<PAGE>   1

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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                  For the fiscal year ended December 31, 1999

                         Commission file number 0-23732

                              WINSTON HOTELS, INC.
             (Exact name of registrant as specified in its charter)

<TABLE>
      <S>                           <C>
           NORTH CAROLINA                        56-1624289
      (State of incorporation)      (I.R.S. Employer Identification Number)
</TABLE>

<TABLE>
 <S>                                             <C>
      2626 GLENWOOD AVENUE, SUITE 200              27608
          RALEIGH, NORTH CAROLINA                (Zip Code)
 (Address of principal executive offices)
</TABLE>

                                 (919) 510-6010
              (Registrant's telephone number, including area code)

          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<S>                                                  <C>
  Common Stock, $0.01 par value per share                      New York Stock Exchange
Preferred Stock, $0.01 par value per share                     New York Stock Exchange
             (Title of Class)                        (Name of Exchange upon Which Registered)
</TABLE>


     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 period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]

     The aggregate market value of the registrant's Common Stock, $0.01 par
value per share, at March 15, 2000, held by those persons deemed by the
registrant to be non-affiliates was approximately $123,626,000.

     As of March 15, 2000, there were 16,896,188 shares of the registrant's
Common Stock, $0.01 par value per share, outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

<TABLE>
<S>                                                                                      <C>
Document                                                                                 Where Incorporated
--------                                                                                 ------------------

1. Proxy Statement for Annual Meeting of Shareholders to be held on May 9, 2000                Part III
</TABLE>


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<PAGE>   2

                              WINSTON HOTELS, INC.

                            FORM 10-K ANNUAL REPORT


                                     INDEX

<TABLE>
<CAPTION>
                                                                                                              Page
                                                                                                              ----

<S>  <C>           <C>                                                                                        <C>
PART I.

     ITEM 1.       BUSINESS                                                                                     3

     ITEM 2.       PROPERTIES                                                                                   9

     ITEM 3.       LEGAL PROCEEDINGS                                                                           12

     ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                         12

PART II.

     ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                   STOCKHOLDER MATTERS                                                                         13

     ITEM 6.       SELECTED FINANCIAL DATA                                                                     14

     ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                   CONDITION AND RESULTS OF OPERATIONS                                                         16

     ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                  21

     ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                 21

     ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                   ACCOUNTING AND FINANCIAL DISCLOSURE                                                         21

PART III.

     ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                          21

     ITEM 11.      EXECUTIVE COMPENSATION                                                                      21

     ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                   MANAGEMENT                                                                                  22

     ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                              22

PART IV.

     ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
                   FORM 8-K                                                                                    23

SIGNATURES                                                                                                     27
</TABLE>


                                       2
<PAGE>   3

PART I.

ITEM 1.      BUSINESS

GENERAL DEVELOPMENT OF BUSINESS

   Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering ("IPO") of $0.01 par value common stock
("Common Stock"), utilizing the majority of the proceeds to acquire one hotel
and a general partnership interest (as the sole general partner) in WINN
Limited Partnership (the "Partnership"). The Partnership used a substantial
portion of the proceeds to acquire nine hotel properties (collectively the ten
hotels are the "Initial Hotels"). WHI and the Partnership (collectively the
"Company") began operations as a REIT on June 2, 1994.

   During 1995 and 1996, WHI completed follow-on Common Stock offerings, as
well as a Preferred Stock offering in September 1997, and invested the net
proceeds from these offerings in the Partnership. The Partnership utilized the
proceeds to acquire 28 additional hotel properties. During 1998, the Company
added 13 additional properties to its portfolio, five of which were internally
developed. As of December 31, 1999, WHI's ownership in the Partnership was
92.83%. As of December 31, 1999, the Company owned 51 hotel properties (the
"Current Hotels"), having an aggregate of 6,904 rooms.

   Under the REIT qualification requirements of the Internal Revenue Code,
REITs generally must lease their hotels to third party operators. Therefore, as
of December 31, 1999, the Company leased 49 of the 51 Current Hotels to CapStar
Winston Company, L.L.C. ("CapStar Winston"), a wholly owned subsidiary of
MeriStar Hotels and Resorts, Inc. ("MeriStar"), one of the Current Hotels to
Bristol Hotels & Resorts, Inc. ("Bristol") and one of the Current Hotels to
Prime Hospitality Corp. ("Prime"). All 51 of the Current Hotels were leased
pursuant to leases that provide for rent payments based, in part, on revenues
from the Current Hotels (the "Percentage Leases"). Under the terms of the
Percentage Leases, the lessees are obligated to pay the Company the greater of
base rent or percentage rent ("Percentage Rent"). The Percentage Leases are
designed to allow the Company to participate in the growth in revenues at the
Current Hotels by providing that a portion of each Current Hotel's room
revenues in excess of specified amounts will be paid to the Company as
Percentage Rent.


NARRATIVE DESCRIPTION OF BUSINESS

   Growth Strategy

   The Company's growth strategy is to enhance shareholder value by increasing
cash available for distribution per share of Common Stock through: (i)
participating in any increased room revenue from the Current Hotels and any
subsequently acquired or developed hotels through Percentage Leases; (ii)
acquiring additional hotels, or ownership interests in hotels, that meet the
Company's investment criteria; (iii) selectively developing hotels and hotel
additions as market conditions warrant; and (iv) leveraging off of its
management team's expertise.

   Internal Growth Strategy

   The Company participates in any increased room revenue from the Current
Hotels through Percentage Leases. The Company believes that internal growth,
through increases in Percentage Rent has and, in the future, may result from:
(i) continued sales and marketing programs by the lessees and operators; (ii)
completion of refurbishment projects as needed at the Current Hotels; (iii)
maintaining hotel franchises with demonstrated market acceptance and national
reservation systems; and (iv) continuation of the industry-wide trend of
increasing average daily room rate ("ADR") and revenue per available room
("REVPAR").

   The Percentage Leases provide that a percentage of room revenues in
specified ranges is paid as Percentage Rent. For most leases, the percentage of
room revenues paid as Percentage Rent increases as a higher specified level of
room revenues is achieved. Pursuant to each Percentage Lease, base rent and the
ranges of room revenues specified for purposes of calculating Percentage Rent
are adjusted on a quarterly or annual basis for inflation beginning on the
first day after the first full fiscal year of the Percentage Lease, based on
changes in the United States Consumer Price Index ("CPI").

   Acquisition Strategy

   The Company intends to acquire additional hotel properties with strong
national franchise affiliations in the mid-scale and upscale market segments,
or hotel properties with the potential to obtain such franchise affiliations.
In particular, the Company will consider acquiring limited-service hotels such
as Hampton Inn and Fairfield Inn by Marriott hotels; full-service hotels such
as Hilton Garden Inn, Courtyard by Marriott and Holiday Inn hotels; and
extended-stay hotel properties such as Homewood Suites by Hilton, Hampton


                                       3
<PAGE>   4

Inn and Suites, Residence Inn by Marriott and Staybridge by Holiday Inn (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Forward Looking Statements").

   The Company intends to consider investments in hotel properties that meet
one or more of the following criteria: (i) properties in locations with
relatively high demand for rooms, a relatively low supply of hotel properties
and barriers to easy entry into the hotel business, such as a scarcity of
suitable sites or zoning restrictions; (ii) successful hotels available at
favorable prices; and (iii) newly developed hotels that the developer does not
intend to own. The Company believes its relationship with each lessee and
franchisor will provide additional potential investment opportunities.

   Additional investments in hotel properties may be made through the
Partnership, directly by WHI or with entities affiliated with the Company. The
Company's ability to acquire additional hotel properties and develop hotels
depends primarily on its ability to obtain additional debt financing, proceeds
from subsequent issuances of Common Stock or other securities, proceeds from
the sale of hotel properties or co-investments from other investors.

   Development Strategy

   The Company intends to pursue hotel development as suitable opportunities
arise. The Company may finance 100% of such development or seek partners who
would co-invest in development or rehabilitation joint ventures. The Company
intends to consider development of hotels with strong national franchise
affiliations in markets where the Company believes that carefully timed and
managed development will yield returns to the Company that exceed returns from
any available hotels in those markets that meet the Company's acquisition
criteria (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Forward Looking Statements"). The Company earns certain
fees from its joint venture development activity and also is exploring other
opportunities to use management's expertise to earn additional fees through
third party development.

   In June 1999, the Company entered into a joint venture agreement to develop
upscale hotels with Regent Partners, Inc., a leading real estate development,
investment and services firm and a wholly owned subsidiary of J.A. Jones, Inc.
("Regent"). By combining Regent's expertise in hotel development with the
Company's, this approach offers each organization the potential for attractive
financial returns. Under the terms of the joint venture (the "Joint Venture"),
Regent and the Company will co-develop the hotels and receive fees for their
respective services including development, asset management and purchasing. The
Company is expected to have an ownership level of up to 49 percent in each
project. The Company also has the right to acquire Regent's interests subject
to the provisions of the joint venture agreement.

   The Joint Venture's initial project is a $16.5 million, full-service
158-room Hilton Garden Inn in Windsor, Connecticut, which is scheduled to open
in the second half of 2000. Construction also is scheduled to begin this spring
on the Joint Venture's second project: a $20 million, 177-room Hilton Garden
Inn in the Chicago suburb of Evanston, which is scheduled to open before the
holiday season in 2001. The Company is considering other possible joint
ventures and also is investigating providing hotel development financing
services as well. In addition to generating development, asset management, and
purchasing fee income and thus enhancing the Company's revenues and cash flow;
other benefits include expanding our affiliations with leading upscale brands
and the potential addition of new hotels to our portfolio, despite the external
capital constraints prevalent in today's real estate market.

   Operations and Property Management

   As of December 31, 1999, CapStar Winston leased 49 of the Current Hotels, 39
of which they also operated. Interstate Management and Investment Corporation
("IMIC") managed nine of the Current Hotels and Promus Hotels, Inc. ("Promus")
managed one of the Current Hotels (collectively the "Property Managers")
pursuant to management agreements with CapStar Winston with respect to each of
such hotels. Bristol and Prime each leased and operated one of the Current
Hotels. The lessees and the Property Managers seek to increase revenues at the
Current Hotels by using established systems to manage the Current Hotels for
marketing, rate achievement, expense management, physical facility maintenance,
human resources, accounting and internal auditing. They are trained in all
aspects of hotel operations, including negotiation of prices with corporate and
other clients and responsiveness to marketing requirements in their particular
markets, with particular emphasis placed on customer service. The lessees and
the Property Managers employ a mix of marketing techniques designed for each
specific Current Hotel, which include individual toll-free lines,
cross-marketing of the Current Hotels' billboards and direct marketing, as well
as taking advantage of national advertising by the franchisors of the Current
Hotels.

   The lessees lease the Current Hotels pursuant to the Percentage Leases.
Under the Percentage Leases, the lessees, or the Property Managers, generally
are required to perform all operational and management functions necessary to
operate the Current Hotels. The lessees are entitled to all profits and cash
flow from the Current Hotels after payment of rent under the Percentage Leases
and other operating expenses, including, in the case of the ten Current Hotels
managed by the Property Managers, the management fee payable to the Property
Managers. The lessees, their affiliates and the Property Managers may manage
other hotel properties in addition to hotels owned by the Company, however, the
lessees and their affiliates may not build or develop a hotel or motel within
five miles of a hotel owned by the Company and leased by the lessee.


                                       4
<PAGE>   5

   CapStar Winston is a wholly owned subsidiary of MeriStar, a New York Stock
Exchange company. As of December 31, 1999, MeriStar, the nation's largest
independent hotel management company, leased or managed 225 hotels with 47,046
rooms in 35 states, the District of Columbia, Canada and the U.S. Virgin
Islands.

   IMIC, a hotel development and management company, operates nine of the
Current Hotels under separate management agreements with CapStar Winston. Each
year, CapStar Winston pays IMIC a base management fee for each Current Hotel
managed by IMIC based on a percentage of the budgeted gross operating profit
for that year with incentive amounts based on actual gross operating profits if
they exceed budgeted amounts. IMIC has agreed that each year it will spend a
specified percentage of the gross revenues of each Current Hotel managed by
IMIC on repairs and maintenance of the hotel. CapStar Winston and the Company
have retained the right to control the expenditure of funds budgeted for
capital and non-routine items, including, at their discretion, approving plans
and selecting and overseeing contractors and other vendors. IMIC currently
operates 28 hotels in six states, including 24 limited-service hotels and four
full-service, convention or resort hotels.

   Promus manages one of the Current Hotels under a management agreement with
CapStar Winston. Each year, CapStar Winston pays Promus a management fee based
on a percentage of the gross operating profit for the hotel managed by Promus
with certain incentive amounts.

   Bristol, a New York Stock Exchange company, is one of the leading
independent hotel operating companies in the United States. As of December 31,
1999, Bristol operated 110 primarily full-service hotels in the upscale and
midscale segments of the hotel industry containing more than 30,000 rooms.
Bristol is the largest franchisee of Bass Hotels & Resorts (formerly Holiday
Hospitality) branded hotels including Crowne Plaza, Holiday Inn, Holiday Inn
Select and Holiday Inn Express hotels.

  Prime, a New York Stock Exchange company, is one of the nation's premier
lodging companies. Prime operates three proprietary brands, AmeriSuites
(all-suites), HomeGate Studios & Suites (extended-stay) and Wellesley Inns
(limited-service). It also owns and/or manages hotels operated under franchise
agreements with national hotel chains. As of December 31, 1999, Prime
Hospitality Corporation owned 172 hotels, operated 28 hotels under lease
agreements with REITs and managed 10 hotels from third parties.

Franchise Agreements

   The Company anticipates that most of the additional hotel properties in
which it invests will be operated under franchise licenses. Franchisors provide
a variety of benefits for franchisees which include national advertising,
publicity and other marketing programs designed to increase brand awareness,
training of personnel, continuous review of quality standards and centralized
reservation systems.

   The hotel franchise licenses generally specify certain management,
operational recordkeeping, accounting, reporting and marketing standards and
procedures with which the lessees must comply. The franchise licenses obligate
the lessees to comply with the franchisors' standards and requirements with
respect to training of operational personnel, safety, maintaining specified
insurance, the types of services and products ancillary to guest room services
that may be provided, display of signs, and the type, quality and age of
furniture, fixtures and equipment included in guest rooms, lobbies and other
common areas.

   Of the Current Hotels' franchise licenses, one expires in 2003, two expire
in 2006, two expire in 2007, three expire in 2008, three expire in 2009, two
expire in 2010, three expire in 2011, two expire in 2014, one expires in 2015,
three expire in 2016, 19 expire in 2017 and 10 expire in 2018. The franchise
agreements provide for termination at the franchisor's option upon the
occurrence of certain events, including the lessees' failure to pay royalties
and fees or perform its other covenants under the franchise agreement,
bankruptcy, abandonment of the franchise, commission of a felony, assignment of
the franchise without the consent of the franchisor, or failure to comply with
applicable law in the operation of the relevant Current Hotel. The lessees are
entitled to terminate the franchise license only by giving at least 12 months'
notice and paying a specified amount of liquidated damages. The franchise
agreements will not renew automatically upon expiration. The lessees are
responsible for making all payments under the franchise agreements to the
franchisors. Under the franchise agreements, the lessees pay a franchise fee of
an aggregate of between 3% and 5% of room revenues, plus additional fees that
amount to between 3% and 4% of room revenues from the Current Hotels.

   Although CapStar Winston entered into new 10-year franchise agreements for
the operation of three Holiday Inn hotels, the Company remains obligated to
Holiday Inn for certain liquidated damages in the event of a termination of the
Holiday Inn franchise agreements prior to the expiration of the 10-year term.
CapStar Winston and its affiliates shall indemnify the Company for certain
obligations arising from CapStar Winston or its affiliates' failure to satisfy
certain conditions in its franchise agreements with Holiday Inn.


                                       5
<PAGE>   6

Competition

   The hotel industry is highly competitive with various participants competing
on the bases of price, level of service and geographic location. The Current
Hotels compete with other hotel properties in their geographic markets. Some of
the Company's competitors may have greater marketing and financial resources
than the Company, the lessees, and the Property Managers. Several of the
Current Hotels are located in areas in which they may compete with other
Current Hotels for business. The Company competes for acquisition opportunities
with entities that may have greater financial resources than the Company. These
entities may generally be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
hotel operator.

Employees

   The Company had 27 employees as of February 28, 2000.

Environmental Matters

   Under various federal, state and local laws and regulations, an owner or
operator of real estate may be liable for the costs of removal or remediation
of certain hazardous or toxic substances on such property. Such laws often
impose such liability without regard to whether the owner knew of, or was
responsible for, the presence of hazardous or toxic substances. Furthermore, a
person that arranges for the disposal or transports for disposal or treatment
of a hazardous substance at another property may be liable for the costs of
removal or remediation of hazardous substances released into the environment at
that property. The costs of remediation or removal of such substances may be
substantial, and the presence of such substances, or the failure to promptly
remediate such substances, may adversely affect the owner's ability to use or
sell such real estate or to borrow using such real estate as collateral.
Certain environmental laws and common law principles could be used to impose
liability for the release of and exposure to hazardous substances, including
asbestos-containing materials ("ACMs") into the air, and third parties may seek
recovery from owners or operators of real properties for personal injury or
property damage associated with exposure to released hazardous substances,
including ACMs. In connection with the ownership and operation of the Current
Hotels, the Company, the lessees, or the Property Managers, as the case may be,
may be potentially liable for such costs.

   Phase I environmental site assessments ("ESAs") were obtained on all of the
Current Hotels. The Phase I ESAs were intended to identify potential sources of
contamination for which the Current Hotels may be responsible and to assess the
status of environmental regulatory compliance. The Phase I ESAs included
historical reviews of the Current Hotels, reviews of certain public records,
preliminary investigations of the sites and surrounding properties, screening
for the presence of asbestos, PCBs and underground storage tanks, and the
preparation and issuance of a written report. The Phase I ESAs did not include
invasive procedures, such as soil sampling or ground water analysis. The Phase
I ESA reports have not revealed any environmental condition, liability or
compliance concern that the Company believes would have a material adverse
effect on the Company's business, assets or results of operations, nor is the
Company aware of any such condition, liability or compliance concern.
Nevertheless, it is possible that these reports do not reveal all environmental
conditions, liabilities or compliance concerns or that there are material
environmental conditions, liabilities or compliance concerns that arose at a
Current Hotel after the related Phase I ESA report was completed of which the
Company is unaware. Moreover, no assurances can be given that (i) future laws,
ordinances or regulations will not impose any material environmental liability,
or (ii) the current environmental condition of the Current Hotels will not be
affected by the condition of the properties in the vicinity of the Current
Hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Company.

   The Company believes that the Current Hotels are in compliance in all
material respects with all federal, state and local laws, ordinances and
regulations regarding hazardous or toxic substances and other environmental
matters. The Company has not been notified by any governmental authority of any
material noncompliance, liability or claim relating to hazardous or toxic
substance or other environmental substances in connection with any of its
properties.

Tax Status

   The Company elected to be taxed as a REIT under Sections 856-860 of the
Internal Revenue Code of 1986, as amended, effective for its short taxable year
ended December 31, 1994. The Company believes that it qualifies for taxation as
a REIT, and with certain exceptions, the Company will not be subject to tax at
the corporate level on its taxable income that is distributed to the
shareholders of the Company. A REIT is subject to a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 95% of its annual taxable income. For taxable years
beginning after December 31, 2000, the annual taxable income


                                       6
<PAGE>   7

distribution requirement has been lowered to 90%. Failure to qualify as a REIT
will render the Company subject to federal income tax (including any applicable
minimum tax) on its taxable income at regular corporate rates and distributions
to the shareholders in any such year will not be deductible by the Company.
Although the Company does not intend to request a ruling from the Internal
Revenue Service (the "Service") as to its REIT status, the Company has obtained
the opinion of its legal counsel that the Company qualifies as a REIT, which
opinion is based on certain assumptions and representations and is not binding
on the Service or any court. Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain state and local taxes on its income
and properties.

Seasonality

   The Current Hotels' operations historically have been seasonal in nature,
reflecting higher REVPAR during the second and third quarters. This seasonality
and the structure of the Percentage Leases, which provide for a higher
percentage of room revenues above stated equal quarterly levels to be paid as
Percentage Rent, can be expected to cause fluctuations in the Company's
quarterly lease revenue under the Percentage Leases.

Investments by Executive Management and Board of Directors

   On October 29, 1999, the Company's Chief Executive Officer, Robert W.
Winston, III, and several members of WHI's Board of Directors, purchased an
aggregate of 594,950 shares of WHI's Common Stock, or approximately 3.5% of the
total shares outstanding as of December 31, 1999.

Executive Officers of the Registrant

         The following table lists the executive officers of the Company:

<TABLE>
<CAPTION>
               NAME                            AGE                            POSITION
               ----                            ---                            --------

<S>                                            <C>            <C>
Charles M. Winston                              70            Chairman of the Board of Directors

Robert W. Winston, III                          38            Chief Executive Officer

James D. Rosenberg                              46            President, Chief Operating Officer and Secretary

Joseph V. Green                                 49            Executive Vice President, Chief Financial Officer

Kenneth R. Crockett                             43            Executive Vice President of Development
</TABLE>

   CHARLES M. WINSTON.  Charles Winston has served as Chairman of the Board of
Directors since March 15, 1994. Mr. Winston is a native of North Carolina and a
graduate of the University of North Carolina at Chapel Hill with an A.B.
degree. Mr. Winston has more than 36 years of experience in developing and
operating full service restaurants. Mr. Winston is Robert Winston's father and
brother of James Winston, a director.

