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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 June 30, 2003 |  | Commission file number 0-23732

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

|                         |  |                                     
|------------------------ |  | ------------------------------------
|North Carolina           |  | 56-1624289                          
|(State of incorporation) |  | (I.R.S. Employer Identification 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 o

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

The number of shares of Common Stock, $.01 par value, outstanding on July 31,
2003 was 20,193,439.



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WINSTON HOTELS, INC.
Index

|        |  |                                                                                                   |  |     
|------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                   |  | Page
|        |  |                                                                                                   |  |     
|PART I  |  | FINANCIAL INFORMATION                                                                             |  |     
|        |  |                                                                                                   |  |     
|Item 1. |  | Financial Statements                                                                              |  |     
|        |  |                                                                                                   |  |     
|        |  | WINSTON HOTELS, INC.                                                                              |  |     
|        |  |                                                                                                   |  |     
|        |  | Consolidated Balance Sheets as of June 30, 2003 (unaudited) and
December 31, 2002                 |  | 3   
|        |  |                                                                                                   |  |     
|        |  | Unaudited Consolidated Statements of Operations for the three months ended
June 30, 2003 and 2002 |  | 4   
|        |  |                                                                                                   |  |     
|        |  | Unaudited Consolidated Statements of Operations for the six months ended
June 30, 2003 and 2002   |  | 5   
|        |  |                                                                                                   |  |     
|        |  | Unaudited Consolidated Statement of Shareholders Equity for the six months ended
June 30, 2003   |  | 6   
|        |  |                                                                                                   |  |     
|        |  | Unaudited Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2002   |  | 7   
|        |  |                                                                                                   |  |     
|        |  | Notes to Consolidated Financial Statements                                                        |  | 8   
|        |  |                                                                                                   |  |     
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations             |  | 15  
|        |  |                                                                                                   |  |     
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                                        |  | 26  
|        |  |                                                                                                   |  |     
|Item 4. |  | Controls and Procedures                                                                           |  | 26  
|        |  |                                                                                                   |  |     
|PART II |  | OTHER INFORMATION                                                                                 |  |     
|        |  |                                                                                                   |  |     
|Item 4. |  | Submission of Matters to Vote of Security Holders                                                 |  | 28  
|        |  |                                                                                                   |  |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                  |  | 28  
|        |  |                                                                                                   |  |     
|        |  | SIGNATURES                                                                                        |  | 30  
|        |  |                                                                                                   |  |     
|        |  | EXHIBIT INDEX                                                                                     |  | 31  

2



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##### 



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

|                                                                                                                                           |                                    |   |               |         |                   |   |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------- | - | ------------- | ------- | ----------------- | - | ------- | ------- | 
|                                                                                                                                           |                                    |   | June 30, 2003 |         | December 31, 2002
|                                                                                                                                           |                                    |   |               |         |                  
|                                                                                                                                           |                                    |   | (unaudited)   |         |                   |   |        
|                                                                                                                                          
|Land                                                                                                                                       |                                    | $ | 39,536        |         |                   | $ | 39,348  |        
|Buildings and improvements                                                                                                                 |                                    |   | 347,143       |         |                   |   | 345,511 |        
|Furniture and equipment                                                                                                                    |                                    |   | 46,120        |         |                   |   | 44,332  |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|Operating properties                                                                                                                       |                                    |   | 432,799       |         |                   |   | 429,191 |        
|Less accumulated depreciation                                                                                                              |                                    |   | 118,262       |         |                   |   | 109,152 |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|                                                                                                                                           |                                    |   | 314,537       |         |                   |   | 320,039 |        
|Properties under development                                                                                                               |                                    |   | 1,864         |         |                   |   | 1,800   |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|                                                                                                                                           | Net investment in hotel properties |   |               | 316,401 |                   |   |         | 321,839 | 
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|Corporate FF&E, net                                                                                                                        |                                    |   | 608           |         |                   |   | 735     |        
|Cash                                                                                                                                       |                                    |   | 5,240         |         |                   |   | 1,510   |        
|Accounts receivable                                                                                                                        |                                    |   | 3,534         |         |                   |   | 1,958   |        
|Notes receivable                                                                                                                           |                                    |   | 5,016         |         |                   |   | 5,016   |        
|Investment in joint ventures                                                                                                               |                                    |   | 8,453         |         |                   |   | 9,117   |        
|Deferred expenses, net                                                                                                                     |                                    |   | 2,527         |         |                   |   | 2,954   |        
|Prepaid expenses and other assets                                                                                                          |                                    |   | 6,559         |         |                   |   | 6,988   |        
|Deferred tax asset                                                                                                                         |                                    |   | 8,008         |         |                   |   | 7,325   |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|Total assets                                                                                                                               |                                    | $ | 356,346       |         |                   | $ | 357,442 |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                      
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|Long-term debt                                                                                                                             |                                    | $ | 65,731        |         |                   | $ | 66,406  |        
|Due to banks                                                                                                                               |                                    |   | 76,200        |         |                   |   | 72,300  |        
|Accounts payable and accrued expenses                                                                                                      |                                    |   | 12,117        |         |                   |   | 11,679  |        
|Distributions payable                                                                                                                      |                                    |   | 4,958         |         |                   |   | 4,951   |        
|Minority interest in Partnership                                                                                                           |                                    |   | 7,287         |         |                   |   | 7,591   |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|Total liabilities                                                                                                                          |                                    |   | 166,293       |         |                   |   | 162,927 |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|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,
20,193,634 and 20,148,334 shares issued and outstanding                        |                                    |   | 202           |         |                   |   | 201     |        
|Additional paid-in capital                                                                                                                 |                                    |   | 257,081       |         |                   |   | 256,720 |        
|Accumulated other comprehensive loss                                                                                                       |                                    |   | (143          | )       |                   |   |        |        
|Unearned compensation                                                                                                                      |                                    |   | (681          | )       |                   |   | (596    | )      
|Distributions in excess of earnings                                                                                                        |                                    |   | (66,436       | )       |                   |   | (61,840 | )      
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|Total shareholders equity                                                                                                                 |                                    |   | 190,053       |         |                   |   | 194,515 |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        
|Total liabilities and shareholders equity                                                                                                 |                                    | $ | 356,346       |         |                   | $ | 357,442 |        
|                                                                                                                                           |                                    |   |               |         |                   |   |         |        

The accompanying notes are an integral part of the consolidated 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
|                                                                                                                        |                                                            |                                                     |        | June 30, 2003      |        | June 30, 2002     
|                                                                                                                        |                                                            |                                                     |        |                    |        |                   
|Revenue:                                                                                                                |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        | Rooms                                                      |                                                     | $      | 30,124             |        |                    | $       |        |        
|                                                                                                                        | Food and beverage                                          |                                                     |        | 1,961              |        |                    |         |        |        
|                                                                                                                        | Other operating departments                                |                                                     |        | 1,062              |        |                    |         |        |        
|                                                                                                                        | Percentage lease revenue                                   |                                                     |        | 739                |        |                    |         | 9,793   |        
|                                                                                                                        | Interest and other income                                  |                                                     |        | 364                |        |                    |         | 353     |        
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        |                                                            | Total revenue                                       |        |                    | 34,250 |                    |         |         | 10,146  |  
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|Hotel operating expenses:                                                                                               |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        | Rooms                                                      |                                                     |        | 6,815              |        |                    |         |        |        
|                                                                                                                        | Food and beverage                                          |                                                     |        | 1,411              |        |                    |         |        |        
|                                                                                                                        | Other operating departments                                |                                                     |        | 710                |        |                    |         |        |        
|Undistributed operating expenses:                                                                                       |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        | Property operating expenses                                |                                                     |        | 6,085              |        |                    |         |        |        
|                                                                                                                        | Real estate taxes and property and casualty insurance      |                                                     |        | 1,721              |        |                    |         | 1,559   |        
|                                                                                                                        | Franchise costs                                            |                                                     |        | 2,170              |        |                    |         |        |        
|                                                                                                                        | Maintenance and repair                                     |                                                     |        | 1,708              |        |                    |         |        |        
|                                                                                                                        | Management fees                                            |                                                     |        | 721                |        |                    |         |        |        
|                                                                                                                        | Percentage lease expense                                   |                                                     |        | 1,302              |        |                    |         |        |        
|                                                                                                                        | General and administrative                                 |                                                     |        | 1,471              |        |                    |         | 1,315   |        
|                                                                                                                        | Depreciation                                               |                                                     |        | 4,549              |        |                    |         | 4,782   |        
|                                                                                                                        | Amortization                                               |                                                     |        | 221                |        |                    |         | 206     |        
|                                                                                                                        | Lease acquisition                                          |                                                     |        |                   |        |                    |         | 17,668  |        
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        |                                                            | Total operating expenses                            |        |                    | 28,884 |                    |         |         | 25,530  |  
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|Operating income (loss)                                                                                                 |                                                            |                                                     | 5,366  |                    |        |                    | (15,384 | )      
|                                                                                                                        | Interest expense                                           |                                                     |        | 1,913              |        |                    |         | 2,527   |        
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|Income (loss) before allocation to minority interest, income
taxes, and equity in income of unconsolidated subsidiaries |                                                            |                                                     | 3,453  |                    |        |                    | (17,911 | )      
|                                                                                                                        | Income (loss) allocation to minority interest              |                                                     |        | 107                |        |                    |         | (787    | )      
|                                                                                                                        | Income tax benefit                                         |                                                     |        | (132               | )      |                    |         | (6,714  | )      
|                                                                                                                        | Equity in loss of unconsolidated subsidiaries              |                                                     |        | (81                | )      |                    |         | (56     | )      
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|Income (loss) from continuing operations                                                                                |                                                            |                                                     | 3,397  |                    |        |                    | (10,466 | )      
|Discontinued operations:                                                                                                |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        | Income from discontinued operations                        |                                                     |        |                   |        |                    |         | 97      |        
|                                                                                                                        | Loss on sale of discontinued operations                    |                                                     |        |                   |        |                    |         | (742    | )      
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        | Net income (loss)                                          |                                                     |        | 3,397              |        |                    |         | (11,111 | )      
|Preferred stock distribution                                                                                            |                                                            |                                                     | (1,734 | )                  |        |                    | (1,734  | )      
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        |                                                            | Net income (loss) applicable to common shareholders |        | $                  | 1,663  |                    |         | $       | (12,845 | )
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|Income (loss) per common share:                                                                                         |                                                            |                                                     |        |                    |        |                    |         |        
|Basic and diluted:                                                                                                      |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        | Income (loss) from continuing operations                   |                                                     | $      | 0.08               |        |                    | $       | (0.61   | )      
|                                                                                                                        | Loss from discontinued operations                          |                                                     |        |                   |        |                    |         | (0.03   | )      
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        | Net income (loss) per common share                         |                                                     | $      | 0.08               |        |                    | $       | (0.64   | )      
|                                                                                                                        |                                                            |                                                     |        |                    |        |                    |         |        
|                                                                                                                        | Weighted average number of common shares                   |                                                     |        | 20,078             |        |                    |         | 20,116  |        
|                                                                                                                        | Weighted average number of common shares assuming dilution |                                                     |        | 21,377             |        |                    |         | 20,116  |        

