeem two outstanding bonds secured by mortgages on two Inns, and letters of credit expiring December 31, 2005. The bond terms required a thirty day notice to bond holders and a deposit equivalent to the outstanding obligation. The bonds were redeemed and letters of credit were cancelled in May 2005.

6. Income Taxes

Effective January 1, 2004, the Company relinquished its status as a REIT for federal income tax purposes and became a taxable corporation. As a REIT, the Company did not record income taxes or related deferred taxes for financial reporting purposes. During 2004 and the first quarter of 2005, the Company did not recognize any income tax benefit for 2004 related to its taxable loss since the Company is uncertain whether there will be sufficient taxable income in future periods to allow for the utilization of the net deferred tax assets. Accordingly, the Company has a full valuation allowance against its net deferred tax assets at March 31, 2005 and December 31, 2004. The Company does not expect to pay federal income taxes for the year ending December 31, 2005.

7. Stock-based Compensation

The Company uses the intrinsic value method for valuing its awards of stock options, restricted stock and other stock awards and recording the related compensation expense, if any. This compensation expense is included in corporate general and administrative expense.

The Company has adopted the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation, and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. The following table presents a summary of the pro forma effects on reported net loss as if the Company had elected to recognize compensation costs based on the fair value of the incentive options granted as prescribed by SFAS No. 123 (in thousands except per share data). Since accounting for restricted stock does not differ under SFAS No. 123, the difference between expense recognized and expense on a pro forma basis is due to stock options. The compensation expense related to restricted stock is excluded from the below table. The Company uses the straight-line method, net of forfeitures, to recognize expense for plans with pro rata vesting.

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8. Discontinued Operations

Discontinued operations exclude properties sold with franchise or other agreements. Results of these discontinued operations are included in a separate component on the condensed consolidated statements of operations. This results in reclassifications of certain 2004 financial statement amounts.

The components of discontinued operations for the three months ended March 31, 2005 and 2004 are:

In total, these 10 Inns represent 1,102 rooms.

The following table includes the results of operations of these discontinued properties through the date of each respective sale.

The Company recorded gains on disposal of discontinued operations of $252,547 related to the asset sold in the first three months of 2004.

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9. Loss Per Share

The following table sets forth the computation of basic and diluted loss per share:

Options to purchase shares of common stock were not included in the computations of diluted loss per share because the effect would be antidilutive given the Company’s loss in each period presented.

Proforma Effects of Significant Equity Transactions

On July 26, 2004, the Company completed a public offering of 43,000,000 shares of its common stock at a price of $1.92 per share, raising gross proceeds of offering of approximately $82.6 million and net proceeds of approximately $77.0 million. On August 25, 2004 the Company redeemed all shares of both issues of preferred stock at their stated par value plus accrued dividends through the date of redemption. The Company recorded a charge to net income attributable to common shareholders of approximately $16.0 million in third quarter 2004 relating to the excess of liquidation value paid to the preferred shareholders over the net proceeds per share recorded.

The following unaudited pro forma data gives effect to the Company’s issuance of common stock and redemption of preferred stock as if they had occurred on January 1, 2004. There would be no effect to net revenues from the common stock offering transaction. These unaudited pro forma results of operations do not purport to represent what the Company’s actual results of operations would have been if the offering and redemption had occurred on January 1, 2004 and should not serve as a forecast of the Company’s operating results for future periods.

10. Commitments and Contingencies

The Company is a defendant or plaintiff in various legal actions which have arisen in the normal course of business. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial position or results of operations.

Jameson Inns, Inc., Kitchin Hospitality, LLC and an employee were named as defendants in a case filed on January 20, 2004 in the Circuit Court of the First Judicial District of Hinds County, Mississippi by Jim and Barbara Doe, individually and as natural parents of Ann Doe, a minor. The plaintiffs are seeking $20 million actual and $5 million punitive damages for injuries sustained by Ann Doe as a result of an alleged sexual assault by two minor boys who were at the Inn in Pearl, Mississippi. Pursuant to a motion the Company filed, this case was moved to the Circuit Court of Rankin County by virtue of an order of the Supreme Court of Mississippi entered on November 10, 2005. The Company has denied any liability for any injuries sustained by Ann Doe or her parents based on the factual circumstances and applicable law. The Company will vigorously defend against this claim. The Company is fully insured for this claim and does not expect that this case will have any material adverse effect upon its financial condition.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

