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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

|                                                  |  |                               
|------------------------------------------------- |  | ------------------------------
|For the quarterly period ended September 30, 2002 |  | Commission file number 0-23732

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

|                                        |  |                                                
|--------------------------------------- |  | -----------------------------------------------
|North Carolina
(State of incorporation) |  | 56-1624289
(I.R.S. Employer Identification No.)

2626 Glenwood Avenue
Raleigh, North Carolina 27608
(Address of principal executive offices)
(Zip Code)

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

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

The number of shares of Common Stock, $.01 par value, outstanding on October
31, 2002 was 20,202,034.



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WINSTON HOTELS, INC.
Index

|        |  |                                                                                                        |  |     
|------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|        |  |                                                                                                        |  | Page
|        |  |                                                                                                        |  |     
|PART I  |  | FINANCIAL INFORMATION                                                                                  |  |     
|        |  |                                                                                                        |  |     
|Item 1. |  | WINSTON HOTELS, INC.                                                                                   |  |     
|        |  |                                                                                                        |  |     
|        |  | Consolidated Balance Sheets as of September 30, 2002 (unaudited) and
December 31, 2001                 |  | 3   
|        |  |                                                                                                        |  |     
|        |  | Unaudited Consolidated Statements of Operations for the three months ended
September 30, 2002 and 2001 |  | 4   
|        |  |                                                                                                        |  |     
|        |  | Unaudited Consolidated Statements of Operations for the nine months ended
September 30, 2002 and 2001  |  | 5   
|        |  |                                                                                                        |  |     
|        |  | Unaudited Consolidated Statement of Shareholders Equity for the nine months
ended September 30, 2002  |  | 6   
|        |  |                                                                                                        |  |     
|        |  | Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001  |  | 7   
|        |  |                                                                                                        |  |     
|        |  | Notes to Consolidated Financial Statements                                                             |  | 8   
|        |  |                                                                                                        |  |     
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations                  |  | 12  
|        |  |                                                                                                        |  |     
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                             |  | 21  
|        |  |                                                                                                        |  |     
|Item 4. |  | Controls and Procedures                                                                                |  | 21  
|        |  |                                                                                                        |  |     
|PART II |  | OTHER INFORMATION                                                                                      |  |     
|        |  |                                                                                                        |  |     
|Item 5. |  | Other Information                                                                                      |  | 22  
|        |  |                                                                                                        |  |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                       |  | 22  
|        |  |                                                                                                        |  |     
|        |  | SIGNATURES                                                                                             |  | 23  
|        |  |                                                                                                        |  |     
|        |  | CERTIFICATIONS                                                                                         |  | 24  

2



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##### 



WINSTON HOTELS, INC.
CONSOLIDATED BALANCE SHEETS($ in thousands, except per share amounts)

ASSETS

|                                                                                                                                           |  |                                    |         |                    |         |                   |         |   |         | 
|------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------- | ------- | ------------------ | ------- | ----------------- | ------- | - | ------- | 
|                                                                                                                                           |  |                                    |         | September 30, 2002 |         | December 31, 2001
|                                                                                                                                           |  |                                    |         |                    |         |                  
|                                                                                                                                           |  |                                    |         | (unaudited)        |         |                   |         |  
|                                                                                                                                          
|Land                                                                                                                                       |  | $                                  | 40,107  |                    |         | $                 | 41,114  |  
|Buildings and improvements                                                                                                                 |  |                                    | 350,908 |                    |         |                   | 359,024 |  
|Furniture and equipment                                                                                                                    |  |                                    | 44,486  |                    |         |                   | 44,376  |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|Operating properties                                                                                                                       |  |                                    | 435,501 |                    |         |                   | 444,514 |  
|Less accumulated depreciation                                                                                                              |  |                                    | 106,894 |                    |         |                   | 96,343  |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|                                                                                                                                           |  |                                    | 328,607 |                    |         |                   | 348,171 |  
|Properties under development                                                                                                               |  |                                    | 1,800   |                    |         |                   | 1,916   |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|                                                                                                                                           |  | Net investment in hotel properties |         |                    | 330,407 |                   |         |   | 350,087 | 
|Corporate FF&E, net                                                                                                                        |  |                                    | 803     |                    |         |                   | 1,033   |  
|Cash                                                                                                                                       |  |                                    | 2,153   |                    |         |                   | 887     |  
|Lease revenue receivable                                                                                                                   |  |                                    |        |                    |         |                   | 4,786   |  
|Accounts receivable                                                                                                                        |  |                                    | 2,787   |                    |         |                   |        |  
|Notes receivable                                                                                                                           |  |                                    | 3,266   |                    |         |                   | 3,516   |  
|Investment in joint ventures                                                                                                               |  |                                    | 9,953   |                    |         |                   | 8,173   |  
|Deferred expenses, net                                                                                                                     |  |                                    | 3,145   |                    |         |                   | 3,405   |  
|Prepaid expenses and other assets                                                                                                          |  |                                    | 6,937   |                    |         |                   | 5,017   |  
|Deferred tax asset                                                                                                                         |  |                                    | 7,076   |                    |         |                   |        |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|Total assets                                                                                                                               |  | $                                  | 366,527 |                    |         | $                 | 376,904 |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                      
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|Long-term debt                                                                                                                             |  | $                                  | 66,735  |                    |         | $                 | 67,684  |  
|Due to banks                                                                                                                               |  |                                    | 77,600  |                    |         |                   | 102,900 |  
|Deferred percentage lease revenue                                                                                                          |  |                                    | 204     |                    |         |                   | 1,226   |  
|Accounts payable and accrued expenses                                                                                                      |  |                                    | 13,838  |                    |         |                   | 8,175   |  
|Accrued lease payable                                                                                                                      |  |                                    | 165     |                    |         |                   |        |  
|Distributions payable                                                                                                                      |  |                                    | 4,959   |                    |         |                   | 4,468   |  
|Minority interest in Partnership                                                                                                           |  |                                    | 7,627   |                    |         |                   | 8,246   |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|Total liabilities                                                                                                                          |  |                                    | 171,128 |                    |         |                   | 192,699 |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|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,
20,202,034 and 16,924,533 shares issued and outstanding                        |  |                                    | 202     |                    |         |                   | 169     |  
|Additional paid-in capital                                                                                                                 |  |                                    | 257,158 |                    |         |                   | 230,109 |  
|Unearned compensation                                                                                                                      |  |                                    | (1,048  | )                  |         |                   | (542    | )
|Accumulated other comprehensive income (loss)                                                                                              |  |                                    | (526    | )                  |         |                   | (1,844  | )
|Distributions in excess of earnings                                                                                                        |  |                                    | (60,417 | )                  |         |                   | (43,717 | )
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|Total shareholders equity                                                                                                                 |  |                                    | 195,399 |                    |         |                   | 184,205 |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  
|Total liabilities and shareholders equity                                                                                                 |  | $                                  | 366,527 |                    |         | $                 | 376,904 |  
|                                                                                                                                           |  |                                    |         |                    |         |                   |         |  

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

3



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##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)