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

4



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

|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |         |         |  
|----------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | --------------------------------------------------- | ------ | ---------------- | ------ | ---------------- | ------- | ------- | ------- | -
|                                                                                                                        |                                                            |                                                     |        | Six Months Ended |        | Six Months Ended
|                                                                                                                        |                                                            |                                                     |        | June 30, 2003    |        | June 30, 2002   
|                                                                                                                        |                                                            |                                                     |        |                  |        |                 
|Revenue:                                                                                                                |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        | Rooms                                                      |                                                     | $      | 56,557           |        |                  | $       |        |        
|                                                                                                                        | Food and beverage                                          |                                                     |        | 3,647            |        |                  |         |        |        
|                                                                                                                        | Other operating departments                                |                                                     |        | 2,171            |        |                  |         |        |        
|                                                                                                                        | Percentage lease revenue                                   |                                                     |        | 1,549            |        |                  |         | 19,326  |        
|                                                                                                                        | Interest and other income                                  |                                                     |        | 730              |        |                  |         | 700     |        
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        |                                                            | Total revenue                                       |        |                  | 64,654 |                  |         |         | 20,026  |  
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|Hotel operating expenses:                                                                                               |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        | Rooms                                                      |                                                     |        | 13,104           |        |                  |         |        |        
|                                                                                                                        | Food and beverage                                          |                                                     |        | 2,716            |        |                  |         |        |        
|                                                                                                                        | Other operating departments                                |                                                     |        | 1,467            |        |                  |         |        |        
|Undistributed operating expenses:                                                                                       |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        | Property operating expenses                                |                                                     |        | 12,217           |        |                  |         |        |        
|                                                                                                                        | Real estate taxes and property and casualty insurance      |                                                     |        | 3,454            |        |                  |         | 3,377   |        
|                                                                                                                        | Franchise costs                                            |                                                     |        | 4,029            |        |                  |         |        |        
|                                                                                                                        | Maintenance and repair                                     |                                                     |        | 3,345            |        |                  |         |        |        
|                                                                                                                        | Management fees                                            |                                                     |        | 1,282            |        |                  |         |        |        
|                                                                                                                        | Percentage lease expense                                   |                                                     |        | 2,210            |        |                  |         |        |        
|                                                                                                                        | General and administrative                                 |                                                     |        | 2,956            |        |                  |         | 2,870   |        
|                                                                                                                        | Depreciation                                               |                                                     |        | 9,270            |        |                  |         | 9,612   |        
|                                                                                                                        | Amortization                                               |                                                     |        | 442              |        |                  |         | 403     |        
|                                                                                                                        | Lease acquisition                                          |                                                     |        |                 |        |                  |         | 17,668  |        
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        |                                                            | Total operating expenses                            |        |                  | 56,492 |                  |         |         | 33,930  |  
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|Operating income (loss)                                                                                                 |                                                            |                                                     | 8,162  |                  |        |                  | (13,904 | )      
|                                                                                                                        | Interest expense                                           |                                                     |        | 3,874            |        |                  |         | 5,360   |        
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|Income (loss) before allocation to minority interest, income
taxes, and equity in income of unconsolidated subsidiaries |                                                            |                                                     | 4,288  |                  |        |                  | (19,264 | )      
|                                                                                                                        | Income (loss) allocation to minority interest              |                                                     |        | 94               |        |                  |         | (994    | )      
|                                                                                                                        | Income tax benefit                                         |                                                     |        | (683             | )      |                  |         | (6,714  | )      
|                                                                                                                        | Equity in income (loss) of unconsolidated subsidiaries     |                                                     |        | 54               |        |                  |         | (51     | )      
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|Income (loss) from continuing operations                                                                                |                                                            |                                                     | 4,931  |                  |        |                  | (11,607 | )      
|Discontinued operations:                                                                                                |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        | Income from discontinued operations                        |                                                     |        |                 |        |                  |         | 144     |        
|                                                                                                                        | Loss on sale of discontinued operations                    |                                                     |        |                 |        |                  |         | (742    | )      
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        | Net income (loss)                                          |                                                     |        | 4,931            |        |                  |         | (12,205 | )      
|Preferred stock distribution                                                                                            |                                                            |                                                     | (3,469 | )                |        |                  | (3,469  | )      
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        |                                                            | Net income (loss) applicable to common shareholders |        | $                | 1,462  |                  |         | $       | (15,674 | )
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|Income (loss) per common share:                                                                                         |                                                            |                                                     |        |                  |        |                  |         |        
|Basic and diluted:                                                                                                      |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        | Income (loss) from continuing operations                   |                                                     | $      | 0.07             |        |                  | $       | (0.80   | )      
|                                                                                                                        | Loss from discontinued operations                          |                                                     |        |                 |        |                  |         | (0.04   | )      
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        | Net income (loss) per common share                         |                                                     | $      | 0.07             |        |                  | $       | (0.84   | )      
|                                                                                                                        |                                                            |                                                     |        |                  |        |                  |         |        
|                                                                                                                        | Weighted average number of common shares                   |                                                     |        | 20,076           |        |                  |         | 18,652  |        
|                                                                                                                        | Weighted average number of common shares assuming dilution |                                                     |        | 21,375           |        |                  |         | 18,652  |        

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

5



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##### 



WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2003(in thousands, except per share amounts)

|                                              |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |      |             |   |   |         |   |       | 
|--------------------------------------------- | ----------------------------------------------------- | -------------------------- | ----- | --------------- |  | ------------ | -- | ---------- |  | -------- | ------ | ------------ |  | ------------- | --- | ------------- |  | ----- | ------- | ------ |  | - | ---- | - |  | - | ------- | ----- |  | - | ---- | ----------- | - | - | ------- | - | ----- | 
|                                              |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |      | Accumulated |   |   |         |  
|                                              |                                                       |                            |       | Preferred Stock |  | Common Stock |    | Additional |  |          |        |              |  | Distributions |     | Other         |  | Total
|                                              |                                                       |                            |       |                 |  |              |    | Paid-in    |  | Unearned |        | In Excess of |  | Comprehensive |     | Shareholders'
|                                              |                                                       |                            |       | Shares          |  | Dollars      |    | Shares     |  | Dollars  |        | Capital      |  | Compensation  |     | Earnings      |  | Loss  |         | Equity
|                                              |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |       
|Balances at December 31, 2002                 |                                                       |                            | 3,000 |                 |  | $            | 30 |            |  |          | 20,149 |              |  | $             | 201 |               |  | $     | 256,720 |        |  | $ | (596 | ) |  | $ | (61,840 | )     |  | $ |     |             |   | $ | 194,515 |  
|                                              |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |      |             |   |   |         |  
|Issuance of shares  restricted stock         |                                                       |                            |      |                 |  |              |   |            |  |          | 45     |              |  |               | 1   |               |  |       | 353     |        |  |   | (354 | ) |  |   |        |       |  |   |     |             |   |   |        |  
|Distributions ($0.15 per common share)        |                                                       |                            |      |                 |  |              |   |            |  |          |       |              |  |               |    |               |  |       |        |        |  |   |     |   |  |   | (6,058  | )     |  |   |     |             |   |   | (6,058  | )
|Distributions ($0.578125 per preferred share) |                                                       |                            |      |                 |  |              |   |            |  |          |       |              |  |               |    |               |  |       |        |        |  |   |     |   |  |   | (3,469  | )     |  |   |     |             |   |   | (3,469  | )
|Unearned compensation amortization            |                                                       |                            |      |                 |  |              |   |            |  |          |       |              |  |               |    |               |  |       |        |        |  |   | 269  |   |  |   |        |       |  |   |     |             |   |   | 269     |  
|Minority interest equity adjustment           |                                                       |                            |      |                 |  |              |   |            |  |          |       |              |  |               |    |               |  |       | 8       |        |  |   |     |   |  |   |        |       |  |   |     |             |   |   | 8       |  
|Comprehensive income:                         |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |      |             |   |   |         |  
|                                              | Net income                                            |                            |       |                |  |              |    |           |  |          |        |             |  |               |     |              |  |       |         |       |  |   |      |  |  |   |         | 4,931 |  |   |      |            |   |   |         |   |      
|                                              | Unrealized holding loss arising on interest
rate swap |                            |       |                |  |              |    |           |  |          |        |             |  |               |     |              |  |       |         |       |  |   |      |  |  |   |         |      |  |   |      | (143        | ) |   |         |   |      
|                                              |                                                       | Total comprehensive income |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |      |             |   |   |         |   | 4,788 | 
|                                              |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |      |             |   |   |         |  
|Balances at June 30, 2003                     |                                                       |                            | 3,000 |                 |  | $            | 30 |            |  |          | 20,194 |              |  | $             | 202 |               |  | $     | 257,081 |        |  | $ | (681 | ) |  | $ | (66,436 | )     |  | $ | (143 | )           |   | $ | 190,053 |  
|                                              |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |      |             |   |   |         |  