   ROBERT W. WINSTON, III.   Robert Winston has served as Chief Executive
Officer and Director of the Company since March 15, 1994. Mr. Winston served as
the Company's President from March 15, 1994 through January 14, 1999 and as
Secretary for the periods from March 1994 through May 1995 and from October
1997 until May 5, 1998. Mr. Winston is a native of North Carolina and a
graduate of the University of North Carolina at Chapel Hill with a B.A. degree
in economics. Mr. Winston is Charles Winston's son and James Winston's nephew.

   JAMES D. ROSENBERG. Mr. Rosenberg assumed the title of President on January
14, 1999. Mr. Rosenberg has also served as Chief Operating Officer since
January 5, 1998, Secretary since May 5, 1998, and served as Chief Financial
Officer from January 5, 1998 through May 18, 1999. Mr. Rosenberg is a CPA and a
graduate of Presbyterian College and received an MBA from the University of
South Carolina. Prior to joining the Company, Mr. Rosenberg held the position
of Senior Vice President with Holiday Inn Worldwide since 1994 where he was
responsible for managing 85 hotels in seven countries. Prior to joining the
Holiday Inn organization, Mr. Rosenberg was a partner in Sage Hospitality
Resources and served as Executive Vice President and Chief Financial Officer of
the Denver-based hospitality firm.


                                       7
<PAGE>   8

   JOSEPH V. GREEN.  Mr. Green assumed the title of Executive Vice President,
Chief Financial Officer on May 18, 1999. Mr. Green has also served as Executive
Vice President - Acquisitions and Finance from January 1, 1998 through May 18,
1999, after having advised Winston Hospitality, Inc. on matters regarding hotel
acquisitions and finance since 1993, including the initial public offering of
WHI. Mr. Green is a graduate of East Carolina University, was awarded his J.D.
degree from Wake Forest University School of Law and received a Master of Laws
in Taxation from Georgetown University.

   KENNETH R. CROCKETT. Mr. Crockett was appointed Senior Vice President of
Development of the Company in September 1995 and Executive Vice President of
Development in January 1998. Mr. Crockett is a graduate of the University of
North Carolina at Chapel Hill with a B.S. degree in Business Administration.
Prior to joining the Company, Mr. Crockett was an Associate Partner for project
development in commercial real estate at Capital Associates, a real estate
development firm located in the Raleigh, North Carolina area.


                                       8
<PAGE>   9

ITEM 2.           PROPERTIES

     The following table sets forth certain unaudited pro forma information
with respect to the Current Hotels:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                       1999
-------------------------------------------------------------------------------------------------------------------------
                                                 Number     Room                                Lease    Number    Room
                                                   of     Revenues                             Revenues    of    Revenues
                                                  Rooms    ($000)        ADR     Occupancy %    ($000)    Rooms   ($000)
-------------------------------------------------------------------------------------------------------------------------
<S> <C>                                          <C>      <C>       <C>         <C>           <C>       <C>      <C>
Hampton Inns
    Boone, NC                                       95    $ 1,896   $    72.31      75.64%    $    787     95    $  1,842
    Brunswick, GA                                  128      2,022        58.32      74.22%         785    128       2,265
    Cary, NC                                       130      2,081        67.21      65.24%         859    130       2,455
    Charlotte, NC                                  125      2,780        79.08      77.06%       1,327    125       2,831
    Chester, VA                                     66      1,334        71.66      77.29%         582     66       1,396
    Duncanville, TX                                119      1,221        49.83      56.39%         403    119       1,425
    Durham, NC                                     137      2,582        68.19      75.72%       1,120    137       2,858
    Gwinnett, GA (Hampton Inn & Suites)            136      2,799        78.57      71.77%       1,428    136       2,728
    Hilton Head, SC                                124      2,380        76.72      68.21%         975    124       2,285
    Jacksonville, NC                               120      1,872        58.62      72.90%         741    120       2,033
    Las Vegas, NV*                                 128      1,872        58.63      68.35%         926    128       1,010
    Perimeter, GA                                  131      2,391        80.13      62.40%       1,173    131       2,641
    Raleigh, NC                                    141      2,930        73.07      77.91%       1,391    141       2,966
    Southern Pines, NC                             126      2,065        63.90      70.28%         850    126       1,968
    Southlake, GA                                  124      2,235        64.46      76.01%         921    124       2,097
    W. Springfield, MA                             126      2,850        80.14      77.69%       1,365    126       2,484
    White Plains, NY                               156      4,902       105.16      81.87%       2,510    156       4,482
    Wilmington, NC                                 118      2,242        68.55      75.95%         946    118       2,275
Comfort Inns
    Augusta, GA                                    123      1,413        57.39      54.85%         468    123       1,471
    Charleston, SC                                 128      2,534        75.24      72.10%       1,194    128       2,548
    Chester, VA                                    122      2,115        64.58      73.53%         958    122       2,105
    Clearwater/St. Petersburg, FL                  120      1,659        53.40      71.40%         576    120       1,850
    Durham, NC                                     138      2,536        72.68      69.28%       1,176    138       2,797
    Fayetteville, NC                               176      2,198        54.08      63.28%         962    176       2,358
    Greenville, SC                                 190      1,552        46.96      47.65%         423    190       1,758
    London, KY (Comfort Suites)                     62        941        54.50      76.29%         394     62         955
    Orlando, FL (Comfort Suites)                   214      3,865        61.13      80.94%       1,705    214       4,027
    Raleigh, NC                                    149      1,812        48.52      68.68%         657    149       1,636
    Wilmington, NC                                 146      2,297        56.98      75.66%         949    146       2,423
Homewood Suites
    Alpharetta, GA*                                112      2,611        90.44      70.61%       1,242    112       1,229
    Cary, NC                                       120      3,252        89.63      82.85%       1,986    120       3,363
    Clear Lake, TX                                  92      2,294        94.80      72.06%         987     92       2,636
    Durham, NC*                                     96      1,916        81.21      67.32%         890     96         171
    Lake Mary, FL*                                 112      2,999        91.82      79.89%       1,153    112       1,398
    Phoenix, AZ*                                   126      2,422        70.95      74.23%       1,285    126         997
    Raleigh, NC*                                   137      3,318        86.38      76.82%       1,589    137       1,720
-------------------------------------------------------------------------------------------------------------------------

<CAPTION>
------------------------------------------------------------------------------------
                                                                  1998
------------------------------------------------------------------------------------
                                                                              Lease
                                                                            Revenues
                                                      ADR      Occupancy %   ($000)
------------------------------------------------------------------------------------
<S> <C>                                            <C>         <C>          <C>
Hampton Inns
    Boone, NC                                      $   71.16      74.65%    $    758
    Brunswick, GA                                      55.67      87.08%         954
    Cary, NC                                           65.89      78.52%       1,126
    Charlotte, NC                                      76.11      81.52%       1,368
    Chester, VA                                        69.47      83.42%         626
    Duncanville, TX                                    49.40      66.41%         519
    Durham, NC                                         69.64      82.08%       1,308
    Gwinnett, GA (Hampton Inn & Suites)                77.28      71.11%       1,386
    Hilton Head, SC                                    71.08      71.03%         923
    Jacksonville, NC                                   57.83      80.26%         860
    Las Vegas, NV*                                     60.72      57.50%         500
    Perimeter, GA                                      78.03      70.78%       1,356
    Raleigh, NC                                        70.46      81.79%       1,423
    Southern Pines, NC                                 57.09      74.95%         793
    Southlake, GA                                      63.03      73.51%         838
    W. Springfield, MA                                 74.99      72.03%       1,122
    White Plains, NY                                   97.34      80.86%       2,235
    Wilmington, NC                                     66.93      78.93%         974
Comfort Inns
    Augusta, GA                                        52.76      62.10%         514
    Charleston, SC                                     70.40      77.47%       1,211
    Chester, VA                                        65.95      71.61%         960
    Clearwater/St. Petersburg, FL                      53.18      79.42%         708
    Durham, NC                                         70.39      78.89%       1,359
    Fayetteville, NC                                   54.45      67.41%       1,081
    Greenville, SC                                     47.09      53.83%         569
    London, KY (Comfort Suites)                        55.83      75.59%         408
    Orlando, FL (Comfort Suites)                       59.35      86.70%       1,840
    Raleigh, NC                                        48.52      61.99%         556
    Wilmington, NC                                     57.13      79.59%       1,040
Homewood Suites
    Alpharetta, GA*                                    91.51      53.53%         577
    Cary, NC                                           91.92      83.53%       2,060
    Clear Lake, TX                                     96.37      81.46%       1,237
    Durham, NC*                                        72.95      42.10%         135
    Lake Mary, FL*                                     87.40      59.26%         650
    Phoenix, AZ*                                       69.87      52.92%         617
    Raleigh, NC*                                       82.55      51.21%         954
------------------------------------------------------------------------------------
</TABLE>


                                       9
<PAGE>   10

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
                                                                               1999
-------------------------------------------------------------------------------------------------------------------------
                                                   Number     Room                                      Lease      Number
                                                    of      Revenues                                  Revenues       of
                                                   Rooms     ($000)         ADR       Occupancy %      ($000)      Rooms
-------------------------------------------------------------------------------------------------------------------------
<S>  <C>                                           <C>     <C>          <C>           <C>             <C>          <C>
Holiday Inns
     Abingdon, VA (Holiday Inn Express)               81      1,394         63.16        74.63%           667         81
     Clearwater, FL (Holiday Inn Express)            127      2,496         68.49        78.61%         1,137        127
     Dallas, TX  (Holiday Inn Select)                244      4,179         72.80        64.45%         1,891        244
     Secaucus, NJ#                                   160      5,442        115.70        80.53%         2,405        160
     Tinton Falls, NJ#                               171      4,414         91.67        77.15%         1,548        171
Courtyard by Marriott
     Ann Arbor, MI                                   160      4,277         90.84        80.62%         2,055        160
     Houston, TX                                     198      3,475         77.02        62.43%         1,565        198
     Wilmington, NC                                  128      2,551         74.39        73.83%         1,082        128
     Winston-Salem, NC*                              122      2,289         76.39        67.29%         1,121        122
Hilton Garden Inns
     Albany, NY*                                     155      3,286         92.12        63.05%         1,813        155
     Alpharetta, GA*                                 164      3,827         98.74        64.75%         2,071        164
     Raleigh/Durham, NC*                             155      3,635         98.33        65.34%         2,030        155

Quality Suites - Charleston, SC                      168      3,955         86.96        74.17%         1,789        168
Residence Inn - Phoenix, AZ#                         168      3,459         82.12        68.68%         1,799        168
Fairfield Inn - Ann Arbor, MI                        110      2,019         69.71        72.14%           821        110
-------------------------------------------------------------------------------------------------------------------------
  TOTAL                                            6,904   $134,886      $  75.24        71.15%       $61,877      6,904
-------------------------------------------------------------------------------------------------------------------------


<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                          1998
-------------------------------------------------------------------------------------------------------
                                                          Room                                  Lease
                                                        Revenues                               Revenues
                                                         ($000)         ADR      Occupancy %    ($000)
-------------------------------------------------------------------------------------------------------
<S>  <C>                                             <C>             <C>         <C>          <C>
Holiday Inns
     Abingdon, VA (Holiday Inn Express)                   1,397         62.55        75.55%        675
     Clearwater, FL (Holiday Inn Express)                 2,196         63.48        74.62%        937
     Dallas, TX  (Holiday Inn Select)                     4,503         74.66        67.73%      2,126
     Secaucus, NJ#                                        5,305        109.79        82.74%      2,748
     Tinton Falls, NJ#                                    3,946         86.75        72.88%      1,286
Courtyard by Marriott
     Ann Arbor, MI                                        3,855         87.16        75.73%      1,780
     Houston, TX                                          3,300         75.08        60.56%      1,456
     Wilmington, NC                                       2,517         71.87        74.97%      1,069
     Winston-Salem, NC*                                     395         73.50        48.94%        186
Hilton Garden Inns
     Albany, NY*                                          2,086         91.56        53.45%      1,341
     Alpharetta, GA*                                      2,593         95.32        54.21%      1,594
     Raleigh/Durham, NC*                                  1,923         87.29        58.01%      1,113

Quality Suites - Charleston, SC                           4,113         81.80        82.00%      1,910
Residence Inn - Phoenix, AZ#                              4,200         90.74        75.48%      2,251
Fairfield Inn - Ann Arbor, MI                             1,901         66.38        71.33%        748
-------------------------------------------------------------------------------------------------------
  TOTAL                                                $121,713      $  72.14        72.11%   $ 56,765
-------------------------------------------------------------------------------------------------------
</TABLE>

      * Hotel opened during 1998.
      # Hotel acquired during 1998.


                                      10
<PAGE>   11

THE PERCENTAGE LEASES

   In order for the Company to qualify as a REIT, the Partnership cannot
operate hotels. Therefore, the Partnership leases the Current Hotels for terms
of 10 or 15 years pursuant to Percentage Leases, which provide for rent equal
to the greater of Base Rent or Percentage Rent. The Percentage Leases for the
Current Hotels contain the provisions described below. The Company intends that
future leases with respect to its hotel property investments will contain
substantially similar provisions, although the Company may, in its discretion,
alter any of these provisions with respect to any particular lease, depending
on the purchase price paid, economic conditions and other factors deemed
relevant at the time.

   Percentage Lease Terms

   Each Percentage Lease for the Current Hotels has a non-cancelable term of 10
or 15 years, subject to earlier termination upon the occurrence of certain
contingencies described in the Percentage Lease.

   Amounts Payable under the Percentage Leases

   During the term of each Percentage Lease, the lessees are or will be
obligated to pay (i) the greater of Base Rent or Percentage Rent and (ii)
certain other additional charges. Base Rent accrues and is required to be paid
monthly. Percentage Rent consists of minimum percentage rent and excess
percentage rent, if any. Minimum percentage rent is calculated based primarily
on the amount of room revenue up to a predetermined threshold per the lease.
The percentage, which differs by hotel, is multiplied by this amount to
calculate minimum percentage rent. These percentages range from 23% to 81%.
Excess percentage rent is calculated based primarily on the amount of any room
revenue in excess of the predetermined threshold mentioned above. The
percentage, which differs by hotel, is multiplied by this amount to calculate
excess percentage rent. These percentages range from 5% to 80%. For most
leases, the percentage used to calculate excess percentage rent exceeds the
percentage used to calculate the minimum percentage rent. Percentage Rent is
due either monthly or quarterly.

   Beginning in the fiscal year following the year in which most Percentage
Leases commence, and for each fiscal year thereafter, (i) the annual Base Rent
and (ii) the Percentage Rent formulas will be adjusted on a quarterly or annual
basis for inflation, based on changes in the CPI. The adjustment in any quarter
may not exceed 2%, which may be less than the change in CPI for the quarter.

   Other than real estate and personal property taxes, casualty insurance,
capital improvements and maintenance of underground utilities and structural
elements, which are obligations of the Company, the Percentage Leases require
the lessees to pay rent, insurance, all costs and expenses and all utility and
other charges incurred in the operation of the Current Hotels. The Percentage
Leases also provide for rent reductions and abatements in the event of damage
to, destruction of or a partial taking of any Current Hotel.

   Maintenance and Modifications

   Under the Percentage Leases, the Company is required to maintain the
underground utilities and the structural elements of the improvements,
including exterior walls (excluding plate glass) and the roof of such Current
Hotel. In addition, the Percentage Leases obligate the Company to fund periodic
capital improvements (in addition to maintenance of underground utilities and
structural elements) to the buildings and grounds comprising their respective
Current Hotels, and the periodic repair, replacement and refurbishment of
furniture, fixtures and equipment in their respective Current Hotels, up to an
amount equal to 5% of room revenues (7% of room revenues and food and beverage
revenue for one of its full-service hotels). These obligations will be carried
forward to the extent that the lessees have not expended such amounts, and any
unexpended amounts will remain the property of the Company upon termination of
the Percentage Leases. Except for capital improvements and maintenance of
structural elements and underground utilities, the lessees are required, at
their expense, to maintain the Current Hotels in good order and repair, except
for ordinary wear and tear, and to make non-structural, foreseen and
unforeseen, and ordinary and extraordinary repairs which may be necessary and
appropriate to keep the Current Hotels in good order and repair.

   The lessees are not obligated to bear the cost of capital improvements to
the Current Hotels. With the consent of the Company, however, the lessees, at
their expense, may make non-capital and capital additions, modifications or
improvements to the Current Hotels, provided that such action does not
significantly alter the character or purposes of the Current Hotels or
significantly detract from the value or operating efficiencies of the Current
Hotels. All such alterations, replacements and improvements shall be subject to
all the terms and provisions of the Percentage Leases and will become the
property of the Company upon termination of the Percentage Leases. The Company
owns or will own substantially all personal property not affixed to, or deemed
a part of, the real estate or improvements thereon comprising the Current
Hotels, except to the extent that ownership of such personal property would
cause the rents under the Percentage Leases not to qualify as "rents from real
property" for REIT income test purposes.


                                      11
<PAGE>   12

ITEM 3.     LEGAL PROCEEDINGS

   Other than the matter described below, the Company currently is not involved
in any pending legal proceedings, other than ordinary routine litigation
incidental to the business, nor are any such proceedings known to be
contemplated by governmental authorities. The lessees have advised the Company
that they currently are not involved in any material pending litigation, other
than routine litigation arising in the ordinary course of business,
substantially all of which is expected to be covered by liability insurance.

   On July 16, 1999, Walton Construction Company, Inc. ("Walton") filed a civil
lawsuit in the State Court of Fulton County Georgia naming the Partnership as
defendant. The Partnership removed the action to the United States District
Court for the Northern District of Georgia on August 30, 1999. The complaint
alleges that the Partnership has not paid approximately $2,500,000 due under a
contract entered into by the parties in connection with the construction of the
Partnership's Alpharetta, Georgia Homewood Suites Hotel. The Partnership
disputes that such monies are due to Walton based upon Walton's alleged
inability to complete construction on the hotel within the time set out in the
construction contract. The Partnership has also filed counterclaims against
Walton arising out of the construction delays and construction deficiencies
allegedly caused by Walton. On August 2, 1999, Walton initiated a virtually
identical action in the United States District Court for the Eastern District
of North Carolina. On February 29, 2000, the Partnership answered Walton's
complaint and counterclaimed for recovery of damages due to the construction
delays and construction deficiencies allegedly caused by Walton.
Simultaneously, the Partnership also filed a third party action against
Walton's surety for recovery on a performance bond.

   The Partnership believes that it has substantial and meritorious defenses
against the claims alleged against it, and the Partnership intends to
vigorously defend against these claims and pursue its own claims.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

   No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.


                                      12
<PAGE>   13

PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
              STOCKHOLDER MATTERS

MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY

   WHI's Common Stock trades on the New York Stock Exchange ("NYSE") under the
symbol "WXH." As of March 15, 2000, WHI had approximately 11,700 common
shareholders based on the number of shareholders of record and an estimate of
the number of participants represented by security position listings. The
following table sets forth, for the indicated periods, the high and low closing
prices for the Common Stock and the cash distributions declared per share:

<TABLE>
<CAPTION>
                                               PRICE RANGE             CASH DISTRIBUTIONS DECLARED
                                               -----------             ---------------------------
                                         HIGH                LOW                PER SHARE
                                         ----                ---                ---------

<S>                                  <C>                  <C>          <C>
1999
First Quarter                        $     9.75           $    8.063           $     0.28
Second Quarter                            10.50                8.188                 0.28
Third Quarter                            10.313                8.375                 0.28
Fourth Quarter                            8.688                 7.75                 0.28

1998
First Quarter                        $   13.875           $   12.813           $     0.27
Second Quarter                            13.50                11.25                 0.27
Third Quarter                            12.125                8.563                 0.27
Fourth Quarter                             9.50                6.938                 0.28
</TABLE>

   Although the declaration of distributions is within the discretion of the
Board of Directors and depends on the Company's results of operations, cash
available for distribution, the financial condition of the Company, tax
considerations (including those related to REITs) and other factors considered
important by the Board of Directors, the Company's policy is to make regular
quarterly distributions to its shareholders.

RECENT SALES OF UNREGISTERED SECURITIES

   On October 2, 1999, WHI issued 440,100 shares of WHI Common Stock to Quantum
Realty Partners, II, L.P. in exchange for 440,100 units of limited partnership
in the Partnership. The WHI Common Stock was issued in reliance on a claim of
exemption pursuant to Section 4(2) of the Securities Act of 1933, as amended.


                                      13
<PAGE>   14

ITEM 6.    SELECTED FINANCIAL DATA

The following table sets forth selected financial information for the Company
for the years ended December 31, 1999, 1998, 1997, 1996, and 1995 and selected
historical balance sheet data as of December 31, 1999, 1998, 1997, 1996, and
1995. This information should be read in conjunction with Management's
Discussion and Analysis of Financial Condition and Results of Operations and
the consolidated financial statements and notes thereto included elsewhere in
this report.

