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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, 2002

Commission file number 0-23732

WINSTON HOTELS, INC.

(Exact name of registrant as specified in its charter)


|                                         |  |                                        
|---------------------------------------- |  | ---------------------------------------
|North Carolina                           |  | 56-1624289                             
|(State of incorporation)                 |  | (I.R.S. Employer Identification Number)
|                                         | 
|2626 Glenwood Avenue, Suite 200          |  |                                        
|Raleigh, North Carolina                  |  | 27608                                  
|(Address of principal executive offices) |  | (Zip Code)                             

(919) 510-6010

(Registrants telephone number, including area code)


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

|                                           |  |                                         
|------------------------------------------ |  | ----------------------------------------
|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)

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]

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

The aggregate market value of the registrants Common Stock, $0.01 par
value per share, at June 28, 2002, held by those persons deemed by the
registrant to be non-affiliates was approximately $184,680,926.

As of March 1, 2003, there were 20,193,634 shares of the registrants
Common Stock, $0.01 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

|         |  |                                                                              |  |                   
|-------- |  | ---------------------------------------------------------------------------- |  | ------------------
|Document |  |                                                                              |  | Where Incorporated
|         |  |                                                                              |  |                   
|1.       |  | Proxy Statement for Annual Meeting of Shareholders to be held on May 6, 2003 |  | Part III          

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WINSTON HOTELS, INC.

Form 10-K Annual Report

INDEX

|               |         |  |                                                                                                |  |  |    |      |  | 
|-------------- | ------- |  | ---------------------------------------------------------------------------------------------- |  |  | -- | ---- |  | 
|               |         |  |                                                                                                |  |  |    | Page
|               |         |  |                                                                                                |  |  |    |     
|PART I.        |         |  |                                                                                                |  |  |    |      | 
|               | ITEM 1  |  | BUSINESS                                                                                       |  |  | 3  |     
|               | ITEM 2  |  | PROPERTIES                                                                                     |  |  | 10 |     
|               | 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          |  |  | 17 |     
|               | ITEM 7A |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |  |  | 38 |     
|               | ITEM 8  |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |  |  | 39 |     
|               | ITEM 9  |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           |  |  | 39 |     
|PART III.      |         |  |                                                                                                |  |  |    |      | 
|               | ITEM 10 |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  |  | 39 |     
|               | ITEM 11 |  | EXECUTIVE COMPENSATION                                                                         |  |  | 39 |     
|               | ITEM 12 |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |  |  | 39 |     
|               | ITEM 13 |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |  |  | 40 |     
|               | ITEM 14 |  | CONTROLS AND PROCEDURES                                                                        |  |  | 40 |     
|PART IV.       |         |  |                                                                                                |  |  |    |      | 
|               | ITEM 15 |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                               |  |  | 40 |     
|SIGNATURES     |         |  |                                                                                                |  |  |    | 44   | 
|CERTIFICATIONS |         |  |                                                                                                |  |  |    | 45   | 

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PART I.

ITEM  1.    BUSINESS

General Development of Business

Winston Hotels, Inc. (WHI), headquartered in Raleigh, North Carolina,
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 its 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
additional hotel properties. These ten hotels were acquired from affiliates of
WHI. WHI and the Partnership (collectively the Company) began operations as
a REIT on June 2, 1994. As of December 31, 2002, WHIs ownership in the
Partnership was 93.95%.

As of December 31, 2002, the Company owned or was invested in 52 hotel
properties in 17 states having an aggregate of 7,200 rooms. This included 44
wholly owned properties with 6,141 rooms, a 49 percent ownership in three joint
venture hotels with 453 rooms, a 13.05 percent ownership interest in two joint
venture hotels with 215 rooms, and a mezzanine financing interest in three
hotels with 391 rooms. The Company does not hold an ownership interest in any
of the hotels for which it has provided mezzanine financing. All of the
Companys hotels are operated under franchises from nationally recognized
franchisors including Marriott International, Inc., Hilton Hotels Corporation,
Six Continents PLC and Choice Hotels International.

Acquisition of Leasehold Interests

Prior to January 1, 2001, under the REIT qualification requirements of the
Internal Revenue Code, REITs generally were required to lease their hotels to
third party operators. Under the REIT Modernization Act of 1999 (the RMA),
which became effective January 1, 2001, a REIT is permitted to lease hotels to
wholly owned taxable REIT subsidiaries of the REIT (TRS Lessees). Under the
RMA, the TRS Lessees may not operate the leased hotels and must enter into
management agreements with eligible independent contractors who manage the
hotels.

Effective July 1, 2002, pursuant to a Leasehold Acquisition Agreement, the
Company, through its TRS Lessee, Barclay Hospitality Services Inc. (Barclay),
acquired the leasehold interests for 47 of its hotels from CapStar Winston
Company, L.L.C., a wholly owned subsidiary of MeriStar Hotels & Resorts, Inc.
(MeriStar). MeriStar has since merged with and become Interstate Hotels &
Resorts, Inc. (Interstate). The acquisition included leasehold interests for
45 wholly owned hotels and two joint venture hotels. Simultaneous with
acquiring the leasehold interests, Barclay entered into new management
contracts with Interstate for 39 of the 47 hotels covered by the leases. These
five-year contracts are terminable by Barclay after June 30, 2003, subject to
certain conditions and limitations. The Company sold two of the 39 hotels
during the third and fourth quarters of 2002 and signed new management
contracts for another two, one with Sage Client 453, LLC, an affiliate of Sage
Hospitality Resources, LLC (Sage) and one with Noble Investment Group, Ltd.
(Noble). As of December 31, 2002, Interstate managed 35 of the Companys
hotels, Interstate Management and Investment Corporation (IMIC) headquartered
in Columbia, South Carolina (unrelated to and unaffiliated with Interstate)
managed six hotels, Concord Hospitality Enterprises Company (Concord) managed
two hotels, and Promus Hotels, Inc., an affiliate of Hilton Hotels Corporation
(Hilton), Sage, and Noble each managed one hotel. Three other hotels, in
which the Company has an ownership interest, including two wholly owned
properties and one joint venture property, continue to be operated under
long-term leases with third parties. Under the terms of the leases, the
lessees are obligated to pay the Company the greater of base rent or percentage
rent. The leases are designed to allow the Company to participate in the
growth in revenues at the hotels by requiring that a portion of each hotels
room revenues in excess of specified amounts be paid to the Company as
percentage rent.

The acquisition of the leasehold interests from Interstate entitles
Barclay to retain the operating profits or losses from the related hotels,
which previously accrued to Interstate under the leases and gives the Company
(i) more control over the operations of these hotels, (ii) the benefits from
any operating margin improvements and risk of any operating margin
deterioration at these hotels, and (iii) more flexibility, in that these hotels
are no longer encumbered by long term leases that are difficult to amend and
expensive to terminate. All of the hotels continue to operate under the same
franchise affiliations as prior to the acquisition of the leasehold interests.

The total consideration of approximately $19.5 million, under the
Leasehold Acquisition Agreement, was based upon a $17 million purchase price
for the leasehold interests, adjusted in part for accrued interest and related
expenses totaling approximately $0.7 million, and $1.8 million of working
capital. The cost of the acquisition of the leasehold interests, including
accrued interest and related expenses, but excluding the working capital
acquired totaled approximately $17.7 million. This cost represents the
cancellation of an executory contract and was expensed on June 28, 2002. In
addition, a deferred tax benefit of $6.7 million was recognized on June 28,
2002 resulting from the timing difference of the $17.7 million payment for
financial reporting purposes versus tax purposes.

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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) aggressive asset management; (ii) acquiring, either directly or through
joint ventures, additional hotels, or ownership interests in hotels, that meet
the Companys investment criteria; (iii) generating development and asset
management fee income from joint ventures; (iv) mezzanine financing activities
whereby the Company initiates hotel loans to third party hotel owners; (v)
selectively developing new hotels and making additions to the hotels as market
conditions warrant; and (vi) selectively disposing of hotels that no longer
meet the Companys long-term investment objectives.

Aggressive Asset Management

The Company seeks to increase operating cash flow and profit through
aggressive asset management and the strategic investment of capital in its
portfolio. The Company maintains strong, strategic relationships with both its
franchisors and managers and focuses on selecting the best, most appropriate
franchisor and manager for each property. Over the past four years, the
Company has spent approximately $26.6 million upgrading and renovating existing
wholly owned hotels in order to enhance their competitive position and improve
cash flow. This is in addition to approximately $27.1 million spent on repairs
and maintenance items during that same time.

Acquisitions

The Company intends to acquire additional hotels, or ownership interests
in hotels, with strong national franchise affiliations in the mid-scale
without food and beverage, upscale and full-service market segments, or
hotel properties with the potential to obtain such franchise affiliations. In
particular, the Company will consider acquiring mid-scale without food and
beverage hotels, such as Hampton Inn and Fairfield Inn by Marriott; upscale
hotels such as Hilton Garden Inn, Courtyard by Marriott, Holiday Inn, Homewood
Suites by Hilton, Hampton Inn and Suites, Residence Inn, Spring Hill Suites by
Marriott and Staybridge by Holiday Inn; and full-service hotels such as
Marriott and Hilton (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 relatively high barriers to entry into the hotel business, such as a
scarcity of suitable sites or zoning restrictions; (ii) successful hotels
available at favorable prices; (iii) newly developed hotels; (iv) hotels that
could benefit from repositioning; (v) hotels that could benefit from
substantial rehabilitation; and (vi) hotels that could benefit from new
management and additional hotel capital. The Company believes that its
relationships with its lessees and franchisors will provide additional
potential investment opportunities.

Joint Ventures

During the fourth quarter of 2002, the Company formed a joint venture (the
Charlesbank Venture) with Boston-based Charlesbank Capital Partners, LLC
(Charlesbank). The Charlesbank Venture intends to acquire more than $100
million of hotel assets. Charlesbank is a private investment firm managing
capital on behalf of institutional investors. The Company owns 15% of the
Charlesbank Venture and Charlesbank owns 85%. The Charlesbank Venture focuses
on acquisitions that have turnaround or upside potential and can benefit from
additional capital and aggressive asset management, which often includes
renovating, repositioning, rebranding or a change in management. The
Charlesbank Venture has invested in two hotels to date through a joint venture
comprised of Concord Hospitality Enterprises Company (Concord) and the
Charlesbank Venture (WCC Project Company LLC). The first hotel is a vacant
building located in the Beachwood suburb of Cleveland, OH that is being
converted into a 113-room Courtyard by Marriott and is expected to open in the
second quarter of 2003. The second hotel is a 102-room Fairfield Inn & Suites
by Marriott located in Des Moines, IA, which was converted from a Wingate Inn
during the summer of 2002. Before these projects were contributed to WCC
Project Company LLC, the Company held them through a 50/50 joint venture with
Concord. The joint venture with Concord had been formed in the second quarter
of 2002. Concord has retained a 13% interest in the projects acquired by WCC
Project Company LLC, while the Charlesbank Venture owns 87%, so that the
Company has a 13.05% ownership interest in WCC Project Company LLC. The total
cost of these two hotels is approximately $14.3 million. The Company earns an
asset management fee equal to 0.50% of the total cost of the assets purchased
by the Charlesbank Venture.

Under the terms of the Charlesbank Venture, Charlesbank will provide 85%
of the total equity, and the Company will provide the remaining 15% of the
total equity committed to each acquisition. Charlesbank will have the option
to expand the venture by committing additional equity to future acquisitions
after the initial equity is committed. The Company anticipates that the
Charlesbank Venture will be able to secure debt financing for 65% of the total
cost of hotel assets that are purchased. In addition to

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generating asset
management fee income, the Company believes that the Charlesbank Venture will
enhance our revenues and cash flow as well as allow us to expand our
affiliations with leading upscale brands and spur growth in our hotel portfolio
with a smaller
equity investment by us (see Managements Discussion and Analysis of Financial
Condition and Results of Operations  Forward Looking Statements).

Under the terms of WCC Project Company LLC, Charlesbank will provide
73.95%, the Company 13.05%, and Concord 13% of the total equity. While the
Company anticipates that WCC Project Company LLC will continue to pursue
opportunities, not all of the Charlesbank Venture opportunities will be made
through WCC Project Company LLC. The Charlesbank Venture will seek additional
investments that may not involve Concord, but may have other operating
partners.

In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan
for the purchase and conversion of a historic office building into a 116-room
Hampton Inn & Suites hotel in Baltimore, MDs Inner Harbor (the Baltimore
Hotel). Subsequently, the Company entered into a joint venture agreement (the
Hall Joint Venture), with an affiliate of Hall Financial Group, (Hall).
The Company assigned the $3,500 mezzanine loan to the Hall Joint Venture and
retained a 50% interest (or $1,750) in the note through the joint venture. The
total cost of the Baltimore Hotel, which is scheduled to open in the first
quarter of 2004, is expected to be approximately $19,000. The Company owns 50%
of the Hall Joint Venture, and Hall owns the remaining 50%.

In addition to the joint ventures described above, the Company owns a 49%
interest in three joint ventures, each of which owns an operating hotel. These
hotels consist of a Hilton Garden Inn located in Windsor, CT, a Hampton Inn
located in Ponte Vedra, FL, and a Hilton Garden Inn located in Evanston, IL,
having a combined total of 453 rooms. Two of our directors own the remaining
51% of the Ponte Vedra, FL joint venture. The Company earns asset management
fees equal to 1.0% of the total revenues of each of these three joint venture
hotels. We continue to seek additional prudent joint venture opportunities
where the Company can leverage its hotel asset management and development
expertise into attractive investments.

Mezzanine Financing

In addition to the Hall mezzanine loan, the Company currently has two
other mezzanine loans outstanding totaling approximately $3.3 million to third
party hotel owners. We continue to seek additional prudent mezzanine financing
opportunities where the Company can leverage its hotel underwriting and
development expertise into attractive investments.

Development

The Company intends to pursue selective 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. 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.
Since its initial public offering in 1994, the Company has developed five
hotels that it now owns and has developed three hotels through joint ventures
in which it owns a 49% interest.

Divest Certain Properties

The Company continually evaluates its portfolio and selectively sells
hotels that no longer meet its long-term investment objectives. These hotels
are typically older, limited service properties that offer limited earnings
growth, require extensive capital investments, and/or have experienced adverse
market conditions. Over the past three years the Company has sold seven
properties for approximately $23.1 million.

Operations and Property Management

As of December 31, 2002, the Company wholly owned 44 hotel properties and
held an ownership interest in five joint venture hotel properties. Of the
total 49 hotels in which the Company held an ownership interest, 35 were
managed by Interstate (formerly MeriStar). IMIC managed six of the hotels,
Concord managed two of the hotels, and Hilton, Sage and Noble each managed one
of the hotels.

Three of the hotels continue to be operated under long-term leases with
third parties. Two of these properties are leased to, and managed by, Bristol
W. Tenant Company, a wholly owned subsidiary of Six Continents Hotels, Inc.,
and one of the hotels is leased to Secaucus Holding Corporation, a wholly owned
subsidiary of Prime Hospitality Corp.

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The managers and the lessees seek to increase revenues by using
established systems to manage the 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 added emphasis
placed on customer service. The lessees and the managers employ a mix of
marketing techniques designed for each specific hotel, which include individual
toll-free lines, cross-marketing of the hotels billboards and direct
marketing, as well as taking advantage of national advertising by the
franchisors of the hotels.

The information below, regarding the hotel managers of the Companys
hotels, is as of December 31, 2002:

Interstate, a New York Stock Exchange listed company and the nations
largest independent hotel management company, managed more than 400 hotels in
45 states and Canada.

IMIC, a hotel development and management company, operated a total of 31
hotels in six states, including 27 limited-service hotels and 4 full-service,
convention or resort hotels.

Concord, a hotel development and management company, operated a total of
33 hotels in eight states and Canada.

Sage, a hotel management company, operated a total of 96 hotels in 33
states.

Noble, a hotel development and management company, operated 20 upscale,
full service, mid-market and all-suites hotels in six states.

Hilton, a New York Stock Exchange listed company, is a developer, owner,
manager or franchisor of 2,000 hotels, resorts and vacation ownership
properties. Its portfolio includes many of the worlds best known and most
highly regarded hotel brands, including Hilton, Doubletree, Embassy Suites,
Hampton Inn, Homewood Suites by Hilton, Red Lion Hotels & Inns and Conrad
International.

Six Continents, one of the leading hotel operating companies in the world,
operated more than 3,300 hotels in close to 100 countries, primarily
full-service hotels in the upscale and mid-scale segments of the hotel industry
with branded hotels including Crowne Plaza, Holiday Inn, Holiday Inn Select and
Holiday Inn Express hotels.

Prime, a New York Stock Exchange listed company, owned, operated, managed
or franchised over 230 hotels in 32 states. Prime, one of the nations premier
lodging companies, operates two proprietary brands, AmeriSuites (all-suites)
and Wellesley Inns (limited-service). It also owns and/or manages hotels
operated under franchise agreements with national hotel chains.

Franchise Agreements

All of the Companys hotels operate under franchise licenses from national
hotel franchisors including Marriott International, Inc., Hilton Hotels
Corporation, Six Continents PLC and Choice Hotels International. The Company
anticipates that most of the additional hotel properties in which it invests
will be operated under franchise licenses with these same franchisors.
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, record keeping, 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.

As of December 31, 2002, of the 48 hotels franchise licenses, including
four joint venture hotels, two expire in 2006, two expire in 2007, four expire
in 2008, three expire in 2009, two expire in 2010, three expire in 2011, one
expires in 2013, one expires in 2015, two expire in 2016, 13 expire in 2017,
nine expire in 2018, one expires in 2020, four expire in 2022, and one expires
in 2023. 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 hotel. 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
generally between 4% and 5% of room revenues, plus additional fees that amount
to between 3% and 4% of room revenues from the hotels.

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Competition

The hotel industry is highly competitive with various participants
competing on the basis of price, level of service and geographic location. The
Companys 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 managers, and the lessees of the
hotels. Several of the Companys hotels are located in areas in which they may
compete with other Company 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 manager.

Employees

The Company had 17 employees as of March 1, 2003.

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
remedy 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) released 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
its 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 Companys hotels. The Phase I ESAs were intended to identify potential
sources of contamination for which the hotels may be responsible and to
identify readily apparent environmental regulatory compliance concerns. The
Phase I ESAs included historical reviews of the hotels, reviews of certain
public records, preliminary investigations of the sites and surrounding
properties, screening for the presence of asbestos, PCBs (polychlorinated
biphenyls) 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 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 for existing conditions at the
Companys hotels, or (ii) the current environmental condition of the hotels
will not be affected by the condition of the properties in the vicinity of the
hotels (such as the presence of leaking underground storage tanks) or by third
parties unrelated to the Company.

In addition to the ESAs, the Company also obtained asbestos surveys for
the Holiday Inn Select-Garland (Dallas), Texas and the Comfort Inn-Greenville,
South Carolina. In each of the asbestos surveys, the consultants discovered
the presence of ACMs. The Company is monitoring the presence of the ACMs with
the assistance of its consultants.

During 2002, the Company invested in the Beachwood, OH Courtyard by
Marriott hotel, which is currently owned by WCC Project Company LLC. The
Companys current ownership interest in this hotel is 13.05%. Prior to making
its initial investment, the Company knew that black mold existed at the hotel
and engaged consultants with expertise in black mold remediation and performed
extensive research to satisfy itself that the black mold condition could be
eradicated through renovation and repair procedures. Following the completion
of such remediation procedures, the Company believes that all of the black mold
has been removed from this hotel, which is expected to open for business in
April 2003. Because black mold is a naturally occurring fungus, the spores of
which can be transported by outside air currents, there can be no assurances
that black mold will not again enter and grow in this hotel or that it will not
be found in the Companys other hotel properties.

The Company believes that its 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

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governmental authority of any material
noncompliance, liability or claim relating to hazardous or toxic substances 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 90% of its annual taxable income. 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.

Under the RMA, the Company may now own up to 100% of one or more taxable
REIT subsidiaries (TRS). A TRS is a taxable corporation that may lease
hotels under certain circumstances, provide services to the Company, and
perform activities such as third
party management, development, and other independent business activities.
Overall, no more than 20% of the value of the Companys assets may consist of
securities of one or more TRSs. In addition, no more than 25% of Winston
Hotels consolidated revenue for any year, excluding all TRS revenues, but
including any dividends received from TRSs, may consist of dividends from one
or more TRSs.

Under the RMA, a TRS is permitted to lease hotels from the Company as long
as the hotels are operated on behalf of the TRS by a third party manager who
satisfies the following requirements:



| | (1) |  | such manager is, or is related to a person who is, actively
engaged in the trade or business of operating qualified lodging
facilities for any person unrelated to the Company and the TRS;
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | such manager does not own, directly or indirectly, more than
35% of the Companys stock;                                                                                                     
|
| | (3) |  | no more than 35% of such manager is owned, directly or
indirectly, by one or more persons owning 35% or more of the
Companys stock; and                                                     
|
| | (4) |  | the Company does not directly or indirectly derive any income
from such manager.                                                                                                             

The RMA limits the deductibility of interest paid or accrued by a TRS to
the Company to assure that the TRS is subject to an appropriate level of
corporate taxation. The RMA also imposes a 100% excise tax on transactions
between a TRS and the Company or its tenants that are not on an arms-length
basis.

Seasonality

The Companys operations historically have been seasonal in nature,
reflecting higher revenue per available room (RevPAR) during the second and
third quarters. This seasonality can be expected to cause fluctuations in the
Companys quarterly operating profits. To the extent that cash flow from
operations is insufficient during any quarter, due to temporary or seasonal
fluctuations in revenue, the Company expects to utilize cash on hand or
borrowings under the line of credit to make distributions to the equity
holders.

Executive Officers of the Registrant

The following table lists the executive officers of the Company:

|                       |  |     |    |          |  |                                                                 |  | 
|---------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------- |  | 
|Name                   |  | Age |    | Position
|                       |  |     |    |         
|Charles M. Winston     |  |     | 73 |          |  | Chairman of the Board of Directors                             
|Robert W. Winston, III |  |     | 41 |          |  | President and Chief Executive Officer                          
|Joseph V. Green        |  |     | 52 |          |  | Executive Vice President, Chief Financial Officer and Secretary
|Kenneth R. Crockett    |  |     | 46 |          |  | Executive Vice President of Development                        
|Brent V. West          |  |     | 35 |          |  | Vice President and Chief Accounting Officer                    

8



---



##### 



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 38 years of experience in developing and
operating full service restaurants and hotels. Mr. Winston is Robert
Winstons father and brother of James Winston, a director of the Company.

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
from November 9, 2002 through the present time. Mr. Winston also served 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 nephew of James
Winston, a director of the Company.

Joseph V. Green. Mr. Green has served as Executive Vice President and
Chief Financial Officer since May 18, 1999 and as Secretary since November 9,
2002. 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.

Brent V. West. Mr. West was appointed Vice President and Chief Accounting
Officer in October 2002. He joined the Company as Vice President and
Controller in September 1997 and served as Vice President of Finance and
Controller from May 1999 through October 2002. Mr. West began his career with
KPMG Peat Marwick and prior to joining the Company, held the position of
Corporate Controller for Coastal Physician Group, Inc. Mr. West is a CPA and
is a graduate of Plattsburgh State University College, Plattsburgh, New York,
with a B.S. degree in Accounting.

AVAILABLE INFORMATION

WHI maintains an Internet site, http://www.winstonhotels.com, which
contains additional information concerning the Company. WHI makes available
free of charge through its Internet site its annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and Exchange Commission.
Information on the Companys Internet site is neither part of nor incorporated
into this report on Form 10-K.

9



---



##### 



ITEM  2.    PROPERTIES

The following table sets forth certain unaudited
information with respect to the Companys wholly owned
hotels.
(Room revenue in thousands)

|                               |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |      |  
|------------------------------ | --------------------------------------- | ----- | --------- | ------- | ----- | ---- | ------- | ---------- | --------- | ------- | ------- | ------ | ----- | ---------- | --------- | ---- | - | - | ------- | ----- | ------- | - | ----- | ------ |  |  | ---- | ---- | -
|                               |                                         |       |           |         |       |      | 2002    |            | 2001     
|                               |                                         |       |           |         |       |      |         |            |          
|                               |                                         |       |           |         |       |      |         |            |           |         | Average |        |       |            |           |      |   |   |         |       | Average |   |       |        | 
|                               |                                         |       | Number of |         | Rooms |      | Daily   |            | Occupancy |         | Rooms   |        | Daily |            | Occupancy
|Hotel Name                     |                                         | Rooms |           | Revenue |       | Rate |         | Percentage |           | Revenue |         | Rate   |       | Percentage
|                               |                                         |       |           |         |       |      |         |            |           |         |         |        |       |           
|Comfort Inns/Suites            |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |     
|                               | Comfort Inn Augusta, GA (**)            |       |           | 123     |       |      | $       | 1,157      |           |         | $       | 59.94  |       |            |           | 47.8 | % |   | $       | 1,329 |         |   | $     | 58.69  |  |  |      | 50.4 | %
|                               | Comfort Inn Charleston, SC              |       |           | 128     |       |      |         | 2,488      |           |         |         | 72.60  |       |            |           | 73.4 | % |   |         | 2,321 |         |   |       | 73.17  |  |  |      | 67.9 | %
|                               | Comfort Inn Chester, VA                 |       |           | 122     |       |      |         | 1,597      |           |         |         | 60.02  |       |            |           | 59.7 | % |   |         | 1,826 |         |   |       | 64.19  |  |  |      | 63.9 | %
|                               | Comfort Inn Clearwater, FL (**)         |       |           | 119     |       |      |         | 572        |           |         |         | 58.97  |       |            |           | 60.8 | % |   |         | 1,512 |         |   |       | 59.49  |  |  |      | 58.0 | %
|                               | Comfort Inn Durham, NC                  |       |           | 138     |       |      |         | 2,147      |           |         |         | 65.12  |       |            |           | 65.4 | % |   |         | 2,403 |         |   |       | 66.92  |  |  |      | 71.3 | %
|                               | Comfort Inn Fayetteville, NC            |       |           | 176     |       |      |         | 2,668      |           |         |         | 52.89  |       |            |           | 78.5 | % |   |         | 2,191 |         |   |       | 51.64  |  |  |      | 66.0 | %
|                               | Comfort Inn Greenville, SC              |       |           | 190     |       |      |         | 1,275      |           |         |         | 50.84  |       |            |           | 36.2 | % |   |         | 1,493 |         |   |       | 56.98  |  |  |      | 37.8 | %
|                               | Comfort Inn Raleigh, NC (*)             |       |           |        |       |      |         |           |           |         |         |       |       |            |           |     |   |   |         | 375   |         |   |       | 47.96  |  |  |      | 51.9 | %
|                               | Comfort Inn Wilmington, NC              |       |           | 146     |       |      |         | 1,651      |           |         |         | 54.57  |       |            |           | 56.8 | % |   |         | 1,834 |         |   |       | 57.27  |  |  |      | 60.2 | %
|                               | Comfort Suites Orlando, FL              |       |           | 214     |       |      |         | 2,463      |           |         |         | 52.06  |       |            |           | 60.6 | % |   |         | 2,977 |         |   |       | 62.58  |  |  |      | 60.9 | %
|Courtyard by Marriotts         |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |     
|                               | Courtyard by Marriott Ann Arbor, MI     |       |           | 160     |       |      |         | 4,106      |           |         |         | 97.48  |       |            |           | 72.1 | % |   |         | 4,171 |         |   |       | 96.49  |  |  |      | 74.0 | %
|                               | Courtyard by Marriott Houston, TX       |       |           | 198     |       |      |         | 3,376      |           |         |         | 88.03  |       |            |           | 53.3 | % |   |         | 3,719 |         |   |       | 88.74  |  |  |      | 58.2 | %
|                               | Courtyard by Marriott Wilmington, NC    |       |           | 128     |       |      |         | 2,297      |           |         |         | 74.93  |       |            |           | 65.6 | % |   |         | 2,306 |         |   |       | 78.84  |  |  |      | 62.6 | %
|                               | Courtyard by Marriott Winston Salem, NC |       |           | 122     |       |      |         | 2,159      |           |         |         | 74.73  |       |            |           | 64.8 | % |   |         | 2,238 |         |   |       | 81.44  |  |  |      | 61.7 | %
|Fairfield Inn                  |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |     
|                               | Fairfield Inn Ann Arbor, MI             |       |           | 110     |       |      |         | 1,823      |           |         |         | 71.93  |       |            |           | 63.1 | % |   |         | 1,840 |         |   |       | 72.01  |  |  |      | 63.6 | %
|Hampton Inn/Suites             |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |     
|                               | Hampton Inn & Suites Gwinnett, GA       |       |           | 136     |       |      |         | 2,521      |           |         |         | 80.27  |       |            |           | 63.3 | % |   |         | 2,637 |         |   |       | 83.08  |  |  |      | 63.9 | %
|                               | Hampton Inn Boone, NC                   |       |           | 95      |       |      |         | 2,098      |           |         |         | 83.33  |       |            |           | 72.6 | % |   |         | 2,046 |         |   |       | 83.37  |  |  |      | 70.8 | %
|                               | Hampton Inn Brunswick, NC               |       |           | 128     |       |      |         | 2,573      |           |         |         | 65.16  |       |            |           | 84.2 | % |   |         | 2,394 |         |   |       | 64.13  |  |  |      | 79.9 | %
|                               | Hampton Inn Cary, NC                    |       |           | 130     |       |      |         | 1,914      |           |         |         | 66.03  |       |            |           | 61.6 | % |   |         | 1,933 |         |   |       | 66.66  |  |  |      | 61.5 | %
|                               | Hampton Inn Charlotte, NC               |       |           | 125     |       |      |         | 1,719      |           |         |         | 71.12  |       |            |           | 53.0 | % |   |         | 1,913 |         |   |       | 82.88  |  |  |      | 50.6 | %
|                               | Hampton Inn Chester, VA (**)            |       |           | 66      |       |      |         | 1,095      |           |         |         | 69.18  |       |            |           | 68.0 | % |   |         | 1,244 |         |   |       | 70.33  |  |  |      | 73.4 | %
|                               | Hampton Inn Durham, NC                  |       |           | 137     |       |      |         | 2,621      |           |         |         | 67.22  |       |            |           | 78.0 | % |   |         | 2,528 |         |   |       | 66.43  |  |  |      | 76.1 | %
|                               | Hampton Inn Hilton Head, SC             |       |           | 125     |       |      |         | 1,667      |           |         |         | 72.11  |       |            |           | 50.7 | % |   |         | 1,997 |         |   |       | 76.97  |  |  |      | 56.9 | %
|                               | Hampton Inn Jacksonville, NC            |       |           | 120     |       |      |         | 2,047      |           |         |         | 62.67  |       |            |           | 73.6 | % |   |         | 1,838 |         |   |       | 61.81  |  |  |      | 67.9 | %
|                               | Hampton Inn Las Vegas, NV               |       |           | 128     |       |      |         | 1,718      |           |         |         | 55.68  |       |            |           | 66.6 | % |   |         | 1,978 |         |   |       | 61.25  |  |  |      | 69.7 | %
|                               | Hampton Inn Perimeter, GA               |       |           | 131     |       |      |         | 2,107      |           |         |         | 82.13  |       |            |           | 53.6 | % |   |         | 2,355 |         |   |       | 88.09  |  |  |      | 55.9 | %
|                               | Hampton Inn Raleigh, NC                 |       |           | 141     |       |      |         | 2,274      |           |         |         | 71.60  |       |            |           | 61.7 | % |   |         | 2,455 |         |   |       | 76.07  |  |  |      | 62.7 | %
|                               | Hampton Inn Southern Pines, NC (**)     |       |           | 126     |       |      |         | 1,047      |           |         |         | 62.77  |       |            |           | 57.1 | % |   |         | 1,640 |         |   |       | 65.29  |  |  |      | 54.6 | %
|                               | Hampton Inn Southlake, GA               |       |           | 125     |       |      |         | 2,216      |           |         |         | 70.78  |       |            |           | 68.1 | % |   |         | 2,305 |         |   |       | 73.00  |  |  |      | 69.2 | %
|                               | Hampton Inn Springfield, MA             |       |           | 126     |       |      |         | 2,903      |           |         |         | 91.10  |       |            |           | 69.8 | % |   |         | 3,132 |         |   |       | 91.50  |  |  |      | 75.0 | %
|                               | Hampton Inn White Plains, NY            |       |           | 156     |       |      |         | 4,721      |           |         |         | 112.17 |       |            |           | 73.9 | % |   |         | 5,277 |         |   |       | 117.07 |  |  |      | 79.2 | %
|                               | Hampton Inn Wilmington, NC              |       |           | 118     |       |      |         | 1,659      |           |         |         | 66.61  |       |            |           | 57.8 | % |   |         | 1,762 |         |   |       | 68.49  |  |  |      | 60.3 | %
|Hilton Garden Inn              |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |     
|                               | Hilton Garden Inn Albany, NY            |       |           | 155     |       |      |         | 4,269      |           |         |         | 98.02  |       |            |           | 77.0 | % |   |         | 4,132 |         |   |       | 96.27  |  |  |      | 75.9 | %
|                               | Hilton Garden Inn Alpharetta, GA        |       |           | 164     |       |      |         | 2,768      |           |         |         | 91.70  |       |            |           | 50.4 | % |   |         | 3,181 |         |   |       | 98.84  |  |  |      | 53.8 | %
|                               | Hilton Garden Inn Raleigh, NC           |       |           | 155     |       |      |         | 4,158      |           |         |         | 109.39 |       |            |           | 67.2 | % |   |         | 4,101 |         |   |       | 111.52 |  |  |      | 65.0 | %
|Holiday Inn/Express/Select     |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |     
|                               | Holiday Inn at Tinton Falls, NJ         |       |           | 171     |       |      |         | 4,677      |           |         |         | 104.21 |       |            |           | 72.1 | % |   |         | 4,936 |         |   |       | 108.48 |  |  |      | 72.9 | %
|                               | Holiday Inn Express Abingdon, VA        |       |           | 81      |       |      |         | 1,321      |           |         |         | 67.67  |       |            |           | 66.1 | % |   |         | 1,399 |         |   |       | 67.37  |  |  |      | 70.2 | %
|                               | Holiday Inn Express Clearwater, FL      |       |           | 127     |       |      |         | 1,750      |           |         |         | 63.26  |       |            |           | 59.7 | % |   |         | 2,274 |         |   |       | 74.46  |  |  |      | 66.1 | %
|                               | Holiday Inn Secaucus, NJ                |       |           | 160     |       |      |         | 4,941      |           |         |         | 115.25 |       |            |           | 73.4 | % |   |         | 5,464 |         |   |       | 121.70 |  |  |      | 76.9 | %
|                               | Holiday Inn Select Garland, TX          |       |           | 244     |       |      |         | 2,664      |           |         |         | 66.59  |       |            |           | 44.9 | % |   |         | 3,085 |         |   |       | 71.66  |  |  |      | 48.3 | %
|Homewood Suites                |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |     
|                               | Homewood Suites Alpharetta, GA          |       |           | 112     |       |      |         | 2,287      |           |         |         | 84.12  |       |            |           | 66.5 | % |   |         | 2,534 |         |   |       | 90.41  |  |  |      | 68.6 | %
|                               | Homewood Suites Cary, NC                |       |           | 120     |       |      |         | 3,273      |           |         |         | 100.85 |       |            |           | 75.2 | % |   |         | 3,195 |         |   |       | 94.41  |  |  |      | 77.9 | %
|                               | Homewood Suites Durham, NC              |       |           | 96      |       |      |         | 2,221      |           |         |         | 88.38  |       |            |           | 71.7 | % |   |         | 2,164 |         |   |       | 88.51  |  |  |      | 69.8 | %
|                               | Homewood Suites Houston, TX             |       |           | 92      |       |      |         | 2,605      |           |         |         | 92.56  |       |            |           | 83.8 | % |   |         | 2,565 |         |   |       | 94.52  |  |  |      | 80.8 | %
|                               | Homewood Suites Lake Mary, FL           |       |           | 112     |       |      |         | 2,614      |           |         |         | 96.50  |       |            |           | 66.3 | % |   |         | 2,855 |         |   |       | 108.00 |  |  |      | 64.7 | %
|                               | Homewood Suites Phoenix, AZ             |       |           | 126     |       |      |         | 2,052      |           |         |         | 81.95  |       |            |           | 54.5 | % |   |         | 2,154 |         |   |       | 92.00  |  |  |      | 50.9 | %
|                               | Homewood Suites Raleigh, NC             |       |           | 137     |       |      |         | 3,039      |           |         |         | 87.47  |       |            |           | 69.5 | % |   |         | 3,120 |         |   |       | 91.24  |  |  |      | 68.4 | %
|Quality Suites & Residence Inn |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |     
|                               | Quality Suites Charleston, SC           |       |           | 168     |       |      |         | 3,580      |           |         |         | 77.13  |       |            |           | 75.7 | % |   |         | 3,411 |         |   |       | 83.56  |  |  |      | 66.6 | %
|                               | Residence Inn Phoenix, AZ               |       |           | 168     |       |      |         | 2,723      |           |         |         | 74.07  |       |            |           | 60.0 | % |   |         | 3,004 |         |   |       | 87.49  |  |  |      | 56.0 | %
|                               |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |      |  
|Total for 49 Hotels            |                                         |       | 6,575     |         |       | $    | 117,621 |            |           | $       | 78.11   |        |       |            | 64.1      | %    |   | $ | 125,543 |       |         | $ | 81.32 |        |  |  | 64.0 | %   
|                               |                                         |       |           |         |       |      |         |            |           |         |         |        |       |            |           |      |   |   |         |       |         |   |       |        |  |  |      |      |  



---

| |  | (*)   Denotes hotel sold in 2001. 
| |  | -----------------------------------
|
| |  | (**)  Denotes hotels sold in 2002.