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

6



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##### 



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

|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |         |        |  
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----- | ---------------- | ------ | ---------------- | ----- | ------- | ------ | -
|                                                        |                                                                                                                             |                                                     |       | Six Months Ended |        | Six Months Ended
|                                                        |                                                                                                                             |                                                     |       | June 30, 2003    |        | June 30, 2002   
|                                                        |                                                                                                                             |                                                     |       |                  |        |                 
|Cash flows from operating activities:                   |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|                                                        | Net income (loss)                                                                                                           |                                                     | $     | 4,931            |        |                  | $     | (12,205 | )     
|                                                        | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:                          |                                                     |       |                  |        |                  |       |         |       
|                                                        |                                                                                                                             | Income (loss) allocation to minority interest       |       |                  | 94     |                  |       |         | (1,034 | )
|                                                        |                                                                                                                             | Depreciation                                        |       |                  | 9,270  |                  |       |         | 10,021 |  
|                                                        |                                                                                                                             | Amortization                                        |       |                  | 442    |                  |       |         | 408    |  
|                                                        |                                                                                                                             | Income tax benefit                                  |       |                  | (683   | )                |       |         | (6,714 | )
|                                                        |                                                                                                                             | Mezzanine loan loss provision                       |       |                  |       |                  |       |         | 250    |  
|                                                        |                                                                                                                             | Loss on sale of hotel properties                    |       |                  |       |                  |       |         | 790    |  
|                                                        |                                                                                                                             | (Income) loss allocations from joint ventures       |       |                  | (54    | )                |       |         | 51     |  
|                                                        |                                                                                                                             | Unearned compensation amortization                  |       |                  | 269    |                  |       |         | 227    |  
|                                                        | Changes in assets and liabilities:                                                                                          |                                                     |       |                  |        |                  |       |         |       
|                                                        |                                                                                                                             | Lease revenue receivable                            |       |                  | (169   | )                |       |         | (3,426 | )
|                                                        |                                                                                                                             | Accounts receivable                                 |       |                  | (1,407 | )                |       |         | (2,922 | )
|                                                        |                                                                                                                             | Deferred percentage lease revenue                   |       |                  |       |                  |       |         | 7,073  |  
|                                                        |                                                                                                                             | Prepaid expenses and other assets                   |       |                  | 429    |                  |       |         | (1,465 | )
|                                                        |                                                                                                                             | Accounts payable and accrued expenses               |       |                  | 295    |                  |       |         | 8,811  |  
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|                                                        |                                                                                                                             | Net cash provided by (used in) operating activities |       |                  | 13,417 |                  |       |         | (135   | )
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|Cash flows from investing activities:                   |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|                                                        | Prepaid acquisitions costs                                                                                                  |                                                     |       |                 |        |                  |       | (161    | )     
|                                                        | Deferred acquisitions/disposition costs                                                                                     |                                                     |       |                 |        |                  |       | (15     | )     
|                                                        | Investment in hotel properties, net                                                                                         |                                                     |       | (3,705           | )      |                  |       | (1,589  | )     
|                                                        | Investment in joint ventures                                                                                                |                                                     |       | (1               | )      |                  |       | (2,512  | )     
|                                                        | Distributions from joint ventures                                                                                           |                                                     |       | 719              |        |                  |       | 307     |       
|                                                        | Sale of hotel properties                                                                                                    |                                                     |       |                 |        |                  |       | 3,240   |       
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|                                                        |                                                                                                                             | Net cash used in investing activities               |       |                  | (2,987 | )                |       |         | (730   | )
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|Cash flows from financing activities:                   |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|                                                        | Fees paid in connection with financing activities                                                                           |                                                     |       | (15              | )      |                  |       | (436    | )     
|                                                        | Proceeds from issuance of common shares, net                                                                                |                                                     |       |                 |        |                  |       | 26,897  |       
|                                                        | Payment of distributions to shareholders                                                                                    |                                                     |       | (9,520           | )      |                  |       | (8,964  | )     
|                                                        | Payment of distributions to minority interest                                                                               |                                                     |       | (390             | )      |                  |       | (390    | )     
|                                                        | Net increase (decrease) in due to banks                                                                                     |                                                     |       | 3,900            |        |                  |       | (10,800 | )     
|                                                        | Decrease in long-term debt                                                                                                  |                                                     |       | (675             | )      |                  |       | (627    | )     
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|                                                        |                                                                                                                             | Net cash provided by (used in) financing activities |       |                  | (6,700 | )                |       |         | 5,680  |  
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|Net increase in cash                                    |                                                                                                                             |                                                     | 3,730 |                  |        |                  | 4,815 |        
|Cash at beginning of period                             |                                                                                                                             |                                                     | 1,510 |                  |        |                  | 887   |        
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|Cash at end of period                                   |                                                                                                                             | $                                                   | 5,240 |                  |        | $                | 5,702 |        
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|Supplemental disclosure:                                |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|                                                        |                                                                                                                             | Cash paid for interest                              |       | $                | 4,558  |                  |       | $       | 5,304  |  
|                                                        |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|Summary of non-cash investing and financing activities: |                                                                                                                             |                                                     |       |                  |        |                  |       |        
|                                                        | Distributions to shareholders declared but not paid                                                                         |                                                     | $     | 4,763            |        |                  | $     | 4,752   |       
|                                                        | Distributions to minority interest declared but not paid                                                                    |                                                     |       | 195              |        |                  |       | 195     |       
|                                                        | Deferred equity compensation                                                                                                |                                                     |       | 354              |        |                  |       | 256     |       
|                                                        | Fair market value adjustment of interest rate swap                                                                          |                                                     |       | 143              |        |                  |       | 825     |       
|                                                        | Minority interest payable adjustment due to the
issuance of common shares and accumulated other
comprehensive income (loss) |                                                     |       | (8               | )      |                  |       | (473    | )     

The accompanying notes are an integral part of the consolidated 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. (WHI), headquartered in Raleigh, North Carolina,
operates so as to qualify as a real estate investment trust (REIT) for
federal income tax purposes. During 1994, WHI completed an initial public
offering of its common stock (Common Stock), utilizing the majority of the
proceeds to acquire one hotel and a general partnership interest (as the
sole general partner) in WINN Limited Partnership (the Partnership). The
Partnership used a substantial portion of the proceeds to acquire nine
additional hotel properties. WHI and the Partnership (together with the
Partnerships wholly owned subsidiaries, Barclay Hospitality Services Inc.
(Barclay) and Winston SPE, LLC), are collectively referred to as the
Company. As of June 30, 2003, WHIs ownership in the Partnership was
93.96 percent.                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | 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. Certain reclassifications have been made to the 2002
financial statements to conform with the 2003 presentation. These
reclassifications have no effect on net income or shareholders equity
previously reported. 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 months ended June 30, 2003 and 2002 is
not necessarily indicative of the results for a full year. SAB 101
effectively defers percentage lease revenue from the first and second
quarters to the third and fourth quarters. Three joint ventures, in which
the Company owned a 49 percent ownership interest as of June 30, 2003,
deferred recognition of percentage lease revenue for three hotels. 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, 2002.
|  
|   |  | As of June 30, 2003, the Company held an ownership interest in 49 hotel
properties in 16 states having an aggregate of 6,809 rooms. This included
44 wholly owned properties with 6,141 rooms, a 49 percent ownership in three
joint venture hotels with 453 rooms, and a 13.05 percent ownership interest
in two joint venture hotels with 215 rooms, (collectively, the Joint
Venture Hotels). The Company also had issued mezzanine loans to owners of
three hotels with 391 rooms. The Company does not hold an ownership
interest in any of the hotels for which it has provided mezzanine financing.
All of the Companys hotels are operated under franchises from nationally
recognized franchisors including Marriott International, Inc., Hilton Hotels
Corporation, Intercontinental Hotels Group PLC, (formerly Six Continents
PLC) and Choice Hotels International.                                                                                                                                                                                                                                                                                                 
|  
|2. |  | ACQUISITION OF LEASEHOLD INTERESTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | Effective July 1, 2002, the Company, through its wholly owned taxable REIT
subsidiary, 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 were terminable by Barclay after June 30, 2003,
subject to certain conditions and limitations. Effective July 1, 2003, the
Company terminated its management contracts with Interstate (See Note 10).                                    
|  
|   |  | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

8



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##### 





|   |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|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 a ten-year maturity, due
December 1, 2008, and a twenty-five-year amortization period. To reduce
overall interest rate risk, 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, the term of which started March 31, 2003 and ends February
27, 2004.
|  
|   |  | The following table summarizes the notional value and fair value of the
Companys interest rate swap instrument. The notional value at June 30, 2003
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 June 30, 2003   |  | Value    |        | Rate     |  | Maturity | Fair Value
|                   |  |          |        |          |  |          |           
|Interest rate swap |  | $        | 50,000 |          |  |          | 1.505      | % |  |  | 02/2004 |  |  | $ | (143 | )



|   |  | 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 June 30, 2003 the derivative
instruments fair value was $(143) and is 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 loss. Over time, the unrealized losses held in
Accumulated other comprehensive loss will be reclassified into earnings in
the same periods in which the hedged interest payments affect earnings.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|4. |  | 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 June 30, |       | Six Months Ended June 30,
|                                                    |  |                             |       |                          
|                                                    |  | 2003                        |       | 2002                      |  | 2003 |         | 2002
|                                                    |  |                             |       |                           |  |      |         |     
|Income (loss) from continuing operations            |  | $                           | 3,397 |                           |  | $    | (10,466 | )    |  | $ | 4,931 |  |  | $ | (11,607 | )
|Plus: income (loss) from discontinued operations    |  |                             |      |                           |  |      | (645    | )    |  |   |      |  |  |   | (598    | )
|Less: preferred stock distribution                  |  |                             | 1,734 |                           |  |      | 1,734   |      |  |   | 3,469 |  |  |   | 3,469   |  
|                                                    |  |                             |       |                           |  |      |         |      |  |   |       |  |  |   |         |  
|Net income (loss) applicable to common shareholders |  |                             | 1,663 |                           |  |      | (12,845 | )    |  |   | 1,462 |  |  |   | (15,674 | )
|Plus: income (loss) allocation to minority interest |  |                             | 107   |                           |  |      |        |      |  |   | 94    |  |  |   |        |  
|                                                    |  |                             |       |                           |  |      |         |      |  |   |       |  |  |   |         |  
|Net income (loss) assuming dilution                 |  | $                           | 1,770 |                           |  | $    | (12,845 | )    |  | $ | 1,556 |  |  | $ | (15,674 | )
|                                                    |  |                             |       |                           |  |      |         |      |  |   |       |  |  |   |         |  



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

9



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##### 



|                                                           |  |                             |        |                           |  |      |        |      |  |  |        |  |  |  |        | 
|---------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- |  | ---- | ------ | ---- |  |  | ------ |  |  |  | ------ | 
|                                                           |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                                           |  |                             |        |                          
|                                                           |  | 2003                        |        | 2002                      |  | 2003 |        | 2002
|                                                           |  |                             |        |                           |  |      |        |     
|Weighted average number of common shares                   |  |                             | 20,078 |                           |  |      | 20,116 |      |  |  | 20,076 |  |  |  | 18,652 | 
|Minority interest units with redemption rights             |  |                             | 1,299  |                           |  |      |       |      |  |  | 1,299  |  |  |  |       | 
|Stock options                                              |  |                             |       |                           |  |      |       |      |  |  |       |  |  |  |       | 
|                                                           |  |                             |        |                           |  |      |        |      |  |  |        |  |  |  |        | 
|Weighted average number of common shares
assuming dilution |  |                             | 21,377 |                           |  |      | 20,116 |      |  |  | 21,375 |  |  |  | 18,652 | 
|                                                           |  |                             |        |                           |  |      |        |      |  |  |        |  |  |  |        | 



|   |  | The number of potential common shares (represented by minority interest and
outstanding options) for the three and six months ended June 30, 2002 totaled
1,299,000 and 1,299,000, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company declared quarterly cash dividends of $0.15 per common share and
$0.578125 per preferred share during the first and second quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|5. |  | 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 six months ended June 30, 2003 consists of a deferred
federal income tax benefit of $629 and a deferred state income tax benefit
of $54.                                                                                                                                                                                                
|  
|   |  | The benefit from income taxes and related deferred tax asset were calculated
using an effective tax rate of 38 percent 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 properties from Interstate, which was expensed for
financial reporting purposes in 2002. For tax purposes, this payment is
being 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 June 30, 2003.                                                                                                                                                                                                                                             
|  
|6. |  | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | At June 30, 2003, the Company has one stock-based employee compensation
plan, the Winston Hotels, Inc. Stock Incentive Plan. The Company accounts
for this plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in
net income (loss) for the issuance of options, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) applicable to common
shareholders and net income (loss) per share as if the Company had applied
the fair value recognition provisions of FASB Statement No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.