                              WINSTON HOTELS, INC.
           SELECTED HISTORICAL FINANCIAL AND OTHER DATA FOR THE YEARS
               ENDED DECEMBER 31, 1999, 1998, 1997, 1996 AND 1995
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                              1999          1998          1997          1996          1995
                                                              ----          ----          ----          ----          ----
<S>                                                       <C>           <C>           <C>           <C>           <C>
STATEMENTS OF INCOME:
Revenue:
    Percentage lease revenue                              $   61,877    $   54,700    $   35,868    $   26,611    $   17,148
    Interest and other income                                    433           249           234            97           442
                                                          ----------    ----------    ----------    ----------    ----------
        Total revenue                                         62,310        54,949        36,102        26,708        17,590
                                                          ----------    ----------    ----------    ----------    ----------
Expenses:
    Real estate taxes and property and casualty
        insurance                                              5,996         5,017         2,702         1,647         1,054
    General and administrative                                 4,236         3,889         2,095         2,061         1,208
    Interest                                                  12,513         8,314         2,648         2,368         2,555
    Depreciation                                              20,565        16,389        10,064         6,476         3,854
    Amortization                                                 834           465           520           368           117
                                                          ----------    ----------    ----------    ----------    ----------
       Total expenses                                         44,144        34,074        18,029        12,920         8,788
                                                          ----------    ----------    ----------    ----------    ----------
       Income before loss on sale of property and
         allocation to minority interest                      18,166        20,875        18,073        13,788         8,802
Loss on sale of property                                         239            --            --            --            --
                                                          ----------    ----------    ----------    ----------    ----------
       Income before allocation to minority interest          17,927        20,875        18,073        13,788         8,802
    Income allocation to minority interest                     1,026         1,349         1,329           786           417
                                                          ----------    ----------    ----------    ----------    ----------
        Net income                                            16,901        19,526        16,744        13,002         8,385
        Preferred stock distribution                           6,938         6,938         2,100            --            --
                                                          ----------    ----------    ----------    ----------    ----------
    Net income available to common shareholders           $    9,963    $   12,588    $   14,644    $   13,002    $    8,385
                                                          ==========    ==========    ==========    ==========    ==========
Earnings per share:
    Net income per common share                           $     0.61    $     0.77    $     0.92    $     1.01    $     0.96
                                                          ==========    ==========    ==========    ==========    ==========
    Net income per common share assuming dilution         $     0.61    $     0.77    $     0.91    $     1.00    $     0.96
                                                          ==========    ==========    ==========    ==========    ==========

    Weighted average number of common shares                  16,467        16,286        15,990        12,922         8,715
    Weighted average number of common shares
       assuming dilution                                      18,108        18,040        17,555        13,768         9,167

Distributions per common share                            $     1.12    $     1.09    $     1.08    $    1.005    $     0.93

BALANCE SHEET DATA:
Cash and cash equivalents                                 $       28    $       33    $      164    $      234    $    2,496
Investment in hotel properties                               388,870       397,861       279,485       196,682       121,886
Total assets                                                 406,071       412,156       287,827       203,502       123,969
Total debt                                                   174,475       173,085        44,081        42,800        34,000
Shareholders' equity                                         209,078       213,425       217,490       141,813        80,872

OTHER DATA:
Lessees' room revenue                                     $  134,885    $  117,752    $   79,526    $   58,956    $   39,677
Funds from operations(1)                                      31,793        30,326        26,037        20,581        12,656
Cash available for distribution                               24,735        24,093        21,809        17,557        11,185
</TABLE>


                                      14
<PAGE>   15

<TABLE>
<S>                                                          <C>          <C>            <C>           <C>           <C>
Cash provided by (used in):
    Operating activities                                      39,952        34,605        27,811        18,729        12,628
    Investing activities                                     (12,658)     (135,398)      (82,349)      (74,614)      (36,059)
    Financing activities                                     (27,299)      100,662        54,468        53,623        24,813
</TABLE>


(1) Funds from operations, as defined by the National Association of Real
Estate Investment Trusts, is income (loss) before minority interest (determined
in accordance with generally accepted accounting principles), excluding gains
(losses) from debt restructuring and sales of properties, plus real
estate-related depreciation and amortization and after adjustments for
unconsolidated partnerships and joint ventures.

   The following table sets forth selected financial information for CapStar
Winston for the years ended December 31, 1999 and 1998 and the period October
15, 1997 (date of inception) through December 31, 1997. This information should
be read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and notes
thereto included elsewhere in this report.

                        CAPSTAR WINSTON COMPANY, L.L.C.
                       SELECTED HISTORICAL FINANCIAL DATA
               FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
                THE PERIOD OCTOBER 15, 1997 (DATE OF INCEPTION)
                           THROUGH DECEMBER 31, 1997
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                    PERIOD OCTOBER 15,
                                                    YEAR ENDED               YEAR ENDED               1997 THROUGH
                                                 DECEMBER 31, 1999        DECEMBER 31, 1998         DECEMBER 31, 1997
                                                 -----------------        -----------------         -----------------

<S>                                              <C>                      <C>                       <C>
Room revenue                                       $     127,571            $      113,451             $      8,197
Other revenue                                             14,144                    12,182                      846
                                                   -------------            --------------             ------------
    Total revenue                                        141,715                   125,633                    9,043
                                                   -------------            --------------             ------------

Rooms expense                                             29,190                    25,664                    2,158
Percentage lease expense                                  58,551                    52,720                    3,242
Other expenses                                            53,087                    46,653                    3,704
                                                   -------------            --------------             ------------
    Total expenses                                       140,828                   125,037                    9,104
                                                   -------------            --------------             ------------
    Net income (loss)                              $         887            $          596             $        (61)
                                                   =============            ==============             ============
</TABLE>

   The following table sets forth selected financial information for Winston
Hospitality, Inc. for the ten months ended October 31, 1997 and 1996 and the
years ended December 31, 1996 and 1995. This information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations and the financial statements and notes thereto
included elsewhere in this report.

                           WINSTON HOSPITALITY, INC.
                       SELECTED HISTORICAL FINANCIAL DATA
               FOR THE TEN-MONTHS ENDED OCTOBER 31, 1997 AND 1996
                 AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                      TEN MONTHS ENDED OCTOBER 31,       YEARS ENDED DECEMBER 31,
                                      ----------------------------       ------------------------
                                          1997            1996             1996             1995
                                          ----            ----             ----             ----
                                                      (unaudited)
<S>                                   <C>             <C>              <C>              <C>
Room revenue                          $    67,145     $    49,633      $     58,956     $    39,677
Other revenue                               3,944           2,390             2,969           1,100
                                      -----------     -----------      ------------     -----------
     Total revenue                         71,089          52,023            61,925          40,777
                                      -----------     -----------      ------------     -----------
Property and operating expenses            38,292          27,965            34,549          22,097
Percentage lease payments                  30,980          22,800            26,611          17,148
                                      -----------     -----------      ------------     -----------
     Total expenses                        69,272          50,765            61,160          39,245
                                      -----------     -----------      ------------     -----------
     Net income                       $     1,817     $     1,258      $        765     $     1,532
                                      ===========     ===========      ============     ===========
</TABLE>


                                      15
<PAGE>   16

ITEM 7.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
               CONDITION AND RESULTS OF OPERATIONS
               ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

   Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering of $0.01 par value common stock ("Common
Stock"), utilizing the majority of the proceeds to acquire one hotel and a
general partnership interest (as the sole general partner) in WINN Limited
Partnership (the "Partnership"). The Partnership used a substantial portion of
the proceeds to acquire nine hotel properties (collectively the ten hotels are
the "Initial Hotels"). The Initial Hotels were acquired from affiliates of WHI.
WHI and the Partnership (collectively the "Company") began operations as a REIT
on June 2, 1994.

   During 1995 and 1996, WHI completed follow-on Common Stock offerings, as
well as a Preferred Stock offering in September 1997, and invested the net
proceeds from these offerings in the Partnership. The Partnership utilized the
proceeds to acquire 28 additional hotel properties. The Company owned 31 hotels
as of December 31, 1996 and acquired seven hotels in 1997 (the "1997 Hotels").
During 1998, the Company added 13 additional properties to its portfolio, five
of which were internally developed (the "1998 Hotels") (see Note 4 to the
consolidated financial statements). As of December 31, 1999, WHI's ownership in
the Partnership was 92.83% (see Note 7 to the consolidated financial
statements). As of December 31, 1999, the Company owned 51 hotel properties
(the "Current Hotels"), in 13 states, having an aggregate of 6,904 rooms.
Forty-nine of the Current Hotels were leased, pursuant to separate percentage
operating lease agreements (the "Percentage Leases"), to CapStar Winston
Company, L.L.C. ("CapStar Winston"), one was leased to Bristol Hotels and
Resorts, Inc. and one was leased to Prime Hospitality Corp.

   Prior to November 17, 1997, the Current Hotels were leased pursuant to the
Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and
November 24, 1997, CapStar Management Company, L.P. purchased substantially all
of the assets and assumed certain liabilities of Winston Hospitality, Inc.,
including all 38 of the then existing Current Hotels' leases. Concurrent with
this transaction, the leases were assigned to CapStar Winston, an affiliate of
CapStar Management Company, L.P., and the terms of the leases were extended to
15 years from the date of the transaction.

   CapStar Winston is a wholly owned subsidiary of MeriStar Hotels and Resorts,
Inc. ("MeriStar"). As of December 31, 1999, MeriStar, the nation's largest
independent hotel management company, leased or managed 225 hotels with 47,046
rooms in 35 states, the District of Columbia, Canada and the U.S. Virgin
Islands.


RESULTS OF OPERATIONS

   For the periods ended December 31, 1999, 1998, and 1997, the differences in
operating results are primarily attributable to the stabilization of the 1998
Hotels and the full year of operations of those hotels in 1999 versus the
partial year of operations in 1998. The table below outlines the Company's
hotel properties owned as of December 31, 1999, 1998 and 1997:


<TABLE>
<CAPTION>
                                   December 31, 1999                   December 31, 1998                 December 31, 1997
                             ---------------------------       -----------------------------        ---------------------------
                             Acquisitions     Properties       Acquisitions*      Properties        Acquisitions     Properties
                                during         owned at           during           owned at            during         owned at
 Type of Hotel                 the year        year end          the year          year end           the year        year end
 -------------                 --------        --------          --------          --------           --------        --------

 <S>                         <C>              <C>              <C>                <C>               <C>              <C>
 Limited-service hotels            --             29                 1                29                  4              28
 Extended-stay hotels              --             11                 6                11                  1               5
 Full-service hotels               --             11                 6                11                  2               5
                                   --             --                --                --                  -              --
 Total                             --             51                13                51                  7              38
                                   ==             ==                ==                ==                  =              ==
</TABLE>


* Five of the total 13 hotels added in 1998 were internally developed
properties.


                                      16
<PAGE>   17

   In order to present a more meaningful comparison of operations, the
following comparisons are presented:

THE COMPANY:
     -    actual operating results for the year ended December 31, 1999 versus
          actual operating results for the year ended December 31, 1998;
     -    actual operating results for the year ended December 31, 1998 versus
          actual operating results for the year ended December 31, 1997;
     -    actual operating results for the year ended December 31, 1999 versus
          pro forma operating results for the year ended December 31, 1998, as
          if the addition of the 1998 Hotels occurred on the later of January
          1, 1998 or the hotel opening date (the Company made no acquisitions
          in 1999, therefore the pro forma 1999 results of operations would be
          identical to the actual 1999 results of operations);
     -    pro forma operating results for the year ended December 31, 1998
          versus pro forma operating results for the year ended December 31,
          1997, as if the Preferred Stock offering and the addition of the 1998
          Hotels and 1997 Hotels occurred on the later of January 1, 1997 or
          the hotel opening date.

CAPSTAR WINSTON COMPANY, L.L.C.:
     -    actual operating results for the year ended December 31, 1999 versus
          actual operating results for the year ended December 31, 1998;
     -    Since CapStar Winston operated for a partial year in 1997 (November
          and December) and for a full year in 1998, the operating results of
          these two periods are very different and difficult to compare. Thus,
          no management discussion and analysis will be included herein. (See
          Item 14 for CapStar Winston's financial statement disclosure.)


THE COMPANY

ACTUAL - YEAR ENDED DECEMBER 31, 1999 VERSUS ACTUAL - YEAR ENDED DECEMBER 31,
1998

   The Company had revenues of $62,310 in 1999, consisting of $61,877 of
Percentage Lease revenues and $433 of interest and other income. Percentage
Lease revenues increased $7,177, or 13%, in 1999 from $54,700 in 1998. This
increase was primarily attributable to an increase in lease revenues from the
1998 Hotels due to a full year of operations in 1999 versus a partial year of
operations in 1998, partially offset by a decrease of $1,160 in lease revenue
generated from the hotels owned as of December 31, 1997, which decrease was
primarily attributable to competitive pressures.

   Real estate taxes and property and casualty insurance expenses incurred in
1999 were $5,996, an increase of $979 from $5,017 in 1998. The increase was
primarily attributable to a full year of operations for the 1998 Hotels in 1999
versus a partial year in 1998. General and administrative expenses increased
$347 to $4,236 in 1999 from $3,889 in 1998. The increase was primarily
attributable to an increase in the number of employees and related compensation
expense throughout the year, costs associated with efforts to form joint
ventures and costs associated with efforts to sell certain hotels. Interest
expense increased $4,199 to $12,513 in 1999 from $8,314 in 1998, primarily due
to an increase in weighted-average outstanding borrowings from $127,776 in 1998
to $178,038 in 1999, and a decrease of capitalized interest of $1,350 from
$1,513 in 1998 to $163 in 1999. Annual weighted-average interest rates
decreased 0.58% from 7.63% in 1998 to 7.05% in 1999. Depreciation expense
increased $4,176 to $20,565 in 1999 from $16,389 in 1998, primarily due to
depreciation related to the 1998 Hotels and renovations completed during 1999
and 1998. Amortization expense increased $369 to $834 in 1999 from $465 in
1998. The increase is primarily attributable to an increase in amortization of
deferred financing costs associated with the Company's new $140,000 line of
credit, which originated in February 1999, and the Company's $71,000 GE Capital
Corporation loan which originated in November 1998.

ACTUAL - YEAR ENDED DECEMBER 31, 1998 VERSUS ACTUAL - YEAR ENDED DECEMBER 31,
1997

   The Company had revenues of $54,949 in 1998, consisting of $54,700 of
Percentage Lease revenues and $249 of interest and other income. Percentage
Lease revenues increased $18,832, or 53%, in 1998 from $35,868 in 1997. This
increase was attributable to (i) $12,132 related to the 1998 Hotels; (ii)
$6,479 related to the 1997 Hotels owned for the entire 12-month period in 1998;
and (iii) $221 in lease revenues generated from the hotels owned as of December
31, 1996.


                                      17
<PAGE>   18

   Real estate taxes and property and casualty insurance expenses incurred in
1998 were $5,017, an increase of $2,315 from $2,702 in 1997. $940 of this
increase was attributable to the 1998 Hotels and $813 was due to the 1997
Hotels that were owned for the entire 12-month period in 1998. The remaining
increase was due to an increase in assessed values and rates. General and
administrative expenses increased $1,794 to $3,889 in 1998 from $2,095 in 1997.
The increase was primarily attributable to (i) an increase in the number of
employees and related compensation expense throughout the year; (ii) costs
related to the increase in size and activities of the Company in 1998 over
1997; as well as (iii) advertising costs associated with the opening of five
internally developed hotels during 1998. Interest expense increased $5,666 to
$8,314 in 1998 from $2,648 in 1997, primarily due to an increase in
weighted-average outstanding borrowings from $48,842 in 1997 to $127,776 in
1998. This increase was due to the borrowings necessary to acquire and develop
the 1998 Hotels as well as an increase in renovation activity in 1998. Interest
rates remained relatively flat from 1997 to 1998. Depreciation expense
increased $6,325 to $16,389 in 1998 from $10,064 in 1997, primarily due to
depreciation related to the 1998 Hotels, the 1997 Hotels and renovations
completed during 1998 and 1997.


ACTUAL - YEAR ENDED DECEMBER 31, 1999 VERSUS PRO FORMA - YEAR ENDED DECEMBER
31, 1998

   The Company had revenues of $62,310 for the year ended December 31, 1999,
consisting of $61,877 of Percentage Lease revenues and $433 of interest and
other income. Percentage Lease revenues increased $5,476, or 10%, to $61,877 in
1999 from $56,401 in 1998. This increase was primarily attributable to the
opening of 10 hotel properties in 1998 (the "1998 New Hotels"), partially
offset by a decrease of $935 in lease revenue generated from the hotels owned
as of December 31, 1997, which decrease was primarily attributable to
competitive pressures.

    Real estate taxes and property and casualty insurance expenses incurred in
1999 were $5,996, an increase of $739 from $5,257 in 1998. The increase was
primarily attributable to the 1998 New Hotels and an increase in tax rates and
assessed values in 1999. General and administrative expenses increased $338 to
$4,236 in 1999 from $3,898 in 1998. The increase was primarily attributable to
an increase in the number of employees and related compensation expense
throughout the year, costs associated with efforts to form joint ventures and
costs associated with efforts to sell certain hotels. Interest expense
increased $3,602 to $12,513 in 1999 from $8,911 in 1998. The increase was
primarily due to an increase in weighted-average borrowings from $137,932 in
1998 to $178,038 in 1999, offset by a decrease of capitalized interest of
$1,350 from $1,513 in 1998 to $163 in 1999. Interest rates decreased 0.58% from
7.63% in 1998 to 7.05% in 1999. Depreciation expense increased $3,845 to
$20,565 in 1999 from $16,720 in 1998, primarily due to additional depreciation
related to the 1998 New Hotels and renovations completed during 1999 and 1998.
Amortization expense increased $372 to $834 in 1999 from $462 in 1998. The
increase is primarily attributable to an increase in amortization of deferred
financing costs associated with the Company's new $140,000 line of credit,
which originated in February 1999, and the Company's $71,000 GE Capital
Corporation loan, which originated in November 1998.


PRO FORMA - YEAR ENDED DECEMBER 31, 1998 VERSUS PRO FORMA - YEAR ENDED DECEMBER
31, 1997

   The Company had pro forma revenues of $56,650 for the year ended December
31, 1998, consisting of $56,401 of pro forma Percentage Lease revenues and $249
of pro forma interest and other income. Pro forma Percentage Lease revenues
increased $8,781, or 18%, to $56,401 in 1998 from $47,620 in 1997. Of this
increase, $7,667 was attributable to the 1998 New Hotels and the remaining
increase of $1,114 was primarily due to an increase in room rates in 1998 from
1997.

   Pro forma real estate taxes and property and casualty insurance expenses
incurred in 1998 were $5,257, an increase of $1,163 from $4,094 in 1997. This
increase was primarily attributable to the 1998 New Hotels and an increase in
tax rates and assessed values in 1998. Pro forma general and administrative
expenses increased $1,730 to $3,898 in 1998 from $2,168 in 1997. The increase
was primarily attributable to (i) an increase in the number of employees and
related compensation expense throughout the year; (ii) costs related to the
increase in size and activities of the Company in 1998 over 1997; as well as
(iii) pre-opening advertising costs associated with the opening of five
internally developed hotels during 1998. Pro forma interest expense increased
$5,269 to $8,911 in 1998 from $3,642 in 1997. The increase was primarily due to
an increase in weighted average borrowings from $68,957 in 1997 to $137,932 in
1998, which resulted from borrowings made to acquire and develop the 1998 New
Hotels. Interest rates remained flat from 1997 to 1998. Pro forma depreciation
expense increased $4,262 to $16,720 in 1998 from $12,458 in 1997, primarily due
to additional depreciation related to the 1998 New Hotels and renovations
completed during 1998 and 1997.


                                      18
<PAGE>   19

CAPSTAR WINSTON COMPANY, L.L.C.

ACTUAL - YEAR ENDED DECEMBER 31, 1999 VERSUS ACTUAL - YEAR ENDED DECEMBER 31,
1998

   Total revenue increased $16,082 or 12.8%, to $141,715 from $125,633. This
increase was primarily related to an increase in room revenues of $14,120 or
12.4%, to $127,571 from $113,451. The increase in room revenues was due to an
increase of $14,058 for the 1998 Hotels and an increase of $62 for all other
hotels. Food and beverage revenue increased $1,939 to $8,732 in 1999 from
$6,793 in 1998, primarily due to increased revenue from the 1998 Hotels.

   Total expenses increased $15,791 or 12.6%, to $140,828 from $125,037. This
increase was primarily related to increased expenses generated by the 1998
Hotels.

   Net income increased $291, to $887 from $596, primarily driven by the
operating results of the 1998 Hotels.