|                                                               |                                                            |   |                    |        |                    |   |        |        | 
|-------------------------------------------------------------- | ---------------------------------------------------------- | - | ------------------ | ------ | ------------------ | - | ------ | ------ | 
|                                                               |                                                            |   | Three Months Ended |        | Three Months Ended
|                                                               |                                                            |   | September 30, 2002 |        | September 30, 2001
|                                                               |                                                            |   |                    |        |                   
|Revenue:                                                       |                                                            |   |                    |        |                    |   |        |       
|                                                               | Rooms                                                      |   | $                  | 30,420 |                    |   | $      |       | 
|                                                               | Food and beverage                                          |   |                    | 1,845  |                    |   |        |       | 
|                                                               | Other operating departments                                |   |                    | 1,206  |                    |   |        |       | 
|                                                               | Percentage lease revenue                                   |   |                    | 8,886  |                    |   |        | 14,322 | 
|                                                               | Interest, joint venture and other income                   |   |                    | 325    |                    |   |        | 452    | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                               | Total revenue                                              |   |                    | 42,682 |                    |   |        | 14,774 | 
|Hotel operating expenses:                                      |                                                            |   |                    |        |                    |   |        |       
|                                                               | Rooms                                                      |   |                    | 7,260  |                    |   |        |       | 
|                                                               | Food and beverage                                          |   |                    | 1,437  |                    |   |        |       | 
|                                                               | Other operating departments                                |   |                    | 810    |                    |   |        |       | 
|Undistributed operating expenses:                              |                                                            |   |                    |        |                    |   |        |       
|                                                               | Property operating costs                                   |   |                    | 6,479  |                    |   |        |       | 
|                                                               | Real estate taxes and property and casualty insurance      |   |                    | 1,590  |                    |   |        | 1,715  | 
|                                                               | Franchise costs                                            |   |                    | 2,182  |                    |   |        |       | 
|                                                               | Maintenance and repair                                     |   |                    | 1,702  |                    |   |        |       | 
|                                                               | Management fees                                            |   |                    | 655    |                    |   |        |       | 
|                                                               | Percentage lease expense                                   |   |                    | 1,086  |                    |   |        |       | 
|                                                               | Depreciation                                               |   |                    | 4,870  |                    |   |        | 4,973  | 
|                                                               | Amortization                                               |   |                    | 218    |                    |   |        | 226    | 
|                                                               | General and administrative                                 |   |                    | 1,224  |                    |   |        | 1,232  | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                               | Total operating expenses                                   |   |                    | 29,513 |                    |   |        | 8,146  | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|Operating income                                               |                                                            |   | 13,169             |        |                    |   | 6,628  |       
|                                                               | Interest expense                                           |   |                    | 2,642  |                    |   |        | 2,984  | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|Income before allocation to minority interest and income taxes |                                                            |   | 10,527             |        |                    |   | 3,644  |       
|                                                               | Income allocation to minority interest                     |   |                    | 513    |                    |   |        | 139    | 
|                                                               | Income tax benefit                                         |   |                    | (362   | )                  |   |        |       | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|Income from continuing operations                              |                                                            |   | 10,376             |        |                    |   | 3,505  |       
|Discontinued operations:                                       |                                                            |   |                    |        |                    |   |        |       
|                                                               | Earnings from discontinued operations, net                 |   |                    |       |                    |   |        | 41     | 
|                                                               | Loss on sale of discontinued operations                    |   |                    | (662   | )                  |   |        |       | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                               | Net income                                                 |   |                    | 9,714  |                    |   |        | 3,546  | 
|Preferred stock distribution                                   |                                                            |   | (1,734             | )      |                    |   | (1,734 | )     
|                                                               |                                                            |   |                    |        |                    |   |        |       
|Net income applicable to common shareholders                   |                                                            | $ | 7,980              |        |                    | $ | 1,812  |       
|                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                               |                                                            |   |                    |        |                    |   |        |       
|Income (loss) per common share:                                |                                                            |   |                    |        |                    |   |        |       
|Basic and diluted:                                             |                                                            |   |                    |        |                    |   |        |       
|                                                               | Income from continuing operations                          |   | $                  | 0.43   |                    |   | $      | 0.11   | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                               | Loss from discontinued operations                          |   | $                  | (0.03  | )                  |   | $      |       | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                               | Net income per common share                                |   | $                  | 0.40   |                    |   | $      | 0.11   | 
|                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                               | Weighted average number of common shares                   |   |                    | 20,202 |                    |   |        | 16,926 | 
|                                                               | Weighted average number of common shares assuming dilution |   |                    | 21,500 |                    |   |        | 18,258 | 

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

4



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WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)

|                                                                                                |                                                            |   |                    |        |                    |   |        |        |  
|----------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | - | ------------------ | ------ | ------------------ | - | ------ | ------ | -
|                                                                                                |                                                            |   | Nine Months Ended  |        | Nine Months Ended 
|                                                                                                |                                                            |   | September 30, 2002 |        | September 30, 2001
|                                                                                                |                                                            |   |                    |        |                   
|Revenue:                                                                                        |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Rooms                                                      |   | $                  | 30,420 |                    |   | $      |       |  
|                                                                                                | Food and beverage                                          |   |                    | 1,845  |                    |   |        |       |  
|                                                                                                | Other operating departments                                |   |                    | 1,206  |                    |   |        |       |  
|                                                                                                | Percentage lease revenue                                   |   |                    | 28,500 |                    |   |        | 34,114 |  
|                                                                                                | Interest, joint venture and other income                   |   |                    | 973    |                    |   |        | 1,750  |  
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Total revenue                                              |   |                    | 62,944 |                    |   |        | 35,864 |  
|Hotel operating expenses:                                                                       |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Rooms                                                      |   |                    | 7,260  |                    |   |        |       |  
|                                                                                                | Food and beverage                                          |   |                    | 1,437  |                    |   |        |       |  
|                                                                                                | Other operating departments                                |   |                    | 810    |                    |   |        |       |  
|Undistributed operating expenses:                                                               |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Property operating costs                                   |   |                    | 6,479  |                    |   |        |       |  
|                                                                                                | Real estate taxes and property and casualty insurance      |   |                    | 5,001  |                    |   |        | 5,386  |  
|                                                                                                | Franchise costs                                            |   |                    | 2,182  |                    |   |        |       |  
|                                                                                                | Maintenance and repair                                     |   |                    | 1,702  |                    |   |        |       |  
|                                                                                                | Management fees                                            |   |                    | 655    |                    |   |        |       |  
|                                                                                                | Percentage lease expense                                   |   |                    | 1,086  |                    |   |        |       |  
|                                                                                                | Depreciation                                               |   |                    | 14,657 |                    |   |        | 15,161 |  
|                                                                                                | Lease acquisition                                          |   |                    | 17,668 |                    |   |        |       |  
|                                                                                                | Amortization                                               |   |                    | 625    |                    |   |        | 693    |  
|                                                                                                | General and administrative                                 |   |                    | 4,094  |                    |   |        | 3,729  |  
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Total operating expenses                                   |   |                    | 63,656 |                    |   |        | 24,969 |  
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|Operating income (loss)                                                                         |                                                            |   | (712               | )      |                    |   | 10,895 |       
|                                                                                                | Interest expense                                           |   |                    | 8,001  |                    |   |        | 9,277  |  
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|Income (loss) before loss on sale of property, allocation to
minority interest and income taxes |                                                            |   | (8,713             | )      |                    |   | 1,618  |       
|                                                                                                | Loss on sale of property                                   |   |                    |       |                    |   |        | (683   | )
|                                                                                                | Loss allocation to minority interest                       |   |                    | (521   | )                  |   |        | (304   | )
|                                                                                                | Income tax benefit                                         |   |                    | (7,076 | )                  |   |        |       |  
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|Income (loss) from continuing operations                                                        |                                                            |   | (1,116             | )      |                    |   | 1,239  |       
|Discontinued operations:                                                                        |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Earnings (loss) from discontinued operations, net          |   |                    | 76     |                    |   |        | (3     | )
|                                                                                                | Loss on sale of discontinued operations                    |   |                    | (1,452 | )                  |   |        |       |  
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Net income (loss)                                          |   |                    | (2,492 | )                  |   |        | 1,236  |  
|Preferred stock distribution                                                                    |                                                            |   | (5,203             | )      |                    |   | (5,203 | )     
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|Net loss applicable to common shareholders                                                      |                                                            | $ | (7,695             | )      |                    | $ | (3,967 | )     
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|Loss per common share:                                                                          |                                                            |   |                    |        |                    |   |        |       
|Basic and diluted:                                                                              |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Loss from continuing operations                            |   | $                  | (0.33  | )                  |   | $      | (0.23  | )
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Loss from discontinued operations                          |   | $                  | (0.07  | )                  |   | $      |       |  
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Net loss per common share                                  |   | $                  | (0.40  | )                  |   | $      | (0.23  | )
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|                                                                                                |                                                            |   |                    |        |                    |   |        |       
|                                                                                                | Weighted average number of common shares                   |   |                    | 19,174 |                    |   |        | 16,926 |  
|                                                                                                | Weighted average number of common shares assuming dilution |   |                    | 19,174 |                    |   |        | 16,926 |  

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

5



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##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002(in thousands, except per share amounts)