10



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##### 



|                                                                                                                                            |  |                    |       |                  |  |      |         |      |  |   |       |  |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ---------------- |  | ---- | ------- | ---- |  | - | ----- |  |  | - | ------- | -
|                                                                                                                                            |  | Three Months Ended |       | Six Months Ended
|                                                                                                                                            |  | June 30,           |       | June 30,        
|                                                                                                                                            |  |                    |       |                 
|                                                                                                                                            |  | 2003               |       | 2002             |  | 2003 |         | 2002
|                                                                                                                                            |  |                    |       |                  |  |      |         |     
|Net income (loss) applicable
to common shareholders, as
reported                                                                            |  | $                  | 1,663 |                  |  | $    | (12,845 | )    |  | $ | 1,462 |  |  | $ | (15,674 | )
|Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects |  |                    | 5     |                  |  |      | 23      |      |  |   | 9     |  |  |   | 45      |  
|                                                                                                                                            |  |                    |       |                  |  |      |         |      |  |   |       |  |  |   |         |  
|Pro forma net income (loss)
applicable to common
shareholders                                                                               |  |                    | 1,658 |                  |  |      | (12,868 | )    |  |   | 1,453 |  |  |   | (15,719 | )
|Earnings (loss) per share:                                                                                                                  |  |                    |       |                  |  |      |         |      |  |   |       |  |  |   |         |  
|Basic and diluted  as reported                                                                                                             |  | $                  | 0.08  |                  |  | $    | (0.64   | )    |  | $ | 0.07  |  |  | $ | (0.84   | )
|                                                                                                                                            |  |                    |       |                  |  |      |         |      |  |   |       |  |  |   |         |  
|Basic and diluted  pro forma                                                                                                               |  | $                  | 0.08  |                  |  | $    | (0.64   | )    |  | $ | 0.07  |  |  | $ | (0.84   | )
|                                                                                                                                            |  |                    |       |                  |  |      |         |      |  |   |       |  |  |   |         |  



|7. |  | SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company participates in four 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 one with Charlesbank
Capital Partners, LLC (Charlesbank) and Concord Hospitality Enterprises
Company (Concord). The Company entered into the joint ventures with
Regent and Marsh Landing during 1999 and 2000, respectively, and with
Charlesbank and Concord during the fourth quarter of 2002.                                                                                                                                                                                                                                                        
|  
|   |  | The Company currently owns a 49 percent interest in the joint venture with
Marsh Landing that owns the Ponte Vedra, FL Hampton Inn. Charles Winston
and James Winston, both of whom are directors of the Company, control the
remaining 51 percent interest in the Marsh Landing joint venture. The
Company currently owns a 49 percent interest in the joint venture with
Regent that owns the Evanston, IL Hilton Garden Inn and currently owns a
57.65 percent interest in the joint venture with Regent that owns the
Windsor, CT Hilton Garden Inn (see Note 10).                                                                                                                                                                                                  
|  
|   |  | During the fourth quarter of 2002, the Company entered into a joint venture
agreement with Charlesbank to acquire more than $100,000 of hotel assets
(the Charlesbank Venture). Charlesbank is a private investment firm that
manages capital on behalf of a range of institutional investors. During the
fourth quarter of 2002, the Charlesbank Venture and Concord subsequently
formed a new joint venture entity, WCC Project Company LLC. The Charlesbank
Venture is the managing member of WCC Project Company LLC. Both the West
Des Moines, IA Fairfield Inn & Suites and the Beachwood Courtyard are owned
by WCC Project Company LLC. Charlesbank owns 73.95 percent of WCC Project Company LLC, Concord owns 13
percent and the Company owns 13.05 percent.
|  
|   |  | As of June 30, 2003, total assets of the four joint ventures were $59,070,
total liabilities were $37,770, and total equity was $21,300. For the three
and six months ended June 30, 2003, total revenue of the four joint ventures
was $1,719 and $3,303, respectively, total expenses were $1,807 and $3,149,
respectively, resulting in net income (loss) of ($88) and $154,
respectively, of which the Companys share was ($81) and $54, respectively.
Pursuant to the requirements of SAB 101, $1,046 and $1,152 of total revenue
was deferred during the three and six months ended June 30, 2003,
respectively, all of which will be recognized during 2003.                                                                                                    
|  
|8. |  | RECENT ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51 (ARB No.
51), was issued in January 2003. This Interpretation clarifies the
application of ARB No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the                                                                                                                                                                                                                                                                                                             

11



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##### 





| |  | entity to finance its activities without additional subordinated
financial support from other parties, referred to as variable interest
entities (VIE). FIN 46 explains the concept of a VIE and generally
requires consolidation by the party that has a majority of the risk and/or
rewards, referred to as the primary beneficiary..                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | This Interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities and, thus, to improve
comparability between enterprises engaged in similar activities even if some
of those activities are conducted through variable interest entities.
Including the assets, liabilities, and results of activities of variable
interest entities in the consolidated financial statements of their primary
beneficiaries will provide more complete information about the resources,
obligations, risks, and opportunities of the consolidated enterprise.
Disclosures about variable interest entities in which an enterprise has a
significant variable interest but does not consolidate will help financial
statement users assess the enterprise  ́s risks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which
an enterprise obtains a variable interest after that date. It applies in
the first fiscal year or interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | As discussed in Note 7 above, the Company participates in four joint venture
agreements to develop and own hotel properties. The Company has also issued
three mezzanine loans to owners of three hotels. The management of the
Company has analyzed the terms and provisions of each of these arrangements,
and has determined the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Marsh Landing Joint
Venture:
This joint venture is considered to be a VIE and the Company is considered
to be the primary beneficiary. Therefore, the Company, which owns a 49
percent interest, will consolidate the results of operations beginning with
the third quarter of 2003. For the six months ended June 30, 2003, total
revenue was $317, total expenses were $411, resulting in a net loss of $94.
Deferred revenue for the same six month period totaled $435, per the
provisions of SAB 101, all of which will be recognized during the second
half of 2003. As of June 30, 2003, total assets were $7,541, total
liabilities were $5,474, resulting in stockholders equity totaling $2,067.
The Companys maximum exposure to loss as a result of its involvement in
this joint venture is equal to its equity as of June 30, 2003, which totaled
$1,013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | Charlesbank and Concord Joint Ventures:
This joint venture is considered to be a VIE, however, the Company is not
considered to be the primary beneficiary. Therefore, the Company, which
owns a 13.05 percent interest, will not consolidate its results of
operations. The Companys maximum exposure to loss as a result of its
involvement in this joint venture is equal to its equity as of June 30,
2003, which totaled $627.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Regent Joint Ventures:
These two joint ventures, one which owns the Windsor, CT Hilton Garden Inn
hotel (the Windsor Joint Venture) and the other the owns the Evanston, IL
Hilton Garden Inn (the Evanston Joint Venture) are considered to be VIEs.
However, due to the complexity of the new guidance and the evolving
interpretation among accounting professionals, including currently pending
interpretations from the Financial Accounting Standards Board, the Company
is still in the process of evaluating the provisions of FIN 46 and has not
yet determined if it is considered to be the primary beneficiary in either
case. It is reasonably possible that one or both of these joint ventures
will be consolidated with the Company. For the six months ended June 30,
2003, total revenue of the Windsor Joint Venture and the Evanston Joint
Venture was $883 and 741, respectively, total expenses were 588 and 883,
respectively, resulting in net income (loss) of $295 and $(142),
respectively. Deferred revenue for the same six month period totaled $0 and
$717, respectively, per the provisions of SAB 101, all of which will be
recognized during the second half of 2003. As of June 30, 2003, total
assets were $16,096 and $20,561, respectively, total liabilities were $9,901
and $13,157, respectively, resulting in stockholders equity totaling $6,195
and $7,404, respectively. The Companys maximum exposure to loss as a
result of its involvement in these joint ventures is equal to its equity as
of June 30, 2003, which totaled $6,664.

12



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##### 





|   |  | Noble Investment Group Mezzanine Loans:
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. These two mezzanine loan arrangements are considered to be
variable interests in the entities that own the hotels, both of which are
VIEs. However, the Company is not considered to be the primary beneficiary.
Therefore, the Company will not consolidate the results of operations of
the hotels for which it has provided financing. The Companys maximum
exposure to loss as a result of its involvement in these mezzanine loans is
equal to the outstanding loan balances as of June 30, 2003, which totaled
$3,266.                                                                                                                                                                                                        
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Baltimore, MD Hampton Inn & Suites Mezzanine Loan;
In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan to
a third party owner for the purchase and conversion of a historic office
building into a 116-room Hampton Inn & Suites hotel in Baltimore, MDs Inner
Harbor (the Baltimore Hotel). Subsequently, the Company sold 50 percent
of the loan to an affiliate of Hall Financial Group at face value, or
$1,750. This mezzanine loan arrangement is considered to be a variable
interest in the entity that owns the hotel, which is a VIE. However, the
Company is not considered to be the primary beneficiary. Therefore, the
Company will not consolidate the results of operations of the hotel for
which it has provided financing. The Companys maximum exposure to loss as
a result of its involvement in this mezzanine loans is equal to the
outstanding loan balance as of June 30, 2003, which totaled $1,750.                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In April 2003, FASB issued Statement of Financial Accounting Standards No.
149 Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). FASB Statements No. 133 Accounting for
Derivative Instruments and Hedging Activities and No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, establish
accounting and reporting standards for derivative instruments including
derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 149 amends Statement 133
for certain decisions made by the Board as part of the Derivatives
Implementation Group (DIG) process. This Statement contains amendments
relating to FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurements, and FASB Statements No. 65,
Accounting for Certain Mortgage Banking Activities, No. 91 Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases, No. 95, Statement of Cash Flows, and
No. 126, Exemption from Certain Required Disclosures about Financial
Instruments for Certain Nonpublic Entities. The Company is presently
evaluating the effect of this pronouncement.
|  
|   |  | In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS No.
150). SFAS No. 150 requires issuers to classify certain freestanding
financial instruments as liabilities. These freestanding financial
instruments include mandatory redeemable financial instruments, obligations
to repurchase the issuers equity shares by transferring assets and certain
obligations to issue a variable number of shares. The provisions of SFAS
No. 150 are effective at the beginning of the first interim period beginning
after June 15, 2003. The Company does not expect adoption of SFAS No. 150
to have a material impact on the financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|9. |  | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | The Company adopted Statement of Financial Accounting Standard No. 144
(SFAS No. 144) effective January 1, 2002 which requires, among other
things, that the operating results of certain real estate assets which have
been sold subsequent to January 1, 2002, or otherwise qualify as held for
disposition (as defined by SFAS No. 144), be included in discontinued
operations in the statements of operations for all periods presented. Four                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