From 1994 through December 31, 2003, we operated as a real estate investment trust (REIT) for federal income tax purposes. On January 2, 2004, we acquired Kitchin Hospitality and relinquished our status as a REIT. With the closing of the acquisition, Kitchin Hospitality became our wholly owned subsidiary and we now both own and operate our Inns. Beginning in 2004, room rental revenues were received directly by us, and we bear all of the hotel operating and administrative costs and expenses. As of March 31, 2005, we owned 90 Jameson Inns and 23 Signature Inns, all of which were classified as being within the economy and mid-scale segments of the lodging industry. We did not purchase, build or expand any hotels in 2004 and during the first three months ended March 31, 2005. In addition to our ownership of our hotels, we also own billboards and other related assets.

Room revenues are affected by a number of factors, including the economy, demand for business and leisure travel, the conflict in Iraq, terrorist threat assessments and national security alert levels, regional and local economic factors, the retail price of oil and gasoline, oversupply of rooms in specific markets, the effects of penetration over the last several years by competitors into certain secondary and tertiary markets in which we have historically operated and direct competition as to room rates.

Key Performance Indicator

The primary financial indicator of our performance is our revenue per available room (“RevPAR”) and the factors contributing to it, our occupancy rate and our average daily room rate (“ADR”). Control of our operational and administrative expenses is an important aspect of our business since we are now operating our Inns, although many of the operational expenses vary in proportion to the number of rooms that we operate. Thus, we believe that the results of our efforts to grow RevPAR are the single-most important factor in determining our future financial performance.

Based on information from several observers of our industry and our recent experience, we expect demand for lodging services to increase during 2005. As a result, we expect RevPAR growth to continue in 2005 due primarily to an expected increase in business and leisure travel.

Management’s Priorities

Our highest priority for 2005 is RevPAR growth. In addition, for 2005 our other principal priority is the re-branding of our Signature Inn hotels. Our long-range plan is to grow the Jameson Inn brand as opportunities for growth become available which may include, among other things, new development or additional franchising of the brand. We also intend to consider other strategic alternatives as a possible means of growth and increasing shareholder value. These include acquisitions of other properties, business combinations, corporate restructuring, entry into additional long-term debt financings, and engaging in related lines of new business. We have made no decisions or commitments at this time, but we intend to continue to consider any of these alternatives.

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Results of Operations for the Three Months Ended March 31, 2005 versus 2004

Key Operating Statistics

The operating data tables below show certain historical financial and other information relating to our owned Inns included in continuing operations. We include in discontinued operations assets held for sale and assets sold with respect to which we do not enter into, or anticipate into, a franchise or other agreement.

Revenues

We recorded lodging revenues of approximately $18.5 million for the three months ended March 31, 2005 versus approximately $18.8 million during the same period in 2004, a decrease of 1.6%. The decrease in lodging revenue results from fewer rooms available and a reduction in telephone and other revenues offset by the increase in the combined ADR. There were fewer rooms available in the period due to the sale of two Inns to franchisees and there being an extra day in the first quarter of 2004. The RevPAR increased as a result of 6.8% increase in ADR, to partially offset by 1.5 point decrease in occupancy. RevPAR increased 9.2% for our Jameson Inns and decreased 10.6% for our Signature Inns. Additionally, three Signature Inns which were being converted during the first quarter of 2005 had a RevPAR decrease of 30.2%. Excluding the converting hotels, our combined RevPAR increased 7.4%.

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Direct Lodging Expenses

Our direct lodging expense decreased less than 1% or approximately $63,000 in 2005 as a result of fewer rooms available.

Property and Other Taxes and Insurance

Our property and other taxes and insurance expenses increased 9.2% or approximately $119,000 in 2005 as a result of tax refund of approximately $95,000 in the first quarter of 2004.

Depreciation

Our depreciation expense decreased 10.6% or approximately $370,000 in 2005 as a result of fewer rooms available and many of our shorter life assets still in use being fully depreciated.