|                                           |                                                       |                                   |       |                 |  |              |    |            |  |          |        |              |  |               |     |                   |  |               |         |        |  |   |        |   |  |   |         |        |   |   |        |       |  |   |         |   |        |  
|------------------------------------------ | ----------------------------------------------------- | --------------------------------- | ----- | --------------- |  | ------------ | -- | ---------- |  | -------- | ------ | ------------ |  | ------------- | --- | ----------------- |  | ------------- | ------- | ------ |  | - | ------ | - |  | - | ------- | ------ | - | - | ------ | ----- |  | - | ------- | - | ------ | -
|                                           |                                                       |                                   |       | Preferred Stock |  | Common Stock |    | Additional |  |          |        |              |  | Distributions |     | Accumulated Other |  | Total        
|                                           |                                                       |                                   |       |                 |  |              |    | Paid-in    |  | Unearned |        | In Excess of |  | Comprehensive |     | Shareholders'    
|                                           |                                                       |                                   |       | Shares          |  | Dollars      |    | Shares     |  | Dollars  |        | Capital      |  | Compensation  |     | Earnings          |  | Income (Loss) |         | Equity
|                                           |                                                       |                                   |       |                 |  |              |    |            |  |          |        |              |  |               |     |                   |  |               |         |       
|Balances at December 31, 2001              |                                                       |                                   | 3,000 |                 |  | $            | 30 |            |  |          | 16,925 |              |  | $             | 169 |                   |  | $             | 230,109 |        |  | $ | (542   | ) |  | $ | (43,717 | )      |   | $ | (1,844 | )     |  | $ | 184,205 |  
|                                           |                                                       |                                   |       |                 |  |              |    |            |  |          |        |              |  |               |     |                   |  |               |         |        |  |   |        |   |  |   |         |        |   |   |        |       |  |   |         |  
|Issuance of shares  common stock offering |                                                       |                                   |      |                 |  |              |   |            |  |          | 3,162  |              |  |               | 32  |                   |  |               | 26,534  |        |  |   |       |   |  |   |        |        |   |   |       |       |  |   | 26,566  |  
|Issuance of shares  restricted stock      |                                                       |                                   |      |                 |  |              |   |            |  |          | 115    |              |  |               | 1   |                   |  |               | 1,002   |        |  |   | (1,003 | ) |  |   |        |        |   |   |       |       |  |   |        |  
|Distributions ($0.45 per common share)     |                                                       |                                   |      |                 |  |              |   |            |  |          |       |              |  |               |    |                   |  |               |        |        |  |   |       |   |  |   | (9,005  | )      |   |   |       |       |  |   | (9,005  | )
|Distributions ($1.734 per preferred share) |                                                       |                                   |      |                 |  |              |   |            |  |          |       |              |  |               |    |                   |  |               |        |        |  |   |       |   |  |   | (5,203  | )      |   |   |       |       |  |   | (5,203  | )
|Unearned compensation amortization         |                                                       |                                   |      |                 |  |              |   |            |  |          |       |              |  |               |    |                   |  |               |        |        |  |   | 497    |   |  |   |        |        |   |   |       |       |  |   | 497     |  
|Minority interest equity adjustment        |                                                       |                                   |      |                 |  |              |   |            |  |          |       |              |  |               |    |                   |  |               | (487    | )      |  |   |       |   |  |   |        |        |   |   |       |       |  |   | (487    | )
|Comprehensive income (loss):               |                                                       |                                   |       |                 |  |              |    |            |  |          |        |              |  |               |     |                   |  |               |         |        |  |   |        |   |  |   |         |        |   |   |        |       |  |   |         |  
|                                           | Net loss                                              |                                   |       |                |  |              |    |           |  |          |        |             |  |               |     |                  |  |               |         |       |  |   |        |  |  |   |         | (2,492 | ) |   |        |      |  |   |         |   |       
|                                           | Unrealized holding loss arising on
interest rate swap |                                   |       |                |  |              |    |           |  |          |        |             |  |               |     |                  |  |               |         |       |  |   |        |  |  |   |         |       |   |   |        | 1,318 |  |   |         |   |       
|                                           |                                                       | Total comprehensive income (loss) |       |                 |  |              |    |            |  |          |        |              |  |               |     |                   |  |               |         |        |  |   |        |   |  |   |         |        |   |   |        |       |  |   |         |   | (1,174 | )
|                                           |                                                       |                                   |       |                 |  |              |    |            |  |          |        |              |  |               |     |                   |  |               |         |        |  |   |        |   |  |   |         |        |   |   |        |       |  |   |         |  
|Balances at September 30, 2002             |                                                       |                                   | 3,000 |                 |  | $            | 30 |            |  |          | 20,202 |              |  | $             | 202 |                   |  | $             | 257,158 |        |  | $ | (1,048 | ) |  | $ | (60,417 | )      |   | $ | (526   | )     |  | $ | 195,399 |  
|                                           |                                                       |                                   |       |                 |  |              |    |            |  |          |        |              |  |               |     |                   |  |               |         |        |  |   |        |   |  |   |         |        |   |   |        |       |  |   |         |  

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

6



---



##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)

|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |         |         |  
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----- | ------------------ | ------- | ------------------ | ----- | ------- | ------- | -
|                                                        |                                                                                                                             |                                                     |       | Nine Months Ended  |         | Nine Months Ended 
|                                                        |                                                                                                                             |                                                     |       | September 30, 2002 |         | September 30, 2001
|                                                        |                                                                                                                             |                                                     |       |                    |         |                   
|Cash flows from operating activities:                   |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|                                                        | Net income (loss)                                                                                                           |                                                     | $     | (2,492             | )       |                    | $     | 1,236   |        
|                                                        | Adjustments to reconcile net income (loss) to net cash
provided by operating activities:                                    |                                                     |       |                    |         |                    |       |         |        
|                                                        |                                                                                                                             | Loss allocation to minority interest                |       |                    | (521    | )                  |       |         | (304    | )
|                                                        |                                                                                                                             | Depreciation                                        |       |                    | 14,938  |                    |       |         | 15,667  |  
|                                                        |                                                                                                                             | Amortization                                        |       |                    | 625     |                    |       |         | 693     |  
|                                                        |                                                                                                                             | Income tax benefit                                  |       |                    | (7,076  | )                  |       |         |        |  
|                                                        |                                                                                                                             | Mezzanine loan loss provision                       |       |                    | 250     |                    |       |         |        |  
|                                                        |                                                                                                                             | Loss on sale of hotel properties                    |       |                    | 1,452   |                    |       |         | 683     |  
|                                                        |                                                                                                                             | Unearned compensation amortization                  |       |                    | 497     |                    |       |         | 324     |  
|                                                        | Changes in assets and liabilities:                                                                                          |                                                     |       |                    |         |                    |       |         |        
|                                                        |                                                                                                                             | Lease revenue receivable                            |       |                    | 4,786   |                    |       |         | (555    | )
|                                                        |                                                                                                                             | Accounts receivable                                 |       |                    | (2,787  | )                  |       |         |        |  
|                                                        |                                                                                                                             | Deferred percentage lease revenue                   |       |                    | (1,022  | )                  |       |         | 9,961   |  
|                                                        |                                                                                                                             | Prepaid expenses and other assets                   |       |                    | (1,920  | )                  |       |         | 50      |  
|                                                        |                                                                                                                             | Accounts payable and accrued expenses               |       |                    | 7,146   |                    |       |         | 883     |  
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|                                                        |                                                                                                                             | Net cash provided by operating activities           |       |                    | 13,876  |                    |       |         | 28,638  |  
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|Cash flows from investing activities:                   |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|                                                        | Deferred acquisition/disposition costs                                                                                      |                                                     |       | (177               | )       |                    |       | 100     |        
|                                                        | Investment in hotel properties, net                                                                                         |                                                     |       | (3,369             | )       |                    |       | (5,434  | )      
|                                                        | Investment in joint ventures, net                                                                                           |                                                     |       | (2,615             | )       |                    |       | 566     |        
|                                                        | Distributions from joint ventures                                                                                           |                                                     |       | 835                |         |                    |       |        |        
|                                                        | Proceeds from sales of hotel properties                                                                                     |                                                     |       | 6,918              |         |                    |       | 4,308   |        
|                                                        | Issuance of mezzanine loans                                                                                                 |                                                     |       |                   |         |                    |       | (2,436  | )      
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|                                                        |                                                                                                                             | Net cash provided by (used in) investing activities |       |                    | 1,592   |                    |       |         | (2,896  | )
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|Cash flows from financing activities:                   |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|                                                        | Fees paid in connection with financing activities                                                                           |                                                     |       | (548               | )       |                    |       | (2      | )      
|                                                        | Proceeds from issuance of common shares, net                                                                                |                                                     |       | 26,897             |         |                    |       |        |        
|                                                        | Payment of distributions to shareholders                                                                                    |                                                     |       | (13,717            | )       |                    |       | (19,412 | )      
|                                                        | Payment of distributions to minority interest                                                                               |                                                     |       | (585               | )       |                    |       | (1,091  | )      
|                                                        | Net decrease in due to banks                                                                                                |                                                     |       | (25,300            | )       |                    |       | (3,500  | )      
|                                                        | Decrease in long-term debt                                                                                                  |                                                     |       | (949               | )       |                    |       | (883    | )      
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|                                                        |                                                                                                                             | Net cash used in financing activities               |       |                    | (14,202 | )                  |       |         | (24,888 | )
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|Net increase in cash                                    |                                                                                                                             |                                                     | 1,266 |                    |         |                    | 854   |        
|Cash at beginning of period                             |                                                                                                                             |                                                     | 887   |                    |         |                    | 167   |        
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|Cash at end of period                                   |                                                                                                                             | $                                                   | 2,153 |                    |         | $                  | 1,021 |        
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|Supplemental disclosure:                                |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|                                                        |                                                                                                                             | Cash paid for interest                              |       | $                  | 7,931   |                    |       | $       | 9,632   |  
|                                                        |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|Summary of non-cash investing and financing activities: |                                                                                                                             |                                                     |       |                    |         |                    |       |        
|                                                        | Distributions to shareholders declared but not paid                                                                         |                                                     | $     | 4,764              |         |                    | $     | 6,474   |        
|                                                        | Distributions to minority interest declared but not paid                                                                    |                                                     |       | 195                |         |                    |       | 364     |        
|                                                        | Deferred equity compensation                                                                                                |                                                     |       | 1,003              |         |                    |       | 209     |        
|                                                        | Fair market value adjustment of interest rate swap                                                                          |                                                     |       | 1,318              |         |                    |       | (1,961  | )      
|                                                        | Minority interest payable adjustment due to the
issuance of common shares and accumulated other
comprehensive income (loss) |                                                     |       | 487                |         |                    |       | 132     |        