13



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##### 





|    |  | of the Companys wholly owned hotels were sold during 2002. The operating
results for these four hotels are included in discontinued operations in the
statements of operations for the three and six months ended June 30, 2002.
The Company has not allocated interest expense to the results of the
discontinued operations in accordance with EITF No. 87-24. The Company had
no assets that qualified as held for disposition as defined by SFAS No. 144
at June 30, 2003. This change has resulted in certain reclassifications to
the three and six months ended June 30, 2002 financial statement amounts.
Condensed financial information of the results of operations for the three
and six months ended June 30, 2002, for the four hotels sold during 2002,
consisted of total revenue of $351 and $692, respectively, total expenses of
$248 and $538, respectively, an allocation to minority interest of $6 and
$10, respectively, resulting in income from discontinued operations of $97
and $144, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|10. |  | MANAGEMENT AND LEASE AGREEMENT CHANGES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | Effective July 1, 2003, the Company terminated its management contracts for
33 of its hotels managed by Interstate. Effective July 1, 2003, the Company
also terminated the management agreements under which Interstate Management
and Investment Corporation formerly operated six of the Companys properties
by paying a termination fee of $1.3 million ($0.06 per share), which will be
expensed in the third quarter. The management of all of these properties
along with most of the hotels management personnel and other employees have
been transferred to Alliance Hospitality Management, LLC, (Alliance) a
newly created hotel management company that is owned by Noble and hotel
industry veteran Dale M. Turner, CHA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | The Company terminated the lease agreements for the Las Vegas, NV Hampton
Inn and the Windsor, CT Hilton Garden Inn on July 1, 2003, both of which
were previously leased to Intercontinental Group. The Windsor Hilton Garden
Inn is currently owned by a joint venture entity, Windsor Hotel Associates,
LLC. Prior to the termination of the lease agreement, the Company owned 49
percent, while Regent Partners, Inc. (Regent) owned 36 percent and
Intercontinental Group owned 15 percent. Subsequent to the termination of
the lease agreement, Intercontinental Group forfeited its share of
ownership, with the result that the Company now owns 57.65 percent and
Regent owns 42.35 percent of Windsor Hotel Associates, LLC. The Company
wholly owns the Las Vegas Hampton Inn. The Company has replaced
Intercontinental Group with a newly formed lessee, Windsor Lessee Company
LLC, owned 57.65 percent by the Company and 42.35 percent by Regent, to
lease the Windsor Hilton Garden Inn. The Company has also replaced
Intercontinental Group with Barclay as lessee for the Las Vegas Hampton Inn.
Both Barclay and Windsor Lessee Company LLC have contracted with Alliance
to operate the properties. As a result of replacing Intercontinental Group
as lessee with Barclay and Windsor Lessee Company LLC, the Company now
records any profits or losses from the Las Vegas Hampton Inn and its share
of profits or losses from the Windsor Hilton Garden Inn.
|   
|    |  | Currently, Alliance manages 41 of the Companys hotels, Concord manages two
hotels, Hilton Hotels Corporation manages two hotels, and Sage Hospitality
Resources, LLC, Noble, and Prism Hospitality, L.P. each manage one hotel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | The 41 hotels currently managed by Alliance are operated under a management
agreement with a five-year term. The Company, however, has the right to
terminate the agreement upon delivery of written notice to Alliance not less
than 90 days prior to the effective date of termination. The management fee
payable to Alliance is equal to 2.25% of total hotel revenue and is paid
monthly.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | The Companys wholly owned Secaucus, NJ Holiday Inn continues to be operated
under a long-term lease with Secaucus Holding Corporation, a wholly owned
subsidiary of Prime Hospitality Corp. (Prime). The Company is currently
in negotiations with Prime to transfer the lease to Barclay. It is the
Companys intent to contract with Alliance to manage the property.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

14



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##### 



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

Overview

Winston Hotels, Inc. (WHI), headquartered in Raleigh, North Carolina,
operates so as to qualify as a real estate investment trust (REIT) for
federal income tax purposes. During 1994, WHI completed an initial public
offering of its common stock (Common Stock), utilizing the majority of the
proceeds to acquire one hotel and a general partnership interest (as the sole
general partner) in WINN Limited Partnership (the Partnership). The
Partnership used a substantial portion of the proceeds to acquire nine
additional hotel properties. WHI and the Partnership (together with the
Partnerships wholly owned subsidiaries, Barclay Hospitality Services Inc.
(Barclay) and Winston SPE, LLC), are collectively referred to as the
Company. As of June 30, 2003, WHIs ownership in the Partnership was 93.96
percent.

As of June 30, 2003, the Company held an ownership interest in 49 hotel
properties in 16 states having an aggregate of 6,809 rooms. This included 44
wholly owned properties with 6,141 rooms, a 49 percent ownership in three joint
venture hotels with 453 rooms, and a 13.05 percent ownership interest in two
joint venture hotels with 215 rooms, (collectively, the Joint Venture
Hotels). The Company also had issued mezzanine loans to owners of three hotels
with 391 rooms. The Company does not hold an ownership interest in any of the
hotels for which it has provided mezzanine financing. All of the Companys
hotels are operated under franchises from nationally recognized franchisors
including Marriott International, Inc., Hilton Hotels Corporation,
Intercontinental Hotels Group PLC, (formerly Six Continents PLC) and Choice
Hotels International.

Effective July 1, 2002, the Company, through its wholly owned taxable REIT
subsidiary, Barclay Hospitality Services Inc. (Barclay), acquired the
leasehold interests for 47 of its hotels from CapStar Winston Company, L.L.C.,
a wholly owned subsidiary of MeriStar Hotels & Resorts, Inc. (MeriStar).
MeriStar has since merged with and become Interstate Hotels & Resorts, Inc.
(Interstate). The acquisition included leasehold interests for 45 wholly
owned hotels and two Joint Venture Hotels. Under the REIT Modernization Act,
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.

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.

Effective July 1, 2003, the Company terminated its management contracts for 33
of its hotels managed by Interstate. Effective July 1, 2003, the Company also
terminated the management agreements under which Interstate Management and
Investment Corporation formerly operated six of the Companys properties by
paying a termination fee of $1.3 million ($0.06 per share), which will be
expensed in the third quarter. The management of all of these properties along
with most of the hotels management personnel and other employees have been
transferred to Alliance Hospitality Management, LLC, (Alliance) a newly
created hotel management company that is owned by Noble Investment Group, LTD
and hotel industry veteran Dale M. Turner, CHA.

The Company terminated the lease agreements for the Las Vegas, NV Hampton Inn
and the Windsor, CT Hilton Garden Inn on July 1, 2003, both of which were
previously leased to Intercontinental Group. The Windsor Hilton Garden Inn is
currently owned by a joint venture entity, Windsor Hotel Associates, LLC. Prior
to the termination of the lease agreement, the Company owned 49 percent, while
Regent Partners, Inc. (Regent) owned 36 percent and

15



---



##### 



Intercontinental Group
owned 15 percent. Subsequent to the termination of the lease agreement,
Intercontinental Group forfeited its share of ownership, with the result that
the Company now owns 57.65 percent and Regent owns 42.35 percent of Windsor
Hotel Associates, LLC. The Company wholly owns the Las Vegas Hampton Inn. The
Company has replaced Intercontinental Group with a newly formed lessee, Windsor
Lessee Company LLC, owned 57.65 percent by the Company and 42.35 percent by
Regent, to lease the Windsor Hilton Garden Inn. The Company has also replaced
Intercontinental Group with Barclay as lessee for the Las Vegas Hampton Inn.
Both Barclay and Windsor Lessee Company LLC have contracted with Alliance to
operate the properties. As a result of replacing Intercontinental Group as
lessee with Barclay and Windsor Lessee Company LLC, the Company now records any
profits or losses from the Las Vegas Hampton Inn and its share of profits or
losses from the Windsor Hilton Garden Inn. The Company estimates its share of
the total net loss from these two properties for the period July 1, 2003
through December 31, 2003 to be approximately $440.

Currently, Alliance manages 41 of the Companys hotels, Concord manages two
hotels, Hilton Hotels Corporation manages two hotels, and Sage Hospitality
Resources, LLC, Noble Investment Group, Ltd., and Prism Hospitality, L.P. each
manage one hotel.

The 41 hotels currently managed by Alliance are operated under a management
agreement with a five-year term. The Company, however, has the right to
terminate the agreement upon delivery of written notice to Alliance not less
than 90 days prior to the effective date of termination. The management fee
payable to Alliance is equal to 2.25% of total hotel revenue and is paid
monthly.

The Companys wholly owned Secaucus, NJ Holiday Inn continues to be operated
under a long-term lease with Secaucus Holding Corporation, a wholly owned
subsidiary of Prime Hospitality Corp. (Prime). The Company is currently in
negotiations with Prime to transfer the lease to Barclay. It is the Companys
intent to contract with Alliance to manage the property.

Critical Accounting Policies

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

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

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

Accounting for Joint Ventures
The Company currently has a 49 percent ownership interest in two joint venture
hotels, a 57.65 percent ownership interest in one joint venture hotel, and a
13.05% ownership interest in two joint venture hotels. As of June 30, 2003,
the Company determined that it did not have a controlling interest in any of
the joint ventures during the quarter and six months ended June 30, 2003 and
therefore used the equity method to recognize its share of net income or loss
from the joint ventures and adjusted the carrying value of the investment
accordingly. The joint ventures assets, liabilities, and equity are not
recorded on the Companys balance sheet as of June 30, 2003. See Note 8 for a
discussion of FIN 46.

16



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##### 



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

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

Income Taxes
The Company records a valuation allowance to reduce the deferred tax assets to
an amount that it believes is more likely than not to be realized. In
assessing the need for the valuation allowance, future taxable income and
ongoing prudent and feasible tax planning strategies have been considered.
Should our estimate of future taxable income be less than expected, or our tax
planning strategy not be carried out as planned, we would record an adjustment
to the deferred tax asset in the period such determination was made. As of
June 30, 2003, the Company has not recorded a valuation allowance.