Corporate General and Administrative

Our corporate general and administrative expense increased 40.6% or approximately $676,000 in 2005. The increase results mainly from higher pay roll costs approximately $143,000, start up costs associated with the Jameson Stocks Award Program of approximately $115,000, one time employee severance and termination benefits of approximately $280,000 and professional fees of approximately $133,000.

Income from Operations

As a result of the above quarter over quarter changes in revenues and operating expenses our income from operations was approximately $1.3 million, down approximately $614,000 from 2004.

Interest Expense

Our interest expense increased 4.8% or approximately $127,000 in 2005. The increase results in the increase of the weighted average interest rate on our debt to 5.6% during first quarter 2005 compared to 5.2% during first quarter 2004 and interest expense incurred from the trust preferred securities offering partially offset by reduced mortgage debt balances outstanding.

Lease Termination

In the first quarter 2004 we recorded a lease termination expense of approximately $9.0 million as a result of the acquisition of Kitchin Hospitality, LLC, the former lessee of all our properties.

Gain on Sale

In the first quarter 2004, we had a net gain of approximately $58,000 on the sale of two Inns, two billboards and miscellaneous equipment. We closed no sales of Inns during the first quarter of 2005.

Income Taxes

We do not expect to pay federal income taxes for the year ending December 31, 2005 given our anticipated use of net operating loss carry forwards to offset taxable income. For financial reporting purposes, the Company has decided not to recognize tax benefit related to the net loss incurred during the first quarter of 2005.

Net Loss from Continuing Operations

As a result of the above quarter over quarter changes in revenues and expenses, we had a net loss from continuing operations excluding preferred stock dividends of approximately $1.5 million in 2005 compared to approximately $6.1 million in 2004.

EBITDA- Supplemental Non-GAAP information

We consider EBITDA to be an indicator of operating performance because it can be used to measure our ability to service debt, fund capital expenditures and expand our business. EBITDA is defined as income before interest expense, income tax expense, preferred stock dividends, depreciation and amortization and certain non-recurring items. We consider lease termination costs and the redemption of preferred stock incurred in 2004 “non-recurring” under relevant SEC guidelines.

This information should not be considered as an alternative to any measure of performance as promulgated under U.S. generally accepted accounting principles (GAAP), nor should it be considered as an indicator of our overall financial performance. Our calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited.

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We use EBITDA to measure the financial performance of our operations because it excludes interest, preferred dividends, income taxes, and depreciation, which bear little or no relationship to hotel operating performance. EBITDA from continuing operations also excludes those items which relate to net loss from discontinued operations. By excluding interest expense and preferred dividends, EBITDA measures financial performance irrespective of our capital structure or how we finance our hotel properties and operations. By excluding income taxes, EBITDA provides a basis for measuring the financial performance of our operations excluding income taxes. By excluding depreciation expense, which can vary from hotel to hotel based on historical cost and other factors unrelated to the hotels’ financial performance, EBITDA measures the financial performance of our operations without regard to their historical cost. For all of these reasons, we believe that EBITDA and EBITDA from continuing operations provides information that is relevant and useful in evaluating our business.

However, because EBITDA excludes depreciation, it does not measure the capital required to maintain or preserve our fixed assets. In addition, because EBITDA does not reflect interest expense and preferred dividends, it does not take into account the total amount of interest paid on outstanding debt and preferred dividends nor does it show trends in interest costs due to changes in borrowings or changes in interest rates. EBITDA, as defined by us, may not be comparable to EBITDA as reported by other companies that do not define EBITDA exactly as we define the term. Because we use EBITDA to evaluate our financial performance, we reconcile it to net loss (and in the case of EBITDA from continuing operations, to net loss from continuing operations), which is the most comparable financial measure calculated and presented in accordance with GAAP. EBITDA does not represent cash generated from operating activities determined in accordance with GAAP, and should not be considered as an alternative to operating income or net loss determined in accordance with GAAP as an indicator of performance or as an alternative to cash flows from operating activities as an indicator of liquidity.