REVENUE RECOGNITION AND IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS TO BE
ADOPTED IN 2000

   In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") which provides guidance on revenue
recognition. SAB 101 is effective for fiscal years beginning after December 15,
1999. SAB 101 requires that a lessor not recognize contingent rental income
until annual specified hurdles have been achieved by the lessee. During 1999
and prior years, the Company has recognized contingent rentals throughout the
year since it was considered probable that the lessee would exceed the annual
specified hurdles. The Company has reviewed the terms of its Percentage Leases
and has determined that the provisions of SAB 101 materially impact the
Company's revenue recognition on an interim basis, effectively deferring the
recognition of revenue from its Percentage Leases from the first and second
quarters of the calendar year to the third and fourth quarters. SAB 101 will
impact the Company's revenue recognition on an annual basis, although to a much
lesser degree, as seven of the Company's Percentage Leases have fiscal year
ends which differ from the Company's calendar year end. SAB 101 will have no
impact on the Company's interim or annual cash flow from its third party
lessees, and therefore on its ability to pay dividends. The Company will
account for SAB 101 as a change in accounting principle effective January 1,
2000.


LIQUIDITY AND CAPITAL RESOURCES

   The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the year ended December 31,
1999, cash flow provided by operating activities was $39,952 and funds from
operations, which is equal to net income before allocation to minority interest
(excluding gains/losses on sales of property), plus depreciation, less
preferred share distributions, was $31,793. Under federal income tax law
provisions applicable to REITs, the Company is required to distribute at least
95% of its taxable income to maintain its tax status as a REIT. For taxable
years beginning after December 31, 2000, the taxable income distribution
requirement has been lowered to 90%. In 1999, the Company declared
distributions of $25,388 to its shareholders. Because the Company's cash flow
from operating activities is expected to exceed its taxable income due to
depreciation and amortization expenses, the Company expects to be able to meet
its distribution requirements out of cash flow from operating activities.

   The Company's net cash used in investing activities during the year ended
December 31, 1999 totaled $12,658, primarily relating to capital expenditures
and renovation of hotels. During 1999, the Company spent $16,179 or 12.0% of
the lessees' room revenue, in connection with the renovation of its Current
Hotels. These capital expenditures were well in excess of the 5% of room
revenues for its hotels (7% of room revenues and food and beverage revenues for
one of its full service hotels) which the Company is required to spend under
its Percentage Leases for periodic capital improvements and the refurbishment
and replacement of furniture, fixtures and equipment at its Current Hotels.
These capital expenditures are funded from operating cash flow, and possibly
from borrowings under the Company's $140,000 line of credit, sources which are
expected to be adequate to fund such capital requirements. These capital
expenditures are in addition to amounts spent on normal repairs and maintenance
which have approximated 5.5% and 5.3% of room revenues in 1999 and 1998,
respectively, and are paid by the lessees.

   During 1999, the Company sold two land parcels previously held for
development. Total proceeds received were $3,789, resulting in a loss of $239.
Also during 1999, the Company entered into a joint venture agreement with
Regent Partners, Inc. (the "Joint Venture") to jointly develop hotel
properties. As of December 31, 1999, the Company had invested $183 in the Joint
Venture. The first hotel to be developed by the Joint Venture, a full service
158-room Hilton Garden Inn at Windsor, CT, is scheduled to open during the
third quarter of 2000. The second hotel to be developed by the Joint Venture, a
full-service 177-room Hilton Garden Inn in the Chicago suburb of Evanston, is
scheduled to open before the holiday season in 2001. The Company continues to
seek additional joint venture opportunities with other business partners.


                                      19
<PAGE>   20

   On February 15, 2000, the Company sold its Comfort Suites hotel in London,
KY. Sales proceeds received by the Company totaled $2,497, resulting in a net
loss of $265. The Company also is considering the sale of certain other
non-core hotels that lie outside the Company's upscale segment focus and plans
to use the proceeds to reduce debt.

   The Company's net cash used in financing activities during the year ended
December 31, 1999 totaled $27,299. This net use of cash was primarily due to
the payment of distributions to shareholders of $25,248 and the payment of
distributions to the Partnership's minority interest of $1,947. This amount
also includes payments for financing fees totaling $1,445 primarily related to
the Company's $140,000 line of credit, principal payments totaling $1,025
related to the Company's $71,000 fixed rate note, and $49 to register
additional common shares. These payments were offset by a net increase in
amounts outstanding under the $140,000 line of credit of $2,415.

   On February 1, 1999, the Company entered into a new three-year, $140,000
line of credit agreement with a group of four banks led by Wachovia Bank, N.A.
The Company has collateralized the line of credit with 29 of its Current
Hotels. The line of credit bears interest generally at rates from LIBOR plus
1.45% to LIBOR plus 1.70%, based primarily upon the Company's level of total
indebtedness. The Company's current rate is LIBOR plus 1.45%. As of December
31, 1999, total outstanding debt under the line of credit was $104,500.

   The Line is used primarily to fund the Company's hotel acquisitions,
development and major renovations. Pursuant to the Company's operating
strategies, it maintains minimal cash balances and is substantially dependent
upon, among other things, the availability of adequate financing to support
hotel acquisitions, development and major renovations.

   The Company had $69,975 in debt at December 31, 1999 that was subject to a
fixed interest rate and fixed monthly payments. This debt, a ten-year loan with
a 25-year amortization period, with GE Capital Corporation, carries an interest
rate of 7.375% for the first 10 years. All unpaid principal and interest are
due on December 1, 2008. The GE Capital loan is collateralized with 14 of the
Company's Current Hotels.

   On May 18, 1999, at the Annual Meeting of Shareholders, the Company's
shareholders approved an amendment to the Company's Articles of Incorporation
to increase the limit of its level of permitted indebtedness from 45% to 60% of
investments in hotel properties, at cost. This change should provide the
Company with greater financial flexibility and should allow the Company to be
better positioned to acquire or develop hotel properties when attractive
opportunities are available.

   The Company intends to acquire and develop additional hotel properties that
meet its investment criteria and is continually evaluating acquisition
opportunities. It is expected that future hotel acquisitions will be financed,
in whole or in part, from additional follow-on offerings, from borrowings under
the line of credit, from joint venture agreements, from the sale of hotel
properties and/or from the issuance of other debt or equity securities. There
can be no assurances that the Company will make an investment in any additional
hotel properties that meet its investment criteria.


SEASONALITY

   The Company's operations historically have been seasonal in nature,
reflecting higher REVPAR during the second and third quarters. This seasonality
and the structure of the Percentage Leases, which provide for a higher
percentage of room revenues above the minimum equal quarterly levels to be paid
as Percentage Rent, can be expected to cause fluctuations in the Company's
quarterly lease revenue under the Percentage Leases.


FORWARD LOOKING STATEMENTS

   This report contains certain "forward looking" statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. You can identify these statements
by use of words like "may," "will," "expect," "anticipate," "estimate," or
"continue" or similar expressions. These statements represent the Company's
judgment and are subject to risks and uncertainties that could cause actual
operating results to differ materially from those expressed or implied in the
forward looking statements, including but not limited to the risk that
properties held for sale will not sell, financing risks, development risks
including risk of construction delay, cost overruns, occupancy rates, average
daily rates, governmental permits, zoning, the increase of development costs in
connection with projects that are not pursued to completion, and the other risk
factors described in Exhibit 99.1 attached to this report.


                                      20
<PAGE>   21

ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   As of December 31, 1999, the Company's exposure to market risk for a change
in interest rates related solely to debt outstanding under its $140,000 line of
credit (the "Line"). Debt outstanding under the Line totaled $104,500 at
December 31, 1999. The Line, which expires in February 2002, bears interest
generally at rates from LIBOR plus 1.45% to LIBOR plus 1.70%, based, in part,
on the Company's level of total indebtedness. The Company's current interest
rate is LIBOR plus 1.45%. During 1999, the Company entered into an interest
rate cap agreement to eliminate the exposure to increases in 30-day LIBOR over
7.50%, and therefore from its exposure to interest rate increases over 8.95%
under the Line on a principal balance of $25,000 for the period of March 23,
1999 through March 25, 2002. The weighted average interest rate on the Line for
1999 was 6.84%. (See Note 6 to the consolidated financial statements.) The
definitive extent of the Company's interest rate risk under the Line is not
quantifiable or predictable because of the variability of future interest rates
and business financing requirements. The Line, combined with the fixed-rate
$71,000 loan with GE Capital Corporation, provides the Company with a maximum
borrowing capacity of $211,000. The Company does not enter into derivative or
interest rate transactions for speculative purposes.

    The following table presents the aggregate maturities and historical cost
amounts of the fixed debt principal and interest rates by maturity dates at
December 31, 1999:

<TABLE>
<CAPTION>
                 MATURITY DATE           FIXED RATE DEBT                 INTEREST RATE

                 <S>                     <C>                             <C>
                     2000                      $   1,103                        7.375%
                     2001                          1,187                        7.375%
                     2002                          1,278                        7.375%
                     2003                          1,376                        7.375%
                     2004                          1,480                        7.375%
                  Thereafter                      63,551                        7.375%
                                               ---------                        ------
                                               $  69,975                        7.375%
                                               =========                        ======
</TABLE>


ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

   The financial statements required by this Item 8 are filed with this report
on Form 10-K immediately following the signature page and are listed in Item 14
of this report on Form 10-K.

ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
             FINANCIAL DISCLOSURE

   Not applicable.


PART III

ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

   Information on the Company's directors is incorporated by reference from
pages 5 and 6, "Proposal 1 - Election of Directors", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 9, 2000. Information on the Company's executive officers is included
under the caption "Executive Officers of the Registrant" on pages 7 and 8 of
this report on Form 10-K.

ITEM 11.     EXECUTIVE COMPENSATION

   This information is incorporated by reference from pages 8 through 12,
"Executive Compensation", in the Company's Proxy Statement to be filed with
respect to the Annual Meeting of Shareholders to be held May 9, 2000.


                                      21
<PAGE>   22

ITEM 12.     SHARE OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

   This information is incorporated by reference from pages 2 through 4, "Share
Ownership of Management and Certain Beneficial Owners", in the Company's Proxy
Statement to be filed with respect to the Annual Meeting of Shareholders to be
held May 9, 2000.

ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   This information is incorporated by reference from page 14, "Certain
Relationships and Related Transactions", in the Company's Proxy Statement to be
filed with respect to the Annual Meeting of Shareholders to be held May 9,
2000.


                                      22

<PAGE>   23

PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K

(a)      FINANCIAL STATEMENTS AND SCHEDULES. The financial statements and
         schedules listed below are included in this report.


<TABLE>
<CAPTION>

Financial Statements and Schedules                                                                          Form 10-K Page
----------------------------------                                                                          --------------

<S>                                                                                                         <C>
WINSTON HOTELS, INC.:
---------------------

Report of Independent Accountants                                                                                 28
Consolidated Balance Sheets as of December 31, 1999 and 1998                                                      29
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997                            30
Consolidated Statements of Shareholders' Equity for the years ended December 31,
   1999, 1998 and 1997                                                                                            31
Consolidated Statements of Cash Flows for the years ended December 31,
   1999, 1998 and 1997                                                                                            32
Notes to Consolidated Financial Statements                                                                        33
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 1999                                   42
Notes to Schedule III                                                                                             44

CAPSTAR WINSTON COMPANY, L.L.C.:
--------------------------------

Independent Auditors' Report                                                                                      45
Balance Sheets as of December 31, 1999 and 1998                                                                   46
Statements of Operations for the years ended December 31, 1999 and 1998 and the period
    from October 15, 1997 (date of inception) through December 31, 1997                                           47
Statements of Members' Capital for the years ended December 31, 1999 and 1998
    and the period from October 15, 1997 (date of inception) through December 31, 1997                            48
Statements of Cash Flows for the years ended December 31, 1999 and
    1998 and the period from October 15, 1997 (date of inception) through December 31, 1997                       49
Notes to Financial Statements                                                                                     50

WINSTON HOSPITALITY, INC.:
--------------------------

Report of Independent Accountants                                                                                 53
Statement of Income for the ten months ended October 31, 1997                                                     54
Statement of Shareholders' Equity for the ten months ended October 31, 1997                                       54
Statement of Cash Flows for the ten months ended October 31, 1997                                                 55
Notes to Financial Statements                                                                                     56
</TABLE>


(B)      REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the
         fourth quarter of 1999.


                                       23
<PAGE>   24


(c)      EXHIBITS. The exhibits required by Item 601 of Regulation S-K are
         listed below. Management contracts or compensatory plans are filed as
         Exhibits 10.9, 10.12, 10.13 and 10.16.

<TABLE>
<CAPTION>

         Exhibit           Description
         -------           -----------

         <S>               <C>
         3.1(10)           Restated Articles of Incorporation

         3.2(1)            Amended and Restated Bylaws

         4.1(1)            Specimen certificate for Common Stock, $0.01 par
                           value per share

         4.2(4)            Specimen certificate for 9.25% Series A Cumulative
                           Preferred Stock

         4.3(10)           Restated Articles of Incorporation

         4.4(1)            Amended and Restated Bylaws

         10.1(3)           Second Amended and Restated Agreement of Limited
                           Partnership of WINN Limited Partnership

         10.2(4)           Amendment No. 1 dated September 11, 1997 to Second
                           Amended and Restated Agreement of Limited
                           Partnership of WINN Limited Partnership

         10.3(6)           Amendment No. 2 dated December 31, 1997 to Second
                           Amended and Restated Agreement of Limited
                           Partnership of WINN Limited Partnership

         10.4              Amendment No. 3 dated September 14, 1998 to Second
                           Amended and Restated Agreement of Limited
                           Partnership of WINN Limited Partnership

         10.5(11)          Amendment No. 4 dated October 1, 1999 to Second
                           Amended and Restated Agreement of Limited Partnership
                           of WINN Limited Partnership

         10.6(2)           Form of Percentage Leases

         10.7(5)           First Amendment to Lease dated November 17, 1997
                           between WINN Limited  Partnership  and CapStar
                           Winston Company, L.L.C.

         10.8(5)           First Amendment to Lease dated November 24, 1997
                           between WINN Limited  Partnership  and CapStar
                           Winston Company, L.L.C.

         10.9(1)           Winston Hotels, Inc. Directors' Stock Incentive Plan

         10.10(2)          Limitation of Future Hotel Ownership and Development
                           Agreement

         10.11(5)          Guaranty dated November 17, 1997 between CapStar Hotel
                           Company, WINN Limited Partnership and Winston Hotels,
                           Inc.

         10.12(6)          Employment Agreement, dated July 31, 1997, by and
                           between Kenneth R. Crockett and Winston Hotels, Inc.

         10.13(7)          Winston Hotels, Inc. Stock Incentive Plan as amended
                           May 1998

         10.14(8)          Loan Agreement by and between Winston SPE LLC and CMF
                           Capital Company LLC dated November 3, 1998

         10.15(8)          Promissory note dated November 3, 1998 by and between
                           Winston SPE LLC and CMF Capital Company, LLC
</TABLE>


                                       24
<PAGE>   25


<TABLE>
       <S>                  <C>
       10.16(9)             Winston Hotels, Inc. Executive Deferred Compensation Plan

       10.17(9)             Credit Agreement, dated as of January 15, 1999, among
                            Wachovia Bank, N.A., Branch Banking and Trust
                            Company, SouthTrust Bank, N.A., Centura Bank, Winston
                            Hotels, Inc., WINN Limited Partnership and Wachovia
                            Bank, N.A. as Agent (the "Credit Agreement")

       10.18(9)             Promissory Note, dated as of January 15, 1999, from
                            Winston Hotels, Inc. and WINN Limited Partnership to
                            Wachovia Bank, N.A. for the principal sum of
                            $60,000,000 pursuant to the Credit Agreement

       10.19(9)             Promissory Note, dated as of January 15, 1999, from
                            Winston Hotels, Inc. and WINN Limited Partnership to
                            Branch Banking and Trust Company for the principal
                            sum of $40,000,000 pursuant to the Credit Agreement

       10.20(9)             Promissory Note, dated as of January 15, 1999, from
                            Winston Hotels, Inc. and WINN Limited Partnership to
                            SouthTrust Bank, N.A. for the principal sum of
                            $25,000,000 pursuant to the Credit Agreement

       10.21(9)             Promissory Note, dated as of January 15, 1999, from
                            Winston Hotels, Inc. and WINN Limited Partnership to
                            Centura Bank for the principal sum of $15,000,000
                            pursuant to the Credit Agreement

       10.22(9)             Form of Deed of Trust, Assignment of Rents, Security
                            Agreement and Financing Statement used to secure
                            certain obligations under the Credit Agreement (not
                            including certain variations existing in the
                            different states where the properties are located)

       21.1                 Subsidiaries of the Registrant

       23.1                 Consent of Independent Accountants
                            (PricewaterhouseCoopers LLP)

       23.2                 Accountants' Consent (KPMG LLP)

       24.1                 Powers of Attorney

       27.1                 Financial Data Schedule (for SEC use only)

       99.1                 Risk Factors
</TABLE>

(1)      Exhibits to the Company's Registration Statement on Form S-11 as filed
         with the Securities and Exchange Commission (Registration No. 33-76602)
         effective May 25, 1994 and incorporated herein by reference.

(2)      Exhibits to the Company's Registration Statement on Form S-11 as filed
         with the Securities and Exchange Commission (Registration No. 33-91230)
         effective May 11, 1995 and incorporated herein by reference.

(3)      Exhibit to the Company's report on Form 8-K as filed with the
         Securities and Exchange Commission on July 24, 1997 and incorporated
         herein by reference.

(4)      Exhibits to the Company's report on Form 8-K as filed with the
         Securities and Exchange Commission on September 15, 1997 and
         incorporated herein by reference.

(5)      Exhibits to the Company's report on Form 8-K as filed with the
         Securities and Exchange Commission on December 10, 1997 and
         incorporated herein by reference.

(6)      Exhibits to the Company's Annual Report on Form 10-K as filed with the
         Securities and Exchange Commission on March 27, 1998 and as amended by
         Form 10-K/A filed with the Securities and Exchange Commission on April
         1, 1998.


                                       25
<PAGE>   26


(7)      Exhibit to the Company's Registration Statement on Form S-8 as filed
         with the Securities and Exchange Commission on July 29, 1998
         (Registration No. 333-60079) and incorporated herein by reference.

(8)      Exhibits to the Company's Quarterly Report on Form 10-Q as filed with
         the Securities and Exchange Commission on November 16, 1998 and as
         amended on Form 10-Q/A filed with the Securities and Exchange
         Commission on February 23, 1999 and incorporated herein by reference.

(9)      Exhibits to the Company's Annual Report on Form 10-K as filed with the
         Securities and Exchange Commission on March 25, 1999 and incorporated
         herein by reference.

(10)     Exhibit to the Company's Quarterly Report on Form 10-Q as filed with
         the Securities and Exchange Commission on August 4, 1999 and
         incorporated herein by reference.

(11)     Exhibit to the Company's Quarterly Report on Form 10-Q as filed with
         the Securities and Exchange Commission on November 13, 1999 and
         incorporated herein by reference.


                                       26
<PAGE>   27

                                   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.

                             WINSTON HOTELS, INC.

                             By:  /s/ Robert W. Winston, III
                                 ---------------------------
                                Robert W. Winston, III
                                Chief Executive Officer

                             Date:  March 17, 2000

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

Signature                                            Title                                         Date
---------                                            -----                                         ----

<S>                                                  <C>                                           <C>
*                                                    Chairman of the Board of Directors            March 17, 2000
--------------------------------------------
Charles M. Winston

/s/ Robert W. Winston, III                           Chief Executive Officer and Director          March 17, 2000
--------------------------------------------         (Principal Executive Officer)
Robert W. Winston, III

/s/ James D. Rosenberg                               President, Chief Operating Officer and        March 17, 2000
--------------------------------------------         Secretary
James D. Rosenberg

/s/ Joseph V. Green                                  Executive Vice President and Chief            March 17, 2000
--------------------------------------------         Financial Officer
Joseph V. Green

/s/ Brent V. West                                    Vice President of Finance and Controller      March 17, 2000
--------------------------------------------
Brent V. West

*                                                    Director                                      March 17, 2000
--------------------------------------------
Edwin B. Borden

*                                                    Director                                      March 17, 2000
--------------------------------------------
Thomas F. Darden, II

*                                                    Director                                      March 17, 2000
--------------------------------------------
Richard L. Daugherty

*                                                    Director                                      March 17, 2000
--------------------------------------------
James H. Winston

*                                                    Director                                      March 17, 2000
--------------------------------------------
David C. Sullivan


*By /s/ Robert W. Winston, III
   -----------------------------------------
   Robert W. Winston, III, Attorney-in-Fact

*By /s/ James D. Rosenberg
   -----------------------------------------
   James D. Rosenberg, Attorney-in-Fact
</TABLE>


                                       27
<PAGE>   28


                       REPORT OF INDEPENDENT ACCOUNTANTS




The Board of Directors and Shareholders
Winston Hotels, Inc.


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the consolidated financial position of
Winston Hotels, Inc. as of December 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedule of Winston Hotels, Inc. as listed on the index and
included in this Form 10-K, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein. These financial statements and
financial statement schedule are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements and
the financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.