Results of Operations

The following table outlines the number of hotels wholly owned by the Company
by service type as of June 30, 2003 and 2002.

|                       |  |               |    |               |  |  |    | 
|---------------------- |  | ------------- | -- | ------------- |  |  | -- | 
|Type of Hotel          |  | June 30, 2003 |    | June 30, 2002
|                       |  |               |    |              
|Limited-service hotels |  |               | 23 |               |  |  | 26 | 
|Extended-stay hotels   |  |               | 10 |               |  |  | 10 | 
|Full-service hotels    |  |               | 11 |               |  |  | 11 | 
|                       |  |               |    |               |  |  |    | 
|Total                  |  |               | 44 |               |  |  | 47 | 
|                       |  |               |    |               |  |  |    | 

The Company adopted Staff Accounting Bulletin No. 101 (SAB 101) on January 1,
2000. SAB 101 requires that a lessor not recognize contingent rental income
until the lessee has achieved annual specified hurdles. SAB 101 effectively
defers percentage lease revenue from the first and second quarters to the third
and fourth quarters. Due to the acquisition of the leasehold interests from
Interstate, effective July 1, 2002, percentage lease payments made by Barclay
to the Company (for all but two of its wholly owned hotels), are eliminated in
consolidation. Through June 30, 2003 the Company continued to defer
recognition of any percentage lease revenue for the two wholly owned hotels,
the Las Vegas, NV Hampton Inn and the Secaucus, NJ Holiday Inn, that continued
to be operated under long term leases with Intercontinental Group and Prime,
respectively. In addition, three joint ventures, in which the Company owned a
49 percent ownership interest as of June 30, 2003, deferred recognition of any
percentage lease revenue for three hotels. 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.

17



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Due to the acquisition of the leasehold interests from Interstate, the results
of operations for the three and six months ended June 30, 2003 versus the
results of operations for the three and six months ended June 30, 2002 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 six months ended June 30, 2003 and 2002, shown below is a
comparison of selected actual financial information for the three and six
months ended June 30, 2003 with selected pro forma financial information for
the three and six months ended June 30, 2002, as if the acquisition of the
leasehold interests from Interstate occurred on January 1, 2002. The selected
pro forma financial information is also shown as if the sales of hotel
properties, which occurred during 2002, occurred on January 1, 2002 as well.
Therefore, the selected pro forma financial information below is based on both
the Companys and Interstates historical results of operations, after giving
effect to certain pro forma adjustments to 2002, for the 44 wholly owned hotels
as of June 30, 2003. The pro forma adjustments include the elimination of the
transaction to acquire the leasehold interests from Interstate and the
percentage lease revenue applicable to the 45 wholly owned hotels for which the
leasehold interests were acquired, as well as adjustments to undistributed
property operating expenses to remove management company corporate costs, to
make adjustments to management fees to reflect the fee structure per the new
management agreements, and to make resulting adjustments to the allocation of
earnings to minority interests. The unaudited pro forma financial information
does not purport to be indicative of what the actual results of operations of
the Company would have been had the transaction occurred on the basis assumed
above nor are they indicative of results of future operations. The unaudited
pro forma financial information is based upon available information and upon
assumptions and estimates that management believes are reasonable under the
circumstances.

Actual Three and Six Months Ended June 30, 2003 versus Actual Three and Six
Months Ended June 30, 2002

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 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 three
months ended June 30 from $9,793 to $739, and for the six months ended June 30
declined from $19,326 to $1,549. These declines are primarily due to the
acquisition of the leasehold interests from Interstate. The percentage lease
revenue for 2003 reflects only the percentage lease revenue for the two wholly
owned hotels that remained under long term leases with third parties, the
Secaucus, NJ Holiday Inn and the Las Vegas, NV Hampton Inn.

Interest and Other Income- Interest and other income increased from $353 to
$364 for the three months ended June 30 and from $700 to $730 for the six
months ended June 30. The increase is primarily due to an increase in
mezzanine loan interest income, offset by a decrease in third party development
fees.

EXPENSES

Rooms, Food and Beverage and 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 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

18



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of the 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 increased $162 for the three months ended June 30,
from $1,559 in 2002 to $1,721 in 2003, and for the six months ended June 30
increased from $3,377 in 2002 to $3,454 in 2003. These increases are primarily
due to higher insurance premiums and additional out of pocket costs for the
portion of losses that did not exceed deductibles.

Percentage Lease Expense- Beginning July 1, 2002, this expense represents the
lease expense Barclay, as lessee, pays to the owners of two Joint Venture
Hotels.

General and Administrative- General and administrative expense increased $156
for the quarter ended June 30, from $1,315 in 2002 to $1,471 in 2003. The
increase is primarily attributable to an additional $253 in legal and other
costs primarily associated with new business development, offset by a decline
in payroll costs of $183 due to a reduction in personnel. General and
administrative expense increased $86 for the six months ended June 30, from
$2,870 in 2002 to $2,956 in 2003. The increase is primarily attributable to an
additional $508 in legal and other costs primarily associated with new business
development, offset by the write off of a mezzanine loan totaling $250 in the
first quarter of 2002 and a decline in payroll costs of $137 due to a reduction
in personnel.

Depreciation and Amortization- Depreciation and amortization expenses remained
relatively consistent with the same periods in the prior year.

Interest- Interest expense decreased $614 for the quarter ended June 30, from
$2,527 in 2002 to $1,913 in 2003. Interest expense also decreased for the six
months ended June 30, from $5,360 in 2002 to $3,874 in 2003. 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.

Income (loss) Allocation to Minority Interest- Minority interest weighted
average share of ownership totaled 6.04% for the three and six months ended
June 30, 2003 and 6.06% and 6.43% for the three and six months ended June 30,
2002, respectively.

Income Tax Benefit- The income tax benefit is a result of the net loss
experienced by Barclay during 2003.

Equity in Income (loss) of Unconsolidated Subsidiaries- The Companys share of
income (loss) from unconsolidated subsidiaries totaled ($81) and $54 for the
three and six months ended June 30, 2003, respectively, versus ($56) and ($51)
for the three and six months ended June 30, 2002, respectively. As of June 30,
2003 and 2002, the Companys share of deferred revenue for these unconsolidated
subsidiaries totaled $565 and $562, respectively.

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

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 six months
ended June 30, 2003 and 2002 shown above, shown below is a comparison of
selected actual financial information for the three and six months ended June
30, 2003 with selected pro forma financial information for the three and six
months ended June 30, 2002, as if the acquisition of the leasehold interests
from Interstate occurred on January 1, 2002. This information is shown for the
44 wholly owned hotels that were open for the entire periods presented.

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Selected Financial Information  Actual Three and Six Months Ended June 30,
2003 versus Pro Forma Three and Six Months Ended June 30, 2002

|                          |                                           |  |                    |        |                  |  |          |        |             |  |   |        |  |  |   |        | 
|------------------------- | ----------------------------------------- |  | ------------------ | ------ | ---------------- |  | -------- | ------ | ----------- |  | - | ------ |  |  | - | ------ | 
|                          |                                           |  | Three Months Ended |        | Six Months Ended
|                          |                                           |  | June 30,           |        | June 30,        
|                          |                                           |  |                    |        |                 
|                          |                                           |  | 2003               |        | 2002             |  | 2003     |        | 2002       
|                          |                                           |  |                    |        |                  |  |          |        |            
|                          |                                           |  | (actual)           |        | (pro forma)      |  | (actual) |        | (pro forma)
|Revenue:                  |                                           |  |                    |        |                  |  |          |        |             |  |   |        |  |  |   |       
|                          | Rooms                                     |  | $                  | 30,124 |                  |  | $        | 31,465 |             |  | $ | 56,557 |  |  | $ | 58,721 | 
|                          | Other hotel revenue                       |  |                    | 3,023  |                  |  |          | 3,311  |             |  |   | 5,818  |  |  |   | 6,236  | 
|Hotel operating expenses: |                                           |  |                    |        |                  |  |          |        |             |  |   |        |  |  |   |       
|                          | Rooms and other operating expenses        |  |                    | 8,936  |                  |  |          | 9,190  |             |  |   | 17,287 |  |  |   | 17,327 | 
|                          | Undistributed property operating expenses |  |                    | 10,684 |                  |  |          | 10,887 |             |  |   | 20,873 |  |  |   | 20,709 | 

REVENUE

Room Revenue- Room revenue decreased $1,341 to $30,124 for the three months
ended June 30, 2003 versus $31,465 for the three months ended June 30, 2002.
For the quarter, revenue per available room (RevPAR) decreased 4.8% from
$56.28 in 2002 to $53.57 in 2003. Average daily rate for the quarter declined
3.1% from
$80.41 in 2002 to $77.94 in 2003, while occupancy rates decreased from 70.0% to
68.7%. For the six months ended June 30, 2003 room revenue decreased $2,164 to
$56,557 compared to $58,721 for the six months ended June 30, 2002. RevPAR
decreased 4.0% from $52.79 in 2002 to $50.69 in 2003. Average daily rate
declined 3.5% from $79.97 in 2002 to $77.14 in 2003, while occupancy rates
decreased from 66.0% to 65.7%. We believe that the decrease in RevPAR, average
daily rate and occupancy rates in 2003 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
$3,311 in 2002 to $3,023 in 2003 for the quarter ended June 30. Other hotel
revenue declined from $6,236 in 2002 to $5,818 in 2003 for the six months ended
June 30. These decreases are 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 ended June 30 from 57.7% in 2002 to 59.2% in 2003, and for the six
months ended June 30 from 58.6% in 2002 to 61.2% in 2003.

Rooms and Other Operating Expenses- Rooms and other operating expense
decreased $254 for the quarter, from $9,190 in 2002 to $8,936 in 2003,
primarily due to a decline in payroll costs. Rooms and other operating expense
for the six months ended June 30, 2003 totaled $17,287, relatively flat when
compared with $17,327 for the six months ended June 30, 2002.

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 decreased $203 for the three months
ended June 30, from $10,887 in 2002 to $10,684 in 2003. These decreases are
primarily due to lower sales and marketing labor costs, lower franchise fees
and management fees, offset by higher utility costs for electricity and gas.
Undistributed property operating expenses increased $165 for the six months
ended June 30, from $20,709 in 2002 to $20,873 in 2003. The increase is
primarily due to higher administrative and general and repairs and maintenance
labor costs, higher utility costs for electricity and gas, offset by lower
franchise fees and management fees.

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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 six months ended June 30, 2003 and 2002, cash
flow provided by (used in) operating activities was $13,417 and $(135),
respectively. The increase is primarily due to the acquisition of the
leasehold interests in 2002, which resulted in an adjustment to cash provided
by (used in) operating activities in the second quarter of 2002 totaling
($10,954), as well as the timing of payments, both received and made.

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 two quarters of 2003, the Company declared
distributions of $6,058 to its common shareholders ($0.30 per share) and $3,469
to its preferred shareholders ($1.156 per share). The Company intends to
monitor its dividend policy closely and to act accordingly as results of
operations dictate. The Company also intends to fund cash distributions to
shareholders out of cash flow from operating activities. The Company may 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 used in investing activities for the six months ended
June 30, 2003 totaled $2,987. Gross capital expenditures at the wholly owned
hotels totaled $3,705. The Company plans to spend approximately $5,300 to
renovate certain of its wholly owned hotels during the next six 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 5.5% and 5.0%
of room revenues for each of the six months ended June 30, 2003 and 2002,
respectively.