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Liquidity and Capital Resources

Overview

Prior to 2004, we were organized as a REIT and were required to distribute to stockholders at least 90% of our taxable income. The relinquishment of our status as a REIT in January 2004 eliminated this requirement. However, by relinquishing our status as a REIT beginning in 2004, we are subject to payment of federal and state income taxes. In addition, due to the acquisition of Kitchin Hospitality on January 2, 2004, we are now exposed to greater business risks, including the fluctuation of cash flows related to the operation of hotels due to the seasonal nature of our business. Our hotel revenues are generally greater in the second and third quarters than in the first and fourth quarters.

Our short-term liquidity needs include funds for interest and principal payments on our outstanding indebtedness, funds for maturing loans and funds for capital expenditures. We expect to meet our short-term liquidity requirements generally through net cash provided by operations and existing cash on hand, refinancing maturing mortgages and, if necessary, by drawing upon our lines of credit.

In general, we expect to meet our long-term liquidity requirements for the funding of hotel property development, including rebranding of Signature Inns to Jameson Inns, property acquisitions, renovations and other nonrecurring capital improvements through net cash from operations, long-term secured and unsecured indebtedness, including our lines of credit and potentially through the issuance of additional equity securities or through joint ventures. In March 2005, we raised net proceeds of approximately $25.5 million from the Junior Subordinated Notes issued in connection with the trust preferred offering. The proceeds were used to retire other indebtedness and other liquidity needs.

Historically, our cash and capital requirements have been satisfied through cash generated from operating activities, borrowings under our credit facilities, and the issuance of equity securities. We believe cash flow from operations, available borrowings under our credit facilities and cash on hand will provide adequate funds for our foreseeable working capital needs, planned capital expenditures and debt service and other obligations through 2005.

Our ability to fund operations, make planned capital expenditures, and be in compliance with the financial covenants under our debt agreements will be dependent on our future operating performance and our success in extending or refinancing current debt maturities. Our future operating performance is dependent on a number of factors, many of which are beyond our direct control, including occupancy and the room rates we can charge.

Operating

Our net cash provided by operations during the first three months ended March 31, 2005 totaled approximately $937,000.

Our other principal sources of liquidity are:

These funds are used to meet the principal repayments of our amortizing debt, the refurbishing costs and capital maintenance of our existing Inns, and certain other cash requirements. Now that we no longer have the requirement to pay annually $6.7 million in preferred dividends, we have more free cash flow to invest in our business.

Investing

Our net cash used in investing activities during the first three months ended March 31, 2005 totaled $1.3 million. We invested a total of $1.7 million in existing properties during this quarter, with approximately $0.4 million being funded from restricted cash reserves. Additions to property and equipment represent capital expenditures for refurbishing and renovating existing Inns and converting three Signature Inns to the Jameson brand.

We plan to spend approximately $14.0 million during 2005 on refurbishment and renovation projects of existing Inns. These capital expenditures are funded from operating cash flow, net proceeds from the disposition of hotels and possibly additional borrowings. The capital budget includes costs to convert several more of our Signature Inns to our more recognizable Jameson Inn brand. During the first quarter of 2005, we have substantially completed the renovation and conversion of three Signature Inns to Jameson Inns. The cost for all three conversions is expected to total approximately $4.0 million, which included the cost of significantly changing the exterior appearance of one of these Inns. Our plan subject to the success of the converted Inns is to renovate and convert 12 other Signature Inns over the next two to three years. The eight that we do not intend to convert are listed for sale and classified as discontinued operations. The remaining cost of the interior renovation and conversion program for the remaining 12 properties is expected to be approximately $16.0 million, and will be completed over the next several years.

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Financing

Our net cash provided by financing activities during the first three months of 2005 totaled approximately $7.7 million. This amount included net proceeds of approximately $25.5 million from the Junior Subordinated Notes issued in connection with the trust preferred securities offering, deposits for the repayment of mortgage notes payable of approximately $6.0 million, repayments of mortgage notes and securities related deferred finance costs and lines of credit of approximately $11.8 million.

At March 31, 2005, our outstanding indebtedness was approximately $213.3 million, $186.2 million of which was mortgage notes and payable and collateralized by 107 of our 113 owned Inns. The outstanding balance of our debt approximated its fair value. In addition, as of March 31, 2005, we had remaining availability of $3.5 million on a line of credit secured by all of our owned billboards. We also had remaining availability of $1.4 million on a line of credit secured by hotel current accounts receivable. Both lines of credit mature annually.