/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
Raleigh, North Carolina

January 21, 2000


                                       28
<PAGE>   29

                              WINSTON HOTELS, INC.
                           CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1999 AND 1998
                   ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                          ASSETS

                                                                                              1999                1998
                                                                                           ---------           ---------

<S>                                                                                        <C>                 <C>
Investment in hotel properties:
     Land                                                                                  $  42,704           $  42,449
     Buildings and improvements                                                              364,481             355,807
     Furniture and equipment                                                                  38,348              32,296
                                                                                           ---------           ---------
          Operating properties                                                               445,533             430,552
     Less accumulated depreciation                                                            58,366              37,920
                                                                                           ---------           ---------
                                                                                             387,167             392,632
     Properties under development                                                              1,703               5,229
                                                                                           ---------           ---------
          Net investment in hotel properties                                                 388,870             397,861
Corporate FF&E, net                                                                              871                 294
Cash and cash equivalents                                                                         28                  33
Lease revenue receivable                                                                       7,611               7,653
Deferred expenses, net                                                                         4,072               3,376
Prepaid expenses and other assets                                                              4,619               2,939
                                                                                           ---------           ---------

                     Total assets                                                          $ 406,071           $ 412,156
                                                                                           =========           =========


                                             LIABILITIES AND SHAREHOLDERS' EQUITY

Long-term debt                                                                             $  69,975           $  71,000
Due to banks                                                                                 104,500             102,085
Accounts payable and accrued expenses                                                          5,490               3,969
Distributions payable                                                                          6,806               6,789
Minority interest in Partnership                                                              10,222              14,888
                                                                                           ---------           ---------
                     Total liabilities                                                       196,993             198,731
                                                                                           ---------           ---------

Shareholders' equity:
     Preferred stock, $.01 par value, 10,000,000 shares authorized, 3,000,000
       shares issued and outstanding (liquidation preference of $76,734)
                                                                                                  30                  30
     Common stock, $.01 par value, 50,000,000 shares authorized, 16,813,823
       and 16,313,980 shares issued and outstanding                                              168                 163
     Additional paid-in capital                                                              229,106             224,757
     Unearned compensation                                                                      (524)               (310)
     Distributions in excess of earnings                                                     (19,702)            (11,215)
                                                                                           ---------           ---------
                     Total shareholders' equity                                              209,078             213,425
                                                                                           ---------           ---------

                     Total liabilities and shareholders' equity                            $ 406,071           $ 412,156
                                                                                           =========           =========
</TABLE>



    The accompanying notes are an integral part of the financial statements.


                                       29
<PAGE>   30

                              WINSTON HOTELS, INC.
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                                  1999             1998             1997
                                                                -------          -------          -------

<S>                                                             <C>              <C>              <C>
Revenue:
     Percentage lease revenue                                   $61,877          $54,700          $35,868
     Interest and other income                                      433              249              234
                                                                -------          -------          -------
         Total revenue                                           62,310           54,949           36,102
                                                                -------          -------          -------

Expenses:
     Real estate taxes and property and casualty
       insurance                                                  5,996            5,017            2,702
     General and administrative                                   4,236            3,889            2,095
     Interest                                                    12,513            8,314            2,648
     Depreciation                                                20,565           16,389           10,064
     Amortization                                                   834              465              520
                                                                -------          -------          -------
         Total expenses                                          44,144           34,074           18,029
                                                                -------          -------          -------
         Income before loss on sale of property and
           allocation to minority interest                       18,166           20,875           18,073

Loss on sale of property                                            239               --               --
                                                                -------          -------          -------

Income before allocation to minority interest                    17,927           20,875           18,073
Income allocation to minority interest                            1,026            1,349            1,329
                                                                -------          -------          -------

         Net income                                              16,901           19,526           16,744
Preferred stock distribution                                      6,938            6,938            2,100
                                                                -------          -------          -------

Net income applicable to common shareholders                    $ 9,963          $12,588          $14,644
                                                                =======          =======          =======

Earnings per share:
     Net income per common share                                $  0.61          $  0.77          $  0.92
                                                                =======          =======          =======

     Net income per common share assuming dilution              $  0.61          $  0.77          $  0.91
                                                                =======          =======          =======

     Weighted average number of common shares                    16,467           16,286           15,990
                                                                =======          =======          =======

     Weighted average number of common shares assuming
       dilution                                                  18,108           18,040           17,555
                                                                =======          =======          =======
</TABLE>



    The accompanying notes are an integral part of the financial statements.


                                       30
<PAGE>   31


                              WINSTON HOTELS, INC.
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)



<TABLE>
<CAPTION>

                                              COMMON STOCK   PREFERRED STOCK  ADDITIONAL               DISTRIBUTIONS     TOTAL
                                            ---------------- ----------------  PAID-IN     UNEARNED    IN EXCESS OF   SHAREHOLDERS'
                                            SHARES   DOLLARS SHARES   DOLLARS  CAPITAL   COMPENSATION    EARNINGS        EQUITY
                                            ------   ------- ------   ------- ---------- ------------  -------------  -------------

<S>                                         <C>      <C>      <C>       <C>    <C>         <C>           <C>            <C>
Balances at December 31, 1996               15,799    $158       --     $--    $145,216    $   (181)     $  (3,380)     $ 141,813

Issuance of shares                             395       4    3,000      30      76,451          --             --         76,485
Adjustment to minority interest                 --      --       --      --       1,760          --             --          1,760
Distributions ($1.08 per common share)          --      --       --      --          --          --        (17,287)       (17,287)
Distributions ($0.70 per preferred share)       --      --       --      --          --          --         (2,100)        (2,100)
Unearned compensation amortization              --      --       --      --          --          75             --             75
Net income                                      --      --       --      --          --          --         16,744         16,744
                                            ------    ----    -----     ---    --------    --------      ---------      ---------
Balances at December 31, 1997               16,194     162    3,000      30     223,427        (106)        (6,023)       217,490

Issuance of shares                             120       1       --      --       1,137        (401)            --            737
Adjustment to minority interest                 --      --       --      --         193          --             --            193
Distributions ($1.09 per common share)          --      --       --      --          --          --        (17,780)       (17,780)
Distributions ($2.31 per preferred share)       --      --       --      --          --          --         (6,938)        (6,938)
Unearned compensation amortization              --      --       --      --          --         197             --            197
Net income                                      --      --       --      --          --          --         19,526         19,526
                                            ------    ----    -----     ---    --------    --------      ---------      ---------
Balances at December 31, 1998               16,314     163    3,000      30     224,757        (310)       (11,215)       213,425

Issuance of shares primarily for
     redemption of partnership units           500       5       --      --       4,398        (535)            --          3,868
Stock Registration fees                         --      --       --      --         (49)         --             --            (49)

Distributions ($1.12 per common share)          --      --       --      --          --          --        (18,450)       (18,450)
Distributions ($2.31 per preferred share)       --      --       --      --          --          --         (6,938)        (6,938)
Unearned compensation amortization              --      --       --      --          --         321             --            321
Net income                                      --      --       --      --          --          --         16,901         16,901
                                            ------    ----    -----     ---    --------    --------      ---------      ---------
Balances at December 31, 1999               16,814    $168    3,000     $30    $229,106    $   (524)     $ (19,702)     $ 209,078
                                            ======    ====    =====     ===    ========    ========      =========      =========
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                       31


<PAGE>   32

                              WINSTON HOTELS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                ($ IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                      1999               1998               1997
                                                                                   ---------           --------           --------
<S>                                                                                <C>                 <C>                <C>
Cash flows from operating activities:
   Net income                                                                      $  16,901           $ 19,526           $ 16,744
      Adjustments to reconcile net income to net cash provided by
      operating activities:
         Minority interest                                                             1,026              1,349              1,329
         Depreciation                                                                 20,565             16,389             10,064
         Amortization                                                                    834                465                520
         Unearned compensation amortization                                              321                197                 75
         Loss of sale on property                                                        239                 --                 --
      Changes in assets and liabilities:
         Lease revenue receivable                                                         42             (1,971)            (1,071)
         Prepaid expenses and other assets                                            (1,497)            (1,792)              (461)
         Accounts payable and accrued expenses                                         1,521                442                611
                                                                                   ---------           --------           --------
                  Net cash provided by operating activities                           39,952             34,605             27,811
                                                                                   ---------           --------           --------

Cash flows from investing activities:
   Prepaid acquisition costs and other assets                                           (183)              (448)              (408)
   Deferred acquisition costs                                                            (85)                --                (64)
   Sale of land parcel                                                                 3,789                445                 --
   Investment in hotel properties                                                    (16,179)          (135,395)           (81,877)
                                                                                   ---------           --------           --------
                  Net cash used in investing activities                              (12,658)          (135,398)           (82,349)
                                                                                   ---------           --------           --------

Cash flows from financing activities:
   Purchase of interest rate protection agreements                                       (57)                --                (69)
   Fees paid to register additional common shares                                        (49)               (45)                --
   Fees paid in connection with new financing facilities                              (1,388)            (2,125)               (16)
   Proceeds from GE Capital Corporation loan                                              --             71,000                 --
   Proceeds from various demand notes                                                     --             34,385                 --
   Net proceeds from issuance of common stock                                             --                600                200
   Net proceeds from issuance of preferred stock                                          --                 --             71,506
   Payment of distributions to shareholders                                          (25,248)           (24,886)           (16,789)
   Payment of distributions to minority interest                                      (1,947)            (1,886)            (1,645)
   Long Term Debt payments                                                            (1,025)                --                 --
   Net increase in line of credit borrowing                                            2,415             23,619              1,281
                                                                                   ---------           --------           --------
                  Net cash provided by (used in) financing activities                (27,299)           100,662             54,468
                                                                                   ---------           --------           --------

Net decrease in cash and cash equivalents                                                 (5)              (131)               (70)
                                                                                          33                164                234
                                                                                   ---------           --------           --------
Cash and cash equivalents at end of period                                         $      28           $     33           $    164
                                                                                   =========           ========           ========

Supplemental disclosure:
         Cash paid for interest                                                    $  12,339           $  9,575           $  4,044
                                                                                   =========           ========           ========

Summary of non-cash investing and financing activities:
   Distributions declared but not paid                                             $   6,806           $  6,789           $  6,950
   Investment in hotel properties payable                                                 --                 --              1,134
    Issuance of shares in exchange for partnership units                               3,868                151              4,799
    Issuance of units in exchange for hotel properties                                    --                 --             11,287
    Adjustment to minority interest due to follow-on offerings and
         issuance of partnership units in connection with the acquisition
         of hotel properties                                                              --                193              1,760
</TABLE>

    The accompanying notes are an integral part of the financial statements.


                                       32
<PAGE>   33

                              WINSTON HOTELS, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. ORGANIZATION:

   Winston Hotels, Inc. ("WHI") operates so as to qualify as a real estate
investment trust ("REIT") for federal income tax purposes. During 1994, WHI
completed an initial public offering ("IPO") of $0.01 par value common stock
("Common Stock"), utilizing the majority of the proceeds to acquire one hotel
and a general partnership interest (as the sole general partner) in WINN Limited
Partnership (the "Partnership"). The Partnership used a substantial portion of
the proceeds to acquire nine hotel properties (collectively the ten hotels are
the "Initial Hotels"). The Initial Hotels were acquired from affiliates of WHI.
WHI and the Partnership (collectively the "Company") began operations as a REIT
on June 2, 1994.

   During 1995 and 1996, WHI completed follow-on Common Stock offerings, as well
as a Preferred Stock offering in September 1997, and invested the net proceeds
from these offerings in the Partnership. The Partnership utilized the proceeds
to acquire 28 additional hotel properties. During 1998, the Company added 13
additional properties to its portfolio, five of which were internally developed
(see Note 4). As of December 31, 1999, WHI's ownership in the Partnership was
92.83% (see Note 7). As of December 31, 1999, the Company owned 51 hotel
properties (the "Current Hotels"), in 13 states, having an aggregate of 6,904
rooms. 49 of the Current Hotels were leased, pursuant to separate percentage
operating lease agreements (the "Percentage Leases"), to CapStar Winston
Company, L.L.C. ("CapStar Winston"), one was leased to Bristol Hotels and
Resorts, Inc. and one was leased to Prime Hospitality Corp.

   Prior to November 17, 1997, 38 of the Current Hotels were leased pursuant to
the Percentage Leases to Winston Hospitality, Inc. On November 17, 1997 and
November 24, 1997, CapStar Management Company, L.P. purchased substantially all
of the assets and assumed certain liabilities of Winston Hospitality, Inc.,
including the 38 then existing leases. Concurrent with this transaction, the
leases were assigned to CapStar Winston, an affiliate of CapStar Management
Company, L.P., and the terms of the leases were extended to 15 years from the
date of the transaction.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

   Principles of Consolidation. The consolidated financial statements include
the accounts of WHI and the Partnership. All significant inter-company balances
and transactions have been eliminated.

   Investment in Hotel Properties. Hotel properties are recorded at cost and are
depreciated using the straight-line method over estimated useful lives of the
assets of 5 and 30 years for furniture, fixtures and equipment, and buildings
and improvements, respectively. Upon disposition, both the assets and
accumulated depreciation accounts are relieved and the related gain or loss is
credited or charged to the income statement. Repairs and maintenance of hotel
properties are paid by the lessees.

   The Company evaluates long-lived assets for potential impairment by analyzing
the operating results, trends and prospects for the Company and considering any
other events and circumstances which might indicate potential impairment.

   Cash and Cash Equivalents. All highly liquid investments with a maturity of
three months or less when purchased are considered to be cash equivalents.

   Revenue Recognition and Impact of Recently Issued Accounting Standards to be
Adopted in 2000. In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101") which provides guidance on revenue
recognition. SAB 101 is effective for fiscal years beginning after December 15,
1999. SAB 101 requires that a lessor not recognize contingent rental income
until annual specified hurdles have been achieved by the lessee. During 1999 and
prior years, the Company has recognized contingent rentals throughout the year
since it was considered probable that the lessee would exceed the annual
specified hurdles. The Company has reviewed the terms of its Percentage Leases
and has determined that the provisions of SAB 101 materially impact the
Company's revenue recognition on an interim basis, effectively deferring the
recognition of revenue from its Percentage Leases from the first and second
quarters of the calendar year to the third and fourth quarters. SAB 101 will
impact the Company's revenue recognition on an annual basis, although to a much
lesser degree, as seven of the Company's Percentage Leases have fiscal year ends
which differ from the Company's calendar year end. SAB 101 will have no impact
on the Company's interim or annual cash flow from its third party lessees, and
therefore on its ability to pay dividends. The Company will account for SAB 101
as a change in accounting principle effective January 1, 2000.

Deferred Expenses. Included in deferred expenses are franchise fees, loan costs,
acquisition costs and disposition costs which are


                                       33
<PAGE>   34

recorded at cost. Amortization of franchise fees is computed using the
straight-line method over ten years. Amortization of loan costs is computed
using the straight-line method over the period of the related debt facility.
Acquisition costs are either capitalized to properties when purchased, or
expensed. Disposition costs are netted against the proceeds from the sale of
properties to determine gain or loss on the sale.

   Minority Interest in Partnership. Certain hotel properties have been
acquired, in part, by the Partnership, through the issuance of limited
partnership units of the Partnership. The equity interest in the Partnership
created by these transactions represents the Company's minority interest
liability. The Company's minority interest liability is: (i) increased or
decreased by its pro-rata share of the net income or net loss, respectively, of
the Partnership; (ii) decreased by distributions; (iii) decreased by redemption
of partnership units for WHI's Common Stock; and (iv) adjusted to equal the net
equity of the Partnership multiplied by the limited partners' ownership
percentage immediately after each issuance of units of the Partnership and/or
Common Stock of the Company through an adjustment to additional paid-in capital.

   Earnings Per Share. Net income per common share is computed by dividing net
income applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Net income per common share
assuming dilution is computed by dividing net income applicable to common
shareholders plus income allocated to minority interest by the weighted-average
number of common shares assuming dilution during the period. Weighted average
number of common shares assuming dilution includes common shares and dilutive
common share equivalents, primarily redeemable limited partnership units and
stock options (see Notes 7 and 9).

   Distributions. WHI's ability to pay regular quarterly distributions is
dependent upon receipt of distributions from the Partnership, which in turn is
dependent upon the results of operations of the Company's properties.
Distributions declared on WHI's Common Stock in 1999, 1998 and 1997 are
considered to be approximately 10%, 2%, and 4% return of capital, respectively,
for federal income tax purposes.

   Income Taxes. The Company qualifies as a REIT under Sections 856 to 860 of
the Internal Revenue Code and therefore no provision for federal income taxes
has been reflected in the financial statements.

   Earnings and profits, which determine the taxability of distributions to
shareholders, differ from net income reported for financial reporting purposes
due to the differences for federal tax purposes in the estimated useful lives
used to compute depreciation and the carrying value (basis) of the investment in
hotel properties. Additionally, certain costs associated with the Company's
equity offerings are treated differently for federal tax purposes than for
financial reporting purposes. At December 31, 1999, the net tax basis of the
Company's assets and liabilities was approximately $11,196 less than the amounts
reported in the accompanying consolidated financial statements.

   For federal income tax purposes, 1999 distributions amounted to $1.12 per
common share, ten percent of which is considered a return of capital.

   Concentration of Credit Risk. The Company places cash deposits at federally
insured depository institutions. At December 31, 1999, bank account balances
exceeded federal depository insurance limits by approximately $1,139.

   Reclassifications. Certain reclassifications have been made to the 1998 and
1997 financial statements to conform with the 1999 presentation. These
reclassifications have no effect on net income or shareholders' equity
previously reported.

   Estimates. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the balance sheet
dates and the reported amounts of revenues and expenses during the periods
reported. Actual results could differ from those estimates.

3. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:

   The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

<TABLE>
   <S>                              <C>
   Cash and cash equivalents:       the carrying amount approximates fair value.
   Interest rate cap agreement:     the fair value is estimated by obtaining
                                    quotes from brokers.
   Long-term debt:                  the fair value is estimated based on current
                                    rates offered to the Company for debt of
                                    the same remaining maturities.
</TABLE>


                                       34
<PAGE>   35

The estimated fair values of the Company's financial instruments are as follows:

<TABLE>
<CAPTION>

                                                        1999                                1998
                                             --------------------------          ---------------------------
                                             Carrying            Fair            Carrying         Fair Value
                                              Amount            Value             Amount
                                             --------          --------          --------         ----------

<S>                                          <C>               <C>               <C>              <C>
Assets:
   Cash and cash equivalents                 $     28          $     28          $     33          $     33
   Interest rate Cap
       In a net receivable position                --               112                --                --
Liabilities:
   Long-term debt                              69,975            64,433            71,000            71,000
   Due to banks                               104,500           104,500           102,085           102,085
</TABLE>

4. HOTEL PROPERTIES:

   The Company owned 51 hotels, consisting of 6,904 rooms, as of December 31,
1999. The Company's acquisition of hotel properties for the years 1999, 1998,
and 1997 are summarized as follows:

<TABLE>
<CAPTION>

                                           NUMBER OF            NUMBER OF
           YEAR        PURCHASE COST    HOTEL PROPERTIES      ROOMS/SUITES
           ----        -------------    ----------------      ------------

           <S>           <C>               <C>                      <C>
           1997            62,625                7                  1,096
           1998           140,794               13*                 1,803
           1999                --               --                     --
                         --------            -----                  -----

           Total         $203,419               20                  2,899
                         ========            =====                  =====
</TABLE>


* Five of the total 13 hotels added in 1998 were internally developed
properties.

   All acquisitions were accounted for by the purchase method of accounting and
results of operations for these hotels are included in the Consolidated
Statements of Income for the period in which they were owned by the Company. The
Company made no acquisitions in 1999; therefore the pro forma 1999 results of
operations are identical to the actual 1999 results of operations. The following
unaudited pro forma 1998 financial information assumes the hotels were acquired
as of the later of January 1, 1998 or their date of opening:

<TABLE>
<CAPTION>

                                                                           FOR THE YEAR ENDED DECEMBER 31,
                                                                           -------------------------------
                                                                              ACTUAL         PRO FORMA
                                                                               1999             1998
                                                                             -------         ---------

         <S>                                                                 <C>             <C>
         Percentage lease and other revenue                                  $62,310          $56,650
                                                                             -------          -------
         Expenses:
            Real estate taxes and property and
             casualty insurance                                                5,996            5,257
            General and administrative                                         4,236            3,898
            Interest                                                          12,513            8,911
            Depreciation                                                      20,565           16,720
            Amortization                                                         834              462
                                                                             -------          -------
              Total expenses                                                  44,144           35,248
                                                                             -------          -------
              Income before loss on sale of property and allocation
                to minority interest                                          18,166           21,402
           Loss on sale of property                                              239               --
                                                                             -------          -------
              Income before allocation to minority interest                   17,927           21,402
          Income allocation to minority interest                               1,026            1,400
          Preferred stock distribution                                         6,938            6,938
                                                                             -------          -------
              Net income applicable to common shareholders                   $ 9,963          $13,064
                                                                             =======          =======
</TABLE>


                                       35
<PAGE>   36


<TABLE>
         <S>                                                                 <C>              <C>
         Net income per common share                                         $  0.61          $  0.80
                                                                             =======          =======

         Net income per common share assuming dilution                       $  0.61          $  0.80
                                                                             =======          =======

         Weighted average number of common shares                             16,467           16,286
                                                                             =======          =======

         Weighted average number of common shares assuming
            dilution                                                          18,108           18,040
                                                                             =======          =======
</TABLE>


5. DEFERRED EXPENSES:

    At December 31, 1999 and 1998 deferred expenses consisted of:

<TABLE>
<CAPTION>

                                                 1999            1998
                                                ------          ------

         <S>                                    <C>             <C>
         Franchise fees                         $1,679          $1,617
         Debt facility fees                      3,513           2,125
         Interest rate caps                         58              --
         Registration costs                         --              30
         Acquisition costs                          27              --
         Disposition costs                          25              --
                                                 5,302           3,772
         Less accumulated amortization           1,230             396
                                                ------          ------
         Deferred expenses, net                 $4,072          $3,376
                                                ======          ======
</TABLE>

6. DEBT:

   The Company's outstanding debt balance as of December 31, 1999 consisted of
amounts due under two separate debt facilities.