During the second quarter of 2002, the Company entered into a joint venture
agreement with Concord Lodging Investment Partners (Winston), LLC, an affiliate
of Concord Hospitality Enterprises Company, (the Concord Joint Venture). The
Company purchased a 50% interest in the Concord Joint Venture. The Concord
Joint Venture subsequently purchased an operating Wingate hotel in West Des
Moines, IA, and a non-operating vacant hotel in Beachwood, OH. The Wingate
hotel has been renovated and converted to a Fairfield Inn & Suites hotel and
the Beachwood, OH hotel (Beachwood Courtyard) has been renovated and opened
as a Courtyard by Marriott hotel in April 2003. The Company and Concord have
jointly signed a completion guarantee for the Beachwood Courtyard, providing a
guaranty to the lender of the full, complete and satisfactory completion of the
renovation of the property. Pursuant to the completion guarantee agreement,
the construction process to renovate the Beachwood Courtyard was completed by
June 26, 2003. The total cost to renovate the property was approximately
$6,260. Under the completion guarantee, upon default by the borrower, the
Company is required to (a) immediately assume responsibility for the completion
of the project at its sole cost and expense, or (b) cure or cause the borrower
to cure any such default. The Company anticipates that it will be released
from the completion guarantee upon payment of all outstanding obligations
related to the project which amounted to approximately $65 at June 30, 2003.

During the fourth quarter of 2002, the Company entered into a joint venture
agreement with Charlesbank Capital Partners, LLC (Charlesbank) to acquire
more than $100,000 of hotel assets (the Charlesbank Venture). Charlesbank is
a private investment firm that manages capital on behalf of a range of
institutional investors. During the fourth quarter of 2002, the Charlesbank
Venture and Concord subsequently formed a new joint venture entity, WCC Project
Company LLC. The Charlesbank Venture is the managing member of WCC Project
Company LLC. Both the West Des Moines, IA Fairfield Inn & Suites hotel and the
Beachwood Courtyard were transferred from the Concord Joint Venture to WCC
Project Company LLC. Subsequent to Charlesbanks equity contribution in WCC
Project Company LLC, Charlesbanks ownership totals 73.95 percent, Concords
ownership was reduced from 50

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percent to 13 percent and the Companys ownership
was reduced from 50 percent to 13.05 percent. At June 30, 2003, the Companys
investment in WCC Project Company LLC totaled $1,022.

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 June 30, 2003,
subsequent to distributions paid to the Company from the operations of the
hotel, the Companys investment in the Marsh Landing Joint Venture totaled
$1,049.

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 June 30, 2003, subsequent to distributions paid to
the Company from the operations of the hotels, the Companys investment in the
Regent Joint Venture totaled $6,381.

As of June 30, 2003, total assets of the four joint venture properties were
$59,070, total liabilities were $37,770, and total equity was $21,300. For the
six months ended June 30, 2003, total revenue of the four joint ventures
properties
was $3,303, total expenses were $3,149, resulting in net income of $154, of
which the Companys share was $54. The Company received cash distributions
totaling $719 from its joint ventures during the first two quarters of 2003.

Under the terms of each of its joint venture agreements, the Company receives
ongoing asset management fees. The Company also receives cash distributions of
the Joint Ventures 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 second
quarter of 2003, the Company continued to receive interest income from these
mezzanine loans.

In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan to a
third party owner for the purchase and conversion of a historic office building
into a 116-room Hampton Inn & Suites hotel in Baltimore, MDs Inner Harbor (the
Baltimore Hotel). Subsequently, the Company sold 50 percent of the loan to
an affiliate of Hall Financial Group at face value, or $1,750. The total cost
of the Baltimore Hotel, which is scheduled to open in the first quarter of
2004, is expected to be approximately $19,000.

The Companys net cash used in financing activities during the six months ended
June 30, 2003 totaled $6,700. This amount included the payment of
distributions to shareholders of $9,520, the payment of distributions to the
Partnerships minority interest of $390, and long-term debt payments of $675,
offset by a net increase of $3,900 in the outstanding balance under the
Companys $125,000 line of credit (the Line) from $72,300 at December 31,
2002 to $76,200 at June 30, 2003.

The Companys availability under the Line totaled approximately $36,125 as of
June 30, 2003. Availability is calculated each quarter on a trailing
twelve-month basis based upon certain valuation criteria contained within the
Line. The Line requires the Company to maintain certain financial ratios
including maximum leverage, minimum interest coverage and minimum fixed charge
coverage, as well as certain levels of unsecured and secured debt and tangible
net worth, all of which the Company was in compliance with as of June 30, 2003.
The failure to comply with any of these covenants would cause a default under
our line of credit. Furthermore, our line of credit provides that

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any default
under, or acceleration of, any of our other debt, any debt of WINN Limited
Partnership or any debt of our subsidiaries, including any default under the
Companys fixed-rate loan with GE Capital Corporation or otherwise, will
constitute a default under the line of credit. Any of these defaults, if not
waived, could result in the acceleration of the indebtedness under our line of
credit. If this occurs, we may not be able to repay our debt or borrow
sufficient funds to refinance it, in which case we would not be able to make
distributions to our shareholders and could lose REIT status, which would
result in the Company not being allowed to deduct its distributions to
shareholders in computing its taxable income and would subject the Company to
federal income tax, including any applicable alternative minimum tax, on its
taxable income at regular corporate rates. The Line 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%.

The Company had $65,731 in debt at June 30, 2003 that was subject to a fixed
interest rate and fixed monthly payments with GE Capital Corporation. This
debt, a ten-year loan with a 25-year amortization period, carries an interest
rate of 7.375%. All unpaid principal and interest are due on December 1, 2008.

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

Effective March 31, 2003, 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 based
on a base rate of 1.505% until February 27, 2004. The Lines interest rate
spread is currently 2.00%, equaling a fixed rate of 3.505% on $50,000 until
February 27, 2004.

As of June 30, 2003, 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 |       | 3 - 5 Years |  | 5 Years
|                             |                               |       |        |          |  |             |       |             |  |        
|Long-term debt               |                               | $     | 65,731 |          |  | $           | 1,427 |             |  | $       | 3,189  |       |  | $ | 3,694 |       |  | $ | 57,421 |       
|Corporate office lease       |                               |       | 619    |          |  |             | 368   |             |  |         | 251    |       |  |   |      |       |  |   |       |       
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |       
|                             | Total contractual obligations |       | $      | 66,350   |  |             | $     | 1,795       |  |         | $      | 3,440 |  |   | $     | 3,694 |  |   | $      | 57,421 | 
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |       
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |       
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   | After 
|Other
Commercial Commitments |                               | Total |        | < 1 Year |  | 1 - 3 Years |       | 3 - 5 Years |  | 5 Years
|                             |                               |       |        |          |  |             |       |             |  |        
|Line of credit               |                               | $     | 76,200 |          |  | $           |      |             |  | $       | 76,200 |       |  |   |      |       |  |   |       |       
|                             |                               |       |        |          |  |             |       |             |  |         |        |       |  |   |       |       |  |   |        |       

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.

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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 to make
distributions to the equity holders.

Funds From Operations

Funds from operations (FFO), as defined by the National Association of Real
Estate Investment Trusts (NAREIT), is net income (loss) (determined in
accordance with generally accepted accounting principles (GAAP)), excluding
gains (losses) from sales of property, plus depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures (which are
calculated to reflect FFO on the same basis). The Company further adjusts FFO
by subtracting preferred share distributions, and income tax benefit, and
adding the lease acquisition expense and the change in deferred revenue during
the period to eliminate the impact of Staff Accounting Bulletin No. 101. The
calculation of FFO may vary from entity to entity and as such the presentation
of FFO by the Company may not be comparable to other similarly titled measures
of other reporting companies. Some reporting companies have adopted the NAREIT
definition of FFO. Due to the acquisition of the Companys leasehold interests
from Interstate Hotels and Resorts in July 2002, the Company believes that the
adoption of the NAREIT definition of FFO would not result in a meaningful
comparison, and would not be an accurate reflection of the operating activity
of the two quarters ended June 30, 2003 compared with the two quarters ended
June 30, 2002. This is primarily due to significant amounts of deferred
revenue which accrued throughout the first two quarters of 2002 and were
recognized in the third quarter of 2002 pursuant to SAB 101. The Company plans
to adopt the NAREIT definition of FFO when the Company believes that the
figures will result in a meaningful comparison between periods presented. FFO
is not intended to represent cash flows for the period. FFO has not been
presented as an alternative to operating income, but as an indicator of
operating performance, and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with generally
accepted accounting principles.

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

24



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##### 



WINSTON HOTELS, INC.
Reconciliation of Net Income (loss) to FFO
For the three and six months ended June 30, 2003 and 2002
($ in thousands)

|                                                                       |  |                             |        |                           |  |      |         |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------- |  | --------------------------- | ------ | ------------------------- |  | ---- | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                       |  | Three Months Ended June 30, |        | Six Months Ended June 30,
|                                                                       |  |                             |        |                          
|                                                                       |  | 2003                        |        | 2002                      |  | 2003 |         | 2002
|                                                                       |  |                             |        |                           |  |      |         |     
|Net income (loss)                                                      |  | $                           | 3,397  |                           |  | $    | (11,111 | )    |  | $ | 4,931  |   |  | $ | (12,205 | )
|Loss on sale of discontinued operations                                |  |                             |       |                           |  |      | 790     |      |  |   |       |   |  |   | 790     |  
|Minority interest allocation                                           |  |                             | 107    |                           |  |      | (787    | )    |  |   | 94     |   |  |   | (994    | )
|Minority interest allocation  loss on sale
of discontinued operations |  |                             |       |                           |  |      | (48     | )    |  |   |       |   |  |   | (48     | )
|Minority interest allocation  earnings from
discontinued operations   |  |                             |       |                           |  |      | 6       |      |  |   |       |   |  |   | 8       |  
|Depreciation                                                           |  |                             | 4,549  |                           |  |      | 4,782   |      |  |   | 9,270  |   |  |   | 9,612   |  
|Depreciation  discontinued operations                                 |  |                             |       |                           |  |      | 191     |      |  |   |       |   |  |   | 410     |  
|Depreciation from joint ventures                                       |  |                             | 204    |                           |  |      | 194     |      |  |   | 398    |   |  |   | 378     |  
|Deferred revenue                                                       |  |                             | (8     | )                         |  |      | 4,388   |      |  |   |       |   |  |   | 7,073   |  
|Deferred revenue from joint ventures                                   |  |                             | 513    |                           |  |      | 403     |      |  |   | 564    |   |  |   | 561     |  
|Lease termination expense                                              |  |                             |       |                           |  |      | 17,668  |      |  |   |       |   |  |   | 17,668  |  
|Income tax benefit                                                     |  |                             | (132   | )                         |  |      | (6,714  | )    |  |   | (683   | ) |  |   | (6,714  | )
|Preferred stock dividend                                               |  |                             | (1,734 | )                         |  |      | (1,734  | )    |  |   | (3,469 | ) |  |   | (3,469  | )
|                                                                       |  |                             |        |                           |  |      |         |      |  |   |        |   |  |   |         |  
|Funds From Operations (FFO)                                            |  | $                           | 6,896  |                           |  | $    | 8,028   |      |  | $ | 11,105 |   |  | $ | 13,070  |  
|                                                                       |  |                             |        |                           |  |      |         |      |  |   |        |   |  |   |         |  