Current maturities at March 31, 2005 include: maturing mortgage loans totaling approximately $31.1 million secured by eighteen Inns; mortgage loans totaling approximately $6.0 million secured by letters of credit which was paid off in May 2005; and scheduled principal payments of approximately $7.3 million for the next twelve months. In May 2005, we received waivers from a lender for technical violations of several covenants at March 31, 2005 related to one loan secured by three Inns with the aggregate outstanding balance of approximately $8.3 million and which is a part of the current maturity. Based on discussions with our lenders, we believe we can successfully extend maturities or obtain replacement financing as our mortgage indebtedness and lines of credit mature at satisfactory renewal terms. If we are unsuccessful in refinancing these obligations, we anticipate employing other available resources which include cash, proceeds from refinancing owned Inns with increased borrowing capacity or selling owned Inns to meet the required obligations.

At March 31, 2005, interest rates of our outstanding indebtedness are as follows:

Our policy historically has been to finance all of the costs of developing new Inns and expanding existing Inns. However, as a result of the acquisition of Kitchin Hospitality and the redemption of our preferred stock, we expect to be able to fund a substantial amount of our future capital needs through internally generated cash flow. Nevertheless, incurring additional debt is likely to be a significant means of financing any substantial growth in the future.

Indebtedness we incur may be in the form of bank borrowings, secured and unsecured, and publicly and privately placed debt instruments. Indebtedness may be recourse to all or any part of our Inns or may be limited to the Inn to which the indebtedness relates. We may also use the proceeds from any of our borrowings for working capital, to refinance existing indebtedness or to finance acquisitions, expansions or development of new Inns. Most of our current mortgage indebtedness is with recourse to us.

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While our organizational documents do not limit the amount or percentage of indebtedness that we may incur, we currently have a policy of limiting outstanding indebtedness to 65% of the aggregate value of the Inns based on the most recent appraisals obtained on the Inns. Our board of directors could change our current policies, and we could become more highly leveraged, resulting in an increased risk of default on our obligations and in an increase in debt service requirements. This increase could adversely affect our financial condition and results of operations.

Jameson Stock Awards

On April 13, 2005, we filed an amendment to the registration statement on the Form S-3 to register 3.0 million shares of common stock in connection with the Jameson Stock Awards Program. The registration statement has not yet been declared effective by the Securities and Exchange Commission. Upon implementation of the program, ten percent of the room charges paid by participants in our Jameson Stock Awards program will be used to purchase shares of our common stock. In our financial statements, the amounts applied to the purchase of these shares will not be reflected as revenues in our statements of operations, but will be recorded as additions to our stockholders’ equity. Under the program, existing shareholders will also be able to purchase stock directly from us.

Inflation

Operators of hotels in general possess the ability to adjust room rates quickly. Nevertheless, competitive pressures have limited, and may in the future limit, our ability to raise room rates in the face of inflation.

Seasonality

Our business is seasonal in nature, with the months from April through September generally accounting for a greater portion of annual revenues than the months from October through March. Therefore, our results for any quarter may not be indicative of the results that may be achieved for the full fiscal year. The seasonal nature of our business increases our vulnerability to risks such as labor force shortages and cash flow problems. Further, if an adverse event such as an actual or threatened terrorist attack, international conflict, regional economic downturn or poor weather conditions should occur during the months of April through September, the adverse impact to our revenues could likely be greater as a result of our seasonal business.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with GAAP, which requires us to make estimates and assumptions. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity.

Impairment of Real Estate Assets

We evaluate the impairment of property and equipment and other long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, effective January 1, 2002. SFAS No. 144 states that an impairment of long-lived assets has occurred whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability is measured based on net, undiscounted expected cash flows. Impairment charges are recorded based upon the difference between the carrying value and the fair value of the asset. We review on a quarterly basis the carrying value of our property and equipment, in relation to historical results, current business conditions and known trends to identify indicators of impairment. If indicators of impairment are present, the expected future results of operations of the asset are projected based on the estimated future earnings before interest expenses, income taxes, depreciation and amortization. Growth assumptions are based on assumed future changes in the economy and changes in demand for lodging in the local markets. In the event assumptions used to perform our review are inappropriate, the carrying value of these properties and our operating results would be misstated.

