<PAGE>   1
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON, DC 20549


                                   FORM 10-Q/A
                                (AMENDMENT NO. 1)



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


<TABLE>
<S>                                                                                      <C>
For the quarterly period ended September 30, 1998                                        Commission file number  0-23732
</TABLE>



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

<TABLE>
<S>                                                                          <C>
      NORTH CAROLINA                                                                        56-1624289
(State of incorporation)                                                     (I.R.S. Employer Identification No.)
</TABLE>


                               2209 CENTURY DRIVE
                          RALEIGH, NORTH CAROLINA 27612
                    (Address of principal executive offices)
                                   (Zip Code)


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




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

The number of shares of Common Stock, $.01 par value, outstanding on October 31,
1998 was 16,313,980.



<PAGE>   2

                              WINSTON HOTELS, INC.
                                      INDEX

The Registrant hereby amends its Quarterly Report on Form 10-Q for the period
ended September 30, 1998, filed with the Securities and Exchange Commission on
November 16, 1998, to reflect a change in accounting principle effective January
1, 1998. This change resulted from the withdrawal of the consensus reached by
the Financial Accounting Standards Board's Emerging Issues Task Force regarding
EITF 98-9 "Accounting for Contingent Rent in Interim Financial Periods,"
(originally issued on May 21, 1998) on November 19, 1998.

<TABLE>
<CAPTION>
                                                                                                                     Page
                                                                                                                     ----
<S>               <C>      <C>                                                                                       <C>
PART I.           FINANCIAL INFORMATION

Item 1.           WINSTON HOTELS, INC.

                           Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
                           December 31, 1997                                                                           3

                           Unaudited Consolidated Statements of Income for the three and nine months
                           ended September 30, 1998 and 1997                                                           4

                           Unaudited Consolidated Statements of Cash Flows for the nine months ended
                           September 30, 1998 and 1997                                                                 5

                           Notes to Consolidated Financial Statements                                                  6

                  CAPSTAR WINSTON COMPANY, L.L.C.  (1)

                           Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997                   9

                           Unaudited Statements of Income for the three and nine months ended
                           September 30, 1998                                                                         10

                           Unaudited Statement of Cash Flows for the nine months ended
                           September 30, 1998                                                                         11

                           Notes to Financial Statements                                                              12

                  WINSTON HOSPITALITY, INC.  (1)

                           Unaudited Statements of Income for the three and nine months ended
                           September 30, 1997                                                                         13

                           Unaudited Statement of Cash Flows for the nine months ended
                           September 30, 1997                                                                         14

                           Notes to Financial Statements                                                              15

Item 2.           Management's Discussion and Analysis of Financial Condition and Results
                  of Operations                                                                                       16

PART II.          OTHER INFORMATION

Item 6.           Exhibits and Reports on Form 8-K                                                                    24

                  SIGNATURES                                                                                          25

                  EXHIBIT INDEX                                                                                       26
</TABLE>

         (1)      The financial statements of CapStar Winston Company, L.L.C.
                  and Winston Hospitality, Inc. are included in this report as
                  they contain material information with respect to the
                  Company's investment in hotel properties. For the nine months
                  ended September 30, 1998, CapStar Winston Company, L.L.C.
                  served as the lessee of 47 of Winston Hotels, Inc.'s (the
                  "Company's") 49 hotels. For the nine months ended September
                  30, 1997, Winston Hospitality, Inc. served as the lessee of
                  all 38 of the Company's hotels. In November 1997, CapStar
                  Winston Company, L.L.C. replaced Winston Hospitality, Inc. as
                  the lessee of all 38 of the Company's hotels. These two
                  companies are not affiliated with the Company other than their
                  lessee relationships.