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

7



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##### 



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



|1. |  | ORGANIZATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Winston Hotels, Inc. (the Company) operates so as to qualify as a real
estate investment trust (REIT) for federal income tax purposes. The
accompanying unaudited consolidated financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation of
the interim financial statements. All such adjustments are of a normal and
recurring nature. Due to the seasonality of the hotel business and the
revenue recognition requirements of Staff Accounting Bulletin No. 101 (SAB
101), the information for the three and nine months ended September 30, 2002
and 2001 is not necessarily indicative of the results for a full year. This
Form 10-Q should be read in conjunction with the Companys Annual Report on
Form 10-K for the year ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|2. |  | ACQUISITION OF LEASEHOLD INTERESTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | 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, 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 the first anniversary, subject to certain limitations. One of
the 39 hotels was sold in the third quarter of 2002. Of the remaining eight
hotels, seven continue to be managed under contracts with Interstate
Management and Investment Corporation (IMIC) headquartered in Columbia,
South Carolina (unrelated to and unaffiliated with Interstate) and one by
Hilton Hotels Corporation. 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.
|  
|   |  | 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 its hotels, (ii) the benefits from any
operating margin improvements and risk of any operating margin deterioration
at its hotels, and (iii) more flexibility, in that its 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 $19,500, as determined and subject
to adjustment by the Leasehold Acquisition Agreement (which was filed as
Exhibit 10.1 to the Companys July 15, 2002 Current Report on Form 8-K), was
based upon a $17,000 purchase price for the leasehold interests, adjusted in
part for accrued interest and related expenses totaling approximately $700,
and $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 approximately $17,700. This cost
represents the cancellation of an executory contract and was expensed on June
28, 2002. In addition, a deferred tax benefit of $6,700 was recognized on
June 28, 2002 resulting from the timing difference of the $17,700 payment for
financial reporting purposes versus tax purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|3. |  | DERIVATIVE INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The Companys financing facilities consist of a $125,000 variable rate line
of credit and a $71,000 fixed rate loan with with a ten-year maturity, due
December 1, 2008, and a twenty-five-year amortization period. To reduce
overall interest cost, the Company uses interest rate hedging instruments to
convert a portion of its variable-rate debt to fixed-rate debt. Interest
rate differentials that arise under these instruments are recognized as
interest expense over the life of the contracts. Currently, the Companys
only such instrument is the interest rate swap instrument described below.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

8



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##### 





| |  | The following table summarizes the notional value and fair value of the
Companys interest rate swap instrument. The notional value at September 30,
2002 provides an indication of the extent of the Companys involvement with
derivative financial instruments at that time, but does not represent the
Companys overall exposure to credit, interest rate or market risks.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                      |  |          |        |          |  |          |      |            |  |  |         |  |  |   |      |  
|--------------------- |  | -------- | ------ | -------- |  | -------- | ---- | ---------- |  |  | ------- |  |  | - | ---- | -
|                      |  | Notional |        | Interest |  |          |      |            |  |  |         | 
|At September 30, 2002 |  | Value    |        | Rate     |  | Maturity |      | Fair Value
|                      |  |          |        |          |  |          |      |           
|Interest rate swap    |  | $        | 50,000 |          |  |          | 5.92 | %          |  |  | 12/2002 |  |  | $ | (526 | )



|   |  | The derivative financial instrument listed in the table above 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. On September 30, 2002, the derivative
instrument was reported at its fair value of $(526) and included in Accounts
payable and accrued expenses on the 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) would be reclassified into earnings in the same
periods in which the hedged interest payments affect earnings. Since the
Companys swap agreement matures in December 2002, within the next three
months, due to the projected differences between the fixed interest rate
under the Companys swap agreement and the variable interest rate under the
$125,000 line of credit, all of the current $(526) balance held in
Accumulated other comprehensive income (loss) will be reclassified into
earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|4. |  | SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Company participates in five joint venture agreements to develop and own
hotel properties, two with Regent Partners, Inc. (Regent), one with Marsh
Landing Investment, L.L.C. (Marsh Landing), and two with Concord Lodging
Investment Partners (Winston) LLC, an affiliate of Concord Hospitality
Enterprises Company (Concord). The Company entered into the joint ventures
with Concord during the second quarter of 2002 and entered into the joint
venture with Regent and Marsh Landing during 1999 and 2000, respectively.
The Company owns a 50% interest in each joint venture with Concord, one of
which owns an operating Fairfield Inn & Suites hotel in West Des Moines, IA,
which has been renovated and converted from a Wingate hotel, and the other
which owns a non-operating vacant hotel in Beachwood, OH. Both of these
hotels were purchased during the second quarter of 2002. The Beachwood, OH
hotel is currently under renovation and is expected to open as a Courtyard by
Marriott during the first quarter of 2003. The Company and Concord have
jointly signed completion guarantees for both of the properties, providing a
guaranty to the lender of the full, complete and satisfactory completion of
the renovation at each property. Pursuant to the completion guarantee
agreements, the construction process to convert the West Des Moines, IA
Wingate hotel to a Fairfield Inn & Suites hotel is to be completed by
February 15, 2003 and the construction process to renovate the Beachwood, OH
Courtyard by Marriott hotel is to be completed by June 26, 2003. The West
Des Moines Fairfield Inn & Suites hotel renovation is complete and the
Company expects that its obligation under this completion guaranty will be
removed by the end of the year. The Beachwood, OH renovation is under way
and expected to be completed during the first quarter of 2003. The total
cost to renovate the West Des Moines, IA Fairfield Inn & Suites was
approximately $900 and the Company anticipates that the total cost to
renovate the Beachwood, OH Courtyard by Marriott will be approximately
$6,700. Under both completion guarantees, 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.
|  
|   |  | The Company owns a 49% interest in each of the joint ventures with Regent and
Marsh Landing. Charles Winston and James Winston, both of whom are directors
of the Company, control the remaining 51% interest in the Marsh Landing joint
venture. As of September 30, 2002, these three joint ventures each owned an
operating hotel including a Hilton Garden Inn in Windsor, CT, a Hilton Garden
Inn in Evanston, IL and a Hampton Inn in Ponte Vedra, FL.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | As of September 30, 2002, total assets of the five joint ventures were
$53,717, total liabilities were $31,614, and total equity was $22,103. For
the three and nine months ended September 30, 2002, total revenue of the five
joint ventures was $1,293 and $3,343, respectively, total expenses were
$1,240 and $3,395, respectively, resulting in net income of $52 and a net
loss of $52, respectively. Pursuant to the requirements of SAB 101, $730 and
$1,876 of total revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

9



---



##### 





|   |  | was deferred during the three and nine months ended September 30, 2002, all
of which will be recognized in the fourth quarter of 2002.                                                                                                                                            
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | 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.

|                                                    |  |                                  |       |                                 |  |      |       |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | -------------------------------- | ----- | ------------------------------- |  | ---- | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                                    |  |                                  |       |                                
|                                                    |  | 2002                             |       | 2001                            |  | 2002 |       | 2001
|                                                    |  |                                  |       |                                 |  |      |       |     
|Net income (loss)                                   |  | $                                | 9,714 |                                 |  | $    | 3,546 |      |  | $ | (2,492 | ) |  | $ | 1,236  |  
|Less: preferred
stock distribution                  |  |                                  | 1,734 |                                 |  |      | 1,734 |      |  |   | 5,203  |   |  |   | 5,203  |  
|                                                    |  |                                  |       |                                 |  |      |       |      |  |   |        |   |  |   |        |  
|Net income (loss)
applicable to
common shareholders |  |                                  | 7,980 |                                 |  |      | 1,812 |      |  |   | (7,695 | ) |  |   | (3,967 | )
|Plus: income (loss)
allocation to
minority interest |  |                                  | 513   |                                 |  |      | 139   |      |  |   |       |   |  |   |       |  
|                                                    |  |                                  |       |                                 |  |      |       |      |  |   |        |   |  |   |        |  
|Net income (loss)
assuming dilution                 |  | $                                | 8,493 |                                 |  |      | 1,951 |      |  | $ | (7,695 | ) |  | $ | (3,967 | )
|                                                    |  |                                  |       |                                 |  |      |       |      |  |   |        |   |  |   |        |  