   On February 1, 1999, the Company entered into a new three-year $140,000 line
of credit agreement (the "New Line") with a group of banks led by Wachovia Bank,
N.A. This New Line replaces the Company's previous $125,000 line of credit (the
"Previous Line"). The New Line bears interest at rates from LIBOR plus 1.45% to
1.70%, based on the Company's level of total indebtedness. The Company's current
rate is LIBOR plus 1.45%. A commitment fee of 0.05% is also payable quarterly on
the unused portion of the New Line. The Company used the proceeds from the New
Line to pay off the outstanding balances under the Previous Line and under the
$45,000 revolving demand note discussed below. The Company has collateralized
the New Line with 29 of its Current Hotels, with a carrying value of $219,512 as
of December 31, 1999. The New Line requires the Company to maintain certain
financial ratios including maximum leverage, minimum interest coverage and
minimum fixed charge coverage, as well as certain levels of unsecured and
secured debt and tangible net worth.

   On November 3, 1998, the Company closed a $71,000 loan with GE Capital
Corporation. The ten-year loan with a 25-year amortization period, bears
interest at a fixed rate of 7.375%. Fourteen of the Company's Current Hotels,
with a carrying value of $124,407 as of December 31, 1999, serve as collateral
for the loan. The Company used the net proceeds from the loan to pay down the
then existing line of credit balance. As of December 31, 1999, $69,975 was
outstanding. All unpaid principal and interest are due on December 1, 2008. The
loan agreement with GE Capital Corporation requires the Company to establish
escrow reserves for the purposes of debt service, capital improvements and
property taxes and insurance. These reserves, which are held by GE Capital
Corporation, totaled $2,523 as of December 31, 1999 and are included in prepaid
expenses and other assets on the accompanying consolidated balance sheets.

   On October 30, 1998, the Company signed a $45,000 revolving demand note with
Wachovia Bank, N.A. Interest accrued on the note at the prime rate (7.75% as of
December 31, 1998). As of December 31, 1998, the Company's outstanding debt
balance under its $45,000 revolving demand note totaled $34,385. Six of the
Company's Current Hotels served as collateral for the note. The note was paid
off in February 1999 with the proceeds from the above mentioned New Line.

   As of December 31, 1999 and 1998 the Company's outstanding debt balance under
its New Line and Previous Line totaled $104,500 and $67,700, respectively.
Interest on borrowings was generally at LIBOR plus 1.45% and LIBOR plus 1.75%
for the two


                                       36
<PAGE>   37

years respectively, and were payable monthly in arrears. As of December 31, 1999
and 1998 the weighted average interest rate on the outstanding balance under the
New Line and the Previous Line was 6.84% and 7.56%, respectively. A commitment
fee of 0.05% was also paid quarterly on the unused portion of the New Line, and
0.0625% on the unused portion of the Previous Line. During the years ended
December 31, 1999, 1998 and 1997, the Company capitalized interest of $163,
$1,513 and $1,284 respectively, related to hotels under development or major
renovation.

   During 1999, the Company entered into an interest rate cap agreement to
eliminate the exposure to increases in 30-day LIBOR over 7.50%, and therefore
from its exposure to interest rate increases over 8.95% under its $140,000 line
of credit on a principal balance of $25,000 for the period of March 23, 1999
through March 25, 2002. During 1997, the Company entered into an interest rate
cap agreement to eliminate the exposure to increases in 90-day LIBOR over 6.25%,
and therefore from its exposure to interest rate increases over 8.00% under its
previous $125,000 line of credit, on a principal balance of $40,000 for the
period June 4, 1997 through June 4, 1998.

7. CAPITAL STOCK:

   On September 11, 1997, WHI issued 3,000,000 shares of 9.25% Series A
Cumulative Preferred Stock. Except in the event of certain occurrences, the
preferred shares are not redeemable prior to September 28, 2001. On and after
such date, the preferred shares will be redeemable for cash at the option of the
Company, in whole or in part, at a redemption price of $25 per share, plus
unpaid cumulative distributions.

   Pursuant to the Partnership Agreement of the Partnership, the holders of
limited partnership units have certain redemption rights (the "Redemption
Rights") which enable them to cause the Partnership to redeem their units in the
Partnership in exchange for shares of Common Stock on a one-for-one basis or, in
certain circumstances, for cash. The number of shares issuable upon exercise of
the Redemption Rights will be adjusted upon the occurrence of stock splits,
mergers, consolidations or similar pro-rata share transactions, which otherwise
would have the effect of diluting the ownership interests of the limited
partners or the shareholders of WHI. During 1999, the Partnership redeemed
440,100 units in exchange for 440,100 shares of WHI's Common Stock. As of
December 31, 1999, the Partnership had 18,112,303 units outstanding, of which
16,813,823 units were held by WHI.

    On October 29, 1999, the Company's Chief Executive Officer, Robert W.
Winston, III, and several members of the Company's Board of Directors purchased
an aggregate of 594,950 shares of WHI's Common Stock, or approximately 3.5% of
the total shares outstanding as of December 31, 1999.

8. EARNINGS PER SHARE:

   The following is a reconciliation of the net income applicable to common
shareholders used in the net income per common share calculation to the net
income assuming dilution used in the net income per common share assuming
dilution calculation:

<TABLE>
<CAPTION>

                                                                         YEAR ENDED DECEMBER 31,
                                                               -----------------------------------------
                                                                 1999             1998             1997
                                                               -------          -------          -------
         <S>                                                   <C>              <C>              <C>
         Net income                                            $16,901          $19,526          $16,744
         Less: preferred shares distribution                     6,938            6,938            2,100
                                                               -------          -------          -------
         Net income applicable to common shareholders            9,963           12,588           14,644
         Plus: income allocation to minority interest            1,026            1,349            1,329
                                                               -------          -------          -------
         Net income assuming dilution                          $10,989          $13,937          $15,973
                                                               =======          =======          =======
</TABLE>

    The following is a reconciliation of the weighted average shares used in net
income per common share to the weighted average shares used in net income per
common share - assuming dilution:

<TABLE>
<CAPTION>

                                                                         YEAR ENDED DECEMBER 31,
                                                                --------------------------------------
                                                                 1999            1998            1997
                                                                ------          ------          ------
         <S>                                                    <C>             <C>             <C>
         Weighted average number of common shares               16,467          16,286          15,990
         Weighted average units with redemption rights           1,629           1,747           1,494
         Stock options                                              12               7              71
                                                                ------          ------          ------
         Weighted average number of common shares
              assuming dilution                                 18,108          18,040          17,555
                                                                ======          ======          ======
</TABLE>


                                       37
<PAGE>   38

9. STOCK INCENTIVE PLAN:

   During 1998, the Company amended the Winston Hotels, Inc. Stock Incentive
Plan (the "Plan"). The amendment increased the number of shares of Common Stock
that may be issued under the Plan to 1,600,000 shares plus an annual increase to
be added as of January 1 of each year, beginning January 1, 1999, equal to the
lesser of (i) 500,000 shares; (ii) 8.5% of any increase in the number of
authorized and issued shares (on a fully diluted basis) since the immediately
preceding January 1; or (iii) a lesser number determined by the Board of
Directors. The Plan permits the grant of incentive or nonqualified stock
options, stock appreciation rights, stock awards and performance shares to
participants. Under the Plan, the exercise price of an option is determined by
the Compensation Committee of the Company. In the case of incentive stock
options, the exercise price is no less than the market price of the Company's
Common Stock on the date of grant and the maximum term of an incentive stock
option is ten years. Stock options and stock awards are granted upon approval of
the Compensation Committee and generally are subject to vesting over a period of
years.

    During 1999 and 1998, the Company granted awards of Common Stock to certain
executive officers. The total numbers of shares granted were 20,000 and 25,000,
respectively. These shares vest either (i) 25% on the anniversary date over each
of the next four years, or (ii) 20% immediately and 20% on the anniversary date
over each of the next four years.

   On May 18, 1999, WHI issued 42,000 shares, 7,000 shares each, to six of its
Directors. These shares vested 20% immediately and will vest 20% on the
anniversary date over each of the next four years. Upon issuing these shares,
WHI terminated 3,412 unvested shares previously granted to a then new
independent director on January 2, 1998. On May 18, 1999, WHI also issued
options to purchase 2,000 shares of WHI Common Stock to six of its Directors.
These options were 100% vested on May 18, 1999.

    On June 2, 1994, WHI issued 7,500 shares to each of its five initial
independent directors which shares vested at a rate of 1,500 shares per year
beginning on June 2, 1994. These shares became fully vested on May 5, 1998. WHI
also issued 5,687 shares to a new independent director on January 2, 1998. As
noted above, 3,412 unvested shares were terminated on May 18, 1999. Any unvested
shares are subject to forfeiture if the director does not remain a director of
WHI. Each director is entitled to vote and receive distributions paid on such
shares prior to vesting.

   On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"). As
permitted by SFAS 123, no compensation cost has been recognized for options
granted under the Plan. Had the fair value method been used to determine
compensation cost, the impact on the Company's 1999, 1998 and 1997 net income
would have been a decrease of $181, $171, and $57, and a corresponding decrease
in net income per Common Share of $0.01, $0.01 and $0.01, respectively. The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in 1999, 1998 and 1997: dividend of $1.12, $1.09 and $1.08; expected
volatility of 27.8%, 26.2% and 20.8%; risk-free interest rate of 6.5%, 5.5% and
5.5%, respectively, and an expected life of five years for all options. The
estimated weighted average fair value per share of the options granted in 1999,
1998 and 1997 were $0.93, $1.21 and $0.31, respectively.

   A summary of the status of stock options granted under the Plan as of
December 31, 1999, 1998 and 1997, and changes during the years ended on those
dates, is presented below:

<TABLE>
<CAPTION>

                                                1999                               1998                            1997
                                    -------------------------------    -----------------------------   ----------------------------
                                                       WEIGHTED                          WEIGHTED                       WEIGHTED
                                                        AVERAGE                           AVERAGE                        AVERAGE
                                      SHARES         EXERCISE PRICE     SHARES        EXERCISE PRICE    SHARES       EXERCISE PRICE
                                    ----------       --------------    --------       --------------   --------      --------------
<S>                                 <C>              <C>               <C>            <C>              <C>           <C>
Outstanding at beginning of
   year                                798,000           $12.40         436,000           $11.34        401,000           $10.93
Granted                                402,000             8.77         450,000            13.10         55,000            13.88
Exercised                                   --               --         (58,000)           10.33        (20,000)           10.00
Forfeited                             (100,000)           10.50         (30,000)           11.38             --               --
                                    ----------           ------        --------           ------       --------           ------
Outstanding at end of year           1,100,000           $11.25         798,000           $12.40        436,000           $11.34
                                    ==========           ======        ========           ======       ========           ======

Options exercisable at year-end        439,250                          309,250                         254,750
                                    ==========                         ========                        ========
</TABLE>


                                       38
<PAGE>   39


   The following table summarizes information about the Plan at December 31,
1999:

<TABLE>
<CAPTION>

                                               OPTIONS                 OPTIONS
                           EXERCISE          OUTSTANDING             EXERCISABLE                AVERAGE REMAINING
                            PRICE             AT 12/31/99             AT 12/31/99            CONTRACTUAL LIFE (YEARS)
                           --------          ------------            ------------            ------------------------
                           <S>               <C>                     <C>                     <C>
                            $ 8.75              390,000                  78,000                        9.0
                            $ 9.38               12,000                  12,000                        9.4
                            $10.00               28,000                  28,000                        4.4
                            $11.31               50,000                  50,000                        5.8
                            $11.38               90,000                  67,500                        6.0
                            $12.38               50,000                  20,000                        8.4
                            $12.88               25,000                  18,750                        6.8
                            $13.19              400,000                 137,500                        8.0
                            $13.88               55,000                  27,500                        7.8
</TABLE>


10. COMMITMENTS:

   The Company leases its corporate office under a non-cancellable lease. Under
the terms of the lease, the Company makes lease payments through February 2005.
Commitments for minimum rental payments are as follows:

<TABLE>
<CAPTION>

                                                   AMOUNT
                                                   ------
           <S>                                     <C>
           Year ended December 31:
                    2000                           $  93
                    2001                             218
                    2002                             215
                    2003                             220
                    2004                             225
                    2005                              28
                                                   -----
                      Total                        $ 999
                                                   =====
</TABLE>

    Rental expense for the years ended December 31, 1999, 1998 and 1997 was
$177, $102 and $51, respectively.

   The Company has future lease commitments from the lessees through 2013.
Minimum future rental payments contractually due to the Company under these
non-cancelable operating leases are as follows:

<TABLE>
<CAPTION>

                                                           AMOUNT
                                                          --------
           <S>                                            <C>
           Year ended December 31:
                    2000                                  $ 33,824
                    2001                                    33,802
                    2002                                    33,802
                    2003                                    33,802
                    2004                                    33,802
                    2005 and thereafter                    276,637
                                                          --------
                      Total                               $445,669
                                                          ========
</TABLE>

   Under the terms of the Percentage Leases, the lessees are obligated to pay
the Company the greater of base rents or percentage rents. The Company earned
minimum base rents of $32,353, $28,033 and $16,114 for the years ended December
31, 1999, 1998, and 1997, respectively, and percentage rents of $29,882, $26,667
and $19,754 for the years ended December 31, 1999, 1998, and 1997, respectively.
The percentage rents are based on percentages of gross room revenue and certain
food and beverage revenues of the lessees. MeriStar Hospitality Corporation, an
affiliate of CapStar Winston, has guaranteed amounts due and payable to the
Company under the 49 properties leased by CapStar Winston up to $20,000. The
lessees operate the hotel properties pursuant to franchise agreements, which
require the payment of fees based on a percentage of hotel revenue. These fees
are paid by the lessees.


                                       39
<PAGE>   40

   Pursuant to the Percentage Leases, the Company reserves 5% of room revenues
(7% of gross room, food and beverage revenues from one of its full-service
hotels) to fund periodic improvements to the buildings and grounds, and the
periodic replacement and refurbishment of furniture, fixtures and equipment.

    For one of the Current Hotels, the Company leases the land under an
operating lease which expires on December 31, 2062. Expenses incurred in 1999
related to this land lease totaled $358. Minimum future rental payments
contractually due by the Company under this lease are as follows: 2000 - $110,
2001 - $110, 2002 - $110, 2003 - $110, 2004 - $110, 2005 and thereafter -
$6,930.

   In June 1999, the Company entered into a joint venture agreement with Regent
Partners, Inc. to jointly develop and own hotel properties. The first hotel to
be developed by the joint venture, a full-service 158-room Hilton Garden Inn in
Windsor, CT, is scheduled to open during the third quarter of 2000. The Company
will own a 49% interest in this joint venture. On June 25, 1999, the Company
purchased an irrevocable standby letter of credit from Wachovia Bank, N.A.
totaling $3,298, which approximates the Company's future equity investment in
the joint venture. The letter of credit is for the benefit of Compass Bank, the
construction lender, and can be drawn upon after the earliest to occur of either
January 24, 2001 or 30 days after the date of issuance of the certificate of
occupancy. The Company paid $73 to obtain the letter of credit, which expires on
March 25, 2001. The Company's total investment in this joint venture as of
December 31, 1999 was $183, which is included in prepaid expenses and other
assets in the accompanying consolidated balance sheets.


11. SUBSEQUENT EVENT:

   On February 15, 2000, the Company sold its Comfort Suites hotel in London,
KY. Sales proceeds received by the Company totaled $2,497, resulting in a net
loss of $265.


12. QUARTERLY FINANCIAL DATA (UNAUDITED):

   Summarized unaudited quarterly results of operations for the years ended
December 31, 1999 and 1998 are as follows:

<TABLE>
<CAPTION>

1999
----                                                               FIRST           SECOND            THIRD           FOURTH
                                                                  -------          -------          -------          -------
<S>                                                               <C>              <C>              <C>              <C>
Total revenue                                                     $14,748          $17,323          $16,475          $13,764
Total expenses                                                     11,297           11,425           10,851           10,810
                                                                  -------          -------          -------          -------
Income before minority interest                                     3,451            5,898            5,624            2,954
Income allocation to minority interest                                165              400              373               88
                                                                  -------          -------          -------          -------
Income after minority interest                                      3,286            5,498            5,251            2,866
Preferred share distribution                                        1,734            1,734            1,734            1,736
                                                                  =======          =======          =======          =======
Net income applicable to common shareholders
                                                                  $ 1,552          $ 3,764          $ 3,517          $ 1,130
                                                                  =======          =======          =======          =======

Earnings per share:
       Net income per common share                                $  0.10          $  0.23          $  0.21          $  0.07
                                                                  =======          =======          =======          =======
       Net income per common share assuming
         dilution                                                 $  0.10          $  0.23          $  0.21          $  0.07
                                                                  =======          =======          =======          =======
</TABLE>


                                       40
<PAGE>   41

<TABLE>
<CAPTION>

1998
----                                                               FIRST           SECOND            THIRD           FOURTH
                                                                  -------          -------          -------          -------
<S>                                                               <C>              <C>              <C>              <C>
Total revenue                                                     $10,122          $15,064          $16,305          $13,458
Total expenses                                                      5,448            8,406           10,204           10,016
                                                                  -------          -------          -------          -------
Income before minority interest                                     4,674            6,658            6,101            3,442
Income allocation to minority interest                                297              469              420              163
                                                                  -------          -------          -------          -------
Income after minority interest                                      4,377            6,189            5,681            3,279
Preferred share distribution                                        1,734            1,734            1,735            1,735
                                                                  -------          -------          -------          -------
Net income applicable to common shareholders
                                                                  $ 2,643          $ 4,455          $ 3,946          $ 1,544
                                                                  =======          =======          =======          =======

Earnings per share:
       Net income per common share                                $  0.16          $  0.27          $  0.24          $  0.09
                                                                  =======          =======          =======          =======
       Net income per common share assuming
         dilution                                                 $  0.16          $  0.27          $  0.24          $  0.09
                                                                  =======          =======          =======          =======
</TABLE>


                                       41
<PAGE>   42

                             WINSTON HOTELS, INC.
            SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
                            AS OF DECEMBER 31, 1999
                               ($ IN THOUSANDS)
<TABLE>
<CAPTION>
                                       --------------------------------------------------------------------------------
                                                                  Cost Capitalized             Gross Amounts
                                                                   Subsequent to                  Carried
                                            Initial Cost            Acquisition              at Close of Period
                                       ------------------------ --------------------  ---------------------------------
                                                 Buildings and         Buildings and          Buildings and
Description              Encumbrances    Land    Improvements   Land   Improvements    Land   Improvements      Total
----------------------- -------------- --------- -------------- ----   -------------  ------- -------------   ---------
<S>                     <C>            <C>       <C>            <C>    <C>            <C>     <C>             <C>
Hampton Inn
  Boone, NC                   *         $   264    $   2,750    $  7      $    471    $  271    $   3,221     $  3,492
Hampton Inn
  Brunswick, GA               *             716        3,887      --           549       716        4,436        5,152
Hampton Inn
  Cary, NC                    *             613        4,596      --           619       613        5,215        5,828
Hampton Inn
  Charlotte, NC               #             833        3,609      32           206       865        3,815        4,680
Hampton Inn
  Chester, VA                 *             461        2,238      --           117       461        2,355        2,816
Hampton Inn
  Duncanville, TX             *             480        2,689      25           562       505        3,251        3,756
Hampton Inn
  Durham, NC                                634        4,582      --           667       634        5,249        5,883
Hampton Inn & Suites
  Gwinnett, GA                #             557        6,959      16             5       573        6,964        7,537
Hampton inn
  Hilton Head, SC             *             310        3,969      --           713       310        4,682        4,992
Hampton Inn
  Jacksonville, NC            *             473        4,140      --           347       473        4,487        4,960
Hampton Inn
  Las Vegas, NV               *             856        7,945      --            19       856        7,964        8,820
Hampton Inn
  Perimeter , GA              #             914        6,293      --           118       914        6,411        7,325
Hampton Inn
  Raleigh, NC                 #             697        5,955      --          1082       697        7,037        7,734
Hampton Inn
  Southern Pines              *             614        4,280      --           780       614        5,060        5,674
Hampton Inn
  Southlake, GA               *             680        4,065      14           498       694        4,563        5,257
Hampton Inn
  W. Springfield, MA          #             916        5,253       5           554       921        5,807        6,728
Hampton Inn
  White Plains, NY            #           1,382       10,763      --           231     1,382       10,994       12,376
Hampton Inn
  Wilmington, NC              *             460        3,208       2           428       462        3,636        4,098
Comfort Inn
  Augusta, GA                               404        3,541      --           329       404        3,870        4,274
Comfort Inn
  Charleston, SC              #             438        5,853      11           869       449        6,722        7,171
Comfort Inn
  Chester, VA                 *             661        6,447      --           306       661        6,753        7,414
Comfort Inn
  Clearwater, FL              *             532        3,436       3           789       535        4,225        4,760