10



---



##### 



ITEM  2.    PROPERTIES (continued)

The following table sets forth certain unaudited
information with respect to hotels owned through joint ventures with
third parties.
(Room revenue in thousands)

|                                               |  |           |     |         |  |       |        |            |  |         |        |       |  |            |      |   |  |   |       |         |  |   |        |  |  |  |      |  
|---------------------------------------------- |  | --------- | --- | ------- |  | ----- | ------ | ---------- |  | ------- | ------ | ----- |  | ---------- | ---- | - |  | - | ----- | ------- |  | - | ------ |  |  |  | ---- | -
|                                               |  |           |     |         |  | 2002  |        | 2001      
|                                               |  |           |     |         |  |       |        |           
|                                               |  |           |     |         |  |       |        |            |  | Average |        |       |  |            |      |   |  |   |       | Average |  |   |        | 
|                                               |  | Number of |     | Rooms   |  | Daily |        | Occupancy  |  | Rooms   |        | Daily |  | Occupancy 
|Hotel Name                                     |  | Rooms     |     | Revenue |  | Rate  |        | Percentage |  | Revenue |        | Rate  |  | Percentage
|                                               |  |           |     |         |  |       |        |            |  |         |        |       |  |           
|Fairfield Inn & Suites West Des Moines, IA (*) |  |           | 102 |         |  | $     | 756    |            |  | $       | 55.54  |       |  |            | 58.0 | % |  |   |      |         |  |   |       |  |  |  |     |  
|Hampton Inn Ponte Vedra, FL                    |  |           | 118 |         |  |       | 2,442  |            |  |         | 78.90  |       |  |            | 71.9 | % |  |   | 2,259 |         |  |   | 80.39  |  |  |  | 65.2 | %
|Hilton Garden Inn Evanston, IL (**)            |  |           | 178 |         |  |       | 4,606  |            |  |         | 108.70 |       |  |            | 65.2 | % |  |   | 1,845 |         |  |   | 113.69 |  |  |  | 49.6 | %
|Hilton Garden Inn Windsor, CT                  |  |           | 157 |         |  |       | 3,728  |            |  |         | 99.91  |       |  |            | 65.1 | % |  |   | 3,861 |         |  |   | 104.56 |  |  |  | 64.4 | %
|                                               |  |           |     |         |  |       |        |            |  |         |        |       |  |            |      |   |  |   |       |         |  |   |        |  |  |  |      |  
|Total for 4 Hotels                             |  |           | 555 |         |  | $     | 11,532 |            |  | $       | 92.82  |       |  |            | 65.8 | % |  | $ | 7,965 |         |  | $ | 98.02  |  |  |  | 61.0 | %
|                                               |  |           |     |         |  |       |        |            |  |         |        |       |  |            |      |   |  |   |       |         |  |   |        |  |  |  |      |  



---

| |  | (*)   Denotes hotel opened in 2002. 
| |  | -------------------------------------
|
| |  | (**)   Denotes hotel opened in 2001.

11



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ITEM  3.   LEGAL PROCEEDINGS

The Company currently is not involved in any legal proceedings, other than
routine litigation incidental to the Companys business, nor are any such
proceedings known to be contemplated by governmental authorities. Both
Interstate and IMIC, who collectively manage 41 of the Companys hotels, have
advised the Company that there are no such proceedings known to be contemplated
by government authorities, and 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. None of the other managers or third party lessees have
advised the Company that there are any such proceedings known to be
contemplated by government authorities, or that they currently are involved in
any material pending litigation.

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, 2002.

12



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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 1, 2003, WHI had 773 holders of record of its
Common Stock. 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:

|     |                |  |             |       |               |  |           |      |  |  |      |      | 
|---- | -------------- |  | ----------- | ----- | ------------- |  | --------- | ---- |  |  | ---- | ---- | 
|     |                |  |             |       |               |  |           |      |  |  | Cash
|     |                |  | Price Range |       | Distributions
|     |                |  |             |       | Declared     
|     |                |  | High        |       | Low           |  | Per Share
|     |                |  |             |       |               |  |          
|2002 |                |  |             |       |               |  |           |      |  |  |      |     
|     | First Quarter  |  | $           | 9.70  |               |  | $         | 7.82 |  |  | $    | 0.15 | 
|     | Second Quarter |  |             | 9.76  |               |  |           | 8.32 |  |  |      | 0.15 | 
|     | Third Quarter  |  |             | 9.25  |               |  |           | 7.20 |  |  |      | 0.15 | 
|     | Fourth Quarter |  |             | 8.09  |               |  |           | 6.34 |  |  |      | 0.15 | 
|2001 |                |  |             |       |               |  |           |      |  |  |      |     
|     | First Quarter  |  | $           | 8.85  |               |  | $         | 7.13 |  |  | $    | 0.28 | 
|     | Second Quarter |  |             | 10.68 |               |  |           | 7.65 |  |  |      | 0.28 | 
|     | Third Quarter  |  |             | 10.25 |               |  |           | 6.88 |  |  |      | 0.28 | 
|     | Fourth Quarter |  |             | 8.20  |               |  |           | 7.04 |  |  |      | 0.15 | 

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.

13



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##### 



ITEM  6.    SELECTED FINANCIAL DATA

The following table sets forth selected financial information for the
Company that has been derived from the financial statements and notes thereto.
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, 2002, 2001, 2000, 1999 and 1998
(in thousands, except per share amounts)

|                                                             |                      |   |         |         |      |   |         |         |      |   |         |         |   |   |         |         |   |   |         |          |  
|------------------------------------------------------------ | -------------------- | - | ------- | ------- | ---- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | - | - | ------- | -------- | -
|                                                             |                      |   | 2002    |         | 2001 |   | 2000    |         | 1999 |   | 1998   
|                                                             |                      |   |         |         |      |   |         |         |      |   |        
|Operating Data: (1)                                          |                      |   |         |         |      |   |         |         |      |   |         |         |   |   |         |         |   |   |         |         
|Total revenue                                                |                      | $ | 92,344  |         |      | $ | 55,022  |         |      | $ | 61,671  |         |   | $ | 62,670  |         |   | $ | 55,194  |         
|Operating income                                             |                      |   | 3,069   |         |      |   | 22,442  |         |      |   | 29,979  |         |   |   | 30,679  |         |   |   | 29,189  |         
|Net income                                                   |                      |   | 902     |         |      |   | 10,485  |         |      |   | 15,055  |         |   |   | 16,901  |         |   |   | 19,526  |         
|Net income (loss) available to common shareholders           |                      |   | (6,036  | )       |      |   | 3,547   |         |      |   | 8,117   |         |   |   | 9,963   |         |   |   | 12,588  |         
|Net income (loss) per common share                           |                      |   | (0.31   | )       |      |   | 0.21    |         |      |   | 0.48    |         |   |   | 0.61    |         |   |   | 0.77    |         
|Weighted average number of common shares                     |                      |   | 19,308  |         |      |   | 16,926  |         |      |   | 16,890  |         |   |   | 16,467  |         |   |   | 16,286  |         
|Distributions per common share                               |                      |   | 0.60    |         |      |   | 0.99    |         |      |   | 1.12    |         |   |   | 1.12    |         |   |   | 1.09    |         
|Pro forma amounts assuming SAB 101 is
applied retroactively: |                      |   |         |         |      |   |         |         |      |   |         |         |   |   |         |         |   |   |         |         
|Net income (loss) available to common shareholders           |                      |   |         |         |      |   |         |         |      |   |         |         |   |   | 9,846   |         |   |   | 11,985  |         
|Net income (loss) per common share                           |                      |   |         |         |      |   |         |         |      |   |         |         |   |   | 0.60    |         |   |   | 0.74    |         
|Balance Sheet Data (at end of period):                       |                      |   |         |         |      |   |         |         |      |   |         |         |   |   |         |         |   |   |         |         
|Cash                                                         |                      | $ | 1,510   |         |      | $ | 887     |         |      | $ | 167     |         |   | $ | 28      |         |   | $ | 33      |         
|Investment in hotel properties                               |                      |   | 321,839 |         |      |   | 350,087 |         |      |   | 366,882 |         |   |   | 388,870 |         |   |   | 397,861 |         
|Total assets                                                 |                      |   | 357,442 |         |      |   | 376,904 |         |      |   | 394,310 |         |   |   | 406,071 |         |   |   | 412,156 |         
|Total debt                                                   |                      |   | 138,706 |         |      |   | 170,584 |         |      |   | 172,672 |         |   |   | 174,475 |         |   |   | 173,085 |         
|Shareholders equity                                         |                      |   | 194,515 |         |      |   | 184,205 |         |      |   | 198,716 |         |   |   | 209,078 |         |   |   | 213,425 |         
|Other Data:                                                  |                      |   |         |         |      |   |         |         |      |   |         |         |   |   |         |         |   |   |         |         
|Cash provided by (used in):                                  |                      |   |         |         |      |   |         |         |      |   |         |         |   |   |         |         |   |   |         |         
|                                                             | Operating activities |   | $       | 19,115  |      |   | $       | 37,348  |      |   | $       | 39,589  |   |   | $       | 39,952  |   |   | $       | 34,605   |  
|                                                             | Investing activities |   |         | 6,344   |      |   |         | (5,967  | )    |   |         | (10,231 | ) |   |         | (12,658 | ) |   |         | (135,398 | )
|                                                             | Financing activities |   |         | (24,836 | )    |   |         | (30,661 | )    |   |         | (29,219 | ) |   |         | (27,299 | ) |   |         | 100,662  |  
|Funds from operations (2)                                    |                      |   | 24,017  |         |      |   | 26,583  |         |      |   | 31,268  |         |   |   | 31,793  |         |   |   | 30,326  |         
|Cash available for distribution (3)                          |                      |   | 17,485  |         |      |   | 16,768  |         |      |   | 23,483  |         |   |   | 24,735  |         |   |   | 24,093  |         
|Adjusted EBITDA (4)                                          |                      |   | 42,915  |         |      |   | 47,339  |         |      |   | 52,770  |         |   |   | 52,078  |         |   |   | 46,043  |         



---

|(1) |  | Due to the acquisition of the leasehold interest for 47 hotels from
Interstate effective July 1, 2002, only two of the Companys wholly owned
hotels remain under long-term leases with third parties, the Secaucus, NJ
Holiday Inn and the Las Vegas, NV Hampton Inn. The acquisition price of
$17,668 to acquire the leases was expensed. As such, there is limited
comparability between the annual results for 2002 and prior years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Funds from operations (FFO), as defined by the National Association of
Real Estate Investment Trusts (NAREIT), is net income (loss) (determined in
accordance with generally accepted accounting principles (GAAP)), excluding
gains (losses) from sales of property, plus depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures (which are
calculated to reflect FFO on the same basis). The Company further adjusts FFO
by subtracting preferred share distributions and income tax benefit, and adding
lease acquisition expense and the change in deferred revenue during the period
to eliminate the impact of Staff Accounting Bulletin No. 101 (see Note 2 to the
Consolidated Financial Statements). The calculation of FFO may vary from
entity to entity and as such the presentation of FFO by the Company may not be
comparable to other similarly titled measures of other reporting companies.
FFO is not intended to represent cash flows for the period. FFO has not been
presented as an alternative to operating income, but as an indicator of
operating performance, and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.

14



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##### 



|    |  | FFO is a supplemental industry-wide measure of REIT operating performance,
the definition of which was first proposed by NAREIT in 1991 (and clarified in
1995, 1999 and 2002) in response to perceived drawbacks associated with net
income under GAAP as applied to REITs. Since the introduction of the
definition by NAREIT, the term has come to be widely used by REITs. Historical
cost accounting for real estate assets implicitly assumes that the value of
real estate assets diminishes predictably over time. Since real estate values
instead have historically risen or fallen with market conditions, most industry
investors have considered presentations of operating results for real estate
companies that use historical GAAP cost accounting to be insufficient by
themselves. Accordingly, the Company believes FFO (combined with the Companys

primary GAAP presentations required by the Securities and Exchange Commission
(the SEC)) helps improve our equity holders ability to understand our
operating performance and makes it easier than before to compare the results of
one REIT with another. The Company only uses FFO as a supplemental measure of
operating performance. See reconciliation of Net income to FFO below.                                                                                                                                                 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | The Company computes Cash Available for Distribution (CAD) by subtracting
capital expenditures and debt principal payments from FFO. CAD is a
supplemental industry-wide measure of REIT operating performance that measures
a REITs ability to generate cash and to distribute dividends to its
shareholders. The Company believes CAD (combined with the Companys primary
GAAP presentations required by the SEC) helps improve our equity holders
ability to understand our operating performance (including our ability to make
required distributions to maintain our REIT status (see Risk Factors; Risks
Relating to REIT Status under Item 7 below)) and makes it easier than before
to compare the results of one REIT with another. The Company only uses CAD as
a supplemental measure of operating performance. The calculation of CAD may
vary from entity to entity and as such the presentation of CAD by the Company
may not be comparable to other similarly titled measures of other reporting
companies. CAD is not intended to represent cash flows for the period. CAD
has not been presented as an alternative to operating income, but as an
indicator of operating performance, and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles. See reconciliation of FFO to CAD
below.
|   
|(4) |  | The Company computes adjusted earnings before interest, taxes,
depreciation and amortization (Adjusted EBITDA) by adding FFO, interest
expense (including the Companys share of interest expense from its joint
ventures), amortization expense, and preferred stock dividends. Adjusted
EBITDA is a supplemental industry-wide measure of REIT operating performance.
The Company believes Adjusted EBITDA (combined with the Companys primary GAAP
presentations required by the SEC) helps improve our equity holders ability to
understand our operating performance and makes it easier than before to compare
the results of one REIT with another. The Company only uses Adjusted EBITDA as
a supplemental measure of operating performance. The calculation of Adjusted
EBITDA may vary from entity to entity and as such the presentation of Adjusted
EBITDA by the Company may not be comparable to other similarly titled measures
of other reporting companies. Adjusted EBITDA is not intended to represent
cash flows for the period. Adjusted EBITDA has not been presented as an
alternative to operating income, but as an indicator of operating performance,
and should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles. See reconciliation of FFO to Adjusted EBITDA below.              

WINSTON HOTELS, INC.
Reconciliation of Net Income to FFO
For the years ended December 31, 2002, 2001, 2000, 1999 and 1998
(in thousands, except per share amounts)

|                                |  |      |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                |  | 2002 |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                |  |      |        |      |  |      |        |      |  |     
|Net income                      |  | $    | 902    |      |  | $    | 10,485 |      |  | $    | 15,055 |   |  | $ | 16,901 |   |  | $ | 19,526 |  
|Minority interest allocation    |  |      | (414   | )    |  |      | 272    |      |  |      | 625    |   |  |   | 1,026  |   |  |   | 1,349  |  
|Depreciation                    |  |      | 20,586 |      |  |      | 21,355 |      |  |      | 21,177 |   |  |   | 20,565 |   |  |   | 16,389 |  
|Deferred revenue                |  |      | (1,226 | )    |  |      | 727    |      |  |      | 499    |   |  |   |       |   |  |   |       |  
|(Gain) loss on sale of property |  |      | 764    |      |  |      | 682    |      |  |      | 850    |   |  |   | 239    |   |  |   |       |  
|Income tax expense (benefit)    |  |      | (7,325 | )    |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|Lease acquisition expense       |  |      | 17,668 |      |  |      |       |      |  |      |       |   |  |   |       |   |  |   |       |  
|Preferred stock dividend        |  |      | (6,938 | )    |  |      | (6,938 | )    |  |      | (6,938 | ) |  |   | (6,938 | ) |  |   | (6,938 | )
|                                |  |      |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|Funds From Operations           |  | $    | 24,017 |      |  | $    | 26,583 |      |  | $    | 31,268 |   |  | $ | 31,793 |   |  | $ | 30,326 |  
|                                |  |      |        |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  

15



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WINSTON HOTELS, INC.
Reconciliation of FFO to CAD
For the years ended December 31, 2002, 2001, 2000, 1999 and 1998
(in thousands, except per share amounts)

|                                |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                |  | 2002 |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                |  |      |        |      |  |      |        |      |  |     
|Funds From Operations           |  | $    | 24,017 |      |  | $    | 26,583 |      |  | $    | 31,268 |  |  | $ | 31,793 |  |  | $ | 30,326 | 
|Capital expenditures            |  |      | 5,254  |      |  |      | 8,628  |      |  |      | 6,682  |  |  |   | 6,033  |  |  |   | 6,233  | 
|Debt principal payments         |  |      | 1,278  |      |  |      | 1,187  |      |  |      | 1,103  |  |  |   | 1,025  |  |  |   |       | 
|                                |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Cash Available for Distribution |  | $    | 17,485 |      |  | $    | 16,768 |      |  | $    | 23,483 |  |  | $ | 24,735 |  |  | $ | 24,093 | 
|                                |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 

WINSTON HOTELS, INC.
Reconciliation of FFO to Adjusted EBITDA
For the years ended December 31, 2002, 2001, 2000, 1999 and 1998
(in thousands, except per share amounts)

|                          |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                          |  | 2002 |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                          |  |      |        |      |  |      |        |      |  |     
|Funds From Operations     |  | $    | 24,017 |      |  | $    | 26,583 |      |  | $    | 31,268 |  |  | $ | 31,793 |  |  | $ | 30,326 | 
|Interest expense          |  |      | 11,115 |      |  |      | 12,850 |      |  |      | 13,631 |  |  |   | 12,513 |  |  |   | 8,314  | 
|Amortization expense      |  |      | 845    |      |  |      | 968    |      |  |      | 933    |  |  |   | 834    |  |  |   | 465    | 
|Preferred stock dividends |  |      | 6,938  |      |  |      | 6,938  |      |  |      | 6,938  |  |  |   | 6,938  |  |  |   | 6,938  | 
|                          |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|Adjusted EBITDA           |  | $    | 42,915 |      |  | $    | 47,339 |      |  | $    | 52,770 |  |  | $ | 52,078 |  |  | $ | 46,043 | 
|                          |  |      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 

16



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##### 



|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|ITEM 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|        |  | ($ in thousands, except per share amounts)                                           

Winston Hotels, Inc. (WHI), headquartered in Raleigh, North Carolina,
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 its 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
additional hotel properties. These ten hotels were acquired from affiliates of
WHI. WHI and the Partnership (collectively the Company) began operations as
a REIT on June 2, 1994. As of December 31, 2002, WHIs ownership in the
Partnership was 93.95%.

As of December 31, 2002, the Company owned or was invested in 52 hotel
properties in 17 states having an aggregate of 7,200 rooms. This included 44
wholly owned properties with 6,141 rooms, a 49 percent ownership in three joint
venture hotels with 453 rooms, a 13.05 percent ownership interest in two joint
venture hotels with 215 rooms, (collectively, the Joint Venture Hotels) and a
mezzanine financing interest in three hotels with 391 rooms. The Company does
not hold an ownership interest in any of the hotels for which it has provided
mezzanine financing. All of the Companys hotels are operated under franchises
from nationally recognized franchisors including Marriott International, Inc.,
Hilton Hotels Corporation, Six Continents PLC and Choice Hotels International.

Effective July 1, 2002, the Company, through its wholly owned taxable REIT
subsidiary, Barclay Hospitality Services Inc. (Barclay), acquired the
leasehold interests for 47 of its hotels from CapStar Winston Company, L.L.C.,
a wholly owned subsidiary of MeriStar Hotels & Resorts, Inc. (MeriStar).
MeriStar has since merged with and become Interstate Hotels & Resorts, Inc.
(Interstate). The acquisition included leasehold interests for 45 wholly
owned hotels and two Joint Venture Hotels. Under the REIT Modernization Act
(the RMA), which became effective January 1, 2001, the Company is permitted
to lease its hotels to wholly owned taxable REIT subsidiaries, provided that
the subsidiary lessees engage a third-party management company to manage the
hotels. Simultaneous with acquiring the leasehold interests, Barclay entered
into new management contracts with Interstate for 39 of the 47 hotels covered
by the leases. These five-year contracts are terminable by Barclay after June
30, 2003, subject to certain conditions and limitations. The Company sold two
of the 39 hotels during the third and fourth quarters of 2002 and signed new
management contracts for another two, one with Sage Client 453, LLC, an
affiliate of Sage Hospitality Resources, LLC (Sage) and one with Noble
Investment Group, Ltd., (Noble). As of December 31, 2002, Interstate managed
35 of the Companys hotels, Interstate Management and Investment Corporation
(IMIC) headquartered in Columbia, South Carolina (unrelated to and
unaffiliated with Interstate) managed six hotels, Concord Hospitality
Enterprises Company (Concord) managed two hotels, and Promus Hotels, Inc., an
affiliate of Hilton Hotels Corporation (Hilton), Sage, and Noble each managed
one hotel.

Three hotels in which the Company has an ownership interest, including two
wholly owned hotels and one of the Joint Venture Hotels, continue to be
operated under long-term leases with third parties. Two of these hotels are
leased to Bristol W. Tenant Company, a wholly owned subsidiary of Six
Continents Hotels, Inc. (Six Continents), the Las Vegas, NV Hampton Inn and
the Windsor, CT Hilton Garden Inn, and one is leased to Secaucus Holding
Corporation, a wholly owned subsidiary of Prime Hospitality Corp. (Prime),
the Secaucus, NJ Holiday Inn. Under the terms of the leases, the lessees are
obligated to pay the Company the greater of base rent or percentage rent. The
leases are designed to allow the Company to participate in the growth in
revenues at the hotels by requiring that a portion of each hotels room
revenues in excess of specified amounts be paid to the Company as percentage
rent.

Critical Accounting Policies

The Companys discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the Companys management to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenues and expenses,
and related disclosure of contingent assets and liabilities.

The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.

Accounts and Notes Receivable

The Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers, mezzanine loan borrowers,
and other borrowers to make required payments. If the financial condition of
its customers, mezzanine loan borrowers, or other borrowers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

17



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##### 



Accounting for Joint Ventures

The Company has a 49% ownership interest in three joint venture hotels and
a 13.05% ownership interest in two joint venture hotels. The Company has
determined that it does not have a controlling interest in any of the joint
ventures and therefore uses the equity method
to recognize its share of net income or loss from the joint ventures and
adjusts the carrying value of the investment accordingly. The joint ventures
assets, liabilities, and equity are not recorded on the Companys balance
sheet.

The Company receives current financial information from the joint ventures
and performs an analysis to determine its share of income. This analysis
includes the review of operational data, significant assets and liabilities,
and results of operations to ensure that the Companys interests are
realizable. The Company considers, among other criteria, the operating trends
and expectations for the foreseeable future. The Company believes that these
joint venture operations presently support the carrying value of the
investments in joint ventures. If the operations of the joint ventures do not
support such carrying values in the future, the Company may have to write down
its investment in joint ventures accordingly.

Accounting for Long-Lived Assets

The Company evaluates the potential impairment of individual long-lived
assets, principally the hotel properties. The Company records an impairment
charge when it believes an investment in hotels has been impaired, such that
future undiscounted cash flows, together with an anticipated liquidation
amount, would not recover the then current carrying value of the investment in
the hotel property. The Company considers many factors and makes certain
assumptions when making this assessment, including but not limited to general
market and economic conditions, operating results over the past several years,
the performance of similar properties in the same market and expected future
operating results based on a variety of assumptions. Future adverse changes in
market conditions or poor operating results of underlying investments could
result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investments carrying value,
thereby possibly requiring an impairment charge in the future. In addition, if
the Companys assumptions regarding future undiscounted cash flows and
anticipated liquidation amounts are incorrect, a future impairment charge may
be required.

Income Taxes

The Company records a valuation allowance to reduce the deferred tax
assets to an amount that it believes is more likely than not to be realized.
While future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance have been
considered, in the event the Company were to determine that it would be able to
realize its deferred tax assets in the future in excess of their net recorded
amount, an adjustment to the deferred tax asset would increase income in the
period such determination was made. Should our estimate of future taxable
income be less than expected, or our tax planning strategy not be carried out
as planned, we would record an adjustment to the deferred tax asset in the
period such determination was made.

Results of Operations

Due to the acquisition of the leasehold interests from Interstate, the
results of operations for the year ended December 31, 2002 versus the results
of operations for the year ended December 31, 2001 does not result in a
meaningful comparison. This is due primarily to recording the operating
results of the hotels, for which the leasehold interests were acquired, on the
Companys statements of operations beginning in the third quarter of 2002.

The table below outlines the Companys wholly owned hotel properties owned
as of December 31, 2000, 2001 and 2002. The Company made no acquisitions of
hotels, other than through joint ventures, during the periods presented.

|                       |  |                   |   |                   |  |                   |    |            |  |             |   |            |  |  |    |  |  |  |   |  |  |  |    | 
|---------------------- |  | ----------------- | - | ----------------- |  | ----------------- | -- | ---------- |  | ----------- | - | ---------- |  |  | -- |  |  |  | - |  |  |  | -- | 
|                       |  | December 31, 2000 |   | December 31, 2001 |  | December 31, 2002
|                       |  |                   |   |                   |  |                  
|                       |  | Hotels sold       |   | Properties        |  | Hotels sold       |    | Properties |  | Hotels sold |   | Properties
|                       |  | during the        |   | owned at          |  | during the        |    | owned at   |  | during the  |   | owned at  
|                       |  | year              |   | year end          |  | year              |    | year end   |  | year        |   | year end  
|                       |  |                   |   |                   |  |                   |    |            |  |             |   |           
|Type of Hotel          |  |                   |   |                   |  |                   |    |            |  |             |   |            |  |  |    |  |  |  |   |  |  |  |    | 
|Limited-service hotels |  |                   | 2 |                   |  |                   | 28 |            |  |             | 1 |            |  |  | 27 |  |  |  | 4 |  |  |  | 23 | 
|Extended-stay hotels   |  |                   |  |                   |  |                   | 10 |            |  |             |  |            |  |  | 10 |  |  |  |  |  |  |  | 10 | 
|Full-service hotels    |  |                   |  |                   |  |                   | 11 |            |  |             |  |            |  |  | 11 |  |  |  |  |  |  |  | 11 | 
|                       |  |                   |   |                   |  |                   |    |            |  |             |   |            |  |  |    |  |  |  |   |  |  |  |    | 
|Total                  |  |                   | 2 |                   |  |                   | 49 |            |  |             | 1 |            |  |  | 48 |  |  |  | 4 |  |  |  | 44 | 
|                       |  |                   |   |                   |  |                   |    |            |  |             |   |            |  |  |    |  |  |  |   |  |  |  |    | 

18



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The Company adopted Staff Accounting Bulletin No. 101 (SAB 101) on
January 1, 2000. SAB 101 requires that a lessor not recognize contingent
rental income until the lessee has achieved annual specified hurdles. SAB 101
effectively defers percentage lease revenue from the first and second quarters
to the third and fourth quarters. Due to the acquisition of the leasehold
interests from Interstate, effective July 1, 2002, percentage lease payments made by
Barclay to the Company (for 45 of the 47 hotels which are wholly owned), are
eliminated in consolidation. Therefore, during the third quarter of 2002 the
Company recognized deferred revenue totaling $8,104, which had accrued through
June 30, 2002 for 45 of the 47 hotels that were wholly owned. Three of these
hotels have since been sold. The Company continues to defer recognition of
percentage lease revenue for the two wholly owned hotels, the Las Vegas, NV
Hampton Inn and the Secaucus, NJ Holiday Inn, that continue to be operated
under long term leases with Six Continents and Prime, respectively. SAB 101
will have no impact on the Companys Funds From Operations (FFO), or its
interim or annual cash flow from its third party lessees, and therefore, on its
ability to pay dividends.

The acquisition of the leasehold interests from Interstate entitles
Barclay to retain the operating profits or losses from the related hotels,
which previously accrued to Interstate under the leases and gives the Company
(i) more control over the operations of these hotels, (ii) the benefits from
any operating margin improvements and risk of any operating margin
deterioration at these hotels, and (iii) more flexibility, in that these hotels
are no longer encumbered by long term leases that are difficult to amend and
expensive to terminate. All of the hotels continue to operate under the same
franchise affiliations as prior to the acquisition of the leasehold interests.

Actual Year Ended December 31, 2002 versus Actual Year Ended December 31, 2001

REVENUE

Rooms, Food and
Beverage and Other Operating Departments Revenue  The
increase in hotel revenues is a result of the acquisition of the leasehold
interests from Interstate. The operating results of the 47 hotels, for which
the leasehold interests were acquired, are reflected on the Companys
consolidated statements of operations beginning July 1, 2002.

Percentage Lease Revenue Percentage lease revenue declined for the
quarter and year to date. This decline is primarily due to the acquisition of
the leasehold interests from Interstate for 47 hotels. Upon acquisition of
the leases, the Company recognized $8,104 of deferred percentage lease revenue,
which represented the deferred revenue accrued through June 30, 2002 for the 45
wholly owned hotels. Effective July 1, 2002, the percentage lease revenue for
these 45 wholly owned hotels was received from Barclay and eliminated in
consolidation. Beginning July 1, 2002, this percentage lease revenue reflected
only the percentage lease revenue for the two wholly owned hotels that remain
under long term leases with third parties, including the Secaucus, NJ Holiday
Inn and the Las Vegas, NV Hampton Inn.

Interest and Other Income Interest and other income decreased from
$2,166 in 2001 to $1,458 in 2002. The decline is primarily due to a decrease
of $570 in third party development and purchasing fees.

EXPENSES

Rooms, Food and Beverage, Other Operating Departments Expenses The
increase in these hotel expenses is a result of the acquisition of the
leasehold interests from Interstate. The operating results of the 47 hotels,
for which the leasehold interests were acquired, are reflected on the Companys
consolidated statements of operations beginning July 1, 2002.

Property Operating Costs, Franchise Costs, Maintenance and Repair Costs
and Management Fees The increase in these hotel expenses is a result of the
acquisition of the leasehold interests from Interstate. The operating results
of the 47 hotels, for which the leasehold interests were acquired, are
reflected on the Companys consolidated statements of operations beginning July
1, 2002.

Real Estate Taxes and Property and Casualty Insurance Real estate taxes
and property insurance costs decreased from $6,444 in 2001 to $6,345 in 2002.
This decline is primarily due to a decrease in ground rent expense of $81 as a
result of lower room revenues at the corresponding hotel. Insurance expense
increased $36 as a result of higher premiums in 2002. Real estate taxes
remained fairly constant from year to year.

Percentage Lease Expense Beginning July 1, 2002, this expense represents
the lease expense Barclay, as lessee, pays to third party owners of two Joint
Venture Hotels, including the Evanston, IL Hilton Garden Inn and the Ponte
Vedra, FL Hampton Inn.

General and Administrative General and administrative expense decreased
from $5,419 in 2001 to $4,842 in 2002. The decrease was primarily attributable
to lower expenses associated with mezzanine financing, acquisition and
development activities in 2002.

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Depreciation and Amortization Depreciation expense declined primarily
due to the sale of four hotels during 2002 and one hotel during 2001.
Amortization expense remained relatively consistent with the prior year.