                                       2
<PAGE>   3


                              WINSTON HOTELS, INC.
                           CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                  September 30, 1998   December 31, 1997
                                                                                  ------------------   -----------------
                                                                                      (unaudited)
<S>                                                                               <C>                  <C>
Investment in hotel properties:
      Land                                                                             $  40,454           $  27,504
      Buildings and improvements                                                         341,007             224,535
      Furniture and equipment                                                             28,464              22,528
                                                                                       ---------           ---------
      Operating properties                                                               409,925             274,567
      Less accumulated depreciation                                                      (33,145)            (21,572)
                                                                                       ---------           ---------
                                                                                         376,780             252,995
      Properties under development                                                        15,623              26,490
                                                                                       ---------           ---------
         Net investment in hotel properties                                              392,403             279,485
Corporate FF&E, net                                                                          249                  23
Cash and cash equivalents                                                                    136                 164
Lease revenue receivable                                                                  10,564               5,682
Deferred expenses, net                                                                     1,767               1,403
Prepaid expenses and other assets                                                            788               1,070
                                                                                       ---------           ---------
           Total assets                                                                $ 405,907           $ 287,827
                                                                                       =========           =========

                      LIABILITIES AND SHAREHOLDERS' EQUITY

Due to banks                                                                           $ 163,876           $  44,081
Accounts payable and accrued expenses                                                      3,803               3,527
Distributions payable                                                                      6,609               6,950
Minority interest in Partnership                                                          15,213              15,779
                                                                                       ---------           ---------
           Total liabilities                                                             189,501              70,337
                                                                                       ---------           ---------

Shareholders' equity:
      Preferred stock, $.01 par value, 10,000 shares authorized, 3,000 shares
        issued and outstanding (liquidation preference of
        $76,734 and $77,100)                                                                  30                  30
      Common stock, $.01 par value, 50,000 shares authorized,
        16,314 and 16,194 shares issued and outstanding                                      163                 162
      Additional paid-in capital                                                         224,759             223,427
      Unearned compensation                                                                 (353)               (106)
      Distributions in excess of earnings                                                 (8,193)             (6,023)
                                                                                       ---------           ---------
           Total shareholders' equity                                                    216,406             217,490
                                                                                       ---------           ---------
           Total liabilities and shareholders' equity                                  $ 405,907           $ 287,827
                                                                                       =========           =========
</TABLE>


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

                                       3
<PAGE>   4



                              WINSTON HOTELS, INC.
                   UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)


<TABLE>
<CAPTION>
                                                        Three Months        Three Months         Nine Months          Nine Months
                                                           Ended                Ended               Ended                Ended
                                                       Sept. 30, 1998      Sept. 30, 1997       Sept. 30, 1998      Sept. 30, 1997
                                                       --------------      --------------       --------------      --------------
<S>                                                    <C>                 <C>                  <C>                 <C>
Revenue:
     Percentage lease revenue                               $16,229            $10,328              $41,301            $27,098
     Interest and other income                                   76                 78                  190                132
                                                            -------            -------              -------            -------
              Total revenue                                  16,305             10,406               41,491             27,230
                                                            -------            -------              -------            -------

Expenses:
     Real estate taxes and property and casualty
       insurance                                              1,343                670                3,605              1,826
     General and administrative                               1,395                723                3,158              1,585
     Interest                                                 2,861                977                5,440              2,788
     Depreciation                                             4,526              2,612               11,600              7,182
     Amortization                                                79                 45                  256                127
                                                            -------            -------              -------            -------
              Total expenses                                 10,204              5,027               24,059             13,508
                                                            -------            -------              -------            -------

              Income before allocation to minority
                interest                                      6,101              5,379               17,432             13,722

Income allocation to minority interest                          420                490                1,187              1,100
                                                            -------            -------              -------            -------

              Net income                                      5,681              4,889               16,245             12,622
Preferred stock distribution                                  1,735                366                5,203                366
                                                            -------            -------              -------            -------
              Net income applicable to common
                shareholders                                $ 3,946            $ 4,523              $11,042            $12,256
                                                            =======            =======              =======            =======