<CAPTION>
                         ----------------------------------------------------------
                                                                      Life Upon
                                                                         Which
                          Accumulated    Net Book Value             Depreciation in
                          Depreciation   Land, Building              Latest Income
                          Buildings and       and         Date of    Statement is
Description               Improvements   Improvements   Acquisition    Computed
-----------------------   -------------  -------------- ----------- ---------------
<S>                       <C>            <C>            <C>         <C>
Hampton Inn
  Boone, NC                  $     748      $   2,744      6/2/94         30
Hampton Inn
  Brunswick, GA                    888          4,264      6/2/94         30
Hampton Inn
  Cary, NC                       1,100          4,728      6/2/94         30
Hampton Inn
  Charlotte, NC                    758          3,922      6/2/94         30
Hampton Inn
  Chester, VA                      392          2,424     11/29/94        30
Hampton Inn
  Duncanville, TX                  440          3,316      5/7/96         30
Hampton Inn
  Durham, NC                     1,110          4,773      6/2/94         30
Hampton Inn & Suites
  Gwinnett, GA                     794          6,743     7/18/96         30
Hampton inn
  Hilton Head, SC                  888          4,104     11/29/94        30
Hampton Inn
  Jacksonville, NC                 942          4,018      6/2/94         30
Hampton Inn
  Las Vegas, NV                    420          8,400     5/20/98         30
Hampton Inn
  Perimeter , GA                   721          6,604     7/19/96         30
Hampton Inn
  Raleigh, NC                    1,248          6,486     5/18/95         30
Hampton Inn
  Southern Pines                 1,051          4,623      6/2/94         30
Hampton Inn
  Southlake, GA                    964          4,293      6/2/94         30
Hampton Inn
  W. Springfield, MA               496          6,232     7/14/97         30
Hampton Inn
  White Plains, NY                 795         11,581     10/29/97        30
Hampton Inn
  Wilmington, NC                   818          3,280      6/2/94         30
Comfort Inn
  Augusta, GA                      681          3,593     5/18/95         30
Comfort Inn
  Charleston, SC                 1,123          6,048     5/18/95         30
Comfort Inn
  Chester, VA                    1,218          6,196     11/29/94        30
Comfort Inn
  Clearwater, FL                   735          4,025     5/18/95         30
</TABLE>


                                      42
<PAGE>   43

<TABLE>
<CAPTION>
                                       --------------------------------------------------------------------------------
                                                                  Cost Capitalized             Gross Amounts
                                                                   Subsequent to                  Carried
                                            Initial Cost            Acquisition              at Close of Period
                                       ------------------------ --------------------  ---------------------------------
                                                 Buildings and         Buildings and          Buildings and
Description              Encumbrances    Land    Improvements   Land   Improvements    Land   Improvements      Total
----------------------- -------------- --------- -------------- ----   -------------  ------- -------------   ---------
<S>                     <C>            <C>       <C>            <C>    <C>            <C>     <C>             <C>
Comfort Inn
  Durham, NC                  *             947        6,208      35           408       982        6,616        7,598
Comfort Inn
  Fayetteville, NC                        1,223        8,047       4           701     1,227        8,748        9,975
Comfort Inn
  Greenville, SC                            871        3,551      15         1,306       886        4,857        5,743
Comfort Suites
  London, KY                                345        2,170      --           432       345        2,602        2,947
Comfort Inn
   Raleigh, NC                              459        4,075       8           659       467        4,734        5,201
Comfort Inn
  Wilmington, NC                            532        5,889       9           734       541        6,623        7,164
Comfort Suites
  Orlando, FL                 #           1,357       10,180      --           402     1,357       10,582       11,939
Homewood Suites
  Alpharetta, GA              *             985        6,621       1           457       986        7,078        8,064
Homewood Suites
  Cary, NC                    #           1,010       12,367       9           191     1,019       12,558       13,577
Homewood Suites
  Clear Lake, TX              #             879        5,978      --            44       879        6,022        6,901
Homewood Suites
  Durham, NC                  *           1,074        6,136      12           583     1,086        6,719        7,805
Homewood Suites
  Lake Mary, FL               *             871        6,987       4           253       875        7,240        8,115
Homewood Suites
  Phoenix, AZ                 *           1,402        9,763      21            23     1,423        9,786       11,209
Homewood Suites
  Raleigh, NC                 *           1,008       10,076       1           413     1,009       10,489       11,498
Holiday Inn Express
  Abingdon, VA                              918        2,263      --           391       918        2,654        3,572
Holiday Inn Express
  Clearwater, FL              *             510        5,854      --           851       510        6,705        7,215
Holiday Inn Select
  Dallas, TX                  *           1,060       13,615       3         2,826     1,063       16,441       17,504
Holiday Inn
  Secaucus, NJ                *              --       13,699      --         1,025        --       14,724       14,724
Holiday Inn
   Tinton Falls, NJ           *           1,261        4,337       3         2,791     1,264        7,128        8,392
Courtyard by Marriott
  Ann Arbor, MI               #             902        9,850       6           979       908       10,829       11,737
Courtyard by Marriott
  Houston, TX                 *           1,211        9,154      22         1,895     1,233       11,049       12,282
Courtyard by Marriott
  Wilmington, NC              #             742        5,907      --            39       742        5,946        6,688
Courtyard by Marriott

<CAPTION>
                        ----------------------------------------------------------
                                                                     Life Upon
                                                                        Which
                         Accumulated    Net Book Value             Depreciation in
                         Depreciation   Land, Building              Latest Income
                         Buildings and       and         Date of    Statement is
Description              Improvements   Improvements   Acquisition    Computed
-----------------------  ------------   ------------   ----------- ---------------
<S>                      <C>            <C>            <C>         <C>
Comfort Inn
  Durham, NC                    1,182          6,416     11/29/94        30
Comfort Inn
  Fayetteville, NC              1,673          8,302     11/29/94        30
Comfort Inn
  Greenville, SC                  708          5,035      5/6/96         30
Comfort Suites
  London, KY                      389          2,558      5/7/96         30
Comfort Inn
   Raleigh, NC                    909          4,292     8/16/94         30
Comfort Inn
  Wilmington, NC                1,372          5,792      6/2/94         30
Comfort Suites
  Orlando, FL                     938         11,001      5/1/97         30
Homewood Suites
  Alpharetta, GA                  418          7,646     5/22/98         30
Homewood Suites
  Cary, NC                      1,465         12,112      7/9/96         30
Homewood Suites
  Clear Lake, TX                  668          6,233     9/13/96         30
Homewood Suites
  Durham, NC                      258          7,547     11/14/98        30
Homewood Suites
  Lake Mary, FL                   386          7,729     11/4/98         30
Homewood Suites
  Phoenix, AZ                     520         10,689      6/1/98         30
Homewood Suites
  Raleigh, NC                     621         10,877      3/9/98         30
Holiday Inn Express
  Abingdon, VA                    291          3,281      5/7/96         30
Holiday Inn Express
  Clearwater, FL                  538          6,677      8/6/97         30
Holiday Inn Select
  Dallas, TX                    2,040         15,464      5/7/96         30
Holiday Inn
  Secaucus, NJ                    785         13,939     5/27/98         30
Holiday Inn
   Tinton Falls, NJ               395          7,997     4/21/98         30
Courtyard by Marriott
  Ann Arbor, MI                   842         10,895     9/30/97         30
Courtyard by Marriott
  Houston, TX                     941         11,341     7/14/97         30
Courtyard by Marriott
  Wilmington, NC                  592          6,096     12/19/96        30
Courtyard by Marriott
</TABLE>


                                      43
<PAGE>   44

<TABLE>
<CAPTION>

                                       ---------------------------------------------------------------------------------
                                                                  Cost Capitalized             Gross Amounts
                                                                   Subsequent to                  Carried
                                            Initial Cost            Acquisition              at Close of Period
                                       ------------------------ --------------------  ---------------------------------
                                                 Buildings and         Buildings and          Buildings and
Description              Encumbrances    Land    Improvements   Land   Improvements    Land   Improvements    Total
----------------------- -------------- --------- -------------- ----   -------------  ------- -------------   ---------
<S>                     <C>            <C>       <C>            <C>    <C>            <C>     <C>             <C>
  Winston-Salem, NC           *             915        5,202      --           498       915        5,700        6,615
Hilton Garden Inn
  Albany, NY                  *           1,168       11,236      --             5     1,168       11,241       12,409
Hilton Garden Inn
  Alpharetta, GA              *           1,425       11,719      --             3     1,425       11,722       13,147
Hilton Garden Inn
  Raleigh, NC                 *           1,901        9,209       1             3     1,902        9,212       11,114
Quality Suites
  Charleston, SC              #             912       11,224      --           728       912       11,952       12,864
Residence Inn
  Phoenix, AZ                 #           2,076       13,311      33           231     2,109       13,542       15,651
Fairfield Inn
  Ann Arbor, MI               *             542        3,743       1           522       543        4,265        4,808
                                       --------  -----------    ----   -----------    ------  -----------     --------
                                       $ 42,401  $   334,829    $303   $    29,652    $42,704 $   364,481     $407,185
                                       ========  ===========    ====   ===========    ======= ===========     ========

<CAPTION>

                        ----------------------------------------------------------
                                                                     Life Upon
                                                                        Which
                         Accumulated    Net Book Value             Depreciation in
                         Depreciation   Land, Building              Latest Income
                         Buildings and       and         Date of    Statement is
Description              Improvements   Improvements   Acquisition    Computed
-----------------------  ------------   ------------   ----------- ---------------
<S>                      <C>            <C>            <C>         <C>
  Winston-Salem, NC               191          6,424     10/3/98         30
Hilton Garden Inn
  Albany, NY                      624         11,785      5/8/98         30
Hilton Garden Inn
  Alpharetta, GA                  716         12,431     3/17/98         30
Hilton Garden Inn
  Raleigh, NC                     486         10,628      5/8/98         30
Quality Suites
  Charleston, SC                1,990         10,874     5/18/95         30
Residence Inn
  Phoenix, AZ                     831         14,820      3/3/98         30
Fairfield Inn
  Ann Arbor, MI                   330          4,478     9/30/97         30
                         ------------   ------------
                         $     41,429   $    365,756
                         ============   ============
</TABLE>

     *Property serves as collateral for the $140,000 line of credit which
     closed on February 1, 1999 (see Note 6). # Property serves as collateral
     for the $71,000 note through GE Capital Corporation (see Note 6).


                             WINSTON HOTELS, INC.
                             NOTES TO SCHEDULE III

<TABLE>
<CAPTION>
                                                                  1999            1998
                                                                  ----            ----
<S>                                                            <C>              <C>
(a)  Reconciliation of Real Estate:
     Balance at beginning of period                            $ 398,256        $ 256,973
         Acquisitions during period                                   --          131,183
         Additions during period                                   8,929           10,100
                                                               ---------        ---------
     Balance at end of period                                  $ 407,185        $ 398,256
                                                               =========        =========

(b)  Reconciliation of Accumulated Depreciation:
     Balance at beginning of period                               27,774          16,281
     Depreciation for period                                      13,655           11,493
                                                               ---------        ---------
     Balance at end of period                                  $  41,429        $  27,774
                                                               =========        =========
</TABLE>

(c)  The aggregate cost of land, buildings and improvements for federal income
     tax purposes is approximately $391,658.

(d)  Refer to Note 1 to the consolidated financial statements of Winston
     Hotels, Inc. for transactions with affiliates


                                      44
<PAGE>   45


                         INDEPENDENT AUDITORS' REPORT

The Members
CapStar Winston Company, L.L.C.:

   We have audited the accompanying balance sheets of CapStar Winston Company,
L.L.C. (the "Company") as of December 31, 1999 and 1998 and the related
statements of operations, members' capital, and cash flows for the years ended
December 31, 1999 and 1998 and the period from October 15, 1997 (date of
inception) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

   We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

   In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of CapStar Winston Company,
L.L.C. as of December 31, 1999 and 1998, and the results of its operations and
its cash flows for the years ended December 31, 1999 and 1998 and the period
from October 15, 1997 (date of inception) through December 31, 1997, in
conformity with generally accepted accounting principles.


                                                /s/ KPMG LLP


Washington, D.C.
January 28, 2000, except for note 8
which is as of February 14, 2000


                                      45
<PAGE>   46


                        CAPSTAR WINSTON COMPANY, L.L.C.
                                BALANCE SHEETS
                       AS OF DECEMBER 31, 1999 AND 1998
                               ($ IN THOUSANDS)


<TABLE>
<CAPTION>

                                                                  ASSETS
                                                                                             1999              1998
                                                                                          ----------        ----------
<S>                                                                                       <C>               <C>
Current assets:
     Cash and cash equivalents                                                             $    1,051        $    2,075
     Accounts receivable, net of allowance for doubtful accounts of
       $98 and $111                                                                             2,773             3,230
     Due from affiliates                                                                        8,667             5,392
     Deposits and other assets                                                                    455               355
                                                                                           ----------        ----------
                  Total current assets                                                         12,946            11,052
                                                                                           ----------        ----------

Furniture, fixtures and equipment, net of accumulated depreciation of
   $136 and $68                                                                                   240               290
Intangible assets, net of accumulated amortization of $1,942 and $1,015                        32,433            33,253
Deferred franchise costs, net of accumulated amortization of $128 and $72                         559               536
Restricted cash                                                                                    38               204
                                                                                           ----------        ----------

                                                                                           $   46,216        $   45,335
                                                                                           ==========        ==========

                                                     LIABILITIES AND MEMBERS' CAPITAL

Current liabilities:
     Accounts payable                                                                      $    2,018        $    1,606
     Accrued expenses                                                                           3,032             3,390
     Percentage lease payable to Winston Hotels, Inc.                                           7,573             7,601
     Advance deposits                                                                             151               183
                                                                                           ----------        ----------
                  Total current liabilities                                                    12,774            12,780
                                                                                           ----------        ----------

Commitments

Members' capital                                                                               33,442            32,555
                                                                                           ----------        ----------

                                                                                           $   46,216        $   45,335
                                                                                           ==========        ==========
</TABLE>


                See accompanying notes to financial statements.


                                      46
<PAGE>   47

                        CAPSTAR WINSTON COMPANY, L.L.C.
                           STATEMENTS OF OPERATIONS
                  YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
                               ($ IN THOUSANDS)

<TABLE>
<CAPTION>
                                                          1999             1998             1997
                                                       ----------       ----------       ----------
<S>                                                    <C>              <C>              <C>
Revenue:
     Rooms                                             $  127,571       $  113,451       $    8,197
     Food and beverage                                      8,732            6,793              462
     Telephone and other operating departments              5,412            5,389              384
                                                       ----------       ----------       ----------
              Total revenue                               141,715          125,633            9,043
                                                       ----------       ----------       ----------

Operating costs and expenses:
     Rooms                                                 29,190           25,664            2,158
     Food and beverage                                      6,137            5,027              308
     Telephone and other operating departments              3,115            2,636              211
Undistributed expenses:
     Lease expense                                         58,551           52,720            3,242
     Administrative and general                            13,483           12,020            1,069
     Sales and marketing                                    5,954            4,859              415
     Franchise fees                                         9,588            8,311              595
     Repairs and maintenance                                6,685            6,051              515
     Energy                                                 5,686            5,069              431
     Other                                                  1,388            1,630               55
     Depreciation and amortization                          1,051            1,050              105
                                                       ----------       ----------       ----------
              Total expenses                              140,828          125,037            9,104
                                                       ----------       ----------       ----------

Net income (loss)                                      $      887       $      596       $      (61)
                                                       ==========       ==========       ==========
</TABLE>


                See accompanying notes to financial statements.


                                      47
<PAGE>   48

                        CAPSTAR WINSTON COMPANY, L.L.C.
                        STATEMENTS OF MEMBERS' CAPITAL
                    YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
                               ($ IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                              MeriStar
                                               CapStar                          H&R
                                             Management        EquiStar       Operating       MeriStar
                                              Company,       Acquisition      Company,       Hotels and
                                                 L.P.        Corporation        L.P.        Resorts, Inc.       Total
                                            -------------    -----------     ----------     -------------    ----------
<S>                                         <C>              <C>             <C>            <C>              <C>
Member contributions made since
   October 15, 1997 (date of                 $   32,020      $       --      $       --      $       --      $   32,020
   inception)

Net loss                                            (60)             (1)             --              --             (61)
                                             ----------      ----------      ----------      ----------      ----------

Balance, December 31, 1997                       31,960              (1)             --              --          31,959

Net income through August 2, 1998                   696               7              --              --             703

Transfer of members' capital                    (32,656)             (6)         32,656               6              --

Net loss from August 3, 1998
   through December 31, 1998                         --              --            (106)             (1)           (107)
                                             ----------      ----------      ----------      ----------      ----------

Balance, December 31, 1998                           --              --          32,550               5          32,555

Net income                                           --              --             878               9             887
                                             ----------      ----------      ----------      ----------      ----------

Balance, December 31, 1999                   $       --      $       --      $   33,428      $       14      $   33,442
                                             ==========      ==========      ==========      ==========      ==========
</TABLE>


                See accompanying notes to financial statements.


                                      48
<PAGE>   49

                        CAPSTAR WINSTON COMPANY, L.L.C.
                           STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 1999 AND 1998 AND
THE PERIOD FROM OCTOBER 15, 1997 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1997
                               ($ IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                                 1999                1998               1997
                                                                               ---------          ---------          ---------
<S>                                                                            <C>                <C>                <C>
Cash flows from operating activities:
     Net income (loss)                                                         $     887          $     596                (61)
     Adjustments to reconcile net income (loss) to net cash
     (used in) provided by operating activities:
         Depreciation and amortization                                             1,051              1,050                105
         Loss on sale of fixed assets                                                 --                  3                 --
     Change in operating assets and liabilities:
         Accounts receivable, net                                                    457             (1,616)               235
         Due from Winston Hospitality, Inc.                                           --              1,636             (1,636)
         Due from affiliates                                                      (3,275)            (5,007)              (635)
         Deposits and other assets                                                  (100)              (158)              (135)
         Restricted cash                                                             166               (204)                --
         Accounts payable and accrued expenses                                        54                617              4,063
         Percentage lease payable to Winston Hotels, Inc.                            (28)             1,919              1,463
         Advance deposits                                                            (32)                48                 26
                                                                               ---------          ---------          ---------
Net cash (used in) provided by operating activities                                 (820)            (1,116)             3,425
                                                                               ---------          ---------          ---------

Cash flows from investing activities:
     Purchases of furniture, fixtures and equipment                                  (21)              (131)                (3)
     Proceeds from sale of fixed assets                                                3                 16                 --
     Additions to intangible assets                                                 (107)               (87)              (100)
     Additions to deferred franchise costs                                           (79)                --                 --
                                                                               ---------          ---------          ---------
Net cash used in investing activities                                               (204)              (202)              (103)
                                                                               ---------          ---------          ---------

Cash flows from financing activities - contributions by members                       --                 --                 71
                                                                               ---------          ---------          ---------

Net (decrease) increase in cash and cash equivalents                              (1,024)            (1,318)             3,393
Cash and cash equivalents, beginning of period                                     2,075              3,393                 --
                                                                               ---------          ---------          ---------

Cash and cash equivalents, end of period                                       $   1,051          $   2,075          $   3,393
                                                                               =========          =========          =========

Supplemental Disclosure of Cash Flow Information:

     Assets contributed (liabilities assigned) to the Company by
       CapStar Management Company, L.P.:
           Accounts receivable                                                 $      --          $      --          $   1,849
           Deposits and other assets                                                  --                 --                 62
           Furniture, fixtures and equipment                                          --                 --                243
           Intangible assets                                                          --                 --             34,081
           Deferred franchise costs                                                   --                 --                608
           Accounts payable and accrued expenses                                      --                 --               (316)
           Percentage lease payable to Winston Hotels, Inc.                           --                 --             (4,219)
           Advance deposits                                                           --                 --               (109)
           Due to CapStar Management Company, L.P.                                    --                 --               (250)
                                                                               ---------          ---------          ---------

     Non-cash financing activity - contribution by member                             --                 --             31,949
                                                                               =========          =========          =========
</TABLE>

                See accompanying notes to financial statements.


                                      49
<PAGE>   50

                        CAPSTAR WINSTON COMPANY, L.L.C.
                         NOTES TO FINANCIAL STATEMENTS
                               ($ IN THOUSANDS)

1.       ORGANIZATION:

     CapStar Winston Company, L.L.C. (the "Company") was formed on October 15,
1997, pursuant to a limited liability company agreement ("Agreement"), subject
to the Limited Liability Act of the State of Delaware, between CapStar
Management Company, L.P. ("CMC") and EquiStar Acquisition Corporation
("EquiStar"), both wholly owned subsidiaries of CapStar Hotel Company
("CapStar"), to lease and operate certain hotels owned by WINN Limited
Partnership and Winston Hotels, Inc. (collectively, "Winston"). Generally,
members of a limited liability company are not personally responsible for
debts, obligations and other liabilities of the Company. The Agreement
provides for the termination of the Company as upon the consent of the
members.