Interest Interest expense decreased from $12,170 in 2001 to $10,478 in
2002. This decrease was due to both a decline in weighted average interest
rates, from 7.03% in 2001 to 6.85% in 2002, as well as a decline in the
weighted average outstanding debt balance
from $172,022 to $152,879. The weighted average outstanding debt balance
decreased primarily due to the sale of 3.162 million shares of common stock in
March and April 2002, and the use of the net cash proceeds totaling $26,897 to
reduce the then outstanding debt balance.

Loss on Sale of Property The loss on sale of property in 2001 represents
the loss experienced on the sale of the Raleigh, NC Comfort Inn in June 2001.
The net loss on sales of property in 2002 is reported as loss on sale of
discontinued operations  see Discontinued Operations below and Note 13 in
Notes to Consolidated Financial Statements.

Income Tax Benefit The income tax benefit is primarily a result of the
cost of acquiring the leases from Interstate which was expensed for financial
reporting purposes and will be amortized over the lives of the leases for tax
purposes. The income tax benefit is also a result of the net loss experienced
by Barclay during 2002.

Equity in income of unconsolidated subsidiaries Equity in income (loss)
of unconsolidated subsidiaries increased from $523 in 2001 to $1,172 in 2002
primarily due to the Evanston Hilton Garden Inn hotel being open for the entire
year during 2002 and from July through December in 2001.

Discontinued Operations The Company sold the Clearwater, FL Comfort Inn
in May 2002, the Southern Pines, NC Hampton Inn in August 2002, the Augusta, GA
Comfort Inn in November 2002 and the Chester, VA Hampton Inn in December 2002.
The net loss on these sales and the operating results of these properties are
shown as discontinued operations for all periods presented.

Lease Acquisition As discussed above, effective July 1, 2002, the
Company, through Barclay, acquired the leasehold interests for 47 of its hotels
from Interstate. The total consideration of approximately $19,500, as
determined by the Leasehold Acquisition Agreement, was based upon a $17,000
purchase price for the leasehold interests, adjusted in part for accrued
interest and related expenses totaling $668, and approximately $1,800 of
working capital. The cost of the acquisition of the leasehold interests,
including accrued interest and related expenses, but excluding the working
capital acquired, totaled $17,668. This cost represents the cancellation of an
executory contract and was expensed on June 28, 2002. In addition, a deferred
tax benefit of $6,714 was recognized on June 28, 2002 resulting from the timing
difference of the $17,668 payment for financial reporting purposes versus tax
purposes. The net effect of this transaction is a reduction in net income of
$10,954, the primary reason for the reduction in net income from 2001 to 2002.

Due to the acquisition of the leasehold interests from Interstate, the
results of operations for the year ended December 31, 2002 versus the results
of operations for the year ended December 31, 2001 does not result in a
meaningful comparison. This is due primarily to recording the operating
results of the hotels, for which the leasehold interests were acquired, on the
Companys statements of operations beginning in the third quarter of 2002.
Therefore, in an effort to make a more meaningful comparison between periods,
in addition to the comparison of actual results of operations for the year
ended December 31, 2002 and 2001, shown below is selected pro forma financial
information for the years ended December 31, 2002 and 2001, as if the
acquisition of the leasehold interests from Interstate occurred on January 1,
2001. This information is also shown as if the sales of hotel properties,
which occurred during 2001 and 2002, occurred on January 1, 2001 as well.
Therefore, the selected pro forma financial information below is based on both
the Companys and Interstates historical results of operations, after giving
effect to certain pro forma adjustments, for the 44 wholly owned hotels as of
December 31, 2002. The pro forma adjustments include the elimination of the
transaction to acquire the leasehold interests from Interstate and the
percentage lease revenue applicable to the 45 wholly owned hotels for which the
leasehold interests were acquired, as well as adjustments to undistributed
property operating expenses to remove management company corporate costs, to
make adjustments to management fees to reflect the fee structure per the new
management agreements, and to make resulting adjustments to the allocation of
earnings to minority interests. The unaudited pro forma financial information
does not purport to be indicative of what the actual results of operations of
the Company would have been had the transaction occurred on the basis assumed
above nor are they indicative of results of future operations. The unaudited
pro forma financial information is based upon available information and upon
assumptions and estimates that management believes are reasonable under the
circumstances.

20



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Selected Unaudited Pro Forma Financial Information  Year Ended December 31, 2002 versus Year Ended December 31, 2001

(in thousands)


|                          |                                           |  |   |              |  |      |   |         |  | 
|------------------------- | ----------------------------------------- |  | - | ------------ |  | ---- | - | ------- |  | 
|                          |                                           |  |   | Pro Forma   
|                          |                                           |  |   | Year Ended  
|                          |                                           |  |   | December 31,
|                          |                                           |  |   |             
|                          |                                           |  |   | 2002         |  | 2001
|                          |                                           |  |   |              |  |     
|Revenue:                  |                                           |  |   |              |  |      |   |        
|                          | Rooms                                     |  | $ | 114,137      |  |      | $ | 116,102 | 
|                          | Other hotel revenue                       |  |   | 12,463       |  |      |   | 12,629  | 
|Hotel operating expenses: |                                           |  |   |              |  |      |   |        
|                          | Rooms and other operating expenses        |  |   | 34,989       |  |      |   | 34,452  | 
|                          | Undistributed property operating expenses |  |   | 41,317       |  |      |   | 40,617  | 

PRO FORMA REVENUE

Room Revenue  Room revenue decreased $1,965 to $114,137 for the year
ended December 31, 2002 versus $116,102 for the year ended December 31, 2001.
We believe this is attributable to a weak economy, which resulted in revenue
per available room (RevPAR) decreasing 3.2% from $52.53 in 2001 to $50.87 in
2002. Average daily rate for the year declined 3.6% from $82.03 in 2001 to
$79.04 in 2002, while occupancy rates increased slightly from 64.0% to 64.4%.
The decrease in RevPAR was partially offset by an increase of $2,761 in room
revenue from the Evanston, IL Hilton Garden hotel that opened in July 2001.

Other Hotel Revenue  Other hotel revenue consists of food and beverage
revenue and other operating departments revenue. Other hotel revenue declined
from $12,629 in 2001 to $12,463 in 2002. This decrease is primarily due to a
decrease in long distance telephone revenue as a result of the increased use of
cellular phones by guests.

PRO FORMA EXPENSES

As a percentage of total hotel revenue, hotel operating expenses increased
for the year from 58.3% in 2001 to 60.3% in 2002.

Rooms and Other Operating Expenses  Rooms and other operating expense
increased $537, from $34,452 in 2001 to $34,989 in 2002, primarily due to an
increase in payroll costs, guest room supplies costs and complimentary food and
beverage costs.

Undistributed Property Operating Expenses  Undistributed property
operating expenses consist of general and administrative, sales and marketing,
energy, repairs and maintenance, franchise fees, management fees and other
costs. Undistributed property operating expenses increased $700, from $40,617
in 2001 to $41,317 in 2002. These increases are primarily due to increases in
sales and marketing expenses, including additional personnel and higher dues
and subscriptions and e-commerce costs, as well as increases in repairs and
maintenance expenses, including personnel and small equipment and tool costs.
These higher expenses were offset, in part, by a decrease of $186 in franchise
fees on a year to date basis due to lower room revenue.

Year ended December 31, 2001 versus Year ended December 31, 2000

The Company had revenues of $55,022 in 2001, consisting of $52,856 of
percentage lease revenues and $2,166 of interest and other income. Percentage
lease revenues decreased $7,543 in 2001 from $60,399 in 2000. This decrease
was due primarily to a sharp decline in RevPAR during the last four months of
2001 as a result of a weakening economy accelerated by the terrorist attacks
that occurred on September 11, 2001. In 2001, RevPAR decreased 1.4% from
January through August, as occupancy declined 6.3%, offset by an increase in
the average daily rate of 5.3%. However, RevPAR decreased 12.3% from September
through December, including a RevPAR decline of 18.0% in September. During the
last four months of 2001, occupancy declined 10.6% and the average daily rate
declined 1.9%. Percentage lease revenue also decreased $756 due to the sale of
two hotels during 2000 and one hotel during 2001. Interest and other income
increased $894 to $2,166 in 2001 from $1,272 in 2000. This increase is due
primarily to an increase in development and purchasing fees of $277 and an
increase of $335 in interest income from mezzanine loans.

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Real estate taxes and property and casualty insurance expenses remained
fairly constant, at $6,444 in 2001 as compared to $6,404 in 2000. Real estate
taxes increased $129 due to increased rates and property values in 2001 while
property insurance expense decreased $23 due primarily to a lower number of
claims made in 2001. In addition, ground lease expense decreased $66 in 2001
as a result of lower room revenues at the corresponding hotel. General and
administrative expenses increased to $5,419 in 2001 from $4,323 in 2000. This
increase is due primarily to site acquisition expenses of $272, costs related
to efforts to purchase the leasehold interests for 47 of its hotels from
MeriStar totaling $255, a decrease in capitalized costs totaling $341, and loan
costs totaling $124. The loan costs were expensed due to the inability to
finalize a collateralized mortgage backed securities debt instrument as a
result of the instability in the marketplace caused by the terrorist attacks on
September 11, 2001. Depreciation expense decreased $282 to $19,762 in 2001
from $20,044 in 2000, due primarily to the sale of two hotels during 2000 and
one hotel during 2001. Amortization expense increased slightly to $955 in 2001
from $921 in 2000. Interest expense decreased $1,321 to $12,170 in 2001 from
$13,491 in 2000, due primarily to a decrease in the annual weighted-average
interest rate of 0.74% from 7.77% in 2000 to 7.03% in 2001 and a decrease in
weighted average borrowings from $173,213 in 2000 to $172,022 in 2001.

Equity in income (loss) from unconsolidated joint ventures increased from
$(31) to $523 as a result of the opening of two joint venture hotels late in
2000 and the opening of a third joint venture hotel in July 2001.

Liquidity and Capital Resources

The Company finances its operations from operating cash flow, which,
during 2002, was principally derived from percentage lease payments from the
hotels for the period January 1, 2002 through June 30, 2002, and principally
derived from the net operating cash flows from the operations of the hotels
from July 1, 2002 through December 31, 2002. For the year ended December 31,
2002 and 2001, cash flow provided by operating activities was $19,115 and
$37,348, respectively, and FFO was $24,017 and $26,583, respectively. The
decline in cash flow provided by operations is primarily due to the total paid
of approximately $19,500 to acquire the leasehold interests for 47 hotels from
Interstate effective July 1, 2002. Funds from operations (FFO), as defined
by the National Association of Real Estate Investment Trusts (NAREIT), is net
income (loss) (determined in accordance with generally accepted accounting
principles (GAAP)), excluding gains (losses) from sales of property, plus
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures (which are calculated to reflect FFO on the
same basis). The Company further adjusts FFO by subtracting preferred share
distributions and income tax benefit, and adding lease acquisition expense and
the change in deferred revenue during the period to eliminate the impact of
Staff Accounting Bulletin No. 101 (see Note 2 to the Consolidated Financial
Statements). The calculation of FFO may vary from entity to entity and as such
the presentation of FFO by the Company may not be comparable to other similarly
titled measures of other reporting companies. FFO is not intended to represent
cash flows for the period. FFO has not been presented as an alternative to
operating income, but as an indicator of operating performance, and should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.

FFO is a supplemental industry-wide measure of REIT operating performance,
the definition of which was first proposed by NAREIT in 1991 (and clarified in
1995, 1999 and 2002) in response to perceived drawbacks associated with net
income under GAAP as applied to REITs. Since the introduction of the
definition by NAREIT, the term has come to be widely used by REITs. Historical
cost accounting for real estate assets implicitly assumes that the value of
real estate assets diminishes predictably over time. Since real estate values
instead have historically risen or fallen with market conditions, most industry
investors have considered presentations of operating results for real estate
companies that use historical GAAP cost accounting to be insufficient by
themselves. Accordingly, the Company believes FFO (combined with the Companys
primary GAAP presentations required by the Securities and Exchange Commission)
helps improve our equity holders ability to understand our operating
performance.

Under federal income tax law provisions applicable to REITs, the Company
is required to distribute at least 90% of its taxable income to maintain its
tax status as a REIT. In 2002, the Company declared total distributions of
$19,025, $12,087 to its common shareholders and $6,938 to its preferred
shareholders. As shown in the table below, based on the Companys 2002
taxable income, the Company was required to distribute approximately $12,765 to
maintain its REIT status.

22



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|                                                        |  |   |        |  
|------------------------------------------------------- |  | - | ------ | -
|GAAP net income                                         |  | $ | 902    |  
|Plus GAAP net loss on taxable subsidiary
included above |  |   | 11,940 |  
|                                                        |  |   |        |  
|GAAP net income from REIT operations                    |  |   | 12,842 |  
|Book / tax differences on depreciation and amortization |  |   | 4,392  |  
|Book / tax differences on deferred lease revenue        |  |   | (1,266 | )
|Book / tax differences on loss on sale of property      |  |   | (831   | )
|Other book / tax differences, net                       |  |   | (954   | )
|                                                        |  |   |        |  
|Taxable income subject to distribution requirement      |  |   | 14,183 |  
|Distribution requirement                                |  |   | 90     | %
|                                                        |  |   |        |  
|Taxable income required to be distributed               |  | $ | 12,765 |  
|                                                        |  |   |        |  

The Company declared a quarterly common share dividend of $0.15 per share
for each quarter during 2002. The Company intends to monitor its dividend
policy closely and to act accordingly as earnings dictate. The Company intends
to fund cash distributions to shareholders out of cash flow from operating
activities. The Company may incur, or cause the Partnership to incur,
indebtedness to meet its dividend policy or the distribution requirements
imposed on the Company under the Internal Revenue Code (including the
requirement that a REIT distribute to its shareholders annually at least 90% of
its taxable income) to the extent that available capital and cash flow from the
Companys investments are insufficient to make such distributions.

In March and April 2002, the Company completed the sale of 3.162 million
shares of its common stock pursuant to an underwritten public offering led by
Raymond James & Associates, Inc. with BB&T Capital Markets, a Division of Scott
& Stringfellow, Inc., the co-manager of the offer. The net sale proceeds to
the Company were $26,897, which were used to reduce the Companys long-term
debt.

The Companys net cash provided by investing activities during the year
ended December 31, 2002 totaled $6,344, primarily consisting of cash from the
sale of four hotels totaling $13,257 and distributions from joint ventures of
$1,331, offset by cash outflows for mezzanine loans totaling $1,750,
investments in joint ventures totaling $1,103, and capital expenditures and
renovation of hotels totaling $5,182.

The Company sold four hotels during 2002, including the Clearwater, FL
Comfort Inn in May, the Southern Pines, NC Hampton Inn in August, the Augusta,

GA Comfort Inn in November and the Chester, VA Comfort Inn in December. The
total net proceeds were $13,257. The Company also is considering the sale of
certain other hotels that lie outside the Companys mid-scale without food and
beverage and upscale segment focus and plans to use the proceeds to reduce
debt, invest in hotel properties, or provide mezzanine loans.

In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan
for the purchase and conversion of a historic office building into a 116-room
Hampton Inn & Suites hotel in Baltimore, MDs Inner Harbor (the Baltimore
Hotel). Subsequently, the Company entered into a joint venture agreement (the
Hall Joint Venture), with an affiliate of Hall Financial Group, (Hall).
The Company assigned the $3,500 mezzanine loan to the Hall Joint Venture and
retained a 50% interest (or $1,750) in the note through the joint venture. The
total cost of the Baltimore Hotel, which is scheduled to open in the first
quarter of 2004, is expected to be approximately $19,000. The Company owns 50%
of the Hall Joint Venture, and Hall owns the remaining 50%. If at any time,
(i) the Company and Hall (the Members) cannot resolve a disagreement within
30 days after written notice from one Member to the other, or (ii) any Member
transfers its interest to an entity that is not considered an affiliate of such
Member, then either Member (the non-transferring Member in the case of clause
(ii) above), shall have the option to give notice to the other of its intent to
buy or sell its interests to the other Member. If this option is exercised,
the Member that elects to do so must set forth an all cash price that reflects
the net book value of the assets and liabilities of the Hall Joint Venture in
its notice to the other Member. Within 10 days after receiving the notice, the
Member who receives this notice must then decide whether to buy the interests
of the other Member or sell its interests to the other Member. Within 20 days
after making the determination of which Member will be the buyer and which
Member will be the seller, the Members are obligated to complete the purchase
and sale. If the purchasing Member defaults on its obligation to consummate
the purchase, then the non-purchasing Member shall have the right to (i) be the
purchasing Member under the same terms and conditions as the purchase that
failed to close except that the purchase price will be 75% of the previously
determined closing price, or (ii) carry on as if the option to purchase or buy
had never been exercised.

23



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The Company is paid interest monthly on its $1,750 share of the $3,500
mezzanine loan, at an annual interest rate of 30-day LIBOR plus 10.21% from the
date the loan was issued through the date the hotel opens. The Company also
accrues interest monthly (Accrued Interest) at an annual interest rate of 12%
during this same time. Once the hotel opens, the Company will receive monthly
principal and interest payments based on a 10-year amortization period and an
interest rate of 30-day LIBOR plus 10.21% until the earliest of (a) prepayment
of the loan, (b) the initial maturity date of October 29, 2005, or (c) the
earlier of (1) 60 days before the maturity date of the borrowers construction
loan, or (2) the prepayment of the construction loan. Additional interest will
accrue monthly on the loan at a rate of 8% of gross monthly revenues for one
year after the hotel opening date, and at a rate of 10% of gross monthly
revenues thereafter through October 29, 2005; 4% of gross monthly revenues will
be paid quarterly and the balance will accrue (Accrued Participation). The
Accrued Interest and the Accrued Participation constitute the Aggregate
Accrued Amount. The Disposition Fee associated with the loan equals the
greater of (1) the Aggregate Accrued Amount, (2) 50% of the appreciation in the
fair market value (FMV) of the hotel if the loan is repaid during the first
30 months after the loan was issued, and (3) 60% of the appreciation in the FMV
of the hotel if the loan is repaid thereafter. The repayment amount of the
loan shall equal the outstanding principal balance of the loan, plus (i) all
Accrued Interest, (ii) accrued and unpaid monthly interest, (iii) Accrued
Participation, and (iv) the Disposition Fee; provided however, if that sum does
not provide the Hall Joint Venture with an internal rate of return of 23%, then
the repayment amount will equal the outstanding principal balance of the loan,
plus the amount necessary the give the Hall Joint Venture an internal rate of
return of 23%. The Baltimore Hotel is owned 100% by a single purpose entity
(the Borrower) unaffiliated with the Company. The Company holds collateral
equal to 80% of the ownership interest in the Borrower. The Borrower made an
initial equity investment equal to approximately 20% of the total cost of the
respective hotel, and there are certain default provisions under which the
Company may declare the loan immediately due and payable or may step in and
take control of the Borrower, including for failure to maintain specified debt
coverage ratios. Shaffin Jetha, principal of the company who will develop the
hotel, has unconditionally guaranteed the loan for the benefit of the Company.

In 2001 and 2000, the Company made three mezzanine loans totaling $3,516
to third party hotel owners. During 2001, the Company provided $2,186 in
mezzanine financing to Noble Investments  Tampa, LLC, an affiliate of Noble,
to develop a Hilton Garden Inn in Tampa, FL (the Tampa Hotel). The Company
receives monthly interest at annual rates based on 30-day LIBOR plus 8.44%
until the earliest of (a) prepayment of the loan, (b) the initial maturity date
of January 1, 2004, or (c) the earlier of (1) 60 days before the maturity date
of the borrowers qualified refinancing, or (2) February 1, 2006. During 2000,
the Company provided $1,080 in mezzanine financing to Noble
Investments  Sugarloaf, LLC, an affiliate of Noble, to develop a Hilton Garden Inn in
Atlanta (Sugarloaf), GA (the Sugarloaf Hotel). The Company receives monthly
interest at annual rates based on 30-day LIBOR plus 7.36% until the earlier of
(a) prepayment of the loan or (b) June 30, 2005. Both loans are subject to
prepayment penalties during the first three years. When each hotel opened, the
Company began to earn interest equal to 2% of gross revenues, 25% of which is
paid monthly and the remainder is accrued (Accrued Interest). On the earlier
of prepayment or the maturity date of each loan, the Company will also receive
the greater of the Accrued Interest or, with respect to the Tampa Hotel, 20% of
the appreciation in value, and with respect to the Sugarloaf Hotel, 15% of the
appreciation in value. In addition to earning interest income, the Company
also provided development and purchasing services to Noble during each hotels
construction stage for additional fee income. The Company co-developed the
Sugarloaf Hotel and developed the Tampa Hotel. During 2001 and 2000, these
fees totaled $645 and $137, respectively. Both the Tampa Hotel and the
Sugarloaf Hotel are owned 100% by unaffiliated single purpose entities (the
Borrowers). The Company holds collateral equal to 100% of the ownership
interest in the Borrowers. The Borrowers made initial equity investments equal
to 20% of the total cost of the respective hotel, and there are certain default
provisions under which the Company may declare the loan immediately due and

payable or may step in and take control of the Borrowers, including for failure
to maintain specified debt coverage ratios. Noble Investments LLC and the
Noble Company, LLC each unconditionally guaranteed the loans for the benefit of
the Company. The Atlanta (Sugarloaf) project opened during the second quarter
of 2001, and the Tampa project opened during the first quarter of 2002. In
2001, the Company also provided mezzanine financing totaling $250, which
represents a participating interest in a $5,478 mezzanine loan to the owner of
a 769-room resort hotel in Orlando, FL. This loan was written off as
uncollectible during 2002 due to the severe impact on the Orlando area of the
terrorist events of September 11, 2001 and the resulting poor economic
conditions.

During the second quarter of 2002, the Company entered into a joint
venture agreement with Concord Lodging Investment Partners (Winston), LLC, an
affiliate of Concord, (the Concord Joint Venture) to acquire existing poor
performing hotels that are in receivership, closed, located within a site that
could be redeveloped or that could be repositioned or reflagged, or other hotel
assets that are believed to be solid investments. The Company purchased a 50%
interest in the Concord Joint Venture. The Concord Joint Venture subsequently
purchased an operating Wingate hotel in West Des Moines, IA, and a
non-operating vacant hotel in Beachwood, OH. The Wingate hotel has been
renovated and converted to a Fairfield Inn & Suites hotel and the Beachwood, OH
hotel (Beachwood Courtyard) is currently under renovation and expected to
open as a Courtyard by Marriott hotel in April 2003.

During the fourth quarter of 2002, the Company entered into a joint
venture agreement with Charlesbank Capital Partners, LLC (Charlesbank) to
acquire more than $100,000 of hotel assets. Charlesbank is a private
investment firm that manages capital on behalf of a range of institutional
investors. The Company serves as the managing member of the joint venture,
(the Charlesbank Venture) which targets limited-service, upscale extended
stay, and small, full-service branded hotels in secondary and primary markets.
The Charlesbank Venture focuses on acquisitions that have turnaround or upside
potential and can benefit from additional

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capital and aggressive asset
management, which may include renovating, repositioning, rebranding, or a
change in management. Under the terms of the joint venture agreement,
Charlesbank will provide 85 percent and the Company will provide the remaining
15 percent of the total equity committed to each acquisition the entity
approves.

During the fourth quarter of 2002, the Charlesbank Venture and Concord
subsequently formed a new joint venture entity, WCC Project Company LLC. The
Charlesbank Venture is the managing member (the Manager) of WCC Project
Company LLC. Both the West Des Moines, IA Fairfield Inn & Suites hotel and the
Beachwood Courtyard were transferred from the Concord Joint Venture to WCC
Project Company LLC. Subsequent to Charlesbanks equity contribution in WCC
Project Company LLC, Charlesbanks ownership totals 73.95 percent, Concords
ownership was reduced from 50 percent to 13 percent and the Companys ownership
was reduced from 50 percent to 13.05 percent. At any time following two years
after WCC Project Company LLC acquires a hotel, the Manager, by written notice
to Concord, may require the sale of that hotel. At any time following 12
months after the acquisition of the first hotel, either the Manager or Concord
can give the other written notice of their election to buy or sell any one or
all of the hotels owned by WCC Project Company LLC at fair market value. If
the purchasing Member defaults on its obligation to consummate the purchase,
then the non-purchasing Member shall have the right to (i) be the purchasing
Member under the same terms and conditions as the purchase that failed to close
except that the purchase price will be 85% of the previously determined closing
price, or (ii) carry on as if the option to purchase or buy had never been
exercised. As of December 31, 2002, the Companys investment in the
Charlesbank Venture totaled $1,015. The Company, through the Charlesbank
Venture, receives cash distributions of any operating profits from WCC Project
Company LLC on a quarterly basis.

The Company and Concord have jointly signed a completion guarantee for the
Beachwood Courtyard, providing a guaranty to the lender of the full, complete
and satisfactory completion of the renovation of the property. Under the
completion guarantee, upon default by the borrower, the Company is required to
(a) immediately assume responsibility for the completion of the project at its
sole cost and expense, or (b) cure or cause the borrower to cure any such
default. Pursuant to the completion guarantee agreement, the construction
process to renovate the hotel is to be completed by June 26, 2003. The
renovation is under way and expected to be
completed in April 2003. The Company estimates that the total cost to renovate
the Beachwood Courtyard will be approximately $9,800, of which $6,400 had been
incurred as of December 31, 2002.

In 2000, the Company entered into a joint venture agreement with Marsh
Landing Investment, LLC (Marsh) to jointly develop an $8 million, 118-room
Hampton Inn in Ponte Vedra, FL. This hotel opened in December 2000. The
Company owns 49% of the joint venture, and Marsh, a company owned by Charles M.
Winston and James H. Winston, owns the remaining 51%. Both Charles M. Winston
and James H. Winston serve on the Companys Board of Directors. Marsh
currently may offer the Company the right to purchase Marshs interest in the
joint venture and, if the Company refuses to purchase the interest, Marsh may
cause the joint venture to sell the hotel owned by the joint venture to a third
party. In addition, at the Companys option, it has the right to acquire
Marshs interest in the joint venture (1) at any time after December 2005 or
(2) if Marsh fails to sell the hotel following the Companys rejection of an
offer by Marsh to sell its interest in the joint venture to the Company.

During 1999, the Company entered into a joint venture agreement with a
subsidiary of Regent Partners, Inc. (the Regent Joint Venture) to jointly
develop and own upscale hotel properties. The Company owns a 49% ownership
interest in the Regent Joint Venture. The Regent Joint Venture consists of two
separate joint ventures, each of which owns one hotel. The first hotel
developed under the Regent Joint Venture was a $16 million, full service
157-room Hilton Garden Inn in Windsor, CT, opened in September 2000. The
second hotel, a $20 million, 178-room Hilton Garden Inn in Evanston, IL, opened
in July 2001.

Regent currently may offer the Company the right to purchase its interest
in either of the Regent Joint Ventures and, if the Company refuses to purchase
the interest, Regent may cause the joint venture to sell the hotel owned by the
applicable joint venture to a third party. In addition, at the Companys
option, it has the right to acquire Regents interest in either joint venture
(1) at any time after 60 months following the date the applicable hotel
commenced operations or (2) if Regent fails to sell the applicable hotel
following the Companys rejection of an offer by Regent to sell the Company its
interest in that joint venture.

During 2002, the Company received cash distributions from its joint
ventures totaling $1,331. Under the terms of the joint ventures, the Company
has provided property development and purchasing services and will continue to
provide ongoing asset management services for additional fee income.
Recognition of such fee income is reduced by the Companys ownership
percentage, the amount of which is recorded as a reduction of investment in the
joint ventures. Such income earned during 2002 and 2001 totaled $128 and $286,
respectively. Under the terms of the operating agreement for each joint
venture, the Company must approve all major decisions, including refinancing or
selling the respective hotels, making loans, changes in partners interests,
entering into material contracts, and acquiring assets. The Company, however,
does not have a controlling interest in any of its joint ventures. As of
December 31, 2002, the total assets of the joint ventures were $55,908, total
liabilities were $34,108 ($32,419 of which represented long-term debt), and
total equity was $21,800. The Companys share of the total assets,
liabilities, long-term debt and equity equated to $23,307, $14,344, $13,788 and
$8,963, respectively. For the years ended December 31, 2002 and 2001, the
total revenue of the joint ventures was $7,037 and $4,394, and total expenses
were $4,666 and $3,326, resulting in net income of $2,371 and $1,068,
respectively. During the year ended December 31, 2002, the unaudited
financial statements of the joint ventures reflected aggregate cash flow
provided by

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operating activities of $4,793, cash used in investing activities
of $11,544, principally for hotel additions, and cash provided by financing
activities of $7,627, principally in the form of loan proceeds and capital

contributions less distributions to joint venture partners.

During 2002, the Company spent $5,182 or 4.4% of the lessees room
revenue, in connection with the renovation of its hotels and plans to spend
approximately $9,000 during 2003. In connection with the Companys acquisition
of the leasehold interests for 47 of its hotels from Interstate on July 1,
2002, Barclay became the franchisee under the franchise licenses for the
respective hotels. As a result of this change, the Company has elected to
incur additional capital expenditures during 2003 consistent with certain
franchisor requirements, which accounts for most of the projected increase in
2003. These capital expenditures are funded from operating cash flow, and
possibly from borrowings under the Companys $125,000 line of credit (the
Line), sources that 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 were approximately 5.7% and 5.1% of room
revenues in 2002 and 2001, respectively, and are paid by the lessees.

The Companys net cash used in financing activities during the year ended
December 31, 2002 totaled $24,836. This net use of cash was primarily due to
the payments made to decrease the outstanding debt balance of the Line by
$30,600, payments of distributions to shareholders totaling $18,542 and the
payments of distributions to the Partnerships minority interest totaling $779.
This amount also includes principal payments totaling $1,278 related to the
Companys $71,000 fixed rate note. These cash outflows were offset by cash
received from the issuance of 3.162 million common shares for net cash proceeds
totaling $26,897.

During each quarter in 2002, the Company paid cash dividends per common
and preferred share of $0.15 and $0.578125, respectively, equating to $0.60 and
$2.31, respectively, on an annual basis. In addition, on an annual basis, the
Company expects to have adequate cash flow from operations to fund its expected
debt service, capital expenditures, and dividend obligations during 2003.

On December 19, 2001, the Company amended and restated its previous
$140,000 line of credit with the same group of banks, led by Wachovia Bank,
N.A. Fees paid in connection with the new financing facility totaled $1,232.
The new $125,000, three-year line of credit (the Line) bears interest at
rates from LIBOR plus 1.75% to 2.50%, based on the Companys consolidated debt
leverage ratio. The Line is collateralized with 30 of the Companys hotels, with a net
book value of $206,390 as of December 31, 2002. The Company used the proceeds
from the Line to pay off the outstanding balances under the previous $140,000
line of credit. During 2002, the Company reduced the outstanding balance under
its line of credit by $30,600, from $102,900 to $72,300. The Companys
articles of incorporation limit its debt to 60% of the cost of its investment
in hotel properties.

The Companys availability under the Line totaled approximately $42,400 as
of December 31, 2002. Availability is calculated each quarter on a trailing
twelve-month basis based upon certain valuation criteria contained within the
Line. The 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, all of which the Company was in compliance with as of December 31,
2002. The failure to comply with any of these covenants would cause a default
under our line of credit. Furthermore, our line of credit provides that any
default under, or acceleration of, any of our other debt, any debt of WINN
Limited Partnership or any debt of our subsidiaries, including any default by
our financing subsidiary under its fixed-rate loan or otherwise, will
constitute a default under the line of credit. Any of these defaults, if not
waived, could result in the acceleration of the indebtedness under our line of
credit. If this occurs, we may not be able to repay our debt or borrow
sufficient funds to refinance it, in which case we would not be able to make
distributions to our shareholders.

The Company had $66,406 in debt at December 31, 2002 that was subject to a
fixed interest rate and fixed monthly payments with GE Capital Corporation.
This debt, a ten-year loan with a 25-year amortization period, carries an
interest rate of 7.375%. 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 with a net book value of $113,649 as of December 31, 2001.

All 44 of the Companys wholly owned hotels have been pledged as
collateral for the Companys debt securities, 30 against the outstanding
balance under the Line and 14 against the outstanding balance under the GE
Capital loan.

On December 18, 2000, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the Line. This transaction
effectively replaced the Companys variable interest rate based on 30-day LIBOR
on $50,000 of outstanding debt under the Line with a fixed interest rate of
5.915% until December 18, 2002, at which time the swap matured.

On January 31, 2003, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the Line. This swap begins
on March 31, 2003 and matures on February 27, 2004. This transaction
effectively replaces the Companys variable interest rate based on 30-day LIBOR
on $50,000 of the Line with a fixed interest rate of 1.505%. The Lines
interest rate spread is currently 2.00%, equaling a fixed rate of 3.505% on
$50,000 from March 31, 2003 through February 27, 2004.

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In August 2000, the Company announced that its Board of Directors
authorized the Company to purchase up to 1,000,000 shares of its Common Stock.
In making the determination of whether or not to buy shares of Common Stock,
management thoroughly analyzes the yield on such a buyback versus the yield
from alternative uses of capital. Management also considers that when
borrowing under the Line to purchase Common Stock, the Companys availability
under the Line is permanently reduced by the cost of the Common Stock
purchased. To date, the Company has determined that a Common Stock buyback is


not in the best interest of its shareholders.