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

|                                                           |  |                                  |        |                                 |  |      |        |      |  |  |        |  |  |  |        | 
|---------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                                           |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                                           |  |                                  |        |                                
|                                                           |  | 2002                             |        | 2001                            |  | 2002 |        | 2001
|                                                           |  |                                  |        |                                 |  |      |        |     
|Weighted average
number of common
shares                   |  |                                  | 20,202 |                                 |  |      | 16,926 |      |  |  | 19,175 |  |  |  | 16,926 | 
|Minority interest
units with
redemption rights             |  |                                  | 1,298  |                                 |  |      | 1,298  |      |  |  |       |  |  |  |       | 
|Stock options                                              |  |                                  |       |                                 |  |      | 34     |      |  |  |       |  |  |  |       | 
|                                                           |  |                                  |        |                                 |  |      |        |      |  |  |        |  |  |  |        | 
|Weighted average
number of common
shares assuming
dilution |  |                                  | 21,500 |                                 |  |      | 18,258 |      |  |  | 19,175 |  |  |  | 16,926 | 
|                                                           |  |                                  |        |                                 |  |      |        |      |  |  |        |  |  |  |        | 



|   |  | The number of potential common shares (represented by minority interest and
outstanding options) for the nine months ended September 30, 2002 and
September 30, 2001 totaled 1,313 and 1,318, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company declared quarterly cash dividends of $0.15 per common share and
$0.578125 per preferred share during each of the first three quarters of
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|6. |  | 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 amounts of existing
assets and liabilities and their respective tax bases. The income tax
benefit for the three months ended September 30, 2002 consists of a deferred
federal income tax benefit of $324 and a deferred state income tax benefit of
$38.
|  
|   |  | The benefit from income taxes and related deferred tax asset was calculated
using an effective tax rate of 38% applied to the loss of Barclay. The
deferred tax asset also relates to the cost of acquiring the leases for 47 of
the Companys hotel                                                                                                                                                                                                                                                                                                                                                                                                                                            

10



---



##### 





|   |  | properties from Interstate, which was expensed for
financial reporting purposes whereas, for tax purposes, this payment will be
amortized over the lives of the leases. The Company believes that Barclay
will generate sufficient future taxable income to realize in full the deferred tax asset.
Accordingly, no valuation allowance has been recorded as of September 30,
2002.                                                                                                                                                                                                                                                                    
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|7. |  | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|  
|   |  | The Company sold its Comfort Inn hotel in Clearwater, FL during the second
quarter of 2002 and its Hampton Inn hotel in Southern Pines, NC during the
third quarter of 2002 for total cash proceeds of $7,200, resulting in a net
loss of $1,452. The carrying value of the hotels sold totaled $8,370.
Expenses associated with the sales totaled $282, resulting in net cash
proceeds of $6,918. The total revenues and net income (loss) for both hotels
for the nine months ended September 30, 2002 was $656 and $76, respectively,
and for the nine months ended September 30, 2001 was $624 and $(3),
respectively.                             
|  
|8. |  | RECENT ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | 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). 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.                                                                                                                                                                                                                                                                                                                               
|  
|9. |  | SUBSEQUENT EVENT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | On October 29, 2002, the Company announced the resignation of James D.
Rosenberg, its President and Chief Operating Officer. Mr. Rosenberg left the
Company in November to fill one of the top positions at Archstone-Smith
Trust, (NYSE: ASN), one of the largest publicly traded apartment real estate
investment trusts in the country. Robert W. Winston, the Companys Chief
Executive Officer, assumed the additional responsibilities and title held by
Mr. Rosenberg.                                                                                                                                                                          

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Item 2   Managements Discussion and Analysis of Financial Condition and Results of Operations
($ in thousands)

Overview

Winston Hotels, Inc. (the Company) operates so as to qualify for federal
income tax purposes as a real estate investment trust (REIT) to invest in
hotel properties. The Company, through its 93.96% equity interest in WINN
Limited Partnership, currently owns or is invested in 53 hotels in 16 states
with an aggregate of 7,273 rooms. The Company wholly owns 46 of the 53 hotels
(the Current Hotels). The Company also owns a 49% ownership interest in
three joint ventures, each of which owns an operating hotel, including the
Evanston, IL Hilton Garden Inn, the Windsor, CT Hilton Garden Inn and the Ponte
Vedra, FL Hampton Inn. The Company also owns a 50% ownership interest in two
joint ventures, one of which owns an operating hotel, the Fairfield Inn &
Suites in West Des Moines, IA, and one of which owns a non-operating hotel, the
Courtyard by Marriott in Beachwood, OH, (collectively the Joint Venture
Hotels). The Courtyard by Marriott in Beachwood, OH is currently under
renovation and expected to open in the first quarter of 2003. The Joint
Venture Hotels have a total of 668 rooms. Additionally, the Company has
provided mezzanine financing to two unrelated parties, both of which own Hilton
Garden Inn hotels having a total of 275 rooms. The Company has no ownership
interest in any property for which it has provided mezzanine financing.

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,
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 the first
anniversary, subject to certain limitations. One of these hotels was sold in
the third quarter of 2002. Interstate currently manages 38 of the Current
Hotels, including two Joint Venture Hotels. Of the remaining hotels, seven
continue to be managed under contracts with Interstate Management and
Investment Corporation (IMIC) headquartered in Columbia, South Carolina
(unrelated to and unaffiliated with Interstate) and one by Hilton Hotels
Corporation. The two hotels in which the Company owns a 50% interest are
managed by Concord Hospitality Enterprises Company.

Three hotels in which the Company has an ownership interest, including two
wholly owned hotels and one Joint Venture Hotel, will 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.

Results of Operations

The following table outlines the number of hotels wholly owned by the Company
by service type as of September 30, 2002 and 2001.

|                       |  |                    |    |                    |  |  |    | 
|---------------------- |  | ------------------ | -- | ------------------ |  |  | -- | 
|Type of Hotel          |  | September 30, 2002 |    | September 30, 2001
|                       |  |                    |    |                   
|Limited-service hotels |  |                    | 26 |                    |  |  | 28 | 
|Extended-stay hotels   |  |                    | 9  |                    |  |  | 9  | 
|Full-service hotels    |  |                    | 11 |                    |  |  | 11 | 
|                       |  |                    |    |                    |  |  |    | 
|                       |  |                    |    |                    |  |  |    | 
|Total                  |  |                    | 46 |                    |  |  | 48 | 
|                       |  |                    |    |                    |  |  |    | 

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

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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. One of these hotels, the Southern Pines, NC
Hampton Inn has 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 its hotels, (ii) the benefits from any
operating margin improvements and risk of any operating margin deterioration at
its hotels, and (iii) more flexibility, in that its 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 $19,500, as determined and subject to
adjustment by the Leasehold Acquisition Agreement (which was filed as Exhibit
10.1 to the Companys July 15, 2002 Current Report on Form 8-K), was based upon
a $17,000 purchase price for the leasehold interests, adjusted in part for
accrued interest and related expenses totaling approximately $700, and $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 approximately $17,700. This cost represents the
cancellation of an executory contract and was expensed on June 28, 2002. In
addition, a deferred tax benefit of $6,700 was recognized on June 28, 2002
resulting from the timing difference of the $17,700 payment for financial
reporting purposes versus tax purposes. These transactions are not included in
the selected pro forma financial information shown below in an effort to
provide more comparable balances between the periods presented.

Due to the acquisition of the leasehold interests from Interstate, the results
of operations for the three and nine months ended September 30, 2002 versus the
results of operations for the three and nine months ended September 30, 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 three and nine months ended September 30, 2002 and 2001, shown below is
selected pro forma financial information for the three and nine months ended
September 30, 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 sale of the Companys Raleigh, NC Comfort Inn hotel, which occurred in
June 2001, occurred on January 1, 2001 as well. The selected pro forma
financial information is based on both the Companys and CapStar Winston
Company, L.L.C.s historical results of operations, after giving effect to
certain pro forma adjustments. These adjustments include the elimination of
the percentage lease revenue applicable to the 45 wholly owned hotels for which
the leasehold interests were acquired. 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.

Actual Three Months Ended September 30, 2002 versus Actual Three Months Ended
September 30, 2001 and Actual Nine Months Ended September 30, 2002 versus
Actual Nine Months Ended September 30, 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 will be received from Barclay and eliminated in
consolidation. Beginning July 1, 2002, this percentage lease revenue

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reflects only the percentage lease revenue for the two wholly owned hotels that remain
under long term leases with third parties.

Interest, Joint Venture and Other Income Interest, joint venture and other
income decreased from $452 in 2001 to $325 in 2002 for the quarter and from
$1,750 in 2001 to $973 in 2002 year to date. The decline is primarily due to a
decrease in third party development 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 $125 for the quarter, from $1,715 in 2001 to
$1,590 in 2002, and decreased $385 year to date, from $5,386 in 2001 to $5,001
in 2002. This decline is primarily due to lower property taxes as a result of
successful appeals and lower appraised values for some properties. Insurance
expense decreased $66 and $29 for the quarter and year to date in 2002,
respectively, as a result of additional out of pocket costs incurred in 2001.

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.

Depreciation and amortization Depreciation and amortization expenses remained
relatively consistent with the prior quarter and year to date.