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. These statements include, among
other things, the Companys expected termination of the lease with Prime and
the intention to enter into a replacement management contract with Alliance,
its belief that Barclay will generate sufficient taxable income to fully
realize the deferred tax asset, its plans for renovation expenditures, its
share of the estimated total net loss from the Las Vegas, NV Hampton Inn and
the Windsor, CT Hilton Garden Inn for the second half of 2003, its belief that
it will be released from its completion guarantee for the Beachwood Courtyard,
and the adequacy of current funding sources for capital expenditures. You can
identify these statements by use of words like guidance, project, target,
may, will, expect, anticipate, estimate, believes, continue or
similar expressions. These statements represent the Companys judgment and are
subject to risks and uncertainties that could cause actual operating results to
differ materially from those expressed or implied in the forward looking
statements, including but not limited to the following risks: changes in
general economic conditions, properties held for sale will not sell, financing
risks including the inability to obtain financing on favorable terms, if at
all, development risks including the risks of construction delays and cost
overruns, lower than expected occupancy and average daily rates, non-issuance
or delay of issuance of governmental permits, zoning restrictions, the increase
of development costs in connection with projects that are not pursued to
completion, non-payment of mezzanine loans, the failure to make additional
mezzanine debt investments and investments in distressed hotel assets, and
failure to attract joint venture opportunities. From time to time, these and
additional risks are discussed in the Companys filings with the Securities and
Exchange Commission, including but not limited to its Form S-3 Registration
Statements, and its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q
and its other periodic reports.

25



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##### 



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

As of June 30, 2003, 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 $76,200 at June
30, 2003. 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%. Effective March 31, 2003, 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 based on as base rate of 1.505% until February 27,
2004. The Lines interest rate spread is currently 2.00%, equating to an
effective fixed rate of 3.505% on $50,000 until February 27, 2004. The
differential actually paid or received on interest rate agreements is
recognized as an adjustment to interest expense over the life of the swap.
Including the impact of the interest rate swap, the weighted average interest
rate on the Line for the six months ended June 30, 2003 was 3.703%. At June
30, 2003, the Company had $26,200 of variable rate debt outstanding under the
Line that was exposed to fluctuations in the market rate of interest.

The definitive extent of the Companys interest rate risk under the Line is not
quantifiable or predictable because of the variability of future interest rates
and business financing requirements. If interest rates increased by 100 basis
points, the Companys interest expense for the three months ended June 30, 2003
would have increased by approximately $66, based on the weighted-average amount
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 June 30, 2003:

|              |      |                 |        |               |  |  |       |       |  
|------------- | ---- | --------------- | ------ | ------------- |  |  | ----- | ----- | -
|Maturity Date |      | Fixed Rate Debt |        | Interest Rate
|              |      |                 |        |              
|              | 2003 |                 | $      | 700           |  |  |       | 7.375 | %
|              | 2004 |                 |        | 1,480         |  |  |       | 7.375 | %
|              | 2005 |                 |        | 1,594         |  |  |       | 7.375 | %
|              | 2006 |                 |        | 1,715         |  |  |       | 7.375 | %
|              | 2007 |                 |        | 1,846         |  |  |       | 7.375 | %
|Thereafter    |      |                 | 58,396 |               |  |  | 7.375 | %    
|              |      |                 |        |               |  |  |       |      
|              |      | $               | 65,731 |               |  |  | 7.375 | %    
|              |      |                 |        |               |  |  |       |      

Item 4  Controls and Procedures



| |  | (a)     Evaluation of disclosure controls and procedures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | An evaluation was carried out under the supervision and with the
participation of the Companys management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design
and operation of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934, as amended (the Exchange Act)). Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer believe, as of
the end of the period covered by this report, the Companys disclosure
controls and procedures provide reasonable assurances that information
required to be disclosed by the Company in the reports that it files or
submits under the
Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the Commissions rules and forms.

26



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##### 





| |  | (b)     Changes in internal controls.                                                                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | There have been no changes in internal control over financial reporting
during the period covered by this report that have materially affected,
or are reasonably likely to materially affect, the Companys internal
control over financial reporting.

27



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##### 



PART II  OTHER INFORMATION

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Item 4.     |  | Submission of Matters to Vote of Security Holders                                                                                                                                                                                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|            |  | On May 6, 2003, the Annual Meeting of Shareholders was held and the
following matters were submitted to the common shareholders for a
vote. There were 17,595,467 shares of Common Stock either present or
evidenced by proxy. Set forth below is a brief description of the
matters voted on and the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non-votes.
|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                
|Proposal 1: |  | Election of Directors:                                                                                                                                                                                                                                                                                                                                                                                         

|                     |  |           |            |             |  |               |           |        |  |           |   |  |  |  |            | 
|-------------------- |  | --------- | ---------- | ----------- |  | ------------- | --------- | ------ |  | --------- | - |  |  |  | ---------- | 
|                     |  |           |            |             |  |               |           |        |  | Number of |   |  |  | 
|                     |  |           |            |             |  | Votes Against |           | Broker |  |           |   | 
|Name                 |  | Votes For |            | or Withheld |  | Non-votes     |           | Totals
|                     |  |           |            |             |  |               |           |       
|Charles M. Winston   |  |           | 15,505,093 |             |  |               | 2,090,374 |        |  |           | 0 |  |  |  | 17,595,467 | 
|Robert W. Winston    |  |           | 15,484,022 |             |  |               | 2,111,445 |        |  |           | 0 |  |  |  | 17,595,467 | 
|James H. Winston     |  |           | 15,511,972 |             |  |               | 2,083,495 |        |  |           | 0 |  |  |  | 17,595,467 | 
|Thomas F. Darden     |  |           | 15,094,782 |             |  |               | 2,500,685 |        |  |           | 0 |  |  |  | 17,595,467 | 
|Richard L. Daugherty |  |           | 17,385,233 |             |  |               | 210,234   |        |  |           | 0 |  |  |  | 17,595,467 | 
|Edwin B. Borden      |  |           | 15,696,210 |             |  |               | 1,899,257 |        |  |           | 0 |  |  |  | 17,595,467 | 
|David C. Sullivan    |  |           | 15,756,393 |             |  |               | 1,839,074 |        |  |           | 0 |  |  |  | 17,595,467 | 

|            |  |                                                                                     
|----------- |  | ------------------------------------------------------------------------------------
|Proposal 2: |  | Ratification of the accounting firm PricewaterhouseCoopers LLP as external auditors:

|                           |  |  |            | 
|-------------------------- |  |  | ---------- | 
|Votes for:                 |  |  | 15,460,184 | 
|Votes against or withheld: |  |  | 2,090,924  | 
|Votes abstained:           |  |  | 44,359     | 
|Broker non-votes:          |  |  | 0          | 
|                           |  |  |            | 
|Total                      |  |  | 17,595,467 | 
|                           |  |  |            | 

|        |  |                                  
|------- |  | ---------------------------------
|Item 6. |  | Exhibits and Reports on Form 8-K.
|        |  |                                  
|        |  | (a) Exhibits                     

| |  |  |      |  |  |                                                                                                                                                                                                                                                              
| |  |  | ---- |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | 10.1 |  |  | Termination Agreement between Barclay Hospitality
Services Inc. and Interstate Management and Investment
Corporation, dated as of July 1, 2003                                                                                                               
| |  |  |      |  |  |                                                                                                                                                                                                                                                              
| |  |  | 10.2 |  |  | Hotel Management Agreement By and Between Barclay
Hospitality Services Inc. and Alliance Hospitality Management,
LLC, dated as of July 1, 2003                                                                                                               
| |  |  |      |  |  |                                                                                                                                                                                                                                                              
| |  |  | 31.1 |  |  | Certification of Principal Executive Officer of
Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                 
| |  |  |      |  |  |                                                                                                                                                                                                                                                              
| |  |  | 31.2 |  |  | Certification of Principal Financial Officer of
Periodic Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                 
| |  |  |      |  |  |                                                                                                                                                                                                                                                              
| |  |  | 32.1 |  |  | Certification of Robert W. Winston, III, President
and Chief Executive Officer of Winston Hotels, Inc., pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and dated August 13, 2003.                   
| |  |  |      |  |  |                                                                                                                                                                                                                                                              
| |  |  | 32.2 |  |  | Certification of Joseph V. Green, Executive Vice
President, Chief Financial Officer and Secretary of Winston
Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
dated August 13, 2003.

28



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##### 



| |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | (b) |  | Reports on Form 8-K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  |     |  | The Company filed the following reports on Form 8-K for the
quarter ended June 30, 2003:                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |     |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | (1) |  | The Company filed a current report on Form 8-K dated
May 7, 2003, pursuant to Item 12 (Disclosure of Results of
Operations and Financial Condition) of Form 8-K, which was
included under Item 9 in accordance with the interim guidance in
U.S. Securities and Exchange Commission Release No. 33-8216,
effective March 28, 2003. Included in the Form 8-K was the
Companys press release announcing its operating results for the
first quarter ended March 31, 2003, attached as Exhibit 99.1.

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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    August 13, 2003 |  | /s/ Joseph V. Green                                 
|                        |  |                                                     
|                        |  | Joseph V. Green                                     
|                        |  | Executive Vice President and Chief Financial Officer
|                        |  | (Authorized officer and Principal Financial Officer)

30



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##### 



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                              
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                                                              
|10.1    |  | Termination Agreement between Barclay Hospitality Services Inc. and
Interstate Management and Investment Corporation, dated as of July 1, 2003                                                                                                               
|        |  |                                                                                                                                                                                                                                                              
|10.2    |  | Hotel Management Agreement By and Between Barclay Hospitality Services
Inc. and Alliance Hospitality Management, LLC, dated as of July 1, 2003                                                                                                               
|        |  |                                                                                                                                                                                                                                                              
|31.1    |  | Certification of Principal Executive Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                              
|31.2    |  | Certification of Principal Financial Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                              
|32.1    |  | Certification of Robert W. Winston, III, President and Chief Executive
Officer of Winston Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
dated August 13, 2003.                   
|        |  |                                                                                                                                                                                                                                                              
|32.2    |  | Certification of Joseph V. Green, Executive Vice President, Chief
Financial Officer and Secretary of Winston Hotels, Inc., pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and dated August 13, 2003.

31