As of December 31, 2002, the Companys contractual obligations and
commitments (excluding obligations and commitments pursuant to the Companys
joint ventures) were as follows:

|                        |                               |       |                        |          |  |             |       |             |  |               |       |       |  |   |       |       |  |   |        |        | 
|----------------------- | ----------------------------- | ----- | ---------------------- | -------- |  | ----------- | ----- | ----------- |  | ------------- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                        |                               |       | Payments Due by Period
|                        |                               |       |                       
|Contractual Obligations |                               | Total |                        | < 1 Year |  | 1 - 3 Years |       | 3 - 5 Years |  | After 5 Years
|                        |                               |       |                        |          |  |             |       |             |  |              
|Long-term debt          |                               | $     | 66,406                 |          |  | $           | 1,376 |             |  | $             | 3,073 |       |  | $ | 3,561 |       |  | $ | 58,396 |       
|Corporate office lease  |                               |       | 799                    |          |  |             | 364   |             |  |               | 435   |       |  |   |      |       |  |   |       |       
|                        |                               |       |                        |          |  |             |       |             |  |               |       |       |  |   |       |       |  |   |        |       
|                        | Total Contractual Obligations |       | $                      | 67,205   |  |             | $     | 1,740       |  |               | $     | 3,508 |  |   | $     | 3,561 |  |   | $      | 58,396 | 
|                        |                               |       |                        |          |  |             |       |             |  |               |       |       |  |   |       |       |  |   |        |       

|                             |  |       |        |          |  |             |   |             |  |               |        |  |  |   |   |  |  |   |   |  | 
|---------------------------- |  | ----- | ------ | -------- |  | ----------- | - | ----------- |  | ------------- | ------ |  |  | - | - |  |  | - | - |  | 
|Other Commercial Commitments |  | Total |        | < 1 Year |  | 1 - 3 Years |   | 3 - 5 Years |  | After 5 Years
|                             |  |       |        |          |  |             |   |             |  |               |       
|Line of credit               |  | $     | 72,300 |          |  | $           |  |             |  | $             | 72,300 |  |  | $ |  |  |  | $ |  | 
|                             |  |       |        |          |  |             |   |             |  |               |        |  |  |   |   |  |  |   |   |  | 

The Company intends to continue to seek additional mezzanine loan
opportunities, as well as other loan opportunities in general, and to acquire
and develop additional hotel properties that meet its investment criteria. The
Company is continually evaluating such opportunities, as
well as other investment opportunities including, but not limited to, the
acquisition of assets that require substantial renovation and repositioning
within a particular market. It is expected that future mezzanine loans and
hotel acquisitions will be financed, in whole or in part, from additional
follow-on offerings, from borrowings under the Line, from joint venture
agreements, from the net sale proceeds of hotel properties and/or from the
issuance of other debt or equity securities. There can be no assurances that
the Company will make any further mezzanine loans or any investment in
additional hotel properties, or that any hotel development will be undertaken,
or if commenced, that it will be completed on schedule or on budget.
Furthermore, there can be no assurances that the Company will be able to obtain
any additional financing.

Recently Issued Accounting Standards

In April 2002, the FASB issued Statement of Financial Accounting Standard
No. 145, (SFAS No. 145) which provides further guidance on early
extinguishment of debt. SFAS No. 145 rescinds SFAS Statement No. 4, Reporting
Gains and Losses from Extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt to Satisfy Sinking-Fund
Requirements, SFAS No. 44, Accounting for Intangible
Assets of Motor Carriers,
and SFAS No. 13, Accounting for Leases. The Companys adoption of SFAS No.
145 is not expected to have a material impact on the Companys financial
statements or results of operations.

In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
(SFAS No. 146) which addresses financial accounting and reporting for costs
associated with exit or disposal activities. The Companys adoption of SFAS
No. 146 is not expected to have a material impact on the Companys financial
statements or results of operations.

The FASB has issued SFAS No. 147 Acquisitions of Certain Financial

Institutions which is effective for certain transactions arising on or after
October 1, 2002 (SFAS No. 147). SFAS No. 147 will have no impact on the
Company.

The FASB has issued SFAS No. 148 Accounting for Stock-Based Compensation
- Transition and Disclosure (SFAS No. 148). SFAS No. 148 amends SFAS No.
123, Accounting for Stock-Based Compensation, to provide alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company has adopted the disclosure requirements
of SFAS No. 148. The Company currently accounts for stock-based employee
compensation in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations.

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Accordingly, the alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation mandated by SFAS No. 148 are
not applicable to the Company at this time.

FASB Interpretation No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FASB Interpretation No. 34 (FIN 45), was issued in November 2002. FIN 45
elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also clarifies that a guarantor is required to recognize, at
the inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation does not prescribe a
specific approach for subsequently measuring the guarantors recognized
liability over the term of the related guarantee.

The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the
guarantors fiscal
year-end. The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has made the disclosures required by FIN 45.

FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51 (ARB No.
51), was issued in January 2003. This Interpretation clarifies the application
of ARB No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 also addresses consolidation by business enterprises of
variable interest entities, which have one or both of the following
characteristics:

1.     The equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial support from
other parties, which is provided through other interests that will absorb some
or all of the expected losses of the entity.

2.     The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:

a.     The direct or indirect ability to make decisions about the entitys
activities through voting rights or similar rights,

b.     The obligation to absorb the expected losses of the entity if they occur,
which makes it possible for the entity to finance its activities, or

c.     The right to receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the expected losses.

This Interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities and, thus, to improve
comparability between enterprises engaged in similar activities even if some of
those activities are conducted through variable interest entities. Including
the assets, liabilities, and results of activities of variable interest
entities in the consolidated financial statements of their primary
beneficiaries will provide more complete information about the resources,
obligations, risks, and opportunities of the consolidated enterprise.
Disclosures about variable interest entities in which an enterprise has a
significant variable interest but does not consolidate will help financial
statement users assess the enterprises risks.

This Interpretation requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved.

This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003.

The Company is in the process of evaluating the provisions of FIN 46 and
its effect on the joint ventures as disclosed in Note 11 in the notes to
consolidated financial statements.

Seasonality

The hotels operations historically have been seasonal in nature,
reflecting higher occupancy during the second and third quarters. This
seasonality can be expected to cause fluctuations in the Companys quarterly
operating profits. To the extent that cash flow from operations is
insufficient during any quarter, due to temporary or seasonal fluctuations in
revenue, the Company expects to utilize cash on hand or borrowings under the
line of credit to make distributions to the equity holders.

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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 guidance, project, target, may, will,
expect, anticipate, estimate, believes, 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 following risks: changes in general economic
conditions, properties held for sale will not sell, financing risks including
the inability to obtain financing on favorable terms, if at all, development
risks including the risks of construction delays and cost overruns, lower than
expected occupancy and average daily rates, non-issuance or delay of issuance
of governmental permits, zoning restrictions, the increase of development costs
in connection with projects that are not pursued to completion, non-payment of
mezzanine loans, the failure to make additional mezzanine debt investments and
investments in distressed hotel assets, failure to attract joint venture
opportunities and other risk factors described below under the heading Risk
Factors.

Risk Factors

Risks Relating to Our Business

Our ability to make distributions to our shareholders depends upon the ability
of our hotel managers and lessees to operate our hotels effectively.

In order to qualify as a REIT, we cannot operate any hotel, or directly
participate in the decisions affecting the daily operations of any hotel.
Either our third-party managers under management agreements, or our third party
lessees, have direct control of the daily operations of our hotels. Under the
REIT Modernization Act of 1999 (the RMA), which became effective January 1,
2001, REITs are permitted to lease their hotels to wholly owned taxable REIT
subsidiaries of the REITs (TRS Lessees). Even under the RMA, TRS Lessees may
not operate the leased hotels and must enter into management agreements with
eligible independent contractors that will manage the hotels. We do not have
the authority to directly control any particular aspect of the daily operations
of any hotel (e.g., setting room rates). Thus, even if we believe our hotels

are being operated in an inefficient or sub-optimal manner, we may not be able
to require a change to the method of operation. Our only alternative for
changing the operation of our hotels may be to replace the third party manager
of one or more hotels in situations where the applicable management agreement
permits us to terminate the existing manager.

As a result of the Companys acquisition (through its TRS Lessee) of the
leasehold interests for 47 of its hotels, effective July 1, 2002, the operating
income (loss) of these hotels was recorded on the Companys financial
statements. Our income primarily depends upon the net operating income of our
hotels. Our ability to make distributions to our shareholders depends on the
ability of our hotel managers to generate sufficient revenues from our hotels
in excess of operating expenses. Our managers will be affected by factors
beyond their control, such as changes in the level of demand for rooms and
related services of our hotels, their ability to maintain and increase gross
revenues and operating margins at our hotels, and other factors. As of
December 31, 2002, 35 of our hotels were managed by Interstate. Therefore, any
operating difficulties or other factors specifically affecting Interstates
ability to maintain and increase gross revenues and operating margins at our
hotels could significantly adversely affect our financial condition and results
of operations.

In addition, our growth strategy contemplates additional hotel
acquisitions that meet our investment criteria and selective development of
hotels as market conditions warrant. Our ability to grow depends, in part, upon
the ability of our third-party managers to manage our current and future hotels
effectively. If the third-party managers are not able to operate additional
hotels at current staffing levels and office locations, they may need to hire
additional personnel, engage additional third- party managers and/or operate in
new geographic locations. If the third-party managers fail to operate the
hotels effectively, our ability to generate income from the hotels could be
adversely affected.

The events of September 11, 2001, as well as the weak U.S. economic recovery,
have adversely impacted the hotel industry generally, and we have experienced
an adverse effect on our results of operations.

Prior to September 11, 2001, our hotels had begun experiencing declining
revenue per available room, or RevPAR, as a result of the slowing U.S.
economy. The terrorist attacks of September 11, 2001 and more recent concerns
about possible additional terrorist attacks, combined with the effects of the
resulting recession and weak economic recovery, have led to a substantial
reduction in business and leisure travel throughout the United States, and
industry RevPAR generally, and RevPAR at our hotels specifically, has declined
substantially since September 11. While RevPAR at our hotels has improved from
the depressed levels in the weeks immediately following the events of September
11, RevPAR at our hotels remains below pre-September 11 levels and may remain
at such depressed levels. We cannot predict the extent to which the events of
September 11, subsequent concerns about possible

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additional terrorist attacks,
and the weak economic recovery will continue to directly or indirectly impact
the hotel industry or our operating results in the future. Continued depressed
RevPAR at our hotels which we expect in the near term could have an adverse
effect on our results of operations and financial condition, including our
ability to remain in compliance with the covenants contained in our debt
instruments, our ability to fund capital improvements and renovations at our
hotels and our ability to make dividend payments necessary to maintain our REIT
tax status. Additional terrorist attacks could have further material adverse
effects on the hotel industry and our operations.

We may not have access to financing for acquiring or developing additional
hotels.

Our ability to pursue our growth strategy depends, in part, on our ability
to finance additional hotel acquisitions and development. We may not be able
to fund growth solely from cash provided from operating activities because we
must distribute at least 90% of our taxable income each year to maintain our
tax status as a REIT and normally distribute 100% in order to avoid paying
corporate income tax and excise tax on undistributed income. Consequently, we
rely upon the availability of debt or equity capital to fund hotel acquisitions
and improvements. We cannot assure you that we will be successful in
attracting sufficient debt or equity financing at an acceptable cost to fund
future growth. We are subject to restrictions that may limit our ability to
take advantage of expansion opportunities that we believe are attractive. Our
existing $125 million line of credit limits our borrowing availability to a
percentage of the value of the hotels provided as collateral, with the value
determined in part by the cash flow generated by those hotels. As a result, as
of December 31, 2002, we had approximately $114.7 million available for
borrowing under our line of credit, of which $72.3 million was outstanding. If
we need to borrow funds under the line of credit in excess of our current
borrowing availability, we must provide additional collateral, which may not be
available, to increase our borrowing availability to the total amount of debt
we need, up to a maximum amount $125 million. As of December 31, all 44 wholly owned
hotels had been pledged as collateral for our debt facilities, 30 against the
line of credit and 14 against the GE Capital CMBS loan. In addition, our
articles of incorporation limit our debt to 60% of the cost of our investment
in hotel properties, or approximately $259 million as of December 31, 2002.

Our ability to raise additional equity capital will depend on market
conditions. We cannot assure you that we will be able to raise funds through a
public or private offering at a time when we need access to funds. We may seek
alternative methods of funding expansion, such as joint venture development;
however, we cannot assure you that such opportunities will be available when we
need them or on acceptable terms.

We have a significant level of debt that may limit our ability to take certain
actions.

We currently have a significant amount of debt. As of December 31, 2002,
we had $72.3 million outstanding under our line of credit and Winston SPE, LLC,
a special purpose financing subsidiary of WINN Limited Partnership (a
partnership of which we are the sole general partner), had $66.4 million
outstanding under a fixed-rate loan. As of December 31, 2002, the total
liabilities of our joint ventures were $34.1 million ($32.4 million of which
represented long-term debt). Our proportionate share of such total liabilities
and long-term debt equated to $14.3 million and $13.8 million, respectively.
Our level of debt could have important consequences to you. For example, it
could:



| |  | impair our ability to obtain additional financing, if needed, for working
capital, capital expenditures, acquisitions or other purposes in the future;                                                       
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | require us to dedicate a substantial portion of our cash flow from operations
to payments on our debt, thereby reducing our funds available for operations,
future business opportunities and other purposes;
| 
| |  | place us at a disadvantage compared to competitors that have less debt;                                                                                                                                      
| 
| |  | restrict our ability to adjust rapidly to changing market conditions; and                                                                                                                                    
| 
| |  | increase our vulnerability to adverse economic, industry and business conditions.                                                                                                                            

If we or our financing subsidiary do not have sufficient funds to repay
our debt at maturity, it may be necessary for us to refinance our debt through
additional debt financing, private or public offerings of debt securities or
additional equity offerings. If, at the time of any refinancing, prevailing
interest rates or other factors result in higher interest rates on
refinancings, increases in interest expense could adversely affect our cash
flow and, consequently, cash available for distribution to shareholders. If we
are unable to refinance our debt on acceptable terms, we or our financing
subsidiary may be forced to dispose of hotels or other assets on
disadvantageous terms, potentially resulting in losses and adverse effects on
cash flow from operating activities. If we are unable to make required payments
of principal and interest on debt secured by our hotels, one or more of those
properties could be foreclosed upon by the lender with a consequent loss of
revenue and asset value.

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The covenants governing our debt impose significant restrictions on us.

The terms of our line of credit impose significant operating and financial
restrictions on us and require us to meet certain financial tests, including
leverage ratios, maximum unsecured and secured debt ratios, interest and fixed
charge coverage ratios and minimum tangible net worth requirements. These
restrictions may also have a negative impact on our business, financial
condition and results of operations by significantly limiting or prohibiting us
from engaging in certain transactions, including:



| |  | incurring or guaranteeing additional indebtedness;                                                
|- |  | --------------------------------------------------------------------------------------------------
| 
| |  | paying dividends in excess of 85% of our funds from operations over the most recent four quarters;
| 
| |  | making capital expenditures and other investments;                                                
| 
| |  | creating liens on our assets; and                                                                 
| 
| |  | engaging in mergers, consolidations or the sale of all or a substantial portion of our assets.    

The failure to comply with any of these covenants would cause a default
under our line of credit. Furthermore, our line of credit provides that any
default under, or acceleration of, any of our other debt, any debt of WINN
Limited Partnership or any debt of our subsidiaries, including any default by
our financing subsidiary under its fixed-rate loan or otherwise, will
constitute a default under the
line of credit. Any of these defaults, if not waived, could result in the
acceleration of the indebtedness under our line of credit. If this occurs, we
may not be able to repay our debt or borrow sufficient funds to refinance it,
in which case we would not be able to make distributions to our shareholders.
Even if new financing were available, it may not be on terms that are
acceptable to us.

If our cash flow decreases, we may be required to provide additional collateral
under our line of credit or take other actions that would adversely affect our
financial condition and results of operations.

We have pledged 30 hotel properties as collateral to secure the line of
credit and our financing subsidiary has pledged 14 hotel properties to secure
the fixed-rate loan, which accounts for all of the Companys 44 wholly owned
hotels. Both loan agreements prohibit pledging any hotel pledged as collateral
under that facility to secure other debt. Our line of credit limits our
borrowing availability to a percentage of value of the hotels provided as
collateral, with the value determined in part by the cash flow generated by
those hotels. Our current cash flow from the hotels securing the line of credit
limits our borrowing availability under the line of credit, which as of
December 31, 2002, was $114.7 million. If we need to borrow funds under the
line of credit in excess of our borrowing availability, we must provide
additional collateral to increase our borrowing availability to the total
amount of debt we need, but not to exceed $125 million. If our cash flow
decreases to such a level that our borrowing availability is less than the
amount outstanding under the line of credit, we must either (1) repay the
excess of the amounts outstanding over our borrowing availability or (2) with
the unanimous consent of the lenders, provide additional collateral to increase
our borrowing availability. If we were unable to repay the excess debt over our
borrowing availability or provide additional collateral, the resulting payment
default would entitle our lenders to exercise one or more remedies, including
foreclosing on one or more of the properties pledged as collateral.

Rising interest rates could adversely affect our cash flow.

Our borrowings under our line of credit bear interest at a variable rate.
Our line of credit requires that we maintain at least 50% of our total debt at
a fixed rate of interest. Although we have entered into agreements that limit
our interest rate exposure on a portion of the outstanding debt under our line
of credit, outstanding debt of up to $72.3 million under our line of credit
remains subject to variable interest rates. We may incur debt in the future
that bears interest at a variable rate or we may be required to refinance our
existing debt at higher interest rates. Accordingly, increases in interest
rates could increase our interest expense and adversely affect our cash flow.

We may not be able to complete development of new hotels on time or within
budget.

We intend to develop additional hotel properties as suitable opportunities
arise. New project development is subject to a number of risks that could cause
increased costs or delays in our ability to generate revenue from any
development hotel, reducing our cash available for distribution to
shareholders. These risks include:



| |  | construction delays or cost overruns that may increase project costs;                                                         
|- |  | ------------------------------------------------------------------------------------------------------------------------------
| 
| |  | competition for suitable development sites;                                                                                   
| 
| |  | receipt of zoning, land use, building, construction, occupancy and other required governmental permits and authorizations; and

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| |  | substantial development costs in connection with projects that are not completed.
|- |  | ---------------------------------------------------------------------------------

We may not be able to complete the development of any projects we begin
and, if completed, our development and construction activities may not be
completed in a timely manner or within budget.

We also intend to rehabilitate hotels that we believe are underperforming.
These rehabilitation projects will be subject to the same risks as development
projects.

Hotels that we develop have no operating history and may not achieve levels of
occupancy that result in levels of operating income that provide us with an
attractive return on our investment.

The new hotels that we develop have no operating history. These hotels
may not achieve anticipated levels of occupancy, average daily room rates, or
gross operating margins. Similarly, during the start-up period, room revenues
may be less than required to result in the operating income levels that provide
us with an attractive return on our investment.

Property ownership through joint ventures and partnerships could limit our
control of those investments.

Joint ventures or partnerships (other than WINN Limited Partnership)
involve risks not otherwise present for investments we make on our own. It is
possible that our co-venturers or partners may have different interests or
goals than we do at any time and that they
may take actions contrary to our requests, policies or objectives, including
our policy with respect to maintaining our qualification as a REIT. Other risks
of joint venture investment include impasses on decisions, because no single
co-venturer or partner has full control over the joint venture or partnership.
Each of our venture partners for our existing joint venture properties has the
right, after the first twelve months of the hotels operation, to sell the
hotel developed by the joint venture to us, or, if we elect not to purchase, to
sell such hotel to a third party. In addition, future joint ventures may
include other restrictions on us, including requirements that we provide the
joint venture with the right of first offer or right of first refusal to
acquire any new property we consider acquiring directly.

Our business could be disrupted if we need to find a new manager upon
termination of an existing management agreement.

If our managers fail to materially comply with the terms of their
management agreements, we have the right to terminate such management
agreements. Upon termination, we would have to find another manager to manage
the property. We cannot operate the hotels directly due to federal income tax
restrictions. We cannot assure you that we would be able to find another
manager or that, if another manager were found, we would be able to enter into
new management agreements favorable to us. There would be disruption during any
change of hotel management that could adversely affect our operating results.

If we decide to sell hotels, we may not be able to sell those hotels on
favorable terms and may be required to pay termination fees to the lessees of
those hotels.

We have sold five hotels during the past two years, one in 2001 and four
in 2002. Although none of our other hotels is currently under contract to
sell, we may decide to sell additional hotels in the future. We may not be able
to sell such hotels on favorable terms, and such hotels may be sold at a loss.
As with acquisitions, we face competition for buyers of our hotel properties.
Other sellers of hotels may have the financial resources to dispose of their
hotels on unfavorable terms that we would be unable to accept. If we cannot
find buyers for any properties that are designated for sale, we will not be
able to implement our divestiture strategy. In the event that we cannot fully
execute our divestiture strategy or realize the benefits therefrom, we will not
be able to fully execute our growth strategy.

Furthermore, under management agreements for six of our hotels, and under

our three leases with third-party lessees, (two of which are for wholly owned
hotels and one of which is for a Joint Venture Hotel) upon the occurrence of
certain events, we must either pay a termination fee or offer another suitable
property for management or lease, as the case may be. The amount of the
termination fee depends upon certain calculations. Alternatively, we may
negotiate to waive the provision and arrange for the manager or lessee to
continue to manage the property for the buyer or lease the property from the
buyer, as the case may be. If we were not able to successfully negotiate such
a continuation, we would be required to pay a termination fee, substitute
another suitable property or abandon the sale transaction.

We may face conflicts of interest relating to sales of hotels acquired from
affiliates.

We have acquired 14 hotels in the past from related parties of our
affiliates, which include Robert Winston, our Chief Executive Officer, and
Charles Winston, our Chairman of the Board. The limited partners of WINN
Limited Partnership, including Robert Winston and Charles Winston, may have
unrealized gain associated with their interests in these hotels. Our sale of
any of those hotels may cause adverse tax consequences to the limited partners.
Therefore, our interests could conflict with the interests of the limited

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partners in connection with the disposition of one or more of those 14 hotels,
including limited partners who may be board members or otherwise in a position
to exert influence over other board members who will determine whether we sell
these hotels.

We depend on key personnel.

We depend on the efforts and expertise of our Chief Executive Officer,
Chief Financial Officer, Chief Accounting Officer and Executive Vice President
of Development to drive our day-to-day operations and strategic business
direction. The loss of any of their services could have an adverse effect on
our operations. Our ability to replace key individuals may be difficult
because of the limited number of individuals with the breadth of skills and
experience needed to excel in the hotel industry. There can be no assurance
that we would be able to hire, train, retain or motivate such individuals.

Our borrowers may fail to repay all or a portion of the mezzanine loans owed to
us.

We face special risks in connection with our mezzanine loans to borrowers
for the purpose of building and owning hotels. We are subject to risks of
borrower defaults, bankruptcies, fraud and losses and special hazard losses
that are not covered by standard hazard insurance. We expect that each
mezzanine loan will be made to a single purpose entity whose sole asset would
be a hotel being built or renovated. Our present mezzanine loans are not, and
we do not expect that any of our future mezzanine loans will be, collateralized
by the hotel being built by the single purpose entity. Mezzanine loans will be
subordinate to any debt collateralized by the hotel being built and maybe any
other debt of the single purpose entity. Mezzanine loans involve a higher
degree of risk than long-term senior mortgage lending that is secured by
income- producing real property for a variety of reasons including, among other
things, dependency on the success of a project which a third party controls and that a
foreclosure by the holder of the senior loan could result in a mezzanine loan
becoming uncollectible. Additionally, mezzanine loans may have higher loan to
value ratios than conventional term loans. The borrowers may not be able to
repay their obligations under their senior loans or our mezzanine loans, in
which case we could suffer a total or partial loss on our mezzanine loans. In
2002, we wrote off as uncollectible our $250 participation interest in a $5,478
mezzanine loan to the owner of a 769-room resort hotel in Orlando, FL, and
other existing or future borrowers may become in default on our mezzanine
loans.

Mezzanine lending risks.

A mezzanine lender has some of the same risks as a traditional real estate
lender, such as lender liability for improperly exercising control over the
borrower and environmental risks as a potentially responsible party liable for
environmental damage in connection with the property owned by the borrower. A
mezzanine lender may enhance these risks by pursuing remedies on default that
afford greater control over the operations of the borrower, especially if the
mezzanine lender exercises its authority as a managing or co-managing member.
Courts have discretion to decline to enforce loan features which purport to
limit or modify a mortgagors right to redeem real estate after a mortgage
default and before foreclosure by paying off the loan, and thus some remedies
specified in our mezzanine loans may be unavailable to us. In addition a
borrower may allege that being in the position to control the borrowing entity
creates duties by the lender to the borrower, including fiduciary-like duties
that may conflict with the lenders actions to exercise its remedies. Finally,
to be able to protect its mezzanine loan, a mezzanine lender may have to
advance additional funds to cure defaults on senior loans.

If third parties for whom we develop hotels default on their loans, we may be
required to complete the development of those hotels at our own expense.

In certain cases where we are offering third party hotel development
services in exchange for fees, we may elect to provide the hotel
owner/developer with a construction completion guaranty on the particular hotel
under development. In those cases, if the owner/developer were in default under
the terms and conditions of its senior loans, its senior lenders might seek to
compel us to complete the development of the particular hotel with our own
funds, which could materially adversely affect our business, financial
condition and results of operations.

Risks Relating to Our Industry

Our performance and the value of our stock are subject to risks associated with
the hotel industry.

Our hotels are subject to operating risks of the hotel industry that could
reduce our revenue and ability to make distributions to shareholders.

Our hotels are subject to all operating risks common to the hotel
industry. These factors could adversely affect the ability of our hotels to
generate operating income and therefore affect our ability to make
distributions to our shareholders. These risks include, but are not limited to:

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| |  | competition for guests from other hotels, many of which have substantial marketing and financial resources;                   
|- |  | ------------------------------------------------------------------------------------------------------------------------------
| 
| |  | faster growth in room supply than in room demand growth in our markets;                                                       
| 
| |  | increases in operating costs due to inflation and other factors which may not be offset in the future by increased room rates;
| 
| |  | seasonality, with higher hotel revenues occurring in the second and third calendar quarters;                                  
| 
| |  | increases in energy costs, airline fares and other expenses related to travel, which may deter traveling;                     
| 
| |  | terrorist incidents, which may also deter traveling;                                                                          
| 
| |  | adverse effects of general and local economic conditions;                                                                     
| 
| |  | a general inability to control costs, thereby resulting in lower gross operating profit; and                                  
| 
| |  | risks generally associated with the ownership of hotels and real estate, as discussed below.                                  

Our entire business is concentrated in particular segments of a single
industry.

Our entire business is hotel-related. Our investment strategy is to
acquire additional hotels, or ownership interests in hotels, with strong
national franchise affiliations in the mid-scale without food and beverage,
upscale, and full-service market segments, or hotel properties with the
potential to obtain such franchise affiliations. Therefore, a downturn in the
hotel industry, in general, and the segments in which we operate, in
particular, will have a material adverse effect on our income and the amounts
available for distribution to our equity holders.

Large-scale military deployments may adversely impact the occupancy rates and
revenues from our two hotels located in communities that have a large military
population.

Currently, we own two hotels located in communities with a large military
presence; one near Fort Bragg in Fayetteville, North Carolina and one near Camp
Lejeune in Jacksonville, North Carolina. During the Persian Gulf War in the
early 1990s, a large number of military personnel deployed to the Persian Gulf
and, additionally, their respective families departed those communities for the
duration of the military members deployment. The two local communities
suffered economic loss as a result. If a large number of military personnel
were deployed away from their permanent duty stations for an extended period,
we expect that occupancy rates and RevPAR at those two hotels would be
adversely affected.

We may incur higher costs as a result of the proximity of our hotels to the
coast.

Several of our hotels are located near the Atlantic Ocean and are exposed
to more severe weather than hotels located inland. These hotels are also
exposed to salt water and humidity, which can increase or accelerate wear on
the hotels weatherproofing and mechanical, electrical and other systems. As a
result, we may incur additional expenditures for capital improvements.

Our hotel concentration in the Southeastern United States subjects us to
operating risks.

At December 31, 2002, 31 out of our 44 wholly-owned hotels were located in
the five eastern seaboard states ranging from Virginia to Florida, including 17
hotels located in North Carolina. Adverse events in these areas, such as
economic recessions, hurricanes or other natural disasters, could cause a loss
of revenues from these hotels, which could have a greater adverse effect on us
as a result of our concentration of assets in this area. Our geographic
concentration also exposes us to risks of oversupply and competition in our
principal markets. Each of our hotels competes with other hotels in its market
area. A number of additional hotel rooms will continue to be built in the
markets in which our hotels are located, which could result in too many hotel
rooms in those regions. Significant increases in the supply of hotel rooms
without corresponding increases in demand can have a severe adverse effect on
our business, financial condition and results of operations.

Conditions of franchise agreements could adversely affect us.

All of our hotels are operated pursuant to franchise agreements with
nationally-recognized hotel brands. In addition, hotels in which we
subsequently invest may be operated pursuant to franchise agreements. A hotels
failure to adhere to the terms and conditions of the franchise agreement could
result in the loss or cancellation of its franchise license. We rely on our
managers and third party lessees to conform to such franchisor standards. The
franchise agreements generally contain specific standards for, and restrictions
and limitations on, the operation and maintenance of a hotel in order to
maintain uniformity within the franchisors system. These

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standards are subject
to change over time, in some cases at the discretion of the franchisor, and may
restrict our ability to make improvements or modifications to a hotel without
the consent of the franchisor. In addition, compliance with these standards
could require us to incur significant expenses or capital expenditures. Our
cash available for distribution could be adversely affected if we or our
lessees must incur substantial costs to maintain a franchise license.

If a franchise license terminates due to our lessees failure to make
required improvements or to otherwise comply with its terms, our lessee may be
liable to the franchisor for a termination payment. These termination payments
would vary by franchise agreement and by hotel. The loss of a substantial
number of franchise licenses and the related termination payments could have a
material adverse effect on our business, financial condition and results of
operations.

As of December 31, 2002, of the 48 hotels franchise licenses, including
four joint venture hotels, eight expire in the next five years, two in 2006,
two in 2007, and four in 2008. In connection with termination of a franchise
license or changing the franchise affiliation of a hotel, we may have to incur
significant expenses or capital expenditures. Moreover, the loss of a franchise
license, in the event that it could not be renewed or is otherwise lost, could
have a material adverse effect on the operations or the underlying value of the
hotel covered by the franchise because of the loss of association, name
recognition, marketing support and centralized reservation system provided by
the franchisor. Any of these events could have a negative effect on our ability
to make distributions to shareholders. The franchise agreements covering the
hotels expire or terminate, without special renewal rights, at various times
and have different remaining terms.

Operating costs and capital expenditures could adversely affect our cash flow.

Hotels have an ongoing need for renovations and other capital
improvements, particularly in older structures, including periodic replacement
of furniture, fixtures and equipment. Under the terms of our leases, we are
obligated to pay the cost of certain capital expenditures at the hotels and to
pay for furniture, fixtures and equipment. Franchisors also may require
periodic capital improvements to our hotels as a condition of retaining the
franchise licenses. In addition, we intend to invest selectively in hotels that
require significant renovation. Renovation of hotels involves certain risks,
including:



| |  | the possibility of environmental problems;                                                               
|- |  | ---------------------------------------------------------------------------------------------------------
| 
| |  | construction cost overruns and delays;                                                                   
| 
| |  | uncertainties as to market demand or deterioration in market demand after commencement of renovation; and
| 
| |  | the emergence of unanticipated competition from other hotels; and                                        
| 
| |  | displacement of room revenues due to rooms being out of order.                                           

If any of these costs exceed our estimates, the additional costs could have an
adverse effect on our cash available for distribution.

We must compete with larger entities for acquisition and franchising
opportunities.

We compete for acquisition opportunities with entities that have
substantially greater financial resources than we do. These entities generally
may be able to accept more risk than we can prudently manage, including risks
with respect to the creditworthiness of a hotel operator or the geographic
proximity of its investments, and may have better relations with franchisors.
Competition may reduce the number of suitable investment opportunities
available to us and increase the bargaining power of sellers. In addition,
other potential buyers who do not need to use a lessee or a third party
operator to operate the hotel may be able to offer a higher price for a
property than we are able to pay.

Our performance and value are subject to the condition of the real estate
industry.

We may not be able to sell hotels when appropriate.

Real estate investments generally cannot be sold quickly. We may not be
able to vary our portfolio promptly in response to changes in economic and
other conditions. Because we are a REIT, federal income tax laws limit our
ability to sell properties in some situations when it may be economically
advantageous to do so. As a result, returns to our shareholders could be
adversely affected. In addition, we cannot assure you that the market value of
any of our hotels will not decrease in the future, and therefore we may not be
able to sell our hotels on favorable terms.

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Liability for environmental matters could adversely affect our financial
condition.

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of investigation and removal or remediation of hazardous
or toxic substances on, under, originating at or in the property, including
fixtures, structures and other improvements located on the property. These laws
often impose liability whether or not the owner or operator knew of (or should
have known of), or caused, the presence of contaminants. Although Phase I
environmental site assessments (ESAs) were obtained on all of the hotels, the
Phase I ESAs did not include invasive procedures, such as soil sampling or
ground water analysis. While 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, 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 hotel after the related Phase I ESA report was completed of which
the Company is unaware. The costs to clean up a contaminated property, to
defend against a claim, or to comply with environmental laws could be material
and could affect the funds available for distributions to equity holders.
Clean-up costs and the owners or operators liability generally are not
limited under these laws and could exceed the value of the property and/or the
aggregate assets of the owner or operator. In addition, the presence of, or
failure to properly remediate, contaminants may adversely affect the owners
ability to sell or rent the property or borrow using the real property as
collateral. Persons who arrange for the disposal or treatment of hazardous or
toxic substances may also be liable for the clean-up costs of the substances at
the disposal or treatment facility, whether or not the facility is or ever was
owned or operated by that person.

Environmental, health and safety laws and common law principles also
govern the presence, effects, maintenance and removal of hazardous substances,
including asbestos-containing materials, or ACMs. Asbestos has been found in
two of our hotels and asbestos or other hazardous substances may be found in
other hotels we own or acquire in the future. Many such laws permit third
parties, including employees and independent contractors, to 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 of the hotels, we may be considered an owner or
operator and therefore may be potentially liable for any such costs, which
could adversely affect our financial condition.

Black mold claims could adversely affect our financial condition.

Recent publicity regarding families abandoning their homes because of the
presence of stachyhotrys chartarum (black mold) has raised public
consciousness regarding black mold. Black mold is a greenish-black fungus
found worldwide that grows in such places as dry wall, carpet, wall paper,
fiber-board, ceiling tiles, and thermal insulation when the relative humidity
is above 55%. While the scientific community lacks consensus on the health
threat, if any, posed by exposure to black mold, if black mold is detected in
any of our hotels, we may be subject to adverse publicity, which could
adversely affect our operations and financial results from that hotel. Such
claims could require us to spend significant time and money in litigation or
pay significant damages. In addition, we may be required to close all or
portions of the affected hotel during mold remediation operations, generally
consisting of a thorough cleaning with chlorine bleach and water. Under
certain conditions, black mold may be difficult to eradicate and require us to
remove and replace moldy materials in the hotel. In extreme cases, it may be
necessary to perform extensive facility repairs. The presence of black mold in
any hotel also could adversely impact the carrying value of that hotel.