SFAS No. 144 requires a long-lived asset, which is designated for sale, to be classified as “held for sale” in the period in which certain criteria are met. In addition, SFAS No. 144 also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported in discontinued operations. Discontinued operations exclude properties sold with franchise or other agreements which indicate the Company has some form of continuing involvement in the future cash flows of the disposed properties. For properties we consider held for sale, an impairment loss is recognized if the fair value of the property, less the estimated cost to sell, is less than the carrying amount of the asset. Held for sale assets are reported at the lower of the carrying amount or the estimated fair value, less the estimated cost to sell. Subsequent to the date that an asset is

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classified as held for sale, depreciation expense is not recorded. Losses recorded in 2004 and 2003 were related to properties sold or held for sale. In the event our estimates of net realizability of assets held for sale are inappropriate, the carrying value of these properties and operating results would be misstated.

Accounting for Income Taxes

Effective January 1, 2004, we relinquished status as a REIT for federal income tax purposes and became a taxable corporation. As a REIT, we did not record income taxes or related deferred taxes for financial reporting purposes. A deferred tax benefit of approximately $1.4 million, net of a valuation allowance of $0.1 million, was recorded to establish the Company’s initial deferred tax asset resulting from the difference in basis of our assets and liabilities for financial reporting and income tax purposes as a result of the change in taxable status. An additional valuation allowance of approximately $6.0 million was recorded in 2004 based on our review of our estimate of realization of deferred tax assets. We did not recognized any income tax benefit for 2004 or first quarter 2005 related to the taxable loss since we are uncertain whether there will be sufficient taxable income in future periods to allow for the utilization of the net deferred tax assets. Accordingly, the Company had a full valuation allowance against its net deferred tax assets at December 31, 2004. We have based this decision on our cumulative history of losses in accordance with SFAS No. 109.

Investment in Real Estate Assets

Our management is required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful life. These assessments have a direct impact on our operating results. The estimated useful lives of our assets by class are as follows:

In the event that we use inappropriate useful lives or methods for depreciation, our operating results would be misstated.

Forward-Looking Statements

This report, including the documents incorporated in this report by reference, contains certain forward-looking statements. These include statements about the effects of the relinquishment of our status as a real estate investment trust and our acquisition of Kitchin Hospitality, LLC (“Kitchin Hospitality”) on January 2, 2004, changes in interest rates, our expansion plans, acquisition or leasing of additional land parcels, construction of new inns and expansion of existing inns, disposition of land parcels and hotels, access to debt financing and capital, future corporate strategies and direction, effects and circumstances relating to terrorist acts similar in nature to those which occurred on September 11, 2001, on-going military actions and the anticipated negative impact on travel, the national economic slowdown and other matters. These statements are not historical facts but are expectations or projections based on certain assumptions and analyses made by our senior management in light of their experience and perception of historical trends, current conditions, expected future developments and other factors. Whether actual results and developments will conform to our expectations and predictions is, however, subject to a number of risks and uncertainties. These include, but are not limited to:

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The words “estimate,” “project,” “intend,” “expect,” “anticipate,” “believe” and similar expressions are intended to identify forward-looking statements. These forward-looking statements are found at various places throughout this report and the documents incorporated in this report by reference as well as in other written materials, press releases and oral statements issued by us or on our behalf. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date that they are made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no material changes to the disclosure on this matter made in “Quantitative and Qualitative Disclosures about Market Risk” on page 32 of our Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed by us in reports that it file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

During the period covered by this report on Form 10-Q, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are not a party to any litigation which, in our judgment, would have a material adverse effect on our operations or financial condition if adversely determined. However, due to the nature of our business, we are, from time to time, a party to certain legal proceedings arising in the ordinary course of our business.

ITEM 5. OTHER INFORMATION

On May 12, 2005, the Registrant issued a press release announcing its financial results for the first quarter of 2005. This information is being furnished for purposes of Regulation FD and is not deemed filed. A copy of this press release is furnished as Exhibit 99.1 to this report.

ITEM 6. EXHIBITS

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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EXHIBIT INDEX