     In November 1997, CMC purchased substantially all of the assets and
assumed certain liabilities of Winston Hospitality, Inc. ("WHI"), including 38
hotel leases, certain operating assets and liabilities, and goodwill and other
intangible assets. Concurrent with the purchase, CMC contributed the assets
purchased and liabilities assumed in the transaction to the Company.

     On August 3, 1998, MeriStar Hotels & Resorts, Inc. ("MeriStar") was spun
off from CapStar (the "Spin-Off") to become the lessee, manager and operator
of various hotel assets, including those previously owned, leased and managed
by CapStar and certain of its affiliates. Pursuant to the Spin-Off, CMC and
Equistar transferred their capital and interests in the Company to MeriStar
H&R Operating Company, L.P. ("MHOC") and MeriStar, respectively. The transfer
was recorded at its net book value.

     As of December 31, 1999, the Company leased 49 Winston-owned hotels,
which included 28 limited-service hotels, 11 extended-stay hotels and ten
full-service hotels. The hotels have 6,616 rooms, are operated under various
franchise agreements, and are located in Arizona, Florida, Georgia, Kentucky,
Massachusetts, Michigan, North Carolina, New Jersey, New York, South Carolina,
Texas and Virginia.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     Cash Equivalents. The Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents.

     Restricted Cash. Restricted cash represents amounts required to be
maintained in escrow to comply with terms of certain state beverage licensing
agreements.

     Furniture, Fixtures and Equipment. Furniture, fixtures and equipment are
recorded at cost and are depreciated using the straight-line method over
estimated useful lives ranging from five to seven years.

     Intangible Assets. Intangible assets consist of goodwill and hotel lease
contracts purchased and beverage licensing costs incurred.

     Hotel lease contracts represent the estimated present value of net cash
flows expected to be received from the hotel leases originally acquired. Hotel
lease contracts are amortized on a straight-line basis over 30 years.

     Goodwill represents the excess of the cost over the net tangible and
identifiable intangible assets originally acquired. Goodwill is amortized on a
straight-line basis over 40 years.

     Licensing costs represent the cost of beverage licenses mandated by state
statutes. Licensing costs are amortized on a straight-line basis over five
years.

     The Company reviews intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. Recoverability is measured by comparing the carrying amount of
the intangible assets to the projected future cash flows of the Company. If
such assets are considered to be impaired, the impairment to be recognized is
the amount by which the carrying amounts of the intangible assets exceed their
fair value. No impairment loss was recorded in 1999, 1998 or 1997.


                                      50
<PAGE>   51

     Deferred Franchise Costs. Franchise costs are deferred and amortized on a
straight-line basis over the terms of the franchise agreements, which range
from 18 months to 20 years.

     Members' Capital and Allocation of Profits and Losses. Prior to the
Spin-Off, CMC had a 99% ownership interest and EquiStar had a 1% ownership
interest in the Company. Subsequent to the Spin-Off, MHOC has a 99% ownership
interest and MeriStar has a 1% ownership interest in the Company. In general,
the allocation of income and losses and contributions and distributions were
made to the members in proportion to their respective ownership interest.

     Income Taxes. No provision has been made for income taxes since any such
amount is the liability of the individual members.

     Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
recognized during the reporting period. Actual results could differ from those
estimates.


3.       INTANGIBLE ASSETS:

     Intangible assets consist of the following:

<TABLE>
<CAPTION>
                                                         1999               1998
                                                      ----------         ----------
        <S>                                           <C>                <C>
        Lease contract                                $    6,576         $    6,576
        Goodwill                                          27,712             27,605
        Organization costs                                    87                 87
                                                      ----------         ----------
                                                          34,375             34,268
        Less: accumulated amortization                    (1,942)            (1,015)
                                                      ----------         ----------
                                                      $   32,433         $   33,253
                                                      ==========         ==========
</TABLE>


4.       MANAGEMENT AGREEMENTS:

     As of December 31, 1999, the Company managed 39 of the 49 leased hotels
and had separate management agreements with third parties to manage the
remaining 10 hotels. The terms of these third-party management agreements
provide for management fees to be paid on a monthly basis based on budgeted
gross operating profit, as defined in the agreements, with year-end
adjustments, for actual operating results. The term of nine of the management
agreements extends to 2006 and one extends to 2012. The agreements are
cancelable before expiration under certain circumstances. Management fees
incurred during 1999, 1998 and 1997 were $886, $1,001 and $17, respectively
and are included in other expenses.


5.       TRANSACTIONS WITH RELATED PARTIES:

     The Company and MHOC advanced amounts to each other in the normal course
of business. At December 31, 1999 and 1998, MHOC owed the Company $8,667 and
$5,392, respectively.


6.       COMMITMENTS:

     Each of the Company's hotels is leased under a separate participating
lease agreement. The leases in existence at the date CMC purchased the initial
38 hotel leases expire on November 30, 2012; subsequent leases extend through
December 31, 2013. The leases require monthly minimum base rental payments to
Winston and additional quarterly payments of percentage rent, based on
revenues generated by the hotels in excess of specified amounts. The leases
are non-cancelable except upon sale of a hotel. Winston is


                                      51
<PAGE>   52


required to make a termination payment to the Company, as defined in the lease
agreements, upon cancellation of a lease. MeriStar Hospitality Corporation, an
affiliate of the Company, has guaranteed amounts due and payable by the
Company under the leases up to $20,000. Future minimum base rental payments
under these non-cancelable operating leases as of December 31, 1999 are as
follows:

<TABLE>
                  <S>                                      <C>
                  2000                                     $     31,120
                  2001                                           31,120
                  2002                                           31,120
                  2003                                           31,120
                  2004                                           31,120
                  Thereafter                                    252,316
                                                           ------------
                       Total                               $    407,916
                                                           ============
</TABLE>

     The Company incurred minimum base rents of $30,676, $26,378 and $2,731,
and additional percentage rents of $27,875, $26,342 and $511 during 1999, 1998
and 1997, respectively.


7.       BUSINESS CONCENTRATION:

     Winston owns all of the Company's leased hotels. Therefore, the Company's
financial position and results of operations would be adversely and materially
impacted if Winston sells the hotels and terminates the leases. Management
believes that Winston has no intention of selling hotels which would,
individually or in the aggregate, have a material impact on the operations of
the Company.


8.       SUBSEQUENT EVENT:

     On February 14, 2000, Winston sold the Comfort Suites hotel in London,
Kentucky. As a result, the Company's lease for that hotel was terminated.


                                      52
<PAGE>   53



                       REPORT OF INDEPENDENT ACCOUNTANTS

The Shareholders
Winston Hospitality, Inc.

     We have audited the accompanying statements of income, shareholders'
equity and cash flows for the ten months ended October 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Winston Hospitality, Inc. for the ten months ended October 31, 1997, in
conformity with accounting principles generally accepted in the United States.


                                            /s/ PricewaterhouseCoopers LLP

Raleigh, North Carolina
February 6, 1998


                                      53
<PAGE>   54

                           WINSTON HOSPITALITY, INC.
                              STATEMENT OF INCOME
                   FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
                               ($ IN THOUSANDS)

<TABLE>
<CAPTION>
                                                  TEN MONTHS ENDED
                                                  OCTOBER 31, 1997
                                                  ----------------
        <S>                                       <C>
        Revenue:
             Room                                    $   67,145
             Food and beverage                            2,419
             Other operating, net                         1,373
             Interest income                                152
                                                     ----------
                 Total revenue                           71,089
                                                     ----------
        Expenses:
             Property and operating                      24,112
             Property repairs and maintenance             3,193
             Food and beverage                            1,715
             General and administrative                   2,090
             Franchise costs                              6,167
             Management fees                              1,015
             Percentage lease payments                   30,980
                                                     ----------
                 Total expenses                          69,272
                                                     ----------
                 Net income                          $    1,817
                                                     ==========
</TABLE>

                           WINSTON HOSPITALITY, INC.
                      STATEMENTS OF SHAREHOLDERS' EQUITY
                   FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
                               ($ IN THOUSANDS)

<TABLE>
<CAPTION>

                                                  COMMON STOCK               ADDITIONAL                          TOTAL
                                             -----------------------          PAID-IN         RETAINED        SHAREHOLDERS'
                                             SHARES          DOLLARS          CAPITAL         EARNINGS           EQUITY
                                             ------          -------          -------         --------           ------
<S>                                        <C>              <C>              <C>              <C>             <C>
Balances at December 31, 1996                    100                1               49              644               694

Net income                                        --               --               --            1,817             1,817
Distributions                                     --               --               --             (600)             (600)
                                           ---------        ---------        ---------        ---------         ---------
Balances at October 31, 1997                     100        $       1        $      49        $   1,861         $   1,911
                                           =========        =========        =========        =========         =========
</TABLE>


   The accompanying notes are an integral part of the financial statements.


                                      54
<PAGE>   55

                           WINSTON HOSPITALITY, INC.
                            STATEMENT OF CASH FLOWS
                   FOR THE TEN MONTHS ENDED OCTOBER 31, 1997
                               ($ IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               TEN MONTHS
                                                                  ENDED
                                                            OCTOBER 31, 1997
                                                            ----------------
<S>                                                         <C>
Cash flows from operating activities:
     Net income                                               $      1,817
     Adjustments to reconcile net income to net cash
     provided by operating activities:
         Depreciation and amortization                                  67
         Changes in assets and liabilities:
              Accounts receivable - trade                           (1,137)
              Prepaid expenses and other assets                         38
              Accounts payable - trade                                 659
              Percentage lease payable to Lessor                      (729)
              Accrued expenses and other liabilities                   906
                                                              ------------
                  Net cash provided by operating
                  activities
                                                                     1,621
                                                              ------------

Cash flows from investing activities:
     Purchases of furniture, fixtures and equipment                    (76)
     Repayments from (advances to) Lessor, affiliates and
       shareholders, net                                               518
                                                              ------------
                  Net cash provided by investing
                     activities
                                                                       442
                                                              ------------
Cash flows from financing activities:
     Distributions to shareholders                                    (600)
                                                              ------------
                  Net cash used in financing activities               (600)
                                                              ------------

Net increase in cash and cash equivalents                            1,463
Cash and cash equivalents at beginning of the period                 5,463
                                                              ------------

Cash and cash equivalents at end of the period                $      6,926
                                                              ============
</TABLE>


   The accompanying notes are an integral part of the financial statements.


                                      55
<PAGE>   56

                           WINSTON HOSPITALITY, INC.
                         NOTES TO FINANCIAL STATEMENTS
                               ($ IN THOUSANDS)

1.       ORGANIZATION:

     Winston Hospitality, Inc. ("Hospitality") was formed to lease and operate
hotels owned by WINN Limited Partnership (the "Partnership") and Winston
Hotels, Inc. ("WHI") (collectively, the "Company). The two shareholders of
Hospitality (Robert W. Winston, III and John B. Harris, Jr.) are also
shareholders of WHI and/or partners in the Partnership. The Company owned 38
hotels as of October 31, 1997.

     Each hotel was separately leased by the Company to Hospitality under a
Percentage Lease Agreement. These leases required minimum base rental payments
to be made to the Company on a monthly basis and additional quarterly payments
to be made based on a percentage of gross room revenue and certain food and
beverage revenues.

     Twenty-eight of the 38 hotels are limited-service hotels, five are
extended-stay hotels and five are full-service hotels. All 38 hotels are
operated under franchise agreements with Promus Hotels, Inc., Choice Hotels
International, Inc., Holiday Inns Franchising, Inc. and Marriott
International, Inc. The cost of obtaining the franchise licenses was paid by
the Company and the on-going franchise fees were paid by Hospitality.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     Revenue Recognition. Revenue is recognized as earned. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable which is estimated to be
uncollectible.

     Cash Equivalents. All highly liquid investments with a maturity date of
three months or less when purchased are considered to be cash equivalents. At
October 31, 1997, bank account balances exceeded federal depository insurance
limits by approximately $6,252.

     Fair Value of Financial Instruments. Hospitality's financial instruments
consist of cash and cash equivalents whose carrying value approximates fair
value because of their short maturity.

     Furniture, Fixtures and Equipment. Furniture and equipment are recorded
at cost and are depreciated using the straight-line method over estimated
useful lives of the assets of five and seven years. Leasehold improvements are
being amortized using the straight-line method over the terms of the related
leases. Upon disposition, both the asset and accumulated depreciation accounts
are relieved and the related gain or loss is credited or charged to the income
statement. Repairs and maintenance of hotel properties owned by the Company
are paid by Hospitality and are charged to expense as incurred.

     Income Taxes. Hospitality has made an election under Subchapter S of the
Internal Revenue Code of 1986, as amended. Any taxable income or loss is
recognized by the shareholders and, therefore, no provision for income taxes
has been provided in the accompanying financial statements.

3.       COMMITMENTS:

     Under the terms of the Percentage Lease Agreements, Hospitality had
future lease commitments to the Company through 2006. As disclosed in Note 6
below, all Percentage Leases were sold as of November 24, 1997.

     Hospitality incurred minimum base rents of $13,535 as well as percentage
rents of $17,445 for the ten months ended October 31, 1997.

     Hospitality had entered into separate contracts with unrelated parties
for the management of 10 of the hotels. The terms of these agreements provided
for management fees to be paid based on predetermined formulas for a period of
ten years through 2006. The contracts were cancelable under certain
circumstances as outlined in the agreements. As disclosed in Note 6 below, all
such contracts were sold as of November 24, 1997.


                                      56
<PAGE>   57

     Various legal proceedings against Hospitality have arisen from time to
time in the normal course of business. Management believes liabilities arising
from these proceedings, if any, will have no material adverse effect on the
financial positions or results of operations of Hospitality.

4.       DISTRIBUTIONS:

     Beginning with the year ended December 31, 1996, the shareholders agreed
to limit distributions by Hospitality to amounts necessary to pay their income
taxes on the net income derived from Hospitality until such time as the
tangible net worth of Hospitality reached $4,000. Thereafter, they agreed to
invest at least 75% of their after-tax distributions of net income from
Hospitality in Common Stock of the Company. These agreements terminated
effective November 24, 1997, due to the sale of the leases to CapStar.

5.       PROFIT SHARING PLAN:

     On January 1, 1996, Hospitality adopted the Winston 401(k) Plan (the
"Plan") for substantially all employees, (except any highly compensated
employee, as defined in the Plan), who had attained the age of 21 and
completed one year of service. Under the Plan, employees were able to
contribute from 1% to 15% of compensation, subject to an annual maximum as
determined under the Internal Revenue Code. Hospitality made matching
contributions of a specified percentage of the employee's contribution.
Hospitality contributed $54 during the 10-month period ended October 31, 1997.

6.       SUBSEQUENT EVENT:

     On November 24, 1997, Hospitality completed the sale of substantially all
of its assets and all 38 existing Percentage Leases to CapStar Management
Company, L.P. ("CMC") for total consideration of $34,000. The $34,000 sale
price consisted of $10,000 in cash and 674,236 CMC Partnership Units.


                                      57
<PAGE>   58


INDEX TO EXHIBITS

<TABLE>
<CAPTION>
       Exhibit              Description
       -------              -----------
       <S>                  <C>
       3.1(10)              Restated Articles of Incorporation

       3.2(1)               Amended and Restated Bylaws

       4.1(1)               Specimen certificate for Common Stock, $0.01 par value per share

       4.2(4)               Specimen certificate for 9.25% Series A Cumulative Preferred Stock

       4.3(10)              Restated Articles of Incorporation

       4.4(1)               Amended and Restated Bylaws

       10.1(3)              Second Amended and Restated Agreement of Limited Partnership of WINN Limited Partnership

       10.2(4)              Amendment No. 1 dated September 11, 1997 to Second Amended and Restated Agreement of Limited
                            Partnership of WINN Limited Partnership

       10.3(6)              Amendment No. 2 dated December 31, 1997 to Second Amended and Restated Agreement of Limited
                            Partnership of WINN Limited Partnership

       10.4                 Amendment No. 3 dated September 14, 1998 to Second Amended and Restated Agreement of Limited
                            Partnership of WINN Limited Partnership

       10.5(11)             Amendment No. 4 dated October 1, 1999 to Second Amended and Restated Agreement of Limited
                            Partnership of WINN Limited Partnership

       10.6(2)              Form of Percentage Leases

       10.7(5)              First  Amendment to Lease dated  November 17, 1997  between WINN Limited  Partnership  and CapStar
                            Winston Company, L.L.C.

       10.8(5)              First  Amendment to Lease dated  November 24, 1997  between WINN Limited  Partnership  and CapStar
                            Winston Company, L.L.C.

       10.9(1)              Winston Hotels, Inc. Directors' Stock Incentive Plan

       10.10(2)             Limitation of Future Hotel Ownership and Development Agreement

       10.11(5)             Guaranty dated November 17, 1997 between CapStar Hotel Company, WINN Limited Partnership and
                            Winston Hotels, Inc.

       10.12(6)             Employment Agreement, dated July 31, 1997, by and between Kenneth R. Crockett and Winston Hotels,
                            Inc.

       10.13(7)             Winston Hotels, Inc. Stock Incentive Plan as amended May 1998

       10.14(8)             Loan Agreement by and between Winston SPE LLC and CMF Capital Company LLC dated November 3, 1998

       10.15(8)             Promissory note dated November 3, 1998 by and between Winston SPE LLC and CMF Capital Company, LLC
</TABLE>


                                      58
<PAGE>   59

<TABLE>

       <S>                  <C>
       10.16(9)             Winston Hotels, Inc. Executive Deferred Compensation Plan

       10.17(9)             Credit Agreement, dated as of January 15, 1999, among Wachovia Bank, N.A., Branch Banking and
                            Trust Company, SouthTrust Bank, N.A., Centura Bank, Winston Hotels, Inc., WINN Limited
                            Partnership and Wachovia Bank, N.A. as Agent (the "Credit Agreement")

       10.18(9)             Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
                            Partnership to Wachovia Bank, N.A. for the principal sum of $60,000,000 pursuant to the Credit
                            Agreement

       10.19(9)             Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
                            Partnership to Branch Banking and Trust Company for the principal sum of $40,000,000 pursuant to
                            the Credit Agreement

       10.20(9)             Promissory Note, dated as of January 15, 1999, from Winston Hotels, Inc. and WINN Limited
                            Partnership to SouthTrust Bank, N.A. for the principal sum of $25,000,000 pursuant to the Credit
                            Agreement

       10.21(9)             Promissory Note, dated as of January 15, 1999,
                            from Winston Hotels, Inc. and WINN Limited
                            Partnership to Centura Bank for the principal sum
                            of $15,000,000 pursuant to the Credit Agreement

       10.22(9)             Form of Deed of Trust, Assignment of Rents, Security Agreement and Financing Statement used to
                            secure certain obligations under the Credit Agreement (not including certain variations existing
                            in the different states where the properties are located)


       21.1                 Subsidiaries of the Registrant

       23.1                 Consent of Independent Accountants (PricewaterhouseCoopers LLP)

       23.2                 Accountants' Consent (KPMG LLP)

       24.1                 Powers of Attorney

       27.1                 Financial Data Schedule (for SEC use only)

       99.1                 Risk Factors
</TABLE>

(1)  Exhibits to the Company's Registration Statement on Form S-11 as filed
     with the Securities and Exchange Commission (Registration No. 33-76602)
     effective May 25, 1994 and incorporated herein by reference.

(2)  Exhibits to the Company's Registration Statement on Form S-11 as filed
     with the Securities and Exchange Commission (Registration No. 33-91230)
     effective May 11, 1995 and incorporated herein by reference.

(3)  Exhibit to the Company's report on Form 8-K as filed with the Securities
     and Exchange Commission on July 24, 1997 and incorporated herein by
     reference.

(4)  Exhibits to the Company's report on Form 8-K as filed with the Securities
     and Exchange Commission on September 15, 1997 and incorporated herein by
     reference.

(5)  Exhibits to the Company's report on Form 8-K as filed with the Securities
     and Exchange Commission on December 10, 1997 and incorporated herein by
     reference.

(6)  Exhibits to the Company's Annual Report on Form 10-K as filed with the
     Securities and Exchange Commission on March 27, 1998 and as amended by
     Form 10-K/A filed with the Securities and Exchange Commission on April 1,
     1998.


                                      59
<PAGE>   60

(7)  Exhibit to the Company's Registration Statement on Form S-8 as filed with
     the Securities and Exchange Commission on July 29, 1998. (Registration
     No. 333-60079) and incorporated herein by reference.

(8)  Exhibits to the Company's Quarterly Report on Form 10-Q as filed with the
     Securities and Exchange Commission on November 16, 1998 and as amended on
     Form 10-Q/A filed with the Securities and Exchange Commission on February
     23, 1999 and incorporated herein by reference.

(9)  Exhibits to the Company's Annual Report on Form 10-K as filed with the
     Securities and Exchange Commission on March 25, 1999 and incorporated
     herein by reference.

(10) Exhibit to the Company's Quarterly Report on Form 10-Q or filed with the
     Securities and Exchange Commission on August 4, 1999 and incorporated
     herein by reference.

(11) Exhibit to the Company's Quarterly Report on Form 10-Q as filed with the
     Securities and Exchange Commission on November 12, 1999 and incorporated
     herein by reference.


                                       60