During 2002, the Company invested in the Beachwood, OH Courtyard by
Marriott hotel, which is currently owned by WCC Project Company LLC. The
Companys current ownership interest in this hotel is 13.05%. Prior to making
its initial investment, the Company knew that black mold existed at the hotel
and engaged consultants with expertise in black mold remediation and performed
extensive research to satisfy itself that the black mold condition could be
eradicated through renovation and repair procedures. Following the completion
of such remediation procedures, the Company believes that all of the black mold
has been removed from this hotel, which is expected to open for business in
April 2003. Because black mold is a naturally occurring fungus, the spores of
which can be transported by outside air currents, there can be no assurances
that black mold will not again enter and grow in this hotel or that it will not
be found in the Companys other hotel properties.

Liability for uninsured and underinsured losses could adversely affect our
financial condition and results of operations.

In the event of a substantial loss, our insurance coverage may not be
sufficient to pay the full current market value or current replacement cost of
our lost investment. Certain types of losses, such as mold, terrorist acts,
earthquakes, floods, hurricanes, and other acts of God, may be uninsurable or
not economically insurable. In addition, we may not be able to use insurance
proceeds to replace a damaged or destroyed property as a result of changes in
building codes and ordinances, environmental considerations or other factors.
In these circumstances, any insurance proceeds we receive might not be adequate
to restore our economic position with respect to the damaged or destroyed
property and we would be required to seek separate financing for repair and
replacement costs, which may not be available on acceptable terms or at all, or
face a loss on our investment.

36



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##### 



The cost of compliance with the Americans with Disabilities Act and other
changes in governmental rules and regulations could adversely affect our cash
flow.

Under the Americans with Disabilities Act of 1990, or the ADA, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that we are not in
compliance with the ADA could result in imposition of fines or an award of
damages to private litigants. In addition, other governmental rules and
regulations or enforcement policies affecting the use and operation of the
hotels could change, including changes to building codes and fire and life
safety codes. If we are required to spend money to comply with the ADA or other
changes in governmental rules and regulations, our ability to make
distributions to shareholders could be adversely affected.

Increases in property taxes could adversely affect our cash flow.

Real and personal property taxes on our current and future hotel
properties may increase as property tax rates change and as the properties are
assessed or reassessed by taxing authorities. An increase in property taxes
could have an adverse effect on our ability to make distributions to
shareholders.

Risks Relating to Capital Stock

The price of our securities may be affected by changes in market interest
rates.

One of the factors that may influence the price of our common stock or
preferred stock in public trading markets is the annual yield from
distributions on our common stock or preferred stock as compared to yields on
other financial instruments. Thus, an increase in market interest rates will

result in higher yields on other financial instruments, which could adversely
affect the market price of our common stock or preferred stock.

Shareholder approval is required to change certain policies, limiting the
ability of our board of directors to take certain actions in response to
changing conditions.

We cannot change our policy of limiting consolidated debt to 60% of the
cost of our investment in hotel properties without shareholder approval. In
addition, the approval of the holders of two-thirds of our shares of common
stock entitled to vote is necessary to change our policy of seeking to maintain
qualification as a REIT. As a result, our board of directors could not change
either of these policies without first receiving shareholder approval at an
annual or special meeting, even if the change in policy would be advantageous
to us.

The ability of our shareholders to effect a change in control is limited.

Stock ownership limitations could inhibit changes in control.

Our articles of incorporation provide that no shareholder may own,
directly or indirectly, more than 9.9% of any class of our outstanding stock.
This limitation may have the effect of precluding an acquisition of control by
a third party without the approval of our board of directors even if a change
in control were in your best interest.

Our ability to issue preferred stock could inhibit changes in control.

Our articles of incorporation authorize the board of directors to issue up
to 10,000,000 shares of preferred stock and to establish the preferences and
rights of any shares of preferred stock issued. Currently, there are 3,000,000
shares of preferred stock outstanding. Issuing additional preferred stock could
have the effect of delaying or preventing a change in control even if a change
in control were in our shareholders interest.

Risks Relating to REIT Status

We are subject to tax risks as a result of our REIT status.

We have operated and intend to continue to operate so as to qualify as a
REIT for federal income tax purposes. Our continued qualification as a REIT
will depend on our continuing ability to meet various requirements concerning
the ownership of our outstanding stock, the nature of our assets, the sources
of our income, and the amount of distributions to our shareholders. In order to
qualify as a REIT, we generally are required each year to distribute to our
shareholders at least 90% of our taxable income, other than any net capital
gain and any taxable income of our TRS Lessees. To the extent that we meet the
90% distribution requirement, but

37



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##### 



distribute less than 100% of our taxable
income, we will be required to pay income tax on our undistributed income. In
addition, we will be subject to a 4% nondeductible excise tax if the actual
amount we pay out to our shareholders in a calendar year is less than a minimum
amount specified under the federal tax laws. Any taxable income of our TRS
Lessees will incur corporate income tax, but will not be subject to any
distribution requirement. The requirement to distribute a substantial portion
of our net taxable income could cause us to distribute amounts that otherwise
would be spent on future acquisitions, unanticipated capital expenditures or
repayment of debt, which would require us to borrow funds or to sell assets to
fund the costs of such items.

We have made, and intend to continue to make, distributions to our
shareholders to comply with the current 90% distribution requirement and to
avoid corporate income tax and the nondeductible excise tax. Our income
consists of our share of the income of WINN Limited Partnership, and our cash
available for distribution consists of our share of cash distributions from
WINN Limited Partnership, less capital expenditures and principal debt
payments. Differences in timing between the recognition of taxable income and
the receipt of cash available for distribution due to the seasonality of the
hotel industry could require us to borrow funds on a short-term basis to meet
the 90% distribution requirement and to avoid income tax and the nondeductible
excise tax.

If we were to fail to qualify as a REIT for any taxable year, we would not
be allowed to deduct our distributions to our shareholders in computing our
taxable income. Furthermore, we would be subject to federal income tax,
including any applicable alternative minimum tax, on our taxable income at
regular corporate rates. Unless we are entitled to relief under the federal
income tax laws, we also would be disqualified from treatment as a REIT for the
four taxable years following the year during which we lost our qualification.
As a result, our cash available for distribution would be reduced for each of
the years involved. Although we currently operate and intend to continue to
operate in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal,
tax or other considerations may cause our board of directors, with the consent
of shareholders holding at least two-thirds of the common stock entitled to
vote, to revoke the REIT election.

At any time, the federal income tax laws governing REITs or the
administrative interpretations of those laws may be amended. Any of those new
laws or interpretations thereof may take effect retroactively and could
adversely affect the Company or its shareholders. On January 7, 2003, the Bush
administration released a proposal that would exclude corporate dividends from
an individuals taxable income, to the extent that corporate income tax has
been paid on the earnings from which the dividends are paid. REIT dividends
would not be exempt from income tax in the hands of an individual shareholder
because REITs income generally is not subject to corporate-level tax. This
proposal could cause stock in non-REIT corporations to be a more attractive
investment to individual investors than stock in REITs. There can be no
assurance regarding the form in which this proposal ultimately will be enacted
or whether it will in fact be enacted.

|         |  |                                                           
|-------- |  | ----------------------------------------------------------
|ITEM 7A. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|         |  | ($in thousands)                                           

As of December 31, 2002, the Companys exposure to market risk for a
change in interest rates related solely to debt outstanding under the Line.
Debt outstanding under the Line totaled $72,300 at December 31, 2002. The
Line, which expires in January 2005, bears interest generally at rates from
30-day LIBOR plus 1.75% to 30-day LIBOR plus 2.50%, based on the Companys
consolidated debt leverage ratio. The Companys current interest rate is
30-day LIBOR plus 2.00%. The Companys two-year interest rate swap (the
Former Swap Agreement) on $50,000 of its outstanding variable rate debt under
the Line matured on December 18, 2002. The Company had no interest rate
hedging instruments in place as of December 31, 2002. The Former Swap
Agreement was a contract to exchange floating rate interest payments for fixed
interest payments periodically over the life of the agreement without the
exchange of the underlying notional amounts. This transaction effectively
replaced the Companys variable interest rate based on 30-day LIBOR on $50,000
of the Line with a fixed interest rate of 5.915% until December 18, 2002. The
differential paid or received on interest rate agreements is recognized as an
adjustment to interest expense over the life of the swap. The weighted average
interest rate on the Line for 2002 was 6.45%. (See Note 5 to the consolidated
financial statements.) At December 31, 2002, the Company had $72,300 of
variable rate debt outstanding under the Line that was exposed to fluctuations
in the market rate of interest.

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. If interest rates
increased by 100 basis points, the Companys annual interest expense would have
increased by approximately $723, based on the amount of variable rate debt
outstanding and exposed to fluctuations in the market rate of interest at
December 31, 2002. The Company does not enter into derivative or interest rate
transactions for speculative purposes.

38



---



##### 



The following table presents the aggregate maturities of the Companys GE
Capital Corporation fixed rate debt principal and interest rates by maturity
dates at December 31, 2002:

|              |  |                 |        |               |  |  |       |  
|------------- |  | --------------- | ------ | ------------- |  |  | ----- | -
|Maturity Date |  | Fixed Rate Debt |        | Interest Rate
|              |  |                 |        |              
|2003          |  | $               | 1,376  |               |  |  | 7.375 | %
|2004          |  |                 | 1,480  |               |  |  | 7.375 | %
|2005          |  |                 | 1,593  |               |  |  | 7.375 | %
|2006          |  |                 | 1,715  |               |  |  | 7.375 | %
|2007          |  |                 | 1,846  |               |  |  | 7.375 | %
|Thereafter    |  |                 | 58,396 |               |  |  | 7.375 | %
|              |  |                 |        |               |  |  |       |  
|              |  | $               | 66,406 |               |  |  | 7.375 | %
|              |  |                 |        |               |  |  |       |  

|        |  |                                            
|------- |  | -------------------------------------------
|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 15 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
the Companys Proxy Statement (under the heading Proposal 1: Election of
Directors) to be filed with respect to the Annual Meeting of Shareholders to
be held May 6, 2003. Information on the Companys executive officers is
included under the caption Executive Officers of the Registrant on pages 8
and 9 of this report on Form 10-K.

|         |  |                       
|-------- |  | ----------------------
|ITEM 11. |  | EXECUTIVE COMPENSATION

This information is incorporated by reference from the Companys Proxy
Statement (under the heading Executive Compensation) to be filed with respect
to the Annual Meeting of Shareholders to be held May 6, 2003.

|         |  |                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------
|ITEM 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Equity Compensation Plan Information

The following table sets forth information as of December 31, 2002 with respect
to compensation plans under which equity securities of the Company are
authorized for issuance. The Company has no such plans that were not approved
by security holders.

|                                                           |  |                            |         |                      |  |                                |       |  |  |                                |         | 
|---------------------------------------------------------- |  | -------------------------- | ------- | -------------------- |  | ------------------------------ | ----- |  |  | ------------------------------ | ------- | 
|                                                           |  |                            |         |                      |  |                                |       |  |  | Number of securities remaining
|                                                           |  | Number of securities to be |         | Weighted average     |  | available for future issuance 
|                                                           |  | issued upon exercise of    |         | exercise price of    |  | under equity compensation     
|                                                           |  | outstanding options,       |         | outstanding options, |  | plans (excluding securities   
|Plan Category                                              |  | warrants and rights        |         | warrants and rights  |  | reflected in the first column)
|                                                           |  |                            |         |                      |  |                               
|Equity compensation plans
approved by security holders (1) |  |                            | 795,000 |                      |  | $                              | 11.07 |  |  |                                | 644,964 | 



---

|(1) |  | As of December 31, 2002, 644,964 shares of Common Stock remain available
for future issuance under the Stock Incentive Plan. See Note 10 to
consolidated financial statements.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39



---



##### 



The remainder of the information required by Item 12 is incorporated by
reference from the Companys Proxy Statement (under the heading
Share Ownership
of Management and Certain Beneficial Owners) to be filed with respect to the
Annual Meeting of Shareholders to be held May 6, 2003.

ITEM  13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

This information is incorporated by reference the Companys Proxy
Statement (under the heading Certain Relationships and Related Transactions)
to be filed with respect to the Annual Meeting of Shareholders to be held May
6, 2003.

ITEM  14.    CONTROLS AND PROCEDURES



| | (a) |  | Evaluation of disclosure controls and procedures.
| | --- |  | -------------------------------------------------

Based on the Companys most recent evaluation, which was completed within
90 days of the filing of this Form 10-K, the Companys Chief Executive Officer
and Chief Financial Officer believe the Companys disclosure controls and
procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange
Act of 1934, as amended (the Exchange Act)) provide reasonable assurances
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time period required by the Securities and Exchange
Commissions rules and forms.



| | (b) |  | Changes in internal controls.
| | --- |  | -----------------------------

There have been no significant changes in internal controls or in other
factors that could significantly affect these controls subsequent to the date
of the most recent evaluation of the Companys internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

PART IV

ITEM  15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



|(a) |  | Financial Statements and Schedules. The financial statements and
schedules listed below are included in this report.
|--- |  | --------------------------------------------------------------------------------------------------------------------

|                                                                                                     |  |                |    | 
|---------------------------------------------------------------------------------------------------- |  | -------------- | -- | 
|Financial Statements and Schedules                                                                   |  | Form 10-K Page
|                                                                                                     |  |               
|Report of Independent Accountants                                                                    |  |                | 47 | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                         |  |                | 48 | 
|Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000               |  |                | 49 | 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2002, 2001 and 2000 |  |                | 50 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000           |  |                | 51 | 
|Notes to Consolidated Financial Statements                                                           |  |                | 52 | 
|Schedule III  Real Estate and Accumulated Depreciation as of December 31, 2002                      |  |                | 66 | 
|Notes to Schedule III                                                                                |  |                | 68 | 



|(b) |  | Reports on Form 8-K.
|--- |  | --------------------

The Company filed the following reports on Form 8-K for the quarter ended
December 31, 2002:



| | (1) |  | The Company filed a current report on Form 8-K dated November
6, 2002, pursuant to Item 9 of Form 8-K. Included in the Form 8-K
was the Companys press release announcing its operating results for
the third quarter ended September 30, 2002, attached as Exhibit 99.1.                                                                                                                                                        
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | The Company filed a current report on Form 8-K dated November
12, 2002, pursuant to Item 9 of Form 8-K. Included in this Form 8-K
were the certifications of Robert W. Winston, the Companys Chief
Executive Officer, and Joseph V. Green, the Companys Chief Financial
Officer, required pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. These certifications were attached as Exhibits 99.1 and
99.2, respectively.

40



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##### 



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, 10.21, 10.22, and 10.23.

|           |  |                                                                                                                                                                                                                                                                                                   
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit    |  | Description                                                                                                                                                                                                                                                                                       
|           |  |                                                                                                                                                                                                                                                                                                   
|3.1(9)     |  | Restated Articles of Incorporation                                                                                                                                                                                                                                                                
|           |  |                                                                                                                                                                                                                                                                                                   
|3.2 (12)   |  | 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(9)     |  | Restated Articles of Incorporation                                                                                                                                                                                                                                                                
|           |  |                                                                                                                                                                                                                                                                                                   
|4.4 (12)   |  | 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 (5)   |  | Amendment No. 2 dated December 31, 1997 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership                                                                                                                                                               
|           |  |                                                                                                                                                                                                                                                                                                   
|10.4 (11)  |  | Amendment No. 3 dated September 14, 1998 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership                                                                                                                                                              
|           |  |                                                                                                                                                                                                                                                                                                   
|10.5 (10)  |  | Amendment No. 4 dated October 1, 1999 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership                                                                                                                                                                 
|           |  |                                                                                                                                                                                                                                                                                                   
|10.6 (13)  |  | Amendment No. 5 dated as of January 1, 2002 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership                                                                                                                                                           
|           |  |                                                                                                                                                                                                                                                                                                   
|10.7       |  | Amendment No. 6 dated as of April 2, 2002 to Second Amended and Restated Agreement of
Limited Partnership of WINN Limited Partnership                                                                                                                                                             
|           |  |                                                                                                                                                                                                                                                                                                   
|10.8 (2)   |  | Limitation of Future Hotel Ownership and Development Agreement                                                                                                                                                                                                                                    
|           |  |                                                                                                                                                                                                                                                                                                   
|10.9 (6)   |  | Winston Hotels, Inc. Stock Incentive Plan as amended May 1998                                                                                                                                                                                                                                     
|           |  |                                                                                                                                                                                                                                                                                                   
|10.10 (7)  |  | Loan Agreement by and between Winston SPE LLC and CMF Capital Company LLC dated
November 3, 1998                                                                                                                                                                                                  
|           |  |                                                                                                                                                                                                                                                                                                   
|10.11 (7)  |  | Promissory note dated November 3, 1998 by and between Winston SPE LLC and CMF Capital
Company, LLC                                                                                                                                                                                                
|           |  |                                                                                                                                                                                                                                                                                                   
|10.12 (8)  |  | Winston Hotels, Inc. Executive Deferred Compensation Plan                                                                                                                                                                                                                                         
|           |  |                                                                                                                                                                                                                                                                                                   
|10.13 (13) |  | Second Amended and Restated Syndicated Credit Agreement, dated as of December 19,
2001, 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)
|           |  |                                                                                                                                                                                                                                                                                                   
|10.14 (13) |  | Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to Wachovia Bank, N.A. for the principal sum
of $48,000,000 pursuant to the Credit Agreement                                                                          
|           |  |                                                                                                                                                                                                                                                                                                   
|10.15 (13) |  | Amended and Restated Promissory Note, dated as of December 19, 2001, 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                                                             

41



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##### 



|           |  |                                                                                                                                                                                                                                                                                                                
|---------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit    |  | Description                                                                                                                                                                                                                                                                                                    
|           |  |                                                                                                                                                                                                                                                                                                                
|10.16 (13) |  | Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to SouthTrust Bank, N.A. for the principal
sum of $22,000,000 pursuant to the Credit Agreement                                                                                     
|           |  |                                                                                                                                                                                                                                                                                                                
|10.17 (13) |  | Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston
Hotels, Inc. and WINN Limited Partnership to Centura Bank for the principal sum of
$15,000,000 pursuant to the Credit Agreement                                                                                              
|           |  |                                                                                                                                                                                                                                                                                                                
|10.18 (13) |  | Extension Agreement; Second Modification Agreement of 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)
|           |  |                                                                                                                                                                                                                                                                                                                
|10.19 (14) |  | Leasehold Acquisition Agreement, dated as of June 28, 2002, by and among Winston
Hotels, Inc., CapStar Winston Company, LLC, MeriStar Management Company, LLC, Barclay
Hospitality Services Inc. and certain affiliates of the foregoing parties                                                               
|           |  |                                                                                                                                                                                                                                                                                                                
|10.20 (14) |  | Hotel Management Agreement, dated July 1, 2002, by and between Barclay Hospitality
Services, Inc. and MeriStar Management Company, L.L.C.                                                                                                                                                                      
|           |  |                                                                                                                                                                                                                                                                                                                
|10.21      |  | Employment Agreement, dated January 2, 2003, by and between Robert W. Winston, III and
Winston Hotels, Inc.                                                                                                                                                                                                    
|           |  |                                                                                                                                                                                                                                                                                                                
|10.22      |  | Employment Agreement, dated January 2, 2003, by and between Kenneth R. Crockett and
Winston Hotels, Inc.                                                                                                                                                                                                       
|           |  |                                                                                                                                                                                                                                                                                                                
|10.23      |  | Employment Agreement, dated January 2, 2003, by and between Joseph V. Green and
Winston Hotels, Inc.                                                                                                                                                                                                           
|           |  |                                                                                                                                                                                                                                                                                                                
|21.1       |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                                                                 
|           |  |                                                                                                                                                                                                                                                                                                                
|23.1       |  | Consent of Independent Accountants (PricewaterhouseCoopers LLP)                                                                                                                                                                                                                                                
|           |  |                                                                                                                                                                                                                                                                                                                
|24.1       |  | Powers of Attorney                                                                                                                                                                                                                                                                                             



---

|(1) |  | Exhibit 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 Current 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 Current 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 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.                                               
|   
|(6) |  | 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.                                                                       
|   
|(7) |  | 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.

42



---



##### 





|(8)  |  | 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.     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(9)  |  | 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.   
|    
|(10) |  | 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.
|    
|(11) |  | Exhibit to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 17, 2000 and incorporated
herein by reference.      
|    
|(12) |  | Exhibit to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 19, 2001 and incorporated
herein by reference.      
|    
|(13) |  | Exhibit to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 2002 and incorporated
herein by reference.      
|    
|(14) |  | Exhibits to the Companys Current Report on Form 8-K as filed with
the Securities and Exchange Commission on July 15, 2002 and incorporated
herein by reference.      

43



---



##### 



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 14, 2003

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.

|                                                 |  |                                                                               |  |               
|------------------------------------------------ |  | ----------------------------------------------------------------------------- |  | --------------
|Signature                                        |  | Title                                                                         |  | Date          
|                                                 |  |                                                                               |  |               
|                                                 |  |                                                                               |  |               
|                                                
|*Charles M. Winston                              |  | Chairman of the Board of Directors                                            |  | March 14, 2003
|                                                
|/s/ Robert W. Winston, IIIRobert W. Winston, III |  | Chief Executive Officer, President
and Director
(Principal Executive Officer) |  | March 14, 2003
|                                                
|/s/ Joseph V. GreenJoseph V. Green               |  | Executive Vice President and
Chief Financial Officer                          |  | March 14, 2003
|                                                
|/s/ Brent V. WestBrent V. West                   |  | Vice President and Chief
Accounting Officer                                   |  | March 14, 2003
|                                                
|*Edwin B. Borden                                 |  | Director                                                                      |  | March 14, 2003
|                                                
|*Thomas F. Darden, II                            |  | Director                                                                      |  | March 14, 2003
|                                                
|*Richard L. Daugherty                            |  | Director                                                                      |  | March 14, 2003
|                                                
|*James H. Winston                                |  | Director                                                                      |  | March 14, 2003
|                                                
|*David C. Sullivan                               |  | Director                                                                      |  | March 14, 2003

|    |  |                                   | 
|--- |  | --------------------------------- | 
|*By |  | /s/ Joseph V. Green               | 
|    |  |                                   | 
|    |  | Joseph V. Green,
Attorney-in-Fact | 

44



---



##### 



CERTIFICATIONS

I, Robert W. Winston, III, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Winston Hotels, Inc.;                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                               



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                                                                                       
|-------------------- |  | --------------------------------------------------------------------------------------
|Date: March 14, 2003 |  |                                                                                       
|                    
|                     |  |                                                                                       
|                    
|                     |  | /s/ Robert W. Winston, IIIRobert W. Winston, III
President and Chief Executive Officer

45



---



##### 



I, Joseph V. Green, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Winston Hotels, Inc.;                                                                                                                                                                                                                                                
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:                                                                                               



| | a. |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the Evaluation Date); and                                                                                                  
|
| | c. |  | presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a. |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weaknesses
in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                        



|6. |  | The registrants other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |                                                                                
|-------------------- |  | -------------------------------------------------------------------------------
|Date: March 14, 2003 |  |                                                                                
|                     |  |                                                                                
|                     |  | /s/ Joseph V. Green                                                            
|                     |  |                                                                                
|                     |  | Joseph V. Green
Executive Vice President, Chief Financial Officer
and Secretary

46



---



##### 



Report of Independent Accountants

To 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 financial position of Winston
Hotels, Inc. and its subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. 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, presents fairly, in all material
respects, the information required to be included therein. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, 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 our opinion.

As discussed in Note 7 to the consolidated financial statements, in 2001 the
Company changed its method of accounting for derivative instruments and hedging
activities. As discussed in Note 13 to the consolidated financial statements,
in 2002 the Company adopted Statement of Financial Accounting Standard No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.

PricewaterhouseCoopers LLP
Raleigh, North Carolina

January 24, 2003



47



---



##### 



WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETSAs of December 31, 2002 and 2001($ in thousands, except per share amounts)

|                                      |                                    |                                                                                                                                            |         |         |         |      |         |         |         |  
|------------------------------------- | ---------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------ | ------- | ------- | ------- | ---- | ------- | ------- | ------- | -
|                                      |                                    |                                                                                                                                            |         | 2002    |         | 2001
|                                      |                                    |                                                                                                                                            |         |         |         |     
|ASSETS                               
|Investment in hotel properties:       |                                    |                                                                                                                                            |         |         |         |      |         |        
|Land                                  |                                    | $                                                                                                                                          | 39,348  |         |         | $    | 41,114  |        
|Buildings and improvements            |                                    |                                                                                                                                            | 345,511 |         |         |      | 359,024 |        
|Furniture and equipment               |                                    |                                                                                                                                            | 44,332  |         |         |      | 44,376  |        
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|                                      | Operating properties               |                                                                                                                                            |         | 429,191 |         |      |         | 444,514 |        
|Less accumulated depreciation         |                                    |                                                                                                                                            | 109,152 |         |         |      | 96,343  |        
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|                                      |                                    |                                                                                                                                            | 320,039 |         |         |      | 348,171 |        
|Properties under development          |                                    |                                                                                                                                            | 1,800   |         |         |      | 1,916   |        
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|                                      | Net investment in hotel properties |                                                                                                                                            |         | 321,839 |         |      |         | 350,087 |        
|Corporate FF&E, net                   |                                    |                                                                                                                                            | 735     |         |         |      | 1,033   |        
|Cash                                  |                                    |                                                                                                                                            | 1,510   |         |         |      | 887     |        
|Accounts receivable                   |                                    |                                                                                                                                            | 1,958   |         |         |      |        |        
|Lease revenue receivable              |                                    |                                                                                                                                            |        |         |         |      | 4,786   |        
|Notes receivable                      |                                    |                                                                                                                                            | 5,016   |         |         |      | 3,516   |        
|Investment in joint ventures          |                                    |                                                                                                                                            | 9,117   |         |         |      | 8,173   |        
|Deferred expenses, net                |                                    |                                                                                                                                            | 2,954   |         |         |      | 3,405   |        
|Prepaid expenses and other assets     |                                    |                                                                                                                                            | 6,988   |         |         |      | 5,017   |        
|Deferred tax asset                    |                                    |                                                                                                                                            | 7,325   |         |         |      |        |        
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|                                      |                                    | Total assets                                                                                                                               |         | $       | 357,442 |      |         | $       | 376,904 |  
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY 
|Long-term debt                        |                                    | $                                                                                                                                          | 66,406  |         |         | $    | 67,684  |        
|Due to banks                          |                                    |                                                                                                                                            | 72,300  |         |         |      | 102,900 |        
|Deferred percentage lease revenue     |                                    |                                                                                                                                            |        |         |         |      | 1,226   |        
|Accounts payable and accrued expenses |                                    |                                                                                                                                            | 11,679  |         |         |      | 8,175   |        
|Distributions payable                 |                                    |                                                                                                                                            | 4,951   |         |         |      | 4,468   |        
|Minority interest in Partnership      |                                    |                                                                                                                                            | 7,591   |         |         |      | 8,246   |        
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|                                      |                                    | Total liabilities                                                                                                                          |         |         | 162,927 |      |         |         | 192,699 |  
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|Commitments and contingencies         |                                    |                                                                                                                                            |         |         |         |      |         |        
|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,
20,148,334 and 16,924,533 shares issued and outstanding                        |         |         | 201     |      |         |         | 169     |  
|                                      |                                    | Additional paid-in capital                                                                                                                 |         |         | 256,720 |      |         |         | 230,109 |  
|                                      |                                    | Unearned compensation                                                                                                                      |         |         | (596    | )    |         |         | (542    | )
|                                      |                                    | Accumulated other comprehensive income (loss)                                                                                              |         |         |        |      |         |         | (1,844  | )
|                                      |                                    | Distributions in excess of earnings                                                                                                        |         |         | (61,840 | )    |         |         | (43,717 | )
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|                                      |                                    | Total shareholders equity                                                                                                                 |         |         | 194,515 |      |         |         | 184,205 |  
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        
|                                      |                                    | Total liabilities and shareholders equity                                                                                                 |         | $       | 357,442 |      |         | $       | 376,904 |  
|                                      |                                    |                                                                                                                                            |         |         |         |      |         |        

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

48



---



##### 



WINSTON HOTELS, INC
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2002, 2001 and 2000(in thousands, except per share amounts)

|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |        |        |       | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | ------------------------ | --------------------------------------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ----- | ------ | ------ | ------ | ----- | 
|                                                                                                                                                    |                                                                                            |                          |                                                     |        | 2002   |        | 2001   |        | 2000  
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |       
|Revenue:                                                                                                                                            |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Rooms                                                                                      |                          | $                                                   | 55,416 |        |        | $      |       |        |       | $      |       |       
|                                                                                                                                                    | Food and beverage                                                                          |                          |                                                     | 3,898  |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Other operating departments                                                                |                          |                                                     | 2,329  |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Percentage lease revenue                                                                   |                          |                                                     | 29,243 |        |        |        | 52,856 |        |       |        | 60,399 |       
|                                                                                                                                                    | Interest and other income                                                                  |                          |                                                     | 1,458  |        |        |        | 2,166  |        |       |        | 1,272  |       
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    |                                                                                            | Total revenue            |                                                     |        | 92,344 |        |        |        | 55,022 |       |        |        | 61,671 |      
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|Hotel operating expenses:                                                                                                                           |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Rooms                                                                                      |                          |                                                     | 13,254 |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Food and beverage                                                                          |                          |                                                     | 2,873  |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Other operating departments                                                                |                          |                                                     | 1,535  |        |        |        |       |        |       |        |       |       
|Undistributed operating expenses:                                                                                                                   |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Property operating expenses                                                                |                          |                                                     | 12,189 |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Real estate taxes and property and casualty insurance                                      |                          |                                                     | 6,345  |        |        |        | 6,444  |        |       |        | 6,404  |       
|                                                                                                                                                    | Franchise costs                                                                            |                          |                                                     | 3,945  |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Maintenance and repair                                                                     |                          |                                                     | 3,224  |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Management fees                                                                            |                          |                                                     | 1,247  |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Percentage lease expense                                                                   |                          |                                                     | 2,168  |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | General and administrative                                                                 |                          |                                                     | 4,842  |        |        |        | 5,419  |        |       |        | 4,323  |       
|                                                                                                                                                    | Depreciation                                                                               |                          |                                                     | 19,149 |        |        |        | 19,762 |        |       |        | 20,044 |       
|                                                                                                                                                    | Lease acquisition                                                                          |                          |                                                     | 17,668 |        |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Amortization                                                                               |                          |                                                     | 836    |        |        |        | 955    |        |       |        | 921    |       
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    |                                                                                            | Total operating expenses |                                                     |        | 89,275 |        |        |        | 32,580 |       |        |        | 31,692 |      
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|Operating income                                                                                                                                    |                                                                                            |                          | 3,069                                               |        |        |        | 22,442 |        |        |       | 29,979 |       
|                                                                                                                                                    | Interest                                                                                   |                          |                                                     | 10,478 |        |        |        | 12,170 |        |       |        | 13,491 |       
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|Income (loss) before loss on sale of properties, allocation to
minority interest, income taxes, and equity in income of
unconsolidated subsidiaries |                                                                                            |                          | (7,409                                              | )      |        |        | 10,272 |        |        |       | 16,488 |       
|                                                                                                                                                    | Loss on sale of properties                                                                 |                          |                                                     |       |        |        |        | (682   | )      |       |        | (850   | )     
|                                                                                                                                                    | Income (loss) allocation to minority interest                                              |                          |                                                     | (377   | )      |        |        | 226    |        |       |        | 620    |       
|                                                                                                                                                    | Income tax expense (benefit)                                                               |                          |                                                     | (7,440 | )      |        |        |       |        |       |        |       |       
|                                                                                                                                                    | Equity in income (loss) of unconsolidated subsidiaries                                     |                          |                                                     | 1,172  |        |        |        | 523    |        |       |        | (31    | )     
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|Income from continuing operations                                                                                                                   |                                                                                            |                          | 1,580                                               |        |        |        | 9,887  |        |        |       | 14,987 |       
|Discontinued operations:                                                                                                                            |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Income from discontinued operations                                                        |                          |                                                     | 41     |        |        |        | 598    |        |       |        | 736    |       
|                                                                                                                                                    | Loss on sale of discontinued operations                                                    |                          |                                                     | (719   | )      |        |        |       |        |       |        |       |       
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|Income before cumulative effect of change in accounting principle                                                                                   |                                                                                            |                          | 902                                                 |        |        |        | 10,485 |        |        |       | 15,723 |       
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Cumulative
effect of change in accounting principle - net                                  |                          |                                                     |       |        |        |        |       |        |       |        | (668   | )     
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Net income                                                                                 |                          |                                                     | 902    |        |        |        | 10,485 |        |       |        | 15,055 |       
|Preferred stock distribution                                                                                                                        |                                                                                            |                          | (6,938                                              | )      |        |        | (6,938 | )      |        |       | (6,938 | )     
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    |                                                                                            |                          | Net income (loss) applicable to common shareholders |        | $      | (6,036 | )      |        | $      | 3,547 |        |        | $      | 8,117 | 
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|Income (loss) per common share:                                                                                                                     |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|Basic and diluted:                                                                                                                                  |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Income (loss) from continuing operations                                                   |                          | $                                                   | (0.28  | )      |        | $      | 0.17   |        |       | $      | 0.48   |       
|                                                                                                                                                    | Income (loss) from discontinued operations                                                 |                          |                                                     | (0.03  | )      |        |        | 0.04   |        |       |        | 0.04   |       
|                                                                                                                                                    | Net (loss) per common share from cumulative effect of change
in accounting principle - net |                          |                                                     |       |        |        |        |       |        |       |        | (0.04  | )     
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Net income (loss) per common share                                                         |                          | $                                                   | (0.31  | )      |        | $      | 0.21   |        |       | $      | 0.48   |       
|                                                                                                                                                    |                                                                                            |                          |                                                     |        |        |        |        |        |        |       |        |       
|                                                                                                                                                    | Weighted average number of common shares                                                   |                          |                                                     | 19,308 |        |        |        | 16,926 |        |       |        | 16,890 |       
|                                                                                                                                                    | Weighted average number of common shares assuming dilution                                 |                          |                                                     | 19,308 |        |        |        | 18,239 |        |       |        | 18,188 |       