General and Administrative General and administrative expense remained flat
for the quarter, $1,224 for 2002 versus $1,232 for 2001, and increased $365
year to date, from $3,729 in 2001 to $4,094 in 2002. The increase in the year
to date expenses is primarily attributable to the write off of certain
development costs of $133, and the write off of a mezzanine loan totaling $250.

Interest Interest expense decreased $342 for the quarter, from $2,984 in 2001
to $2,642 in 2002, and decreased $1,276 year to date, from $9,277 in 2001 to
$8,001 in 2002. These decreases are due to both a decline in weighted average
interest rates as well as a decline in the weighted average outstanding debt
balances. The weighted average outstanding debt balances decreased primarily
due to the sale of 3,162 shares of common stock in March 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 represents the loss
experienced on the sale of the Raleigh, NC Comfort Inn in June 2001.

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 the third quarter of 2002.

Discontinued Operations The Company sold the Clearwater, FL Comfort Inn in
May 2002 and the Southern Pines, NC Hampton Inn in August 2002. The loss on
the sale and the operating results of these properties are shown as
discontinued operations for the periods presented.

In an effort to make a more meaningful comparison between periods, in addition
to the comparison of actual results of operations for the three and nine months
ended September 30, 2002 and 2001 shown above, shown below is selected pro
forma financial information for the three and nine months ended September 30,
2002 and 2001, as if the acquisition of the leasehold interests from Interstate
occurred on January 1, 2001. This information is shown for the 46 wholly owned
hotels that were open for the entire periods presented.

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Selected Pro Forma Financial Information  Three Months Ended September 30,
2002 versus Three Months Ended September 30, 2001 and Nine Months Ended
September 30, 2002 versus Nine Months Ended September 30, 2001 (in thousands)

|                          |                                           |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|------------------------- | ----------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|                          |                                           |  | Three Months Ended |        | Nine Months Ended
|                          |                                           |  | September 30,      |        | September 30,    
|                          |                                           |  |                    |        |                  
|                          |                                           |  | 2002               |        | 2001              |  | 2002 |        | 2001
|                          |                                           |  |                    |        |                   |  |      |        |     
|Revenue:                  |                                           |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |       
|                          | Rooms                                     |  | $                  | 30,420 |                   |  | $    | 30,336 |      |  | $ | 90,456 |  |  | $ | 92,733 | 
|                          | Other hotel revenue                       |  |                    | 3,051  |                   |  |      | 3,067  |      |  |   | 9,315  |  |  |   | 9,595  | 
|Hotel operating expenses: |                                           |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |       
|                          | Rooms and other operating expenses        |  |                    | 9,507  |                   |  |      | 9,155  |      |  |   | 27,191 |  |  |   | 27,385 | 
|                          | Undistributed property operating expenses |  |                    | 11,016 |                   |  |      | 10,737 |      |  |   | 32,421 |  |  |   | 31,965 | 

REVENUE

Room Revenue Room revenue increased $84 to $30,420 for the three months ended
September 30, 2002 versus $30,336 for the three months ended September 30,
2001. For the quarter, revenue per available room (RevPAR) increased 0.3%
from $52.06 in 2001 to $52.20 in 2002. Average daily rate for the quarter
declined 2.8% from $81.04 in 2001 to $78.81 in 2002, while occupancy rates
increased from 64.2% to 66.2%.

Room revenue decreased $2,277 to $90,456 for the nine months ended September
30, 2002 versus $92,733 for the nine months ended September 30, 2001. For the
nine months year to date, revenue per available room (RevPAR) decreased 4.3%
from $54.66 in 2001 to $52.31 in 2002. Average daily rate for the nine months
ended September 30, 2002 declined 3.7% from $82.39 in 2001 to $79.38 in 2002,
while occupancy rates decreased from 66.3% to 65.9%. The decrease in RevPAR is
primarily a result of the sluggish economy.

Other Hotel Revenue Other hotel revenue consists of food and beverage revenue
and other operating departments revenue. Other hotel revenue declined from
$3,067 in 2001 to $3,051 in 2002 for the quarter, and from $9,595 in 2001 to
$9,315 in 2002 year to date. 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.

EXPENSES

As a percentage of total hotel revenue, hotel operating expenses increased for
the quarter from 55.5% in 2001 to 57.4% in 2002, and also increased for the
nine months ended September 30, 2002 from 53.7% for 2001 to 55.6% for 2002.

Rooms and Other Operating Expenses Rooms and other operating expense
increased $352 for the quarter, from $9,155 in 2001 to $9,507 in 2002,
primarily due to an increase in payroll costs. Year to date, rooms and other
operating expense decreased slightly from $27,385 in 2001 to $27,191 in 2002
due primarily to lower laundry costs and lower travel agent commissions, due in
part to lower occupancy rates. Food and beverage and other operating
departments expenses remained relatively consistent for both the quarter and
year to date.

Undistributed Property Operating Expenses Undistributed property operating
expenses consist of administrative and general, sales and marketing, energy,
repairs and maintenance, franchise fees, management fees and other costs.
Undistributed property operating expenses increased $279, from $10,737 in 2001
to $11,016 in 2002 for the quarter, and increased $456, from $31,965 in 2001 to
$32,421 in 2002 year to date. 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 lower franchise fees on a year
to date basis due to lower room revenue.

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Liquidity and Capital Resources

The Company finances its operations from operating cash flow, which was
principally derived from percentage leases through June 30, 2002 and from the
operations of the hotels for which the leasehold interests were acquired
effective July 1, 2002. For the nine months ended September 30, 2002, cash
flow provided by operating activities was $13,876. This amount is after the
cash used to acquire the leasehold interests for 47 of the Companys hotels
from CapStar Winston on June 28, 2002 for total consideration of $19.5 million,
resulting in a deferred tax asset of $6,714. Excluding this transaction, the
Companys cash flow provided by operating activities totaled $26,689. Funds
from operations, which for the Company is equal to net income (loss) before
loss on sale of property, allocation to minority interest and income taxes
(excluding extraordinary items and gains/losses on debt restructuring), plus
real estate-related depreciation and amortization, adjustments for
unconsolidated partnerships and joint ventures, and the change in deferred
revenue resulting from SAB 101, less preferred share distributions, was
$19,257. 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. During the first three quarters of 2002, the Company
declared distributions of $9,005 to its common shareholders ($0.45 per share)
and $5,203 to its preferred shareholders ($1.734 per share). The Company
intends to monitor its dividend policy closely and to act accordingly as
earnings dictate. The Company also intends to fund cash distributions to
shareholders out of cash flow from operating activities. The Company may
incur, or cause its affiliate, WINN Limited Partnership (the Partnership), to
incur, indebtedness to meet its dividend policy or 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.

The Companys net cash provided by investing activities for the nine months
ended September 30, 2002 totaled $1,592. The Company received net cash
proceeds totaling $3,240 from the sale of the Clearwater, FL Comfort Inn hotel
and $3,678 from the sale of the Southern Pines, NC Hampton Inn. The sale of
these two hotels resulted in a net losses of $790 and $662, respectively.
Proceeds from asset sales are used for debt reduction, mezzanine financing, to
invest in new, premium and upscale properties, or to invest in hotels 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. Gross capital expenditures at the wholly
owned hotels totaled $3,460. The Company plans to spend approximately $2,700
to renovate certain of its Current Hotels during the next three months. These
expenditures exceed the 5% of room revenues for its hotels (7% of room revenues
and food and beverage revenues for one of its full-service hotels) which the
Company is required to spend under its percentage leases for periodic capital
improvements and the refurbishment and replacement of furniture, fixtures and
equipment at its wholly owned hotels. These capital expenditures are funded
from operating cash flow, and possibly from borrowings under the Companys
$125,000 line of credit, 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 have approximated 5.6% and 5.1%
of room revenues for each of the nine months ended September 30, 2002 and 2001,
respectively.

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) during the
second quarter of 2002 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 owns a 50% interest in the Concord Joint
Venture. The Concord Joint Venture currently owns 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 is currently under renovation and
expected to open as a Courtyard by Marriott during the first quarter of 2003.
As of September 30, 2002, the Companys investment in the Concord Joint Venture
totaled $2,619. The Company receives cash distributions of any operating
profits from the Concord Joint Venture on a quarterly basis.

The Company and Concord have jointly signed completion guarantees for both of
the properties, providing a guaranty to the lender of the full, complete and
satisfactory completion of the renovation at each property. Pursuant to the
completion guarantee agreements, the construction process to convert the West
Des Moines, IA Wingate hotel to a Fairfield Inn & Suites hotel is to be
completed by February 15, 2003 and the construction process to renovate the
Beachwood, OH Courtyard by Marriott hotel is to be completed by June 26, 2003.
The West Des Moines Fairfield Inn & Suites hotel renovation is complete and the
Company expects that its obligation under this completion guaranty will be
removed by the end of the year. The Beachwood, OH renovation is under way and
expected to be completed during the first quarter of 2003. The total cost to
renovate the West Des Moines, IA Fairfield Inn & Suites was approximately $900
and the Company estimates that the total cost to renovate the Beachwood, OH
Courtyard by Marriott will be approximately $6,700. Under both completion

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guarantees, 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.