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

49



---



##### 



WINSTON HOTELS, INC
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
For the years ended December 31, 2002, 2001 and 2000(in thousands, except per share amounts)

|                                          |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |        |   |   |      |   |   |   |         |        |   |   |        |             |   |   |         |   |       | 
|----------------------------------------- | --------------------------------------------------- | -------------------------- | ----- | --------------- | - | ------------ | -- | ---------- | - | -------- | ------ | ------------ | - | ------------- | --- | ------------- | - | ------------- | ------- | ------ | - | - | ---- | - | - | - | ------- | ------ | - | - | ------ | ----------- | - | - | ------- | - | ----- | 
|                                          |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |        |   |   |      |   |   |   |         |        |   |   |        | Accumulated |   |   |         |  
|                                          |                                                     |                            |       | Preferred Stock |   | Common Stock |    | Additional |   |          |        |              |   | Distribution  |     | Other         |   | Total        
|                                          |                                                     |                            |       |                 |   |              |    | Paid-in    |   | Unearned |        | in Excess of |   | Comprehensive |     | Shareholders'
|                                          |                                                     |                            |       | Shares          |   | Amount       |    | Shares     |   | Amount   |        | Capital      |   | Compensation  |     | Earnings      |   | Income (Loss) |         | Equity
|                                          |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |       
|Balances at December 31, 1999             |                                                     |                            | 3,000 |                 |   | $            | 30 |            |   |          | 16,814 |              |   | $             | 168 |               |   | $             | 229,106 |        |   | $ | (524 | ) |   | $ | (19,702 | )      |   | $ |       |             |   | $ | 209,078 |  
|Issuance of shares and other              |                                                     |                            |      |                 |   |              |   |            |   |          | 83     |              |   |               | 1   |               |   |               | 690     |        |   |   | (705 | ) |   |   |        |        |   |   |       |             |   |   | (14     | )
|Distributions ($1.12 per common share)    |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   |     |   |   |   | (18,923 | )      |   |   |       |             |   |   | (18,923 | )
|Distributions ($2.31 per preferred share) |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   |     |   |   |   | (6,938  | )      |   |   |       |             |   |   | (6,938  | )
|Unearned compensation amortization        |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   | 458  |   |   |   |        |        |   |   |       |             |   |   | 458     |  
|Net income                                |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   |     |   |   |   | 15,055  |        |   |   |       |             |   |   | 15,055  |  
|                                          |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |        |   |   |      |   |   |   |         |        |   |   |        |             |   |   |         |  
|Balances at December 31, 2000             |                                                     |                            | 3,000 |                 |   |              | 30 |            |   |          | 16,897 |              |   |               | 169 |               |   |               | 229,796 |        |   |   | (771 | ) |   |   | (30,508 | )      |   |   |       |             |   |   | 198,716 |  
|Issuance of shares and other              |                                                     |                            |      |                 |   |              |   |            |   |          | 28     |              |   |               |    |               |   |               | 313     |        |   |   | (198 | ) |   |   |        |        |   |   |       |             |   |   | 115     |  
|Distributions ($0.99 per common share)    |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   |     |   |   |   | (16,756 | )      |   |   |       |             |   |   | (16,756 | )
|Distributions ($2.31 per preferred share) |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   |     |   |   |   | (6,938  | )      |   |   |       |             |   |   | (6,938  | )
|Unearned compensation amortization        |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   | 427  |   |   |   |        |        |   |   |       |             |   |   | 427     |  
|Comprehensive income (loss):              |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |        |   |   |      |   |   |   |         |        |   |   |        |             |   |   |         |  
|                                          | Net income                                          |                            |       |                |   |              |    |           |   |          |        |             |   |               |     |              |   |               |         |       |   |   |      |  |   |   |         | 10,485 |   |   |        |            |   |   |         |   |      
|                                          | Cumulative effect of change in accounting principle |                            |       |                |   |              |    |           |   |          |        |             |   |               |     |              |   |               |         |       |   |   |      |  |   |   |         |       |   |   |        | (245        | ) |   |         |   |      
|                                          | Unrealized gain/loss on derivative instruments      |                            |       |                |   |              |    |           |   |          |        |             |   |               |     |              |   |               |         |       |   |   |      |  |   |   |         |       |   |   |        | (1,599      | ) |   |         |   |      
|                                          |                                                     | Total comprehensive income |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |               |         |        |  |   |      |   |  |   |         |        |  |   |        |             |  |   |         |   | 8,641 | 
|                                          |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |        |   |   |      |   |   |   |         |        |   |   |        |             |   |   |         |  
|Balances at December 31, 2001             |                                                     |                            | 3,000 |                 |   |              | 30 |            |   |          | 16,925 |              |   |               | 169 |               |   |               | 230,109 |        |   |   | (542 | ) |   |   | (43,717 | )      |   |   | (1,844 | )           |   |   | 184,205 |  
|Issuance of shares and other              |                                                     |                            |      |                 |   |              |   |            |   |          | 3,224  |              |   |               | 32  |               |   |               | 26,611  |        |   |   | (555 | ) |   |   |        |        |   |   |       |             |   |   | 26,088  |  
|Distributions ($0.60 per common share)    |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   |     |   |   |   | (12,087 | )      |   |   |       |             |   |   | (12,087 | )
|Distributions ($2.31 per preferred share) |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   |     |   |   |   | (6,938  | )      |   |   |       |             |   |   | (6,938  | )
|Unearned compensation amortization        |                                                     |                            |      |                 |   |              |   |            |   |          |       |              |   |               |    |               |   |               |        |        |   |   | 501  |   |   |   |        |        |   |   |       |             |   |   | 501     |  
|Comprehensive income (loss):              |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |        |   |   |      |   |   |   |         |        |   |   |        |             |   |   |         |  
|                                          | Net income                                          |                            |       |                |   |              |    |           |   |          |        |             |   |               |     |              |   |               |         |       |   |   |      |  |   |   |         | 902    |   |   |        |            |   |   |         |   |      
|                                          | Unrealized gain/loss on derivative instruments      |                            |       |                |   |              |    |           |   |          |        |             |   |               |     |              |   |               |         |       |   |   |      |  |   |   |         |       |   |   |        | 1,844       |   |   |         |   |      
|                                          |                                                     | Total comprehensive income |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |               |         |        |  |   |      |   |  |   |         |        |  |   |        |             |  |   |         |   | 2,746 | 
|                                          |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |        |   |   |      |   |   |   |         |        |   |   |        |             |   |   |         |  
|Balances at December 31, 2002             |                                                     |                            | 3,000 |                 |   | $            | 30 |            |   |          | 20,149 |              |   | $             | 201 |               |   | $             | 256,720 |        |   | $ | (596 | ) |   | $ | (61,840 | )      |   | $ |       |             |   | $ | 194,515 |  
|                                          |                                                     |                            |       |                 |   |              |    |            |   |          |        |              |   |               |     |               |   |               |         |        |   |   |      |   |   |   |         |        |   |   |        |             |   |   |         |  

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

50



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##### 



WINSTON HOTELS, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000($ in thousands)

|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |         |        |        |         |  
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------- | ----- | ------ | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------- | -
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       | 2002   |         | 2001    |        | 2000  
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |       
|Cash flows from operating activities:                   |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|                                                        | Net income                                                                                                      |                                                                                   | $                                        | 902                                                 |       |        | $       | 10,485  |        |        | $       | 15,055  |       
|                                                        |                                                                                                                 | Adjustments to reconcile net income to net cash provided by
operating activities: |                                          |                                                     |       |        |         |         |        |        |         |         |        |       
|                                                        |                                                                                                                 |                                                                                   | Minority interest                        |                                                     |       | (414   | )       |         |        | 272    |         |         |        | 625    |        
|                                                        |                                                                                                                 |                                                                                   | Depreciation                             |                                                     |       | 19,785 |         |         |        | 20,792 |         |         |        | 21,092 |        
|                                                        |                                                                                                                 |                                                                                   | Amortization                             |                                                     |       | 845    |         |         |        | 968    |         |         |        | 933    |        
|                                                        |                                                                                                                 |                                                                                   | Deferred income tax benefit              |                                                     |       | (7,325 | )       |         |        |       |         |         |        |       |        
|                                                        |                                                                                                                 |                                                                                   | Write off of note receivable             |                                                     |       | 250    |         |         |        |       |         |         |        |       |        
|                                                        |                                                                                                                 |                                                                                   | Earnings allocations from joint ventures |                                                     |       | (1,172 | )       |         |        |       |         |         |        |       |        
|                                                        |                                                                                                                 |                                                                                   | Unearned compensation amortization       |                                                     |       | 501    |         |         |        | 427    |         |         |        | 458    |        
|                                                        |                                                                                                                 |                                                                                   | Loss on sale of properties               |                                                     |       | 764    |         |         |        | 682    |         |         |        | 850    |        
|                                                        |                                                                                                                 |                                                                                   | Changes in assets and liabilities:       |                                                     |       |        |         |         |        |        |         |         |        |        |        
|                                                        |                                                                                                                 |                                                                                   |                                          | Lease revenue receivable                            |       |        | 4,786   |         |        |        | 2,341   |         |        |        | 484     |  
|                                                        |                                                                                                                 |                                                                                   |                                          | Accounts receivable                                 |       |        | (1,958  | )       |        |        |        |         |        |        |        |  
|                                                        |                                                                                                                 |                                                                                   |                                          | Prepaid expenses and other assets                   |       |        | (1,971  | )       |        |        | 677     |         |        |        | (1,137  | )
|                                                        |                                                                                                                 |                                                                                   |                                          | Deferred percentage lease revenue                   |       |        | (1,226  | )       |        |        | 727     |         |        |        | 499     |  
|                                                        |                                                                                                                 |                                                                                   |                                          | Accounts payable and accrued expenses               |       |        | 5,348   |         |        |        | (23     | )       |        |        | 730     |  
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|                                                        |                                                                                                                 |                                                                                   |                                          | Net cash provided by operating activities           |       |        | 19,115  |         |        |        | 37,348  |         |        |        | 39,589  |  
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|Cash flows from investing activities:                   |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|                                                        | Note receivable                                                                                                 |                                                                                   |                                          | (1,750                                              | )     |        |         | (2,436  | )      |        |         | (1,080  | )     
|                                                        | Investment in joint ventures                                                                                    |                                                                                   |                                          | (1,103                                              | )     |        |         | (502    | )      |        |         | (6,999  | )     
|                                                        | Distributions from joint ventures                                                                               |                                                                                   |                                          | 1,331                                               |       |        |         | 1,029   |        |        |         |        |       
|                                                        | Deferred acquisition costs                                                                                      |                                                                                   |                                          | (209                                                | )     |        |         |        |        |        |         | (240    | )     
|                                                        | Refund of deferred acquisition costs                                                                            |                                                                                   |                                          |                                                    |       |        |         | 220     |        |        |         |        |       
|                                                        | Sale of hotel properties and land parcel                                                                        |                                                                                   |                                          | 13,257                                              |       |        |         | 4,308   |        |        |         | 5,461   |       
|                                                        | Proceeds from lawsuit settlement                                                                                |                                                                                   |                                          |                                                    |       |        |         | 850     |        |        |         |        |       
|                                                        | Investment in hotel properties                                                                                  |                                                                                   |                                          | (5,182                                              | )     |        |         | (9,436  | )      |        |         | (7,373  | )     
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|                                                        |                                                                                                                 |                                                                                   |                                          | Net cash provided by (used in) investing activities |       |        | 6,344   |         |        |        | (5,967  | )       |        |        | (10,231 | )
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|Cash flows from financing activities:                   |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|                                                        | Payment of distributions to minority interest                                                                   |                                                                                   |                                          | (779                                                | )     |        |         | (1,454  | )      |        |         | (1,454  | )     
|                                                        | Payment of distributions to shareholders                                                                        |                                                                                   |                                          | (18,542                                             | )     |        |         | (25,887 | )      |        |         | (25,839 | )     
|                                                        | Common stock issuance                                                                                           |                                                                                   |                                          | 26,897                                              |       |        |         |        |        |        |         |        |       
|                                                        | Long term debt payments                                                                                         |                                                                                   |                                          | (1,278                                              | )     |        |         | (1,188  | )      |        |         | (1,103  | )     
|                                                        | Net decrease in line of credit borrowing                                                                        |                                                                                   |                                          | (30,600                                             | )     |        |         | (900    | )      |        |         | (700    | )     
|                                                        | Fees paid in connection with new financing facilities                                                           |                                                                                   |                                          | (534                                                | )     |        |         | (1,232  | )      |        |         | (123    | )     
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|                                                        |                                                                                                                 |                                                                                   |                                          | Net cash used in financing activities               |       |        | (24,836 | )       |        |        | (30,661 | )       |        |        | (29,219 | )
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|Net increase in cash                                    |                                                                                                                 |                                                                                   | 623                                      |                                                     |       |        | 720     |         |        |        | 139     |        
|Cash at beginning of year                               |                                                                                                                 |                                                                                   | 887                                      |                                                     |       |        | 167     |         |        |        | 28      |        
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|Cash at end of year                                     |                                                                                                                 | $                                                                                 | 1,510                                    |                                                     |       | $      | 887     |         |        | $      | 167     |        
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|Supplemental disclosure:                                |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|                                                        |                                                                                                                 | Cash paid for interest                                                            |                                          | $                                                   | 9,860 |        |         | $       | 13,193 |        |         | $       | 12,896 |       
|                                                        |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|Summary of non-cash investing and financing activities: |                                                                                                                 |                                                                                   |                                          |                                                     |       |        |         |         |        |        |         |        
|                                                        | Distributions declared but not paid                                                                             |                                                                                   | $                                        | 4,951                                               |       |        | $       | 4,468   |        |        | $       | 6,828   |       
|                                                        | Interest rate swap adjustment to market value                                                                   |                                                                                   |                                          | (1,844                                              | )     |        |         | 1,844   |        |        |         |        |       
|                                                        | Contribution of land parcel to joint venture                                                                    |                                                                                   |                                          |                                                    |       |        |         |        |        |        |         | 1,518   |       
|                                                        | Adjustment to minority interest due to issuance of common stock and
change in other comprehensive income (loss) |                                                                                   |                                          | 538                                                 |       |        |         | 115     |        |        |         | (19     | )     
|                                                        | Deferred equity compensation                                                                                    |                                                                                   |                                          | 555                                                 |       |        |         | 198     |        |        |         | 705     |       

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

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WINSTON HOTELS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS($ in thousands, except per share amounts)

1.     Organization:

Winston Hotels, Inc. (WHI), headquartered in Raleigh, North Carolina,
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 its 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
additional hotel properties. These ten hotels were acquired from affiliates of
WHI. WHI and the Partnership (collectively the Company) began operations as
a REIT on June 2, 1994. As of December 31, 2002, WHIs ownership in the
Partnership was 93.95%.

As of December 31, 2002, the Company owned or was invested in 52 hotel
properties in 17 states having an aggregate of 7,200 rooms. This included 44
wholly owned properties with 6,141 rooms, a 49 percent ownership in three joint
venture hotels with 453 rooms, a 13.05 percent ownership interest in two joint
venture hotels with 215 rooms (collectively, the Joint Venture Hotels), and a
mezzanine financing interest in three hotels with 391 rooms. The Company does
not hold an ownership interest in any of the hotels for which it has provided
mezzanine financing. All of the Companys hotels are operated under franchises
from nationally recognized franchisors including Marriott International, Inc.,
Hilton Hotels Corporation, Six Continents PLC and Choice Hotels International.

Prior to January 1, 2001, under the REIT qualification requirements of the
Internal Revenue Code, REITs generally were required to lease their hotels to
third party operators. Under the REIT Modernization Act of 1999 (the RMA),
which became effective January 1, 2001, a REIT is permitted to lease hotels to
wholly owned taxable REIT subsidiaries of the REIT (TRS Lessees). Under the
RMA, the TRS Lessees may not operate the leased hotels and must enter into
management agreements with eligible independent contractors who manage the
hotels.

Effective July 1, 2002, the Company, through its TRS Lessee, Barclay
Hospitality Services Inc. (Barclay), acquired the leasehold interests for 47
of its hotels from CapStar Winston Company, L.L.C., a wholly owned subsidiary
of MeriStar Hotels & Resorts, Inc. (MeriStar). MeriStar has since merged
with and become Interstate Hotels & Resorts, Inc. (Interstate). The
acquisition included leasehold interests for 45 wholly owned hotels and two
joint venture hotels. Simultaneous with acquiring the leasehold interests,
Barclay entered into new management contracts with Interstate for 39 of the 47
hotels covered by the leases. These five-year contracts are terminable by
Barclay after June 30, 2003, subject to certain conditions and limitations.
The Company sold two of the 39 hotels during the third and fourth quarters of
2002 and signed new management contracts for another two, one with Sage Client
453, LLC, an affiliate of Sage Hospitality Resources, LLC (Sage) and one with
Noble Investment Group, Ltd., (Noble). As of December 31, 2002, Interstate
managed 35 of the Companys hotels, Interstate Management and Investment
Corporation (IMIC) headquartered in Columbia, South Carolina (unrelated to
and unaffiliated with Interstate) managed six hotels, Concord Hospitality
Enterprises Company (Concord) managed two hotels, and Promus Hotels, Inc., an
affiliate of Hilton Hotels Corporation (Hilton), Sage, and Noble each managed
one hotel. Three other hotels, in which the Company has an ownership interest,
including two wholly owned properties and one joint venture property, continue
to be operated under long-term leases with third parties. Under the terms of
the leases, the lessees are obligated to pay the Company the greater of base
rent or percentage rent. The leases are designed to allow the Company to
participate in the growth in revenues at the hotels by requiring that a portion
of each hotels room revenues in excess of specified amounts be paid to the
Company as percentage rent.

The acquisition of the leasehold interests from Interstate entitles
Barclay to retain the operating profits or losses from the related hotels,
which previously accrued to Interstate under the leases and gives the Company
(i) more control over the operations of these hotels, (ii) the benefits from
any operating margin improvements and risk of any operating margin
deterioration at these hotels, and (iii) more flexibility, in that these hotels
are no longer encumbered by long term leases that are difficult to amend and
expensive to terminate. All of these hotels continue to operate under the same
franchise affiliations as prior to the acquisition of the leasehold interests.
As a result of the acquisition of the leases, the Company began recording the
operations of the hotels in its consolidated financial statements as of July 1,
2002. Accordingly, the lease revenue paid by Barclay, as lessee, to the
Company is eliminated in consolidation.

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,

52



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##### 



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. The Company expenses repairs
and maintenance costs of the hotels as they are incurred.

The Company evaluates long-lived assets for potential impairment in
accordance with Statement of Financial Accounting Standard No. 144 by analyzing
the operating results, trends and prospects for the Company and considering any
other events and circumstances that might indicate potential impairment.

Investment in Joint Venture Properties.Investment in joint venture
properties consists of the Companys direct cash or land contributions to the
joint ventures as well as capitalized internal costs of services provided by
the Company during the development stage. These internal costs are capitalized
at the same percentage as the Companys ownership interest in each joint
venture, with the remaining amount expensed. The Company has provided
development and purchasing services during the construction of the hotels, and,
upon opening of the hotels, provides on-going asset management services to the
joint ventures. The Company receives fees for these services, a percentage of
which are recognized as a reduction in the investment in joint venture
properties based on the Companys ownership interest, and the remainder of
which are recognized as revenue. The Company uses the equity method to
recognize its share of net income or loss of the unconsolidated joint ventures
it has invested in.

The Company evaluates its investment in joint venture properties for
potential impairment in accordance with Accounting Principles Board Opinion No.
18 (APB 18), The Equity Method of Accounting for Investments in Common Stock.
The Company analyzes the operating results, trends and prospects of the joint
venture properties and considers any other events and circumstances that might
indicate potential impairment.

Revenue Recognition and Impact of SAB 101.Staff Accounting Bulletin
No. 101 (SAB 101) was issued by the Securities and Exchange Commission in
December 1999 and adopted by the Company effective January 1, 2000. SAB 101
requires that a lessor not recognize contingent rental income until the lessee
has achieved annual specified hurdles. The Company accounted for SAB 101 as a
change in accounting principle effective January 1, 2000, and recognized the
related deferred revenue during 2000. As of December 31, 2002 and 2001, two
and 48 of the Companys wholly owned hotels were leased to third party lessees,
respectively. SAB 101 has no impact on the Companys interim or annual cash
flow from its third party lessees, and therefore, on its ability to pay
dividends.

Recently Issued Accounting Standards. In April 2002, the FASB issued
Statement of Financial Accounting Standard No. 145, (SFAS No. 145) which
provides further guidance on early extinguishment of debt. SFAS No. 145
rescinds SFAS Statement No. 4, Reporting Gains and Losses from Extinguishment
of Debt, and an amendment of that Statement, SFAS No. 64, Extinguishments of
Debt to Satisfy Sinking-Fund Requirements, SFAS No. 44, Accounting for
Intangible Assets of Motor Carriers, and SFAS No. 13, Accounting for Leases.
The Companys adoption of SFAS No. 145 is not expected to have a material
impact on the Companys financial statements or results of operations.

In June 2002, the FASB issued Statement of Financial Accounting Standard
No. 146, Accounting for Costs Associated with Exit or Disposal Activities,
(SFAS No. 146) which addresses financial accounting and reporting for costs
associated with exit or disposal activities. The Companys adoption of SFAS
No. 146 is not expected to have a material impact on the Companys financial
statements or results of operations.

In July, 2002, the FASB issued SFAS No. 147 Acquisitions of Certain
Financial Institutions (SFAS No. 147) which is effective for certain
transactions arising on or after October 1, 2002. SFAS No. 147 will have no
impact on the Company.

In December, 2002, the FASB issued SFAS No. 148 Accounting for
Stock-Based Compensation  Transition and Disclosure (SFAS No. 148). SFAS
No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of Statement 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The Company has adopted the
disclosure requirements of SFAS No. 148. The Company currently accounts for
stock-based employee compensation in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees and related interpretations.
Accordingly, the alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee compensation
mandated by SFAS No. 148 are not applicable to the Company at this time.

FASB Interpretation No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FASB (FIN 45), was issued in November 2002. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This Interpretation does not prescribe a specific
approach for subsequently measuring the guarantors recognized liability over
the term of the related guarantee.

53



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The initial recognition and initial measurement provisions of this
Interpretation are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor  ́s fiscal
year-end. The disclosure requirements in this Interpretation are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has made the disclosures required by FIN 45.

FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51 (ARB No.
51), was issued in January 2003. This Interpretation clarifies the application
of ARB No. 51, Consolidated Financial Statements, to certain entities in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other
parties. FIN 46 also addresses consolidation by business enterprises of
variable interest entities, which have one or both of the following
characteristics:

1.     The equity investment at risk is not sufficient to permit the entity to
finance its activities without additional subordinated financial support from
other parties, which is provided through other interests that will absorb some
or all of the expected losses of the entity.

2.     The equity investors lack one or more of the following essential
characteristics of a controlling financial interest:

a.     The direct or indirect ability to make decisions about the entitys
activities through voting rights or similar rights,

b.     The obligation to absorb the expected losses of the entity if they occur,
which makes it possible for the entity to finance its activities, or

c.     The right to receive the expected residual returns of the entity if they
occur, which is the compensation for the risk of absorbing the expected losses.

This Interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities and, thus, to improve
comparability between enterprises engaged in similar activities even if some of
those activities are conducted through variable interest entities. Including
the assets, liabilities, and results of activities of variable interest
entities in the consolidated financial statements of their primary
beneficiaries will provide more complete information about the resources,
obligations, risks, and opportunities of the consolidated enterprise.
Disclosures about variable interest entities in which an enterprise has a
significant variable interest but does not consolidate will help financial
statement users assess the enterprise  ́s risks.

This Interpretation requires existing unconsolidated variable interest
entities to be consolidated by their primary beneficiaries if the entities do
not effectively disperse risks among parties involved.

This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003.

The Company is in the process of evaluating the provisions of FIN 46 and
its effect on the joint ventures disclosed in Note 11.

Derivative Financial Instruments.The Company recognizes all derivative
financial instruments as assets and liabilities and measures them at fair
value. For derivative financial instruments that are designated and qualify as
a cash flow hedge, the effective portions of changes in fair value of the
derivative are recorded in accumulated other comprehensive income and are
recognized in the income statement when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges are
recognized currently in earnings. Changes in the fair value of derivatives
that do not qualify for hedge treatment are recognized currently in earnings.

Deferred Expenses.Included in deferred expenses are franchise fees, loan
costs and acquisition costs which are recorded at cost. Amortization of
franchise fees is computed using the straight-line method over the term of the
related franchise agreement. 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.

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

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adjustment to additional paid-in capital. Income (loss) is allocated to minority interest based on the weighted
average percentage ownership throughout the year.

Earnings Per Share.Net income (loss) per common share is computed by
dividing net income (loss) applicable to common shareholders by the
weighted-average number of common shares outstanding during the period. Net
income (loss) per common share assuming dilution is computed by dividing net
income (loss) 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 8
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. For
federal income tax purposes, 2002 distributions amounted to $0.60 per common
share.

Stock-based Compensation.At December 31, 2002, the Company has one
stock-based employee compensation plan, which is described more fully in Note
10. The Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. No stock-based employee compensation cost is
reflected in net income for the issuance of options, as all options granted
under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income (loss) applicable to common shareholders and earnings
(loss) per share as if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

|                                                                                                                                            |  |                         |        |      |  |      |       |  |  |   |       | 
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                                                                            |  | Year Ended December 31,
|                                                                                                                                            |  |                        
|                                                                                                                                            |  | 2002                    |        | 2001 |  | 2000
|                                                                                                                                            |  |                         |        |      |  |     
|Net income (loss) applicable to common shareholders, as reported                                                                            |  | $                       | (6,036 | )    |  | $    | 3,547 |  |  | $ | 8,117 | 
|Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effects |  |                         | 90     |      |  |      | 143   |  |  |   | 150   | 
|                                                                                                                                            |  |                         |        |      |  |      |       |  |  |   |       | 
|Pro forma net income (loss) applicable to common shareholders                                                                               |  |                         | (6,126 | )    |  |      | 3,404 |  |  |   | 7,967 | 
|Earnings (loss) per share:                                                                                                                  |  |                         |        |      |  |      |       |  |  |   |       | 
|Basic and diluted  as reported                                                                                                             |  | $                       | (0.31  | )    |  | $    | 0.21  |  |  | $ | 0.48  | 
|                                                                                                                                            |  |                         |        |      |  |      |       |  |  |   |       | 
|Basic and diluted  pro forma                                                                                                               |  | $                       | (0.32  | )    |  | $    | 0.20  |  |  | $ | 0.47  | 
|                                                                                                                                            |  |                         |        |      |  |      |       |  |  |   |       | 

Income Taxes.The Company qualifies as a REIT under Sections 856 to 860
of the Internal Revenue Code. Effective July 1, 2002, under the REIT
Modernization Act, the Company began leasing its hotels to a wholly owned
taxable REIT subsidiary that is subject to federal and state income taxes. The
Company accounts for income taxes of this subsidiary in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. Under SFAS 109, the Company accounts for income
taxes using the asset and liability method under which deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases.

Earnings and profits, which determine the taxability of distributions to
shareholders, differ from net income reported for financial reporting purposes
due primarily 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. For federal income tax purposes, approximately
41%, 39%, and 20% of the distributions declared on WHIs Common Stock in 2002,
2001, and 2000, respectively, are considered to be return of capital.

Concentration of Credit Risk.Financial instruments that potentially
subject the Company to concentration of credit risk consist principally of
cash, accounts receivable and notes receivable. The Company places cash
deposits at federally insured depository institutions. At December 31, 2002,
bank account balances exceeded federal depository insurance limits by
approximately $2,092.

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.

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3.     Notes Receivable:

In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan
for the purchase and conversion of a historic office building into a 116-room
Hampton Inn & Suites hotel in Baltimore, MDs Inner Harbor (the Baltimore
Hotel). Subsequently, the Company entered into a joint venture agreement (the
Hall Joint Venture), with an affiliate of Hall Financial Group, (Hall).
The Company assigned the $3,500 mezzanine loan to the Hall Joint Venture and
retained a 50% interest (or $1,750) in the note through the joint venture. The
total cost of the Baltimore Hotel, which is scheduled to open in the first
quarter of 2004, is expected to be approximately $19,000. The Company owns 50%
of the Hall Joint Venture, and Hall owns the remaining 50%. The Company is
paid interest monthly on its $1,750 share of the $3,500 mezzanine loan, at an
annual interest rate of 30-day LIBOR plus 10.21% from the date the loan was
issued through the date the hotel opens. The Company also accrues interest
monthly (Accrued Interest) at an annual rate of 12% during this same time.
Once the hotel opens, the Company will receive monthly principal and interest
payments based on a 10-year amortization period and an annual interest rate of
30-day LIBOR plus 10.21% until the earliest of (a) prepayment of the loan, (b)
the initial maturity date of October 29, 2005, or (c) the earlier of (1) 60
days before the maturity date of the borrowers construction loan, or (2) the
prepayment of the construction loan. Additional interest will accrue monthly
on the loan at a rate of 8% of gross monthly revenues for one year after the
hotel opening date, and at a rate of 10% of gross monthly revenues thereafter
through October 29, 2005; 4% of the gross monthly revenues will be paid
quarterly and the balance will accrue (Accrued Participation). The Accrued
Interest and the Accrued Participation constitute the Aggregate Accrued
Amount. The Disposition Fee associated with the loan equals the greater of
(1) the Aggregate Accrued Amount, (2) 50% of the appreciation in the fair
market value (FMV) of the hotel if the loan is repaid during the first 30
months after the loan was issued, and (3) 60% of the appreciation in the FMV of
the hotel if the loan is repaid thereafter. The repayment amount of the loan
shall equal the outstanding principal balance of the loan, plus (i) all Accrued
Interest, (ii) accrued and unpaid monthly interest, (iii) Accrued
Participation, and (iv) the Disposition Fee; provided however, if that sum does
not provide the Hall Joint Venture with an internal rate of return of 23%, then
the repayment amount will equal the outstanding principal balance of the loan,
plus the amount necessary to give the Hall Joint Venture an internal rate of
return of 23%. The Baltimore Hotel is owned 100% by a single purpose entity
(the Borrower) unaffiliated with the Company. The Company holds collateral
equal to 80% of the ownership interest in the Borrower. The Borrower made an
initial equity investment equal to approximately 20% of the total cost of the
respective hotel, and there are certain default provisions under which the
Company may declare the loan immediately due and payable or may step in and
take control of the Borrower, including for failure to maintain specified debt
coverage ratios. Shaffin Jetha, principal of the company who will develop the
hotel, has unconditionally guaranteed the loan for the benefit of the Company.

In 2001 and 2000, the Company made three mezzanine loans totaling $3,516
to third party hotel owners. During 2001, the Company provided $2,186 in
mezzanine financing to Noble Investments  Tampa, LLC to develop a Hilton
Garden Inn in Tampa, FL (the Tampa Hotel). The Company receives monthly
interest at annual rates based on 30-day LIBOR plus 8.44% until the earliest of
(a) prepayment of the loan, (b) the initial maturity date of January 1, 2004,
or (c) the earlier of (1) 60 days before the maturity date of the borrowers
qualified refinancing, or (2) February 1, 2006. During 2000, the Company
provided $1,080 in mezzanine financing to Noble Investments  Sugarloaf, LLC to
develop a Hilton Garden Inn in Atlanta (Sugarloaf), GA (the Sugarloaf Hotel).
The Company receives monthly interest at annual rates based on 30-day LIBOR
plus 7.36% until the earlier of (a) prepayment of the loan or (b) June 30,
2005. Both loans are subject to prepayment penalties during the first three
years. When each hotel opened, the Company began to earn interest equal to 2%
of gross revenues, 25% of which is paid monthly and the remainder is accrued
(Accrued Interest). On the earlier of prepayment or the maturity date of
each loan, the Company will also receive the greater of the Accrued Interest
or, with respect to the Tampa Hotel, 20% of the appreciation in value, and with
respect to the Sugarloaf Hotel, 15% of the appreciation in value. In addition
to earning interest income, the Company also provided development and
purchasing services to Noble during each hotels construction stage for
additional fee income. The Company co-developed the Sugarloaf Hotel and
developed the Tampa Hotel. During 2001 and 2000, these fees totaled $645 and
$137, respectively. Both the Tampa Hotel and the Sugarloaf Hotel are owned
100% by unaffiliated single purpose entities (the Borrowers). The Company
holds collateral equal to 100% of the ownership interest in the Borrowers. The
Borrowers made initial equity investments equal to 20% of the total cost of the
respective hotel, and there are certain default provisions under which the
Company may declare the loan immediately due and payable or may step in and
take control of the Borrowers, including for failure to maintain specified debt
coverage ratios. Noble Investments LLC and the Noble Company, LLC each
unconditionally guaranteed the loan for the benefit of the Company. The
Atlanta (Sugarloaf) project opened during the second quarter of 2001, and the
Tampa project opened during the first quarter of 2002. In 2001, the Company
also provided mezzanine financing totaling $250, which represents a
participating interest in a $5,478 mezzanine loan to the owner of a 769-room
resort hotel in Orlando, FL. This loan was written off as uncollectible in
2002 due to the severe impact on the Orlando area of the terrorist events of
September 11, 2001 and the resulting poor economic conditions.

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4.     Deferred Expenses:

At December 31, 2002 and 2001 deferred expenses consisted of:

|                              |  |      |       |      |  |   |       | 
|----------------------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                              |  | 2002 |       | 2001
|                              |  |      |       |     
|Franchise fees                |  | $    | 1,592 |      |  | $ | 1,552 | 
|Debt facility fees            |  |      | 3,567 |      |  |   | 3,305 | 
|                              |  |      |       |      |  |   |       | 
|                              |  |      | 5,159 |      |  |   | 4,857 | 
|Less accumulated amortization |  |      | 2,205 |      |  |   | 1,452 | 
|                              |  |      |       |      |  |   |       | 
|Deferred expenses, net        |  | $    | 2,954 |      |  | $ | 3,405 | 
|                              |  |      |       |      |  |   |       | 

5.     Debt:

The Companys outstanding debt balance as of December 31, 2002 consisted
of amounts due under two debt facilities.

On December 19, 2001, the Company amended and restated its previous
$140,000 line of credit with the same group of banks, led by Wachovia Bank,
N.A. The new $125,000, three-year line of credit (the Line) bears interest
at rates from LIBOR plus 1.75% to 2.50%, based on the Companys consolidated
debt leverage ratio. The Companys current rate is LIBOR plus 2.00%. A
commitment fee of 0.05% is also payable quarterly on the unused portion of the
Line. The Company used the proceeds from the Line to pay off the outstanding
balances under the previous $140,000 line of credit. The Company has
collateralized the Line with 30 of its hotels, with a carrying value of
$206,390 as of December 31, 2002. The 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, all of which the Company was in compliance
with as of December 31, 2002.

On December 18, 2000, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the Line. This swap
matured on December 18, 2002. This transaction effectively replaced the
Companys variable interest rate based on 30-day LIBOR on $50,000 of the Line
with a fixed interest rate of 5.915% until December 18, 2002.

On January 31, 2003, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the Line. This swap begins
on March 31, 2003 and matures on February 27, 2004. This transaction
effectively replaces the Companys variable interest rate based on 30-day LIBOR
on $50,000 of the Line with a fixed interest rate of 1.505%. The Lines
interest rate spread is currently 2.00%, equaling a fixed rate of 3.505% on
$50,000 from March 31, 2003 through February 27, 2004.

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 hotels, with a
carrying value of $113,649 as of December 31, 2002, 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, 2002, $66,406 was
outstanding. All unpaid principal and interest are due on December 1, 2008.
The loan agreement with GE Capital Corporation requires monthly principal and
interest payments of $519 and 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
$2,991 as of December 31, 2002 and are included in prepaid expenses and other
assets on the accompanying Consolidated Balance Sheets.

As of December 31, 2002 and 2001 the Companys outstanding debt balance
under its Line totaled $72,300 and $102,900, respectively. From January 1,
2001 through December 31, 2001, interest rates on $50,000 of outstanding debt
under the Line were at 5.915% plus 1.45%, with the remainder at LIBOR plus
1.45%. From January 1, 2002 through December 18, 2002, interest rates on
$50,000 of outstanding debt under the Line were at 5.915% plus 2.00%, or 5.915%
plus 2.25%, with the remainder at LIBOR plus 2.00% or 2.25%. Interest costs
were payable monthly in arrears. As of December 31, 2002 and 2001 the weighted
average interest rates on the outstanding balance under the Line were 6.45% and
6.88%, respectively. During the years ended December 31, 2002, 2001 and 2000,
the Company capitalized interest of $0, $0, and $26, respectively, related to
hotels under development or major renovation.

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As of December 31, 2002, the Companys future scheduled debt obligations are
as follows:

|           |  |        |         | 
|---------- |  | ------ | ------- | 
|Year       |  | Amount
|           |  |       
|2003       |  | $      | 1,376   | 
|2004       |  |        | 73,780  | 
|2005       |  |        | 1,593   | 
|2006       |  |        | 1,715   | 
|2007       |  |        | 1,846   | 
|Thereafter |  |        | 58,396  | 
|           |  |        |         | 
|           |  | $      | 138,706 | 
|           |  |        |         | 

6.     Income Taxes:

The Company has elected to be taxed as a REIT under the Internal Revenue
Code. To qualify as a REIT, the Company must meet a number of organizational
and operational requirements, including a requirement that it currently
distribute at least 90% of its taxable income to its shareholders. It is
managements current intention to adhere to these requirements and maintain the
Companys REIT status. As a REIT, the Company generally will not be subject to
corporate level federal income taxes on taxable income it distributes currently
to its shareholders. If the Company fails to qualify as a REIT in any taxable
year, it will be subject to federal income taxes at regular corporate rates
(including any applicable alternative minimum tax) and may not qualify as a
REIT for subsequent taxable years. 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 property, and to federal income and excise taxes on its
undistributed taxable income. In addition, taxable income from non-REIT
activities conducted through taxable REIT subsidiaries is subject to federal,
state and local income taxes.

Prior to July 1, 2002, the Company had not been required to provide for
federal income taxes because dividends paid deductions had been sufficient to
offset the REIT taxable income. Effective July 1, 2002, (under the RMA that
became effective January 1, 2001), the Company leases substantially all of its
hotels to its wholly owned taxable REIT subsidiary, Barclay Hospitality
Services Inc. (Barclay), which is subject to federal and state income taxes.
The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for
Income Taxes. Under SFAS 109, the Company accounts for income taxes using the
asset and liability method under which deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amount of existing assets and liabilities and
their respective tax bases.

The components of income tax benefit for the year ended December 31, 2002
are as follows:

|                   |         |   |       |       | 
|------------------ | ------- | - | ----- | ----- | 
|Deferred:          |         |   |       |      
|                   | Federal |   | $     | 6,748 | 
|                   | State   |   |       | 577   | 
|                   |         |   |       |      
|Income tax benefit |         | $ | 7,325 |      
|                   |         |   |       |      

The deferred tax benefit was calculated using an effective tax rate of 38
percent applied to the net loss of Barclay, and other temporary differences
primarily related to the acquisition of the leases from Interstate. The
deferred tax benefit relates mainly to the payment to acquire the operating
leases from Interstate effective July 1, 2002, which was expensed for financial
reporting purposes, whereas, for tax purposes, this payment will be amortized
over the remaining lives of the leases. The Company believes that Barclay will
generate sufficient future taxable income to realize in full this deferred tax
asset. Accordingly, no valuation allowance has been recorded as of December
31, 2002. As of December 31, 2002, the Company had net operating losses
totaling $2,553 for federal and state income tax purposes with expiration dates
through 2022.

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A reconciliation of the Companys statutory income tax rate to effective
tax rate for the year ended December 31, 2002 is as follows:

|                                          |  |  |      |  
|----------------------------------------- |  |  | ---- | -
|Statutory U.S. federal income tax benefit |  |  | 35   | %
|State income tax benefit                  |  |  | 3    | %
|Non-taxable REIT income                   |  |  | -151 | %
|                                          |  |  |      |  
|Effective tax rate                        |  |  | -113 | %
|                                          |  |  |      |  

The following table reconciles GAAP net income to taxable REIT income for
the years ended December 31, 2002, 2001, and 2000:

|                                                        |  |      |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                        |  | 2002 |        | 2001 |  | 2000
|                                                        |  |      |        |      |  |     
|GAAP net income                                         |  | $    | 902    |      |  | $    | 10,485 |   |  | $ | 15,055 |  
|Plus GAAP net loss on taxable subsidiary
included above |  |      | 11,940 |      |  |      |       |   |  |   |       |  
|                                                        |  |      |        |      |  |      |        |   |  |   |        |  
|GAAP net income from REIT operations                    |  |      | 12,842 |      |  |      | 10,485 |   |  |   | 15,055 |  
|Book / tax differences on depreciation and amortization |  |      | 4,392  |      |  |      | 4,314  |   |  |   | 3,470  |  
|Book / tax differences on deferred lease revenue        |  |      | (1,266 | )    |  |      | 727    |   |  |   | 499    |  
|Book / tax differences on loss on sale of property      |  |      | (831   | )    |  |      | (266   | ) |  |   | (135   | )
|Other book / tax differences, net                       |  |      | (954   | )    |  |      | 375    |   |  |   | 731    |  
|                                                        |  |      |        |      |  |      |        |   |  |   |        |  
|Taxable income subject to distribution requirement      |  | $    | 14,183 |      |  | $    | 15,635 |   |  | $ | 19,620 |  
|                                                        |  |      |        |      |  |      |        |   |  |   |        |  

7.     Derivative Instruments:

On January 1, 2001, the Company adopted SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, which establishes accounting
and reporting standards for derivative instruments. Specifically, SFAS No. 133
requires an entity to recognize all derivatives as either assets or liabilities
on the balance sheet and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either shareholders
equity or net income depending on whether the derivative instrument qualifies
as a hedge for accounting purposes and, if so, the nature of the hedging
activity.

In the normal course of business, the Company is exposed to the effect of
interest rate changes. The Company limits these risks by following established
risk management policies and procedures including the use of derivatives.
Derivatives are used primarily to fix the rate on debt based on floating-rate
indices and manage the cost of borrowing obligations. The Company does not use
derivatives for trading or speculative purposes. Further, the Company has a
policy of only entering into contracts with major financial institutions based
upon their credit ratings and other factors. The Company uses a variety of
methods and assumptions based on market conditions and risks existing at each
balance sheet date to determine the fair values of derivative instruments. All
methods of assessing fair value result in a general approximation of value, and
such value may never actually be realized.

As of January 1, 2001, the adoption of the new standard resulted in
derivative instruments reported on the Companys Consolidated Balance Sheets of
$1 in assets and $245 in liabilities; an adjustment of $(245) to Accumulated
other comprehensive income (loss), which are gains and losses not affecting
Distributions in excess of earnings in the Consolidated Statement of
Shareholders Equity; and an adjustment of $(17) recorded as a General and
administrative expense in the Consolidated Statements of Income.

The Companys financing facilities consist of a $125,000 variable rate
line of credit and a $71,000 fixed rate loan with a ten-year maturity and a
twenty-five-year amortization period. To reduce overall interest cost, the
Company uses interest rate instruments, typically an interest rate cap
agreement or an interest rate swap agreement, to convert a portion of its
variable-rate debt to fixed-rate debt. Interest rate differentials that arise
under these agreements are recognized in interest expense over the life of the
contracts.

As of December 31, 2002, the Company did not have any derivative financial
instruments. However, on January 31, 2003, the Company completed an interest
rate swap on $50,000 of its outstanding variable rate debt under the Line.
This swap begins on March 31, 2003 and matures on February 27, 2004. This
transaction effectively replaces the Companys variable interest rate based on
30-day LIBOR on $50,000 of the Line with a fixed interest rate of 1.505%. The
Lines interest rate spread is currently 2.00%, equaling a fixed rate of 3.505%
on $50,000 from March 31, 2003 through February 27, 2004.

59



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The interest rate swap agreement that begins on March 31, 2003 converts
variable payments to fixed payments and is, therefore, characterized as a cash
flow hedge. Cash flow hedges address the risk associated with future cash flows
of debt transactions. Derivative instruments are reported at their fair values
of and included in Accounts payable and accrued expenses on the Companys
Consolidated Balance Sheets. Offsetting adjustments are represented as
deferred gains or losses in Accumulated other comprehensive income (loss).
Over time, the unrealized gains and losses held in Accumulated other
comprehensive income (loss) will be reclassified into earnings in the same
periods in which the hedged interest payments affect earnings.

8.     Capital Stock:

On March 25, 2002, the Company completed a Common Stock offering, selling
2.75 million shares, which generated cash proceeds totaling $23,389. In
addition, on April 2, 2002, the Company sold an additional 412,500 Common
Shares generating cash proceeds of $3,508. The Company used the proceeds to
reduce its outstanding debt balance under the Line.

WHI has issued 3,000,000 shares of 9.25% Series A Cumulative Preferred
Stock. Except in the event of certain occurrences, the preferred shares were
not redeemable prior to September 28, 2001. Since that date, the preferred
shares have been 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, at the option of the Company, for an equivalent amount of 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. As of
December 31, 2002, the total number of partnership units outstanding was
1,298,480.

9.     Earnings Per Share:

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

|                                             |  |                         |        |      |  |      |        |  |  |   |        | 
|-------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                             |  | Year Ended December 31,
|                                             |  |                        
|                                             |  | 2002                    |        | 2001 |  | 2000
|                                             |  |                         |        |      |  |     
|Net income                                   |  | $                       | 902    |      |  | $    | 10,485 |  |  | $ | 15,055 | 
|Less: preferred shares distribution          |  |                         | 6,938  |      |  |      | 6,938  |  |  |   | 6,938  | 
|                                             |  |                         |        |      |  |      |        |  |  |   |        | 
|Net income applicable to common shareholders |  |                         | (6,036 | )    |  |      | 3,547  |  |  |   | 8,117  | 
|Plus: income allocation to minority interest |  |                         |       |      |  |      | 272    |  |  |   | 625    | 
|                                             |  |                         |        |      |  |      |        |  |  |   |        | 
|Net income assuming dilution                 |  | $                       | (6,036 | )    |  | $    | 3,819  |  |  | $ | 8,742  | 
|                                             |  |                         |        |      |  |      |        |  |  |   |        | 

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

|                                                           |                   |  |                         |  |      |  |        |  |  |  |        |  | 
|---------------------------------------------------------- | ----------------- |  | ----------------------- |  | ---- |  | ------ |  |  |  | ------ |  | 
|                                                           |                   |  | Year Ended December 31,
|                                                           |                   |  |                        
|                                                           |                   |  | 2002                    |  | 2001 |  | 2000  
|                                                           |                   |  |                         |  |      |  |       
|Weighted average number of common shares                   |                   |  | 19,308                  |  |      |  | 16,926 |  |  |  | 16,890 | 
|Weighted average partnership units with                    |                   |  |                        |  |      |  | 1,298  |  |  |  | 1,298  | 
|                                                           | redemption rights |  |                         |  |      |  |        |  |  |  |        |  | 
|Stock
options                                              |                   |  |                        |  |      |  | 15     |  |  |  |       | 
|                                                           |                   |  |                         |  |      |  |        |  |  |  |        | 
|Weighted average number of common shares
assuming dilution |                   |  | 19,308                  |  |      |  | 18,239 |  |  |  | 18,188 | 
|                                                           |                   |  |                         |  |      |  |        |  |  |  |        | 

As of December 31, 2002, there were 795,000 stock options outstanding
which were antidilutive (see Note 10).

60



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10.     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 Compensation Committee of the Company
determines the exercise price of an option. In the case of incentive stock
options, the exercise price cannot be 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. The number of securities that remain
available for future issuance under the Plan totaled 644,964 as of December 31,
2002.

During 2002, 2001 and 2000, the Company granted awards of Common Stock to
certain executive officers and Vice Presidents. The total numbers of shares
granted were 115,000, 28,000, and 81,000, respectively. These shares vest 20%
immediately and 20% on the anniversary of the grant date over each of the next
four years.

On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation (SFAS 123).
Under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations, and 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 2002, 2001 and 2000 net income
would have been a decrease of $90, $143, and $150, respectively, and a
corresponding decrease in net income (loss) 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 2000: dividend of $1.12; expected
volatility of 26.1%; risk-free interest rate of 5.5%, and an expected life of
five years for all options. The estimated weighted average fair value per
share, of the options granted in 2000 were $0.24. There were no options
granted in 2002 or 2001.

A summary of the status of stock options granted under the Plan as of
December 31, 2002, 2001 and 2000, and changes during the years ended on those
dates, is presented below:

|                                 |  |        |           |                |  |          |       |                |  |        |           |                |  |   |       |  |  |          |           |   |  |   |       | 
|-------------------------------- |  | ------ | --------- | -------------- |  | -------- | ----- | -------------- |  | ------ | --------- | -------------- |  | - | ----- |  |  | -------- | --------- | - |  | - | ----- | 
|                                 |  | 2002   |           | 2001           |  | 2000    
|                                 |  |        |           |                |  |         
|                                 |  |        |           |                |  | Weighted |       |                |  |        |           | Weighted       |  |   |       |  |  | Weighted
|                                 |  |        |           |                |  | Average  |       |                |  |        |           | Average        |  |   |       |  |  | Average 
|                                 |  | Shares |           | Exercise Price |  | Shares   |       | Exercise Price |  | Shares |           | Exercise Price
|                                 |  |        |           |                |  |          |       |                |  |       
|Outstanding at beginning
of year |  |        | 1,055,000 |                |  | $        | 11.13 |                |  |        | 1,100,000 |                |  | $ | 11.13 |  |  |          | 1,100,000 |   |  | $ | 11.25 | 
|Granted                          |  |        |          |                |  |          |      |                |  |        |          |                |  |   |      |  |  |          | 25,000    |   |  |   | 8.50  | 
|Exercised                        |  |        |          |                |  |          |      |                |  |        |          |                |  |   |      |  |  |          |          |   |  |   |      | 
|Forfeited                        |  |        | (260,000  | )              |  |          | 11.31 |                |  |        | (45,000   | )              |  |   | 11.04 |  |  |          | (25,000   | ) |  |   | 13.88 | 
|                                 |  |        |           |                |  |          |       |                |  |        |           |                |  |   |       |  |  |          |           |   |  |   |       | 
|Outstanding at end of year       |  |        | 795,000   |                |  | $        | 11.07 |                |  |        | 1,055,000 |                |  | $ | 11.13 |  |  |          | 1,100,000 |   |  | $ | 11.13 | 
|                                 |  |        |           |                |  |          |       |                |  |        |           |                |  |   |       |  |  |          |           |   |  |   |       | 
|Options exercisable
at year-end  |  |        | 730,500   |                |  |          |       |                |  |        | 790,750   |                |  |   |       |  |  |          | 638,500   |   |  |   |       | 
|                                 |  |        |           |                |  |          |       |                |  |        |           |                |  |   |       |  |  |          |           |   |  |   |       | 

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The following table summarizes information about the Plan at December 31, 2002:

|         |       |                     |         |                     |  |                          |         |         |  |                   |     |     | 
|-------- | ----- | ------------------- | ------- | ------------------- |  | ------------------------ | ------- | ------- |  | ----------------- | --- | --- | 
|Exercise |       |                     |         |                     |  |                          |         |         |  | Average Remaining
|Price    |       | Options Outstanding |         | Options Exercisable |  | Contractual Life (years)
|         |       |                     |         |                     |  |                         
|         | $8.50 |                     |         | 25,000              |  |                          |         | 12,500  |  |                   |     | 7.1 | 
|         | $8.75 |                     |         | 260,000             |  |                          |         | 208,000 |  |                   |     | 6.0 | 
|         | $9.38 |                     |         | 12,000              |  |                          |         | 12,000  |  |                   |     | 6.4 | 
|$10.00   |       |                     | 28,000  |                     |  |                          | 28,000  |         |  |                   | 1.4 |    
|$11.31   |       |                     | 50,000  |                     |  |                          | 50,000  |         |  |                   | 2.8 |    
|$11.38   |       |                     | 90,000  |                     |  |                          | 90,000  |         |  |                   | 3.0 |    
|$12.38   |       |                     | 50,000  |                     |  |                          | 50,000  |         |  |                   | 5.4 |    
|$13.19   |       |                     | 250,000 |                     |  |                          | 250,000 |         |  |                   | 5.0 |    
|$13.88   |       |                     | 30,000  |                     |  |                          | 30,000  |         |  |                   | 4.8 |    

11.     Commitments:

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

|                         |  |        |     | 
|------------------------ |  | ------ | --- | 
|Year ending December 31: |  | Amount
|                         |  |       
|2003                     |  | $      | 364 | 
|2004                     |  |        | 372 | 
|2005                     |  |        | 63  | 
|                         |  |        |     | 
|Total                    |  | $      | 799 | 
|                         |  |        |     | 

Rental expense for the years ended December 31, 2002, 2001 and 2000 was
$323, $327, and $193, respectively.

The Company has future lease commitments from its third party lessees
under the percentage leases through 2008. Minimum future rental payments
contractually due to the Company under these non-cancelable operating leases
are as follows:

|                         |  |        |       |        | 
|------------------------ |  | ------ | ----- | ------ | 
|Year ending December 31: |  | Amount
|                         |  |       
|2003                     |  |        | $     | 3,064  | 
|2004                     |  |        |       | 3,064  | 
|2005                     |  |        |       | 3,064  | 
|2006                     |  |        |       | 3,064  | 
|2007                     |  |        |       | 3,064  | 
|Thereafter               |  |        | 1,277 |       
|                         |  |        |       |       
|Total                    |  |        | $     | 16,597 | 
|                         |  |        |       |       

Effective July 1, 2002, the Company, through its TRS Lessee, Barclay,
acquired the leasehold interests for 47 of its hotels from Capstar Winston
Company, L.L.C., a wholly owned subsidiary of Meristar. Under the terms of the
percentage leases, the Companys third party lessees are obligated to pay the
Company the greater of base rents or percentage rents. The Company earned
minimum base rents of $19,145, $34,872, and $34,405 for the years ended
December 31, 2002, 2001 and 2000, respectively, and percentage rents of
$10,773, $19,883, and $28,025 for the years ended December 31, 2002, 2001, and
2000, respectively. The percentage rents are based on percentages of gross
room revenue and certain food and beverage revenues of the lessees.

Pursuant to the percentage leases, the Company is obligated to pay 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. This obligation is cumulative, in that any capital expenditures
made in one year in excess of the required limit shall serve as a credit for
future years.

For one of the hotels, the Company leases the land under an operating
lease, which expires on December 31, 2062. Expenses incurred in 2002, 2001 and
2000 related to this land lease totaled $307, $388, and $454, respectively.
Minimum future rental payments contractually due by the Company under this
lease are as follows: 2003  $110, 2004  $110, 2005 
$110, 2006  $110, 2007  $110, 2008 and thereafter  $6,050.

During the second quarter of 2002, the Company entered into a joint
venture agreement with Concord Lodging Investment Partners (Winston), LLC, an
affiliate of Concord Hospitality Enterprises Company (Concord), (the Concord
Joint Venture) to acquire

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existing poor performing hotels that are in receivership, closed, located within a site that could be redeveloped or that
could be repositioned or reflagged, or other hotel assets that are believed to
be solid investments. The Company purchased a 50% interest in the Concord
Joint Venture. The Concord Joint Venture subsequently purchased an operating
Fairfield Inn & Suites hotel in West Des Moines, IA, and a non-operating vacant
hotel in Beachwood, OH. The Fairfield Inn & Suites hotel has been converted
from a Wingate hotel and the Beachwood, OH hotel (Beachwood Courtyard) is
currently under renovation and expected to open as a Courtyard by Marriott in
April 2003.

During the fourth quarter of 2002, the Company entered into a joint
venture agreement with Charlesbank Capital Partners, LLC (Charlesbank) to
acquire more than $100,000 of hotel assets. Charlesbank is a private
investment firm that manages capital on behalf of a range of institutional
investors. The Company serves as the managing member of the joint venture,
(the Charlesbank Venture) which targets limited-service, upscale extended
stay, and small, full-service branded hotels in secondary and primary markets.
The Charlesbank Venture focuses on acquisitions that have turnaround or upside
potential and can benefit from additional capital and aggressive asset
management, which may include renovating, repositioning, rebranding, or a
change in management. Under the terms of the joint venture agreement,
Charlesbank will provide 85 percent and the Company will provide the remaining
15 percent of the total equity committed to each acquisition the entity
approves.

During the fourth quarter of 2002, the Charlesbank Venture and Concord
subsequently formed a new joint venture entity, WCC Project Company LLC. Both
the West Des Moines, IA Fairfield Inn & Suites hotel and the Beachwood
Courtyard were transferred from the Concord Joint Venture to WCC Project
Company LLC. Subsequent to Charlesbanks equity contribution in WCC Project
Company LLC, Charlesbanks ownership totals 73.95 percent, Concords ownership
was reduced from 50 percent to 13 percent and the Companys ownership was
reduced from 50 percent to 13.05 percent. As of December 31, 2002, the
Companys investment in the Charlesbank Joint Venture totaled $1,015. The
Company, through the Charlesbank Venture, receives cash distributions of any
operating profits from WCC Project Company LLC on a quarterly basis.

The Company and Concord have jointly signed a completion guarantee for the
Beachwood Courtyard, providing a guaranty to the lender of the full, complete
and satisfactory completion of the renovation of the property. Under the
completion guarantee, upon default by the borrower, the Company is required to
(a) immediately assume responsibility for the completion of the project at its
sole cost and expense, or (b) cure or cause the borrower to cure any such
default. Pursuant to the completion guarantee agreement, the construction
process to renovate the hotel is to be completed by June 26, 2003. The
renovation is under way and expected to be completed in April 2003. The
Company estimates that the total cost to renovate the Beachwood Courtyard will
be approximately $9,800, of which $6,400 had been incurred as of December 31,
2002.

During 2000, the Company entered a joint venture agreement with Marsh
Landing Investment, LLC (Marsh) to jointly develop an $8 million, 118-room
Hampton Inn in Ponte Vedra, FL. This hotel opened in December 2000. The
Company owns 49% of the joint venture, and Marsh, a company owned by Charles M.
Winston and James H. Winston, owns the remaining 51%. Both Charles M. Winston
and James H. Winston serve on the Companys Board of Directors. The Company is
providing on-going asset management services to the joint venture for
additional fee income. Marsh currently may offer the Company the right to
purchase Marshs interest in the joint venture and, if the Company refuses to
purchase the interest, Marsh may cause the joint venture to sell the hotel
owned by the joint venture to a third party. In addition, at the Companys
option, it has the right to acquire Marshs interest in the joint venture (1)
at any time after December 2005 or (2) if Marsh fails to sell the hotel
following the Companys rejection of an offer by Marsh to sell its interest in
the joint venture to the Company.

During 1999, the Company entered into a joint venture agreement with a
subsidiary of Regent Partners, Inc. (the Regent Joint Venture) to jointly
develop and own upscale hotel properties. The Regent Joint Venture consists of
two separate joint ventures, each of which owns one hotel. The first hotel, a
$16 million full-service 157-room Hilton Garden Inn in Windsor, CT, opened in
September 2000 and the second hotel, a $20 million full-service 178-room Hilton
Garden Inn in Evanston, IL, opened in July 2001. The Company provided
development and asset purchasing services during the construction of each hotel
for fees, and is providing on-going asset management services to generate
additional fee income. Regent currently may offer the Company the right to
purchase its interest in either of the Regent Joint Ventures and, if the
Company refuses to purchase the interest, Regent may cause the joint venture to
sell the hotel owned by the applicable joint venture to a third party. In
addition, at the Companys option, it has the right to acquire Regents
interest in either joint venture (1) at any time after 60 months following the
date the applicable hotel commenced operations or (2) if Regent fails to sell
the applicable hotel following the Companys rejection of an offer by Regent to
sell the Company its interest in that joint venture. The Company owns a 49%
ownership interest in the Regent Joint Venture.

Under the terms of the operating agreement for each joint venture, the
Company must approve all major decisions, including refinancing or selling the
respective hotels, making loans, changes in partners interests, entering into
material contracts, and purchasing or acquiring assets. The Company does not
have a controlling interest in any of the joint ventures.

As of December 31, 2002, the total assets of the Companys joint ventures
were $55,908, total liabilities were $34,108, and total equity was $21,800.
For the years ended December 31, 2002 and 2001, the total revenue of the
Companys joint ventures was $7,037 and $4,394, and total expenses were $4,666
and $3,326, resulting in net income of $2,371 and $1,068, respectively.
During the year

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ended December 31, 2002, the unaudited financial statements of
the joint ventures reflected aggregate cash flow provided by operating
activities of $4,793, cash used in investing activities of $11,544, principally
for hotel additions, and cash provided by financing activities of $7,627,
principally in the form of loan proceeds and capital contributions less
distributions to joint venture partners.

12.     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:

|                                                                                         |  |                                                                                                                 
|---------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|Class                                                                                    |  | Method                                                                                                          
|Cash, lease revenue receivable,
notes receivable, accounts
payable and accrued expenses: |  | Carrying amount approximates fair value.                                                                        
|                                                                                         |  |                                                                                                                 
|Interest rate swap agreement:                                                            |  | Fair value is estimated by obtaining quotes from brokers.                                                       
|Long-term debt:                                                                          |  | Fair value is estimated based on current rates offered to the
Company for debt of the same remaining maturities.
|Due to banks:                                                                            |  | Carrying amount approximates fair value.                                                                        

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

|             |                                                |  |          |        |       |  |          |        |       |  |   |         |  |  |   |         | 
|------------ | ---------------------------------------------- |  | -------- | ------ | ----- |  | -------- | ------ | ----- |  | - | ------- |  |  | - | ------- | 
|             |                                                |  | 2002     |        | 2001 
|             |                                                |  |          |        |      
|             |                                                |  | Carrying |        | Fair  |  | Carrying |        | Fair 
|             |                                                |  | Amount   |        | Value |  | Amount   |        | Value
|             |                                                |  |          |        |       |  |          |        |      
|Liabilities: |                                                |  |          |        |       |  |          |        |       |  |   |         |  |  |   |        
|             | Long-term debt                                 |  | $        | 66,406 |       |  | $        | 66,637 |       |  | $ | 67,684  |  |  | $ | 65,522  | 
|             | Due to banks                                   |  |          | 72,300 |       |  |          | 72,300 |       |  |   | 102,900 |  |  |   | 102,900 | 
|             | Interest rate swap
in a net liability position |  |          |       |       |  |          |       |       |  |   | 1,844   |  |  |   | 1,844   | 

13.     Discontinued Operations

The Company adopted Statement of Financial Accounting Standard No. 144
(SFAS No. 144) effective January 1, 2002 which requires, among other things,
that the operating results of certain real estate assets which have been sold
subsequent to January 1, 2002, or otherwise qualify as held for disposition (as
defined by SFAS No. 144), be included in discontinued operations in the
statements of operations for all periods presented. Four of our wholly owned
hotels were sold during 2002. The operating results for these four hotels are
included in discontinued operations in the statements of operations for all
periods presented. The Company has not allocated interest expense to the
results of the discontinued operations in accordance with EITF No. 87-24. The
Company had no assets that qualified as held for disposition as defined by SFAS
No. 144 at December 31, 2002. This change has resulted in certain
reclassifications to the 2001 and 2000 financial statement amounts.

Condensed financial information of the results of operations for the
hotels sold included in discontinued operations is as follows:

|                                                                                 |  |      |       |      |  |      |       |  |  |   |       | 
|-------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                 |  | 2002 |       | 2001 |  | 2000
|                                                                                 |  |      |       |      |  |     
|Total revenue                                                                    |  | $    | 1,898 |      |  | $    | 1,923 |  |  | $ | 2,079 | 
|Total expenses                                                                   |  |      | 1,731 |      |  |      | 1,279 |  |  |   | 1,286 | 
|                                                                                 |  |      |       |      |  |      |       |  |  |   |       | 
|Income (loss) from discontinued operations                                       |  |      | 167   |      |  |      | 644   |  |  |   | 793   | 
|Allocation to minority interest  income (loss) from
discontinued operations     |  |      | 10    |      |  |      | 46    |  |  |   | 57    | 
|Gain (loss) on sale of discontinued operations                                   |  |      | (764  | )    |  |      |      |  |  |   |       | 
|Allocation to minority interest  gain (loss) on sale of
discontinued operations |  |      | (45   | )    |  |      |      |  |  |   |       | 
|Income tax expense (benefit)                                                     |  |      | 116   |      |  |      |      |  |  |   |      | 
|                                                                                 |  |      |       |      |  |      |       |  |  |   |       | 
|Income (loss) from discontinued operations                                       |  |      | (678  | )    |  |      | 598   |  |  |   | 736   | 
|                                                                                 |  |      |       |      |  |      |       |  |  |   |       | 

64



---



##### 



14.     Quarterly Financial Data (Unaudited):

Summarized unaudited quarterly results of operations for the years ended
December 31, 2002 and 2001 are as follows:

|                                                                                                                                                |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ------ | ------ |  | ----- | ------- | ------ |  | - | ------ | - |  | - | ------ | -
|2002                                                                                                                                            |  | First |        | Second |  | Third |         | Fourth
|                                                                                                                                                |  |       |        |        |  |       |         |       
|Total revenue                                                                                                                                   |  | $     | 9,880  |        |  | $     | 10,146  |        |  | $ | 42,044 |   |  | $ | 30,274 |  
|Total expenses                                                                                                                                  |  |       | 11,231 |        |  |       | 28,058* |        |  |   | 31,623 |   |  |   | 28,841
|                                                                                                                                                |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|Income (loss) before loss on sale of properties,
allocation to minority interest, income taxes and
equity income of unconsolidated subsidiaries |  |       | (1,351 | )      |  |       | (17,912 | )      |  |   | 10,421 |   |  |   | 1,433  |  
|Loss on sale of property                                                                                                                        |  |       |       |        |  |       |        |        |  |   |       |   |  |   |       |  
|Income allocation to minority interest                                                                                                          |  |       | (208   | )      |  |       | (788    | )      |  |   | 547    |   |  |   | 72     |  
|Income
tax benefit                                                                                                                              |  |       |       |        |  |       | (6,714  | )*     |  |   | (461   | ) |  |   | (265   | )
|Equity in income of unconsolidated subsidiaries                                                                                                 |  |       | 5      |        |  |       | (56     | )      |  |   | 25     |   |  |   | 1,198  |  
|                                                                                                                                                |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                                                                                        |  |       | (1,138 | )      |  |       | (10,466 | )      |  |   | 10,360 |   |  |   | 2,824  |  
|Discontinued operations
Income (loss) from discontinued operations, net                                                                         |  |       | 44     |        |  |       | 97      |        |  |   | (20    | ) |  |   | (80    | )
|Loss on sale of discontinued operations                                                                                                         |  |       |       |        |  |       | (742    | )      |  |   | (622   | ) |  |   | 645    |  
|                                                                                                                                                |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|Net Income                                                                                                                                      |  |       | (1,094 | )      |  |       | (11,111 | )      |  |   | 9,718  |   |  |   | 3,389  |  
|Preferred stock distribution                                                                                                                    |  |       | (1,734 | )      |  |       | (1,734  | )      |  |   | (1,734 | ) |  |   | (1,736 | )
|                                                                                                                                                |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|Net income (loss) applicable to common shareholders                                                                                             |  | $     | (2,828 | )      |  | $     | (12,845 | )      |  | $ | 7,984  |   |  | $ | 1,653  |  
|                                                                                                                                                |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|Income (loss) per common share:                                                                                                                 |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|Basic and diluted:                                                                                                                              |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                                                                                        |  | $     | (0.16  | )      |  | $     | (0.61   | )      |  | $ | 0.43   |   |  | $ | 0.05   |  
|Income (loss) from discontinued operations                                                                                                      |  |       |       |        |  |       | (0.03   | )      |  |   | (0.03  | ) |  |   | 0.03   |  
|                                                                                                                                                |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  
|Net income (loss) per common share -
basic and diluted                                                                                          |  | $     | (0.16  | )      |  | $     | (0.64   | )      |  | $ | 0.40   |   |  | $ | 0.08   |  
|                                                                                                                                                |  |       |        |        |  |       |         |        |  |   |        |   |  |   |        |  



|* |  | - During the second quarter of 2002, the Company acquired the
leasehold interests for 47 of its hotels from Interstate. The acquisition cost
of $17,668 was expensed and a related income tax benefit of $6,714 was
recorded.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                                               |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ------ | ------ |  | ----- | ------ | ------ |  | - | ------ | - |  | - | ------ | -
|2001                                                                                                                                           |  | First |        | Second |  | Third |        | Fourth
|                                                                                                                                               |  |       |        |        |  |       |        |       
|Total revenue                                                                                                                                  |  | $     | 9,875  |        |  | $     | 10,931 |        |  | $ | 14,542 |   |  | $ | 19,674 |  
|Total expenses                                                                                                                                 |  |       | 11,795 |        |  |       | 11,113 |        |  |   | 11,007 |   |  |   | 10,835 |  
|                                                                                                                                               |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Income (loss) before loss on sale of properties,
allocation to minority interest and income taxes
equity income of unconsolidated subsidiaries |  |       | (1,920 | )      |  |       | (182   | )      |  |   | 3,535  |   |  |   | 8,839  |  
|Loss on sale of property                                                                                                                       |  |       |       |        |  |       | (682   | )      |  |   |       |   |  |   |       |  
|Income allocation to minority interest                                                                                                         |  |       | (263   | )      |  |       | (182   | )      |  |   | 126    |   |  |   | 545    |  
|Income tax benefit                                                                                                                             |  |       |       |        |  |       |       |        |  |   |       |   |  |   |       |  
|Equity in income of unconsolidated subsidiaries                                                                                                |  |       | (45    | )      |  |       | 41     |        |  |   | (36    | ) |  |   | 563    |  
|                                                                                                                                               |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                                                                                       |  |       | (1,702 | )      |  |       | (641   | )      |  |   | 3,373  |   |  |   | 8,857  |  
|Discontinued operations                                                                                                                        |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Income (loss) from discontinued operations, net                                                                                                |  |       | 6      |        |  |       | 29     |        |  |   | 172    |   |  |   | 391    |  
|Loss on sale of discontinued operations                                                                                                        |  |       |       |        |  |       |       |        |  |   |       |   |  |   |       |  
|                                                                                                                                               |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Net Income                                                                                                                                     |  |       | (1,696 | )      |  |       | (612   | )      |  |   | 3,545  |   |  |   | 9,248  |  
|Preferred stock distribution                                                                                                                   |  |       | (1,734 | )      |  |       | (1,734 | )      |  |   | (1,734 | ) |  |   | (1,736 | )
|                                                                                                                                               |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Net income (loss) applicable to common shareholders                                                                                            |  | $     | (3,430 | )      |  | $     | (2,346 | )      |  | $ | 1,811  |   |  | $ | 7,512  |  
|                                                                                                                                               |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Income (loss) per common share:                                                                                                                |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Basic and diluted:                                                                                                                             |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations                                                                                                       |  | $     | (0.20  | )      |  | $     | (0.14  | )      |  | $ | 0.10   |   |  | $ | 0.42   |  
|Income (loss) from discontinued operations                                                                                                     |  |       |       |        |  |       |       |        |  |   | 0.01   |   |  |   | 0.02   |  
|                                                                                                                                               |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  
|Net income (loss) per common share -
basic and diluted                                                                                         |  | $     | (0.20  | )      |  | $     | (0.14  | )      |  | $ | 0.11   |   |  | $ | 0.44   |  
|                                                                                                                                               |  |       |        |        |  |       |        |        |  |   |        |   |  |   |        |  