During 2000, the Company entered into a joint venture agreement with Marsh
Landing Investment, L.L.C., (the Marsh Landing Joint Venture) to jointly
develop hotel properties. Marsh Landing Investment, L.L.C. is owned by the
Companys Chairman, Charles M. Winston and Board Member, James H. Winston. The
first hotel developed by the Marsh Landing Joint Venture, a 118-room Hampton
Inn in Ponte Vedra, FL, opened in December 2000. As of September 30, 2002,
subsequent to distributions paid to the Company from the operations of the
hotels, the Companys investment in the Marsh Landing Joint Venture totaled
$1,073.

During 1999, the Company entered into a joint venture agreement with Regent
Partners, Inc., (the Regent Joint Venture) to jointly develop hotel
properties. The Regent Joint Venture has since developed two hotels, a full
service 158-room Hilton Garden Inn in Windsor, CT, which opened in September
2000, and a full service 178-room Hilton Garden Inn in Evanston, IL, which
opened in July 2001. As of September 30, 2002, subsequent to distributions
paid to the Company from the operations of the hotels, the Companys investment
in the Regent Joint Venture totaled $6,261.

As of September 30, 2002, total assets of the five joint venture properties
were $53,717, total liabilities were $31,614, and total equity was $22,103.
For the three months and nine months ended September 30, 2002, total revenue of
the five joint ventures properties was $1,293 and $3,343, respectively, total
expenses were $1,240 and $3,395, respectively, resulting in net income of $52
and a net loss of $52, respectively. Pursuant to the requirements of SAB 101,
$730 and $1,876 of total revenue was deferred during the three and nine months
ended September 30, 2002, all of which will be recognized in the fourth quarter
of 2002.

The Company holds a 49 percent ownership interest in both the Marsh Landing
Joint Venture and the Regent Joint Venture. Under the terms of both of these
joint venture agreements, in addition to having received fees for its services,
which included development fees and purchasing fees during construction, the
Company currently receives ongoing asset management fees. The Company also
receives cash distributions of the Joint Ventures operating profits, if any,
on a quarterly basis. The Company continues to seek additional joint venture
opportunities.

On July 5, 2000, the Company entered into a strategic alliance with Noble
Investment Group, Ltd. (Noble) to partially finance and develop two Hilton
Garden Inn hotels in Atlanta, GA and Tampa, FL and to explore other similar
upscale Hilton and Marriott opportunities. In July 2000, the Company provided
a $1,080 mezzanine loan for a Hilton Garden Inn in Atlanta and in February 2001
provided a $2,186 mezzanine loan for a Hilton Garden Inn in Tampa. Noble
provided the remainder of the funding and owns and operates the hotels. The
Atlanta hotel opened in April 2001 and the Tampa hotel opened in February 2002.
In connection with the alliance, the Company co-developed the Atlanta project
with Noble, provided all development services for the Tampa project, and
accordingly received fees for its development services. During the third
quarter of 2002, the Company continued to receive interest income from these
mezzanine loans.

During August, 2002, Noble signed a contract with a third party (Purchaser)
to sell the Tampa Hilton Garden Inn. The contract was terminated soon
thereafter. The property is no longer being marketed for sale.

Also, in 2001 the Company 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. As a result of a default by the
borrower in accordance with the terms of the loan agreement, this mezzanine
loan was fully reserved for in the first quarter of 2002. The Company
continues to seek to recover the full loan balance, however, there are no
guarantees that the Company will be able to recover any portion of the loan
balance.

The Companys net cash used in financing activities during the nine months
ended September 30, 2002 totaled $14,202. This amount included the payment of
distributions to shareholders of $13,717, the payment of distributions to the
Partnerships minority interest of $585, long-term debt payments of $949, and a
reduction of $25,300 in the outstanding balance under the Companys $125,000
line of credit (the Line) from $102,900 at December 31, 2001 to $77,600 at
September 30, 2002. The Company was able to reduce its outstanding balance
under the Line as a result of the execution of a public offering in March 2002,
which raised net proceeds of $26,897 through the sale of 3,162,500 shares of
Common Stock. Fees incurred in connection with financing activities totaled
$548.

The Line is collateralized with 32 of the Current Hotels. During the third
quarter of 2002, the Company pledged six additional properties as collateral
for the Line. Currently all 46 of the Companys wholly owned properties are
pledged as collateral, 32 against the Line and 14 against its long-term CMBS
note with GE Capital Corporation. In accordance with the provisions of the
Line, the Companys availability under the Line totaled approximately $38.8
million as of September 30, 2002. The Line

17



---



##### 



bears interest generally 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%.

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. The Lines interest rate spread is currently
2.00%, equaling a fixed rate of 7.915% on $50,000 until December 18, 2002.

The Company had $66,735 in long-term debt at September 30, 2002 that was
subject to a fixed interest rate and principal payments. This debt is
comprised of a 10-year loan with a 25-year amortization period with GE Capital
Corporation, which carries an interest rate of 7.375%. This debt facility is
collateralized with 14 of the Companys Current Hotels.

As of December 31, 2001, the Companys contractual obligations and commitments
(excluding obligations and commitments pursuant to the Companys joint
ventures) were as follows:

|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |        | 
|---------------------------- | ----------------------------- | ----- | ------ | -------- |  | ----------- | ----- | ----------- |  | ------- | ------ | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   | After 
|Contractual Obligations      |                               | Total |        | < 1 Year |  | 1 - 3 Years |       | 4 - 5 Years |  | 5 Years
|                             |                               |       |        |          |  |             |       |             |  |        
|Long-term debt               |                               |       | 66,735 |          |  |             | 1,350 |             |  |         | 4,702  |       |  |   | 3,763 |       |  |   | 56,920 |       
|Corporate office lease       |                               |       | 889    |          |  |             | 315   |             |  |         | 574    |       |  |   |      |       |  |   |       |       
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |       
|                             | Total contractual obligations |       | $      | 67,624   |  |             | $     | 1,665       |  |         | $      | 5,276 |  |   | $     | 3,763 |  |   | $      | 56,920 | 
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |       
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |       
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   | After 
|Other
Commercial Commitments |                               | Total |        | < 1 Year |  | 1 - 3 Years |       | 4 - 5 Years |  | 5 Years
|                             |                               |       |        |          |  |             |       |             |  |        
|Line of credit               |                               | $     | 77,600 |          |  | $           |      |             |  | $       | 77,600 |       |  | $ |      |       |  | $ |       |       
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |       

The Company intends to continue to seek additional mezzanine loan opportunities
and to acquire and develop additional hotel properties that meet its investment
criteria and is continually evaluating such opportunities. 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. Further, there can be no assurances that the Company will be able to
obtain any additional financing.

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.

On an on-going basis, all estimates are evaluated by the Companys management,
including those related to bad debts, carrying value of investments in hotel
properties, income taxes, contingencies and litigation. All estimates are
based upon historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.

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

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

18



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##### 



The Company has a 49% interest in three joint ventures and a 50% ownership in
two joint ventures. 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 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.

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 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 interest rate on debt based on
floating-rate indices and to 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. On December
18, 2000, the Company completed an interest rate swap on $50,000 of its
outstanding variable rate debt under its $125,000 line of credit (the Line).
The Companys interest rate swap qualifies as a hedge for accounting purposes,
and therefore is reported at its fair value on the Consolidated Balance Sheets.
Changes in the Companys amounts due to banks could affect the hedge
determination. The interest rate swap 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 5.915% until December 18, 2002, which is two years prior
to the expiration of the Line, at which time the variable rate debt will no
longer be fixed. The Company plans to continue to monitor its interest rate
risk and to manage and limit this risk in accordance with its established
interest rate risk management policies.

The Company records a valuation allowance to reduce the deferred tax assets to
an amount that 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. Likewise, should the Company determine that it would not be able to
realize all or part of the net deferred tax asset in the future, an adjustment
to the deferred tax asset would be charged to income in the period such
determination was made.

Recent 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). 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.

19



---



##### 



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.