65



---



##### 



WINSTON HOTELS, INC
SCHEDULE III  REAL ESTATE AND ACCUMULATED DEPRECIATION
as of December 31, 2002
($ in thousands)

|                                  |  |               |    |      |  |                            |       |                                            |  |                                         |        |      |  |                           |     |       |  |                                                      |       |                                             |  |                      |       |                                                                  |  |   |        |  |  |   |        |  |  |   |       |  |  |   |        |  |  |          |  |  | 
|--------------------------------- |  | ------------- | -- | ---- |  | -------------------------- | ----- | ------------------------------------------ |  | --------------------------------------- | ------ | ---- |  | ------------------------- | --- | ----- |  | ---------------------------------------------------- | ----- | ------------------------------------------- |  | -------------------- | ----- | ---------------------------------------------------------------- |  | - | ------ |  |  | - | ------ |  |  | - | ----- |  |  | - | ------ |  |  | -------- |  |  | 
|                                  |  |               |    |      |  | Initial Cost               |       | Cost Capitalized Subsequent
to Acquisition |  | Gross AmountsCarried at Close of Period |        |      |  |                           |     |       |  |                                                      |       |                                             | 
|                                  |  |               |    |      |  |                            |       |                                            |  |                                         |        |      |  |                           |     |       |  |                                                      |       |                                             | 
|Description                       |  | Encum-brances |    | Land |  | Buildings
andImprove-ments |       | Land                                       |  | BuildingsandImprove-ments               |        | Land |  | BuildingsandImprove-ments |     | Total |  | Accumu-
latedDepreci-
ationBuildingsandImprove-ments |       | Net
BookValueLand,BuildingsandImprove-ments |  | Date
ofAcquisi-
tion |       | Life
UponWhichDepreci-iation inLatestIncomeStatement
is
Computed
|                                  |  |               |    |      |  |                            |       |                                            |  |                                         |        |      |  |                           |     |       |  |                                                      |       |                                             |  |                      |       |                                                                 
|Hampton Inn
Boone, NC             |  |               | (* | )    |  | $                          | 264   |                                            |  | $                                       | 2,750  |      |  | $                         | 115 |       |  | $                                                    | 737   |                                             |  | $                    | 379   |                                                                  |  | $ | 3,487  |  |  | $ | 3,866  |  |  | $ | 1,273 |  |  | $ | 2,593  |  |  | 6/2/94   |  |  | 
|Hampton Inn
Brunswick, GA         |  |               | (* | )    |  |                            | 716   |                                            |  |                                         | 3,887  |      |  |                           | 8   |       |  |                                                      | 813   |                                             |  |                      | 724   |                                                                  |  |   | 4,700  |  |  |   | 5,424  |  |  |   | 1,512 |  |  |   | 3,912  |  |  | 6/2/94   |  |  | 
|Hampton Inn
Cary, NC              |  |               | (* | )    |  |                            | 613   |                                            |  |                                         | 4,596  |      |  |                           | 4   |       |  |                                                      | 949   |                                             |  |                      | 617   |                                                                  |  |   | 5,545  |  |  |   | 6,162  |  |  |   | 1,858 |  |  |   | 4,304  |  |  | 6/2/94   |  |  | 
|Hampton Inn
Charlotte, NC         |  |               | #  |      |  |                            | 833   |                                            |  |                                         | 3,609  |      |  |                           | 34  |       |  |                                                      | 402   |                                             |  |                      | 867   |                                                                  |  |   | 4,011  |  |  |   | 4,878  |  |  |   | 1,237 |  |  |   | 3,641  |  |  | 6/2/94   |  |  | 
|Hampton Inn
Durham, NC            |  |               | (* | )    |  |                            | 634   |                                            |  |                                         | 4,582  |      |  |                           | 16  |       |  |                                                      | 1,070 |                                             |  |                      | 650   |                                                                  |  |   | 5,652  |  |  |   | 6,302  |  |  |   | 1,826 |  |  |   | 4,476  |  |  | 6/2/94   |  |  | 
|Hampton Inn & Suites
Gwinnett, GA |  |               | #  |      |  |                            | 557   |                                            |  |                                         | 6,959  |      |  |                           | 21  |       |  |                                                      | 155   |                                             |  |                      | 578   |                                                                  |  |   | 7,114  |  |  |   | 7,692  |  |  |   | 1,539 |  |  |   | 6,153  |  |  | 7/18/96  |  |  | 
|Hampton Inn
Hilton Head, SC       |  |               | (* | )    |  |                            | 310   |                                            |  |                                         | 3,969  |      |  |                           | 11  |       |  |                                                      | 990   |                                             |  |                      | 321   |                                                                  |  |   | 4,959  |  |  |   | 5,280  |  |  |   | 1,546 |  |  |   | 3,734  |  |  | 11/29/94 |  |  | 
|Hampton Inn
Jacksonville, NC      |  |               | (* | )    |  |                            | 473   |                                            |  |                                         | 4,140  |      |  |                           | 18  |       |  |                                                      | 518   |                                             |  |                      | 491   |                                                                  |  |   | 4,658  |  |  |   | 5,149  |  |  |   | 1,524 |  |  |   | 3,625  |  |  | 6/2/94   |  |  | 
|Hampton Inn
Las Vegas, NV         |  |               | (* | )    |  |                            | 856   |                                            |  |                                         | 7,945  |      |  |                           | 18  |       |  |                                                      | 199   |                                             |  |                      | 874   |                                                                  |  |   | 8,144  |  |  |   | 9,018  |  |  |   | 1,272 |  |  |   | 7,746  |  |  | 5/20/98  |  |  | 
|Hampton Inn
Perimeter , GA        |  |               | #  |      |  |                            | 914   |                                            |  |                                         | 6,293  |      |  |                           | 4   |       |  |                                                      | 141   |                                             |  |                      | 918   |                                                                  |  |   | 6,434  |  |  |   | 7,352  |  |  |   | 1,368 |  |  |   | 5,984  |  |  | 7/19/96  |  |  | 
|Hampton Inn
Raleigh, NC           |  |               | #  |      |  |                            | 697   |                                            |  |                                         | 5,955  |      |  |                           | 6   |       |  |                                                      | 1,329 |                                             |  |                      | 703   |                                                                  |  |   | 7,284  |  |  |   | 7,987  |  |  |   | 2,063 |  |  |   | 5,924  |  |  | 5/18/95  |  |  | 
|Hampton Inn
Southlake, GA         |  |               | (* | )    |  |                            | 680   |                                            |  |                                         | 4,065  |      |  |                           | 15  |       |  |                                                      | 692   |                                             |  |                      | 695   |                                                                  |  |   | 4,757  |  |  |   | 5,452  |  |  |   | 1,600 |  |  |   | 3,852  |  |  | 6/2/94   |  |  | 
|Hampton Inn
W. Springfield, MA    |  |               | #  |      |  |                            | 916   |                                            |  |                                         | 5,253  |      |  |                           | 6   |       |  |                                                      | 756   |                                             |  |                      | 922   |                                                                  |  |   | 6,009  |  |  |   | 6,931  |  |  |   | 1,136 |  |  |   | 5,795  |  |  | 7/14/97  |  |  | 
|Hampton Inn
White Plains, NY      |  |               | #  |      |  |                            | 1,382 |                                            |  |                                         | 10,763 |      |  |                           | 48  |       |  |                                                      | 438   |                                             |  |                      | 1,430 |                                                                  |  |   | 11,201 |  |  |   | 12,631 |  |  |   | 1,976 |  |  |   | 10,655 |  |  | 10/29/97 |  |  | 
|Hampton Inn
Wilmington, NC        |  |               | (* | )    |  |                            | 460   |                                            |  |                                         | 3,208  |      |  |                           | 25  |       |  |                                                      | 622   |                                             |  |                      | 485   |                                                                  |  |   | 3,830  |  |  |   | 4,315  |  |  |   | 1,291 |  |  |   | 3,024  |  |  | 6/2/94   |  |  | 
|Comfort Inn
Charleston, SC        |  |               | #  |      |  |                            | 438   |                                            |  |                                         | 5,853  |      |  |                           | 23  |       |  |                                                      | 2,415 |                                             |  |                      | 461   |                                                                  |  |   | 8,268  |  |  |   | 8,729  |  |  |   | 2,000 |  |  |   | 6,729  |  |  | 5/18/95  |  |  | 
|Comfort Inn
Chester, VA           |  |               | (* | )    |  |                            | 661   |                                            |  |                                         | 6,447  |      |  |                           | 5   |       |  |                                                      | 449   |                                             |  |                      | 666   |                                                                  |  |   | 6,896  |  |  |   | 7,562  |  |  |   | 1,989 |  |  |   | 5,573  |  |  | 11/29/94 |  |  | 

66



---



##### 



|                                        |  |               |    |      |  |                           |       |                                         |  |                                        |        |      |  |                           |      |       |  |                                                  |       |                                              |  |                    |       |                                                               |  |  |        |  |  |  |        |  |  |  |       |  |  |  |        |  |  |  |          |  |  |  |    | 
|--------------------------------------- |  | ------------- | -- | ---- |  | ------------------------- | ----- | --------------------------------------- |  | -------------------------------------- | ------ | ---- |  | ------------------------- | ---- | ----- |  | ------------------------------------------------ | ----- | -------------------------------------------- |  | ------------------ | ----- | ------------------------------------------------------------- |  |  | ------ |  |  |  | ------ |  |  |  | ----- |  |  |  | ------ |  |  |  | -------- |  |  |  | -- | 
|                                        |  |               |    |      |  | Initial Cost              |       | CostCapitalizedSubsequentto Acquisition |  | Gross AmountsCarried atClose of Period |        |      |  |                           |      |       |  |                                                  |       |                                              |  |                   
|                                        |  |               |    |      |  |                           |       |                                         |  |                                        |        |      |  |                           |      |       |  |                                                  |       |                                             
|Description                             |  | Encum-brances |    | Land |  | BuildingsandImprove-ments |       | Land                                    |  | BuildingsandImprove-ments              |        | Land |  | BuildingsandImprove-ments |      | Total |  | AccumulatedDepreciationBuildingsandImprove-ments |       | Net
BookValue Land,BuildingsandImprove-ments |  | Date ofAcquisition |       | Life
UponWhichDepreciationin
LatestIncomeStatementis Computed
|                                        |  |               |    |      |  |                           |       |                                         |  |                                        |        |      |  |                           |      |       |  |                                                  |       |                                              |  |                    |       |                                                              
|Comfort Inn
Durham, NC                  |  |               | (* | )    |  |                           | 947   |                                         |  |                                        | 6,208  |      |  |                           | 37   |       |  |                                                  | 594   |                                              |  |                    | 984   |                                                               |  |  | 6,802  |  |  |  | 7,786  |  |  |  | 2,005 |  |  |  | 5,781  |  |  |  | 11/29/94 |  |  |  | 30 | 
|Comfort Inn
Fayetteville, NC            |  |               | (* | )    |  |                           | 1,223 |                                         |  |                                        | 8,047  |      |  |                           | 16   |       |  |                                                  | 778   |                                              |  |                    | 1,239 |                                                               |  |  | 8,825  |  |  |  | 10,064 |  |  |  | 2,588 |  |  |  | 7,476  |  |  |  | 11/29/94 |  |  |  | 30 | 
|Comfort Inn
Greenville, SC              |  |               | (* | )    |  |                           | 871   |                                         |  |                                        | 3,551  |      |  |                           | 20   |       |  |                                                  | 1,445 |                                              |  |                    | 891   |                                                               |  |  | 4,996  |  |  |  | 5,887  |  |  |  | 1,351 |  |  |  | 4,536  |  |  |  | 5/6/94   |  |  |  | 30 | 
|Comfort Inn
Wilmington, NC              |  |               | (* | )    |  |                           | 532   |                                         |  |                                        | 5,889  |      |  |                           | 27   |       |  |                                                  | 851   |                                              |  |                    | 559   |                                                               |  |  | 6,740  |  |  |  | 7,299  |  |  |  | 2,223 |  |  |  | 5,076  |  |  |  | 6/2/94   |  |  |  | 30 | 
|Comfort Suites
Orlando, FL              |  |               | #  |      |  |                           | 1,357 |                                         |  |                                        | 10,180 |      |  |                           | 43   |       |  |                                                  | 966   |                                              |  |                    | 1,400 |                                                               |  |  | 11,146 |  |  |  | 12,546 |  |  |  | 2,127 |  |  |  | 10,419 |  |  |  | 5/1/97   |  |  |  | 30 | 
|Homewood Suites
Alpharetta, GA          |  |               | (* | )    |  |                           | 985   |                                         |  |                                        | 6,621  |      |  |                           | 30   |       |  |                                                  | 92    |                                              |  |                    | 1,015 |                                                               |  |  | 6,713  |  |  |  | 7,728  |  |  |  | 1,234 |  |  |  | 6,494  |  |  |  | 5/22/98  |  |  |  | 30 | 
|Homewood Suites
Cary, NC                |  |               | #  |      |  |                           | 1,010 |                                         |  |                                        | 12,367 |      |  |                           | 36   |       |  |                                                  | 596   |                                              |  |                    | 1,046 |                                                               |  |  | 12,963 |  |  |  | 14,009 |  |  |  | 2,886 |  |  |  | 11,123 |  |  |  | 7/9/96   |  |  |  | 30 | 
|Homewood Suites
Clear Lake, TX          |  |               | #  |      |  |                           | 879   |                                         |  |                                        | 5,978  |      |  |                           | 6    |       |  |                                                  | 263   |                                              |  |                    | 885   |                                                               |  |  | 6,241  |  |  |  | 7,126  |  |  |  | 1,297 |  |  |  | 5,829  |  |  |  | 9/13/96  |  |  |  | 30 | 
|Homewood Suites
Durham, NC              |  |               | (* | )    |  |                           | 1,074 |                                         |  |                                        | 6,136  |      |  |                           | (124 | )     |  |                                                  | 680   |                                              |  |                    | 950   |                                                               |  |  | 6,816  |  |  |  | 7,766  |  |  |  | 958   |  |  |  | 6,808  |  |  |  | 11/14/98 |  |  |  | 30 | 
|Homewood Suites
Lake Mary, FL           |  |               | (* | )    |  |                           | 871   |                                         |  |                                        | 6,987  |      |  |                           | 11   |       |  |                                                  | 295   |                                              |  |                    | 882   |                                                               |  |  | 7,282  |  |  |  | 8,164  |  |  |  | 1,120 |  |  |  | 7,044  |  |  |  | 11/4/98  |  |  |  | 30 | 
|Homewood Suites
Phoenix, AZ             |  |               | (* | )    |  |                           | 1,402 |                                         |  |                                        | 9,763  |      |  |                           | 26   |       |  |                                                  | 76    |                                              |  |                    | 1,428 |                                                               |  |  | 9,839  |  |  |  | 11,267 |  |  |  | 1,520 |  |  |  | 9,747  |  |  |  | 6/1/98   |  |  |  | 30 | 
|Homewood Suites
Raleigh, NC             |  |               | (* | )    |  |                           | 1,008 |                                         |  |                                        | 10,076 |      |  |                           | 15   |       |  |                                                  | 426   |                                              |  |                    | 1,023 |                                                               |  |  | 10,502 |  |  |  | 11,525 |  |  |  | 1,684 |  |  |  | 9,841  |  |  |  | 3/9/98   |  |  |  | 30 | 
|Holiday Inn Express
Abingdon, VA        |  |               | (* | )    |  |                           | 918   |                                         |  |                                        | 2,263  |      |  |                           | (481 | )     |  |                                                  | 528   |                                              |  |                    | 437   |                                                               |  |  | 2,791  |  |  |  | 3,228  |  |  |  | 563   |  |  |  | 2,665  |  |  |  | 5/7/96   |  |  |  | 30 | 
|Holiday Inn Express
Clearwater, FL      |  |               | (* | )    |  |                           | 510   |                                         |  |                                        | 5,854  |      |  |                           | 6    |       |  |                                                  | 899   |                                              |  |                    | 516   |                                                               |  |  | 6,753  |  |  |  | 7,269  |  |  |  | 1,291 |  |  |  | 5,978  |  |  |  | 8/6/97   |  |  |  | 30 | 
|Holiday Inn Select
Dallas, TX           |  |               | (* | )    |  |                           | 1,060 |                                         |  |                                        | 13,615 |      |  |                           | 26   |       |  |                                                  | 3,172 |                                              |  |                    | 1,086 |                                                               |  |  | 16,787 |  |  |  | 17,873 |  |  |  | 3,966 |  |  |  | 13,907 |  |  |  | 5/7/96   |  |  |  | 30 | 
|Holiday Inn
Secaucus, NJ                |  |               | (* | )    |  |                           |      |                                         |  |                                        | 13,699 |      |  |                           |     |       |  |                                                  | 1,298 |                                              |  |                    |      |                                                               |  |  | 14,997 |  |  |  | 14,997 |  |  |  | 2,531 |  |  |  | 12,466 |  |  |  | 5/27/98  |  |  |  | 30 | 
|Holiday Inn
Tinton Falls, NJ            |  |               | (* | )    |  |                           | 1,261 |                                         |  |                                        | 4,337  |      |  |                           | 7    |       |  |                                                  | 1,609 |                                              |  |                    | 1,268 |                                                               |  |  | 5,946  |  |  |  | 7,214  |  |  |  | 1,040 |  |  |  | 6,174  |  |  |  | 4/21/98  |  |  |  | 30 | 
|Courtyard by Marriott
Ann Arbor, MI     |  |               | #  |      |  |                           | 902   |                                         |  |                                        | 9,850  |      |  |                           | 14   |       |  |                                                  | 1,020 |                                              |  |                    | 916   |                                                               |  |  | 10,870 |  |  |  | 11,786 |  |  |  | 2,076 |  |  |  | 9,710  |  |  |  | 9/30/97  |  |  |  | 30 | 
|Courtyard by Marriott
Houston, TX       |  |               | (* | )    |  |                           | 1,211 |                                         |  |                                        | 9,154  |      |  |                           | 55   |       |  |                                                  | 2,037 |                                              |  |                    | 1,266 |                                                               |  |  | 11,191 |  |  |  | 12,457 |  |  |  | 2,238 |  |  |  | 10,219 |  |  |  | 7/14/97  |  |  |  | 30 | 
|Courtyard by Marriott
Wilmington, NC    |  |               | #  |      |  |                           | 742   |                                         |  |                                        | 5,907  |      |  |                           | 5    |       |  |                                                  | 100   |                                              |  |                    | 747   |                                                               |  |  | 6,007  |  |  |  | 6,754  |  |  |  | 1,201 |  |  |  | 5,553  |  |  |  | 12/19/96 |  |  |  | 30 | 
|Courtyard by Marriott
Winston-Salem, NC |  |               | (* | )    |  |                           | 915   |                                         |  |                                        | 5,202  |      |  |                           | 4    |       |  |                                                  | 507   |                                              |  |                    | 919   |                                                               |  |  | 5,709  |  |  |  | 6,628  |  |  |  | 693   |  |  |  | 5,935  |  |  |  | 10/3/98  |  |  |  | 30 | 

67



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##### 



|                                 |  |               |    |      |  |                            |        |                                            |  |                                         |         |      |  |                           |     |       |  |                                                      |        |                                             |  |                      |        |                                                                  |  |   |         |  |  |   |         |  |  |   |        |  |  |   |         |  |  |  |         |  |    |  |  |  | 
|-------------------------------- |  | ------------- | -- | ---- |  | -------------------------- | ------ | ------------------------------------------ |  | --------------------------------------- | ------- | ---- |  | ------------------------- | --- | ----- |  | ---------------------------------------------------- | ------ | ------------------------------------------- |  | -------------------- | ------ | ---------------------------------------------------------------- |  | - | ------- |  |  | - | ------- |  |  | - | ------ |  |  | - | ------- |  |  |  | ------- |  | -- |  |  |  | 
|                                 |  |               |    |      |  | Initial Cost               |        | Cost Capitalized Subsequent
to Acquisition |  | Gross AmountsCarried at Close of Period |         |      |  |                           |     |       |  |                                                      |        |                                             | 
|                                 |  |               |    |      |  |                            |        |                                            |  |                                         |         |      |  |                           |     |       |  |                                                      |        |                                             | 
|Description                      |  | Encum-brances |    | Land |  | Buildings
andImprove-ments |        | Land                                       |  | BuildingsandImprove-ments               |         | Land |  | BuildingsandImprove-ments |     | Total |  | Accumu-
latedDepreci-
ationBuildingsandImprove-ments |        | Net
BookValueLand,BuildingsandImprove-ments |  | Date
ofAcquisi-
tion |        | Life
UponWhichDepreci-iation inLatestIncomeStatement
is
Computed
|                                 |  |               |    |      |  |                            |        |                                            |  |                                         |         |      |  |                           |     |       |  |                                                      |        |                                             |  |                      |        |                                                                 
|Hilton Garden Inn
Albany, NY     |  |               | (* | )    |  |                            | 1,168  |                                            |  |                                         | 11,236  |      |  |                           |    |       |  |                                                      | 22     |                                             |  |                      | 1,168  |                                                                  |  |   | 11,258  |  |  |   | 12,426  |  |  |   | 1,751  |  |  |   | 10,675  |  |  |  | 5/8/98  |  | 30 | 
|Hilton Garden Inn
Alpharetta, GA |  |               | (* | )    |  |                            | 1,425  |                                            |  |                                         | 11,719  |      |  |                           | 1   |       |  |                                                      | 65     |                                             |  |                      | 1,426  |                                                                  |  |   | 11,784  |  |  |   | 13,210  |  |  |   | 1,894  |  |  |   | 11,316  |  |  |  | 3/17/98 |  | 30 | 
|Hilton Garden Inn
Raleigh, NC    |  |               | (* | )    |  |                            | 1,901  |                                            |  |                                         | 9,209   |      |  |                           | 4   |       |  |                                                      | 31     |                                             |  |                      | 1,905  |                                                                  |  |   | 9,240   |  |  |   | 1,145   |  |  |   | 1,409  |  |  |   | 9,736   |  |  |  | 5/8/98  |  | 30 | 
|Quality Suites
Charleston, SC    |  |               | #  |      |  |                            | 912    |                                            |  |                                         | 11,224  |      |  |                           |    |       |  |                                                      | 1,104  |                                             |  |                      | 912    |                                                                  |  |   | 12,328  |  |  |   | 13,240  |  |  |   | 3,489  |  |  |   | 9,751   |  |  |  | 5/18/95 |  | 30 | 
|Residence Inn
Phoenix, AZ        |  |               | #  |      |  |                            | 2,076  |                                            |  |                                         | 13,311  |      |  |                           | 55  |       |  |                                                      | 399    |                                             |  |                      | 2,131  |                                                                  |  |   | 13,710  |  |  |   | 15,841  |  |  |   | 2,251  |  |  |   | 13,590  |  |  |  | 3/3/98  |  | 30 | 
|Fairfield Inn
Ann Arbor, MI      |  |               | (* | )    |  |                            | 542    |                                            |  |                                         | 3,743   |      |  |                           | 26  |       |  |                                                      | 583    |                                             |  |                      | 568    |                                                                  |  |   | 4,326   |  |  |   | 4,894   |  |  |   | 816    |  |  |   | 4,078   |  |  |  | 9/30/97 |  | 30 | 
|                                 |  |               |    |      |  |                            |        |                                            |  |                                         |         |      |  |                           |     |       |  |                                                      |        |                                             |  |                      |        |                                                                  |  |   |         |  |  |   |         |  |  |   |        |  |  |   |         |  |  |  |         |  |    |  | 
|                                 |  |               |    |      |  | $                          | 39,106 |                                            |  | $                                       | 312,400 |      |  | $                         | 242 |       |  | $                                                    | 33,111 |                                             |  | $                    | 39,348 |                                                                  |  | $ | 345,511 |  |  | $ | 384,859 |  |  | $ | 75,212 |  |  | $ | 309,647 |  |  |  |         |  |    |  |  | 
|                                 |  |               |    |      |  |                            |        |                                            |  |                                         |         |      |  |                           |     |       |  |                                                      |        |                                             |  |                      |        |                                                                  |  |   |         |  |  |   |         |  |  |   |        |  |  |   |         |  |  |  |         |  |    |  | 



|* |  | Property serves as collateral for the $125,000 line of credit which closed
effective December 19, 2001 (see Note 5).
|- |  | --------------------------------------------------------------------------------------------------------------------
| 
|# |  | Property serves as collateral for the $71,000 note through GE Capital
Corporation (see Note 5).                     

WINSTON HOTELS, INC.
NOTES TO SCHEDULE III

|                                                                                                                        |                                |  |      |         |      |  |   |         | 
|----------------------------------------------------------------------------------------------------------------------- | ------------------------------ |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                                                                        |                                |  | 2002 |         | 2001 |  |   |         | 
|                                                                                                                        |                                |  |      |         |      |  |   |         | 
|(a) Reconciliation of Real Estate:                                                                                      |                                |  |      |         |      |  |   |        
|                                                                                                                        | Balance at beginning of period |  | $    | 400,138 |      |  | $ | 403,716 | 
|                                                                                                                        | Acquisitions during period     |  |      |        |      |  |   |        | 
|                                                                                                                        | Dispositions during period     |  |      | 17,931  |      |  |   | 6,861   | 
|                                                                                                                        | Additions during period        |  |      | 2,652   |      |  |   | 3,283   | 
|                                                                                                                        |                                |  |      |         |      |  |   |         | 
|                                                                                                                        | Balance at end of period       |  | $    | 384,859 |      |  | $ | 400,138 | 
|                                                                                                                        |                                |  |      |         |      |  |   |         | 
|(b) Reconciliation of Accumulated Depreciation:                                                                         |                                |  |      |         |      |  |   |        
|                                                                                                                        | Balance at beginning of period |  |      | 66,642  |      |  |   | 54,236  | 
|                                                                                                                        | Depreciation for period        |  |      | 13,240  |      |  |   | 13,668  | 
|                                                                                                                        | Dispositions during period     |  |      | 4,670   |      |  |   | 1,262   | 
|                                                                                                                        |                                |  |      |         |      |  |   |         | 
|                                                                                                                        | Balance at end of period       |  | $    | 75,212  |      |  | $ | 66,642  | 
|                                                                                                                        |                                |  |      |         |      |  |   |         | 
|(c) The aggregate cost of land, Build-ings and Improve-ments for federal income
tax purposes is approximately $368,127.



68



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##### 



INDEX TO EXHIBITS

|           |  |                                                                                         |  | 
|---------- |  | --------------------------------------------------------------------------------------- |  | 
|Exhibit    |  | Description                                                                            
|           |  |                                                                                        
|3.1(9)     |  | Restated Articles of Incorporation                                                     
|3.2 (12)   |  | 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(9)     |  | Restated Articles of Incorporation                                                     
|4.4 (12)   |  | 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 (5)   |  | Amendment No. 2 dated December 31, 1997 to Second Amended and Restated Agreement of    
|           |  | Limited Partnership of WINN Limited Partnership                                        
|10.4 (11)  |  | Amendment No. 3 dated September 14, 1998 to Second Amended and Restated Agreement of   
|           |  | Limited Partnership of WINN Limited Partnership                                        
|10.5 (10)  |  | Amendment No. 4 dated October 1, 1999 to Second Amended and Restated Agreement of      
|           |  | Limited Partnership of WINN Limited Partnership                                        
|10.6 (13)  |  | Amendment No. 5 dated as of January 1, 2002 to Second Amended and Restated Agreement of
|           |  | Limited Partnership of WINN Limited Partnership                                        
|10.7       |  | Amendment No. 6 dated as of April 2, 2002 to Second Amended and Restated Agreement of  
|           |  | Limited Partnership of WINN Limited Partnership                                        
|10.8 (2)   |  | Limitation of Future Hotel Ownership and Development Agreement                         
|10.9 (6)   |  | Winston Hotels, Inc. Stock Incentive Plan as amended May 1998                          
|10.10 (7)  |  | Loan Agreement by and between Winston SPE LLC and CMF Capital Company LLC dated        
|           |  | November 3, 1998                                                                       
|10.11 (7)  |  | Promissory note dated November 3, 1998 by and between Winston SPE LLC and CMF Capital  
|           |  | Company, LLC                                                                           
|10.12 (8)  |  | Winston Hotels, Inc. Executive Deferred Compensation Plan                              
|10.13 (13) |  | Second Amended and Restated Syndicated Credit Agreement, dated as of December 19,      
|           |  | 2001, 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")                                                 
|10.14 (13) |  | Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston      
|           |  | Hotels, Inc. and WINN Limited Partnership to Wachovia Bank, N.A. for the principal sum 
|           |  | of $48,000,000 pursuant to the Credit Agreement                                        
|10.15 (13) |  | Amended and Restated Promissory Note, dated as of December 19, 2001, 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                          

69



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##### 



|           |  |                                                                                        |  | 
|---------- |  | -------------------------------------------------------------------------------------- |  | 
|Exhibit    |  | Description                                                                           
|           |  |                                                                                       
|10.16 (13) |  | Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston     
|           |  | Hotels, Inc. and WINN Limited Partnership to SouthTrust Bank, N.A. for the principal  
|           |  | sum of $22,000,000 pursuant to the Credit Agreement                                   
|10.17 (13) |  | Amended and Restated Promissory Note, dated as of December 19, 2001, from Winston     
|           |  | Hotels, Inc. and WINN Limited Partnership to Centura Bank for the principal sum of    
|           |  | $15,000,000 pursuant to the Credit Agreement                                          
|10.18 (13) |  | Extension Agreement; Second Modification Agreement of 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)                                
|10.19 (14) |  | Leasehold Acquisition Agreement, dated as of June 28, 2002, by and among Winston      
|           |  | Hotels, Inc., CapStar Winston Company, LLC, MeriStar Management Company, LLC, Barclay 
|           |  | Hospitality Services Inc. and certain affiliates of the foregoing parties             
|10.20 (14) |  | Hotel Management Agreement, dated July 1, 2002, by and between Barclay Hospitality    
|           |  | Services, Inc. and MeriStar Management Company, L.L.C.                                
|10.21      |  | Employment Agreement, dated January 2, 2003, by and between Robert W. Winston, III and
|           |  | Winston Hotels, Inc.                                                                  
|10.22      |  | Employment Agreement, dated January 2, 2003, by and between Kenneth R. Crockett and   
|           |  | Winston Hotels, Inc.                                                                  
|10.23      |  | Employment Agreement, dated January 2, 2003, by and between Joseph V. Green and       
|           |  | Winston Hotels, Inc.                                                                  
|21.1       |  | Subsidiaries of the Registrant                                                        
|23.1       |  | Consent of Independent Accountants (PricewaterhouseCoopers LLP)                       
|24.1       |  | Powers of Attorney                                                                    



|(1) |  | Exhibit 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 Current 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 Current 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 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.                                               
|   
|(6) |  | 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.                                                                       
|   
|(7) |  | 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.

70



---



##### 





|(8)  |  | 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.     
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(9)  |  | 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.   
|    
|(10) |  | 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.
|    
|(11) |  | Exhibit to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 17, 2000 and incorporated
herein by reference.      
|    
|(12) |  | Exhibit to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 19, 2001 and incorporated
herein by reference.      
|    
|(13) |  | Exhibit to the Companys Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 15, 2002 and incorporated
herein by reference.      
|    
|(14) |  | Exhibits to the Companys Current Report on Form 8-K as filed with
the Securities and Exchange Commission on July 15, 2002 and incorporated
herein by reference.      

71