Adjusted Funds From Operations

The Company considers Funds From Operations (FFO) a widely used and
appropriate measure of performance for an equity REIT. FFO, as defined by the
National Association of Real Estate Investment Trusts, is income (loss) before
minority interest (determined in accordance with generally accepted accounting
principles), excluding extraordinary items and gains (losses) from sales of
operating properties, plus real estate-related depreciation and amortization
and after adjustments for unconsolidated partnerships and joint ventures. The
Company further adjusts FFO by subtracting preferred stock dividends, adding
the change in deferred revenue during the period to eliminate the impact of SAB
101, and adding back the cost of the acquisition of the leases from Interstate.
The calculation of FFO may vary from entity to entity and as such the
presentation of adjusted FFO by the Company may not be comparable to other
similarly titled measures of other reporting companies. Adjusted FFO is not
intended to represent cash flows for the period. Adjusted 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. The following table details the computation of
adjusted FFO for the three and nine months ended September 30, 2002.

|                                                                                                |  |                                  |        |                                 |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | ------------------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                                                                                                |  |                                  |        |                                
|                                                                                                |  | 2002                             |        | 2001                            |  | 2002 |        | 2001
|                                                                                                |  |                                  |        |                                 |  |      |        |     
|Income (loss) before loss on sale of property,
allocation to minority interest and income
taxes |  | $                                | 10,527 |                                 |  | $    | 3,644  |      |  | $ | (8,713 | ) |  | $ | 1,618  |  
|Plus: income (loss) from discontinued operations                                                |  |                                  |       |                                 |  |      | 41     |      |  |   | 76     |   |  |   | (3     | )
|Plus: depreciation                                                                              |  |                                  | 4,870  |                                 |  |      | 4,973  |      |  |   | 14,657 |   |  |   | 15,161 |  
|Plus: depreciation from discontinued operations                                                 |  |                                  | 47     |                                 |  |      | 159    |      |  |   | 281    |   |  |   | 506    |  
|Plus: depreciation of joint venture properties                                                  |  |                                  | 215    |                                 |  |      | 191    |      |  |   | 594    |   |  |   | 428    |  
|Plus: deferred percentage lease revenue                                                         |  |                                  | (8,095 | )                               |  |      | (802   | )    |  |   | (1,022 | ) |  |   | 9,961  |  
|Plus: deferred percentage lease revenue of
joint venture properties                             |  |                                  | 357    |                                 |  |      | 243    |      |  |   | 919    |   |  |   | 378    |  
|Plus: lease acquisition expense                                                                 |  |                                  |       |                                 |  |      |       |      |  |   | 17,668 |   |  |   |       |  
|Less: preferred stock dividends                                                                 |  |                                  | (1,734 | )                               |  |      | (1,734 | )    |  |   | (5,203 | ) |  |   | (5,203 | )
|                                                                                                |  |                                  |        |                                 |  |      |        |      |  |   |        |   |  |   |        |  
|Adjusted FFO                                                                                    |  | $                                | 6,187  |                                 |  | $    | 6,715  |      |  | $ | 19,257 |   |  | $ | 22,846 |  
|                                                                                                |  |                                  |        |                                 |  |      |        |      |  |   |        |   |  |   |        |  

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, 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,
terrorism, competition, 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, and the failure to make additional
mezzanine debt investments and investments in distressed hotel assets. These
and additional risks are discussed in the Companys filings with the Securities
and Exchange Commission, including but not limited to its Annual Report on Form
10-K for the year ended December 31, 2001, Quarterly Reports on Form 10-Q and its other periodic reports.

20



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##### 



Item 3  Quantitative and Qualitative Disclosures About Market Risk
($ in thousands)

As of September 30, 2002, the Companys exposure to market risk for a change in
interest rates related solely to debt outstanding under its $125,000 line of
credit (the Line). Debt outstanding under the Line totaled $77,600 at
September 30, 2002. The Line, which expires in December 2004, bears interest
generally at rates from 30-day LIBOR plus 1.75% to 2.50%, based on the
Companys consolidated debt leverage ratio. The Companys current interest
rate is 30-day LIBOR plus 2.00%. On December 18, 2000, the Company completed
an interest rate swap on $50,000 of its outstanding variable rate debt under
the Line. The agreement is 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 replaces 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 Lines interest rate spread is currently 2.00%,
equating to an effective fixed rate of 7.915% on $50,000 until December 18,
2002. The differential actually paid or received on interest rate agreements
is recognized as an adjustment to interest expense over the life of the swap.
During the nine months ended September 30, 2002, the cash paid in excess of
receipts was $1,547. The weighted average interest rate on the Line for the
three months ended September 30, 2002 was 6.58%. At September 30, 2002, the
Company had $27,600 of variable rate debt outstanding under the Line that
remained 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 per annum, the Companys third quarter interest expense would have
increased by approximately $84, based on the weighted-average balance of
$33,845 of variable rate debt outstanding and exposed to fluctuations in the
market rate of interest. The Company does not enter into derivative or
interest rate transactions for speculative purposes.

The following table presents the aggregate maturities and historical cost
amounts of the Companys GE Capital Corporation fixed rate debt principal and
interest rates by maturity dates at September 30, 2002:

|              |      |                 |        |               |  |  |       |       |  
|------------- | ---- | --------------- | ------ | ------------- |  |  | ----- | ----- | -
|Maturity Date |      | Fixed Rate Debt |        | Interest Rate
|              |      |                 |        |              
|              | 2002 |                 | $      | 328           |  |  |       | 7.375 | %
|              | 2003 |                 |        | 1,376         |  |  |       | 7.375 | %
|              | 2004 |                 |        | 1,480         |  |  |       | 7.375 | %
|              | 2005 |                 |        | 1,594         |  |  |       | 7.375 | %
|              | 2006 |                 |        | 1,715         |  |  |       | 7.375 | %
|Thereafter    |      |                 | 60,242 |               |  |  | 7.375 | %    
|              |      |                 |        |               |  |  |       |      
|              |      | $               | 66,735 |               |  |  | 7.375 | %    
|              |      |                 |        |               |  |  |       |      

Item 4  Controls and Procedures

Based on the Companys most recent evaluation, which was completed within 90
days of the filing of this Form 10-Q, 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) are effective. 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.

21



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##### 



PART II  OTHER INFORMATION

|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 5. |  | Other Information.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |  | On October 29, 2002, the Company announced the resignation of James
D. Rosenberg, its President and Chief Operating Officer. Mr.
Rosenberg left the Company in November to fill one of the top
positions at Archstone-Smith Trust, (NYSE: ASN), one of the largest
publicly traded apartment real estate investment trusts in the
country. Robert W. Winston, the Companys Chief Executive Officer,
assumed the additional responsibilities and title held by Mr.
Rosenberg.
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|Item 6. |  | Exhibits and Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |  | (a) Exhibits  none.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|        |  | (b) Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| | (1) |  | The Company filed a current report on
Form 8-K, pursuant to Item 2 of Form 8-K, dated July 15,
2002. This Form 8-K reported the Companys acquisition,
(through its taxable REIT subsidiary, Barclay Hospitality
Services Inc. Barclay) of the leasehold interests for
47 of its hotels from CapStar Winston Company, L.L.C.
CapStar, a wholly owned subsidiary of MeriStar Hotels &
Resorts, Inc. MeriStar. Simultaneously with the
acquisition, Barclay entered into new management
contracts with MeriStar for 39 of the 47 hotels covered
by the leases. The financial statements of CapStar were
incorporated by reference from the Companys Annual
Report on Form 10-K for the year ended December 31, 2001,
filed with the Securities and Exchange Commission on
March 15, 2002 and the Companys Quarterly Report on Form
10-Q for the quarter ended March 31, 2002, filed with the
Securities and Exchange Commission on May 7, 2002.
Copies of the Leasehold Acquisition Agreement, the Hotel
Management Agreement and the Form of Leases were filed as
exhibits to the Form 8-K.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | The Company filed a current report on
Form 8-K/A dated August 1, 2002, as an amendment to the
current report on Form 8-K filed on July 15, 2002,
pursuant to Item 2 of Form 8-K. Included in this Form
8-K/A was the pro forma financial information required to
be filed but not available at the time of the initial
filing.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (3) |  | The Company filed a current report on
Form 8-K dated August 14, 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

22



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##### 



SIGNATURES

Pursuant to the requirements 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                                 
|                       |  |                                                     
|Date November 12, 2002 |  | /s/ Joseph V. Green                                 
|                       |  |                                                     
|                       |  | Joseph V. Green                                     
|                       |  | Executive Vice President and Chief Financial Officer
|                       |  | (Authorized officer and Principal Financial Officer 

23



---



##### 



CERTIFICATIONS

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



|1. |  | I have reviewed this quarterly report on Form 10-Q of Winston
Hotels, Inc.;                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly 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 quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly 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 quarterly 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: November 12, 2002 |  |                           
|                        |  |                           
|                        |  | /s/ Robert W. Winston, III
|                        |  |                           
|                        |  | Robert W. Winston, III    
|                        |  | Chief Executive Officer   

24



---



##### 



I, Joseph V. Green, certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Winston
Hotels, Inc.;                                                                                                                                                                                                                                                   
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly 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 quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly 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 quarterly 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 quarterly 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 quarterly report (the Evaluation
Date); and                                                                                                  
|
| | c. |  | presented in this quarterly 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 quarterly 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: November 12, 2002 |  |                                                     
|                        |  |                                                     
|                        |  | /s/ Joseph V. Green                                 
|                        |  |                                                     
|                        |  | Joseph V. Green                                     
|                        |  | Executive Vice President and Chief Financial Officer

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