Earnings per share:
     Net income per common share                            $  0.24            $  0.28              $  0.68            $  0.77
                                                            =======            =======              =======            =======
     Net income per common share assuming dilution
                                                            $  0.24            $  0.28              $  0.68            $  0.77
                                                            =======            =======              =======            =======
     Weighted average number of common shares                16,314             16,129               16,280             15,923
                                                            =======            =======              =======            =======
     Weighted average number of common shares
       assuming dilution                                     18,054             17,878               18,050             17,395
                                                            =======            =======              =======            =======
</TABLE>


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


                                       4
<PAGE>   5



                              WINSTON HOTELS, INC.
                 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                ($ IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                               Nine Months               Nine Months
                                                                                  Ended                     Ended
                                                                           September 30, 1998        September 30, 1997
                                                                           ------------------        ------------------
<S>                                                                        <C>                       <C>
Cash flows provided by operating activities:
      Net income                                                                 $  16,245               $ 12,622
      Adjustments to reconcile net income to net cash provided by
         operating activities:
            Minority interest                                                        1,187                  1,100
            Depreciation                                                            11,600                  7,182
            Amortization                                                               256                    127
            Amortization recorded as interest expense                                  258                    316
      Changes in assets and liabilities:
            Lease revenue receivable                                                (4,882)                (2,985)
            Prepaid expenses and other assets                                          181                   (591)
            Accounts payable and accrued expenses                                      276                    683
                                                                                 ---------               --------
                          Net cash provided by operating activities                 25,121                 18,454
                                                                                 ---------               --------

Cash flows used in investing activities:
      Prepaid acquisition costs                                                       (436)                  (335)
      Investment in hotel properties                                              (124,867)               (57,653)
      Sale of land parcel                                                              445                     --
                                                                                 ---------               --------
                         Net cash used in investing activities                    (124,858)               (57,988)
                                                                                 ---------               --------

Cash flows provided by financing activities:
      Fees paid in connection with debt obligations                                   (510)                   (90)
      Net proceeds from issuance of stock                                              588                 72,066
      Payment of distributions                                                     (20,164)               (13,565)
      Net increase (decrease) in line of credit borrowings                          76,895                (18,319)
      Increase in demand notes                                                      42,900                     --
                                                                                 ---------               --------
                       Net cash provided by financing activities                    99,709                 40,092
                                                                                 ---------               --------

Net increase (decrease) in cash and cash equivalents                                   (28)                   558
Cash and cash equivalents at beginning of period                                       164                    234
                                                                                 ---------               --------
Cash and cash equivalents at end of period                                       $     136               $    792
                                                                                 =========               ========

Supplemental disclosure:
            Cash paid for interest                                               $   5,789               $  2,809
                                                                                 =========               ========
Summary of non-cash investing and financing activities:
      Distributions declared but not paid                                        $   6,609               $  5,216
      Issuance of partnership units for the acquisition of hotel                        --                 11,287
        properties
      Conversion of partnership units for common shares                                152                     --
      Investment in hotel properties payable                                            --                    703
      Unearned compensation                                                            400                     --
      Minority interest payable adjustment due to follow-on offerings,
         the exercise of stock options and conversion of partnership
         units for common shares                                                       193                  1,675
      Amounts included in accounts payable and accrued expenses related
         to the September 1997 stock offering                                           --                    363
</TABLE>

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

                                       5
<PAGE>   6

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


1.       ORGANIZATION

         Winston Hotels, Inc. (the "Company") operates so as to qualify as a
         real estate investment trust ("REIT") for federal income tax purposes.
         The accompanying unaudited consolidated financial statements reflect,
         in the opinion of management, all adjustments necessary for a fair
         presentation of the interim financial statements. All such adjustments
         are of a normal and recurring nature. Due to the seasonality of the
         hotel business, the information for the three and nine months ended
         September 30, 1998 and the information for the three and nine months
         ended September 30, 1997 are not necessarily indicative of the results
         for a full year.

2.       DEVELOPMENT

         The Company opened two internally-developed hotels on October 3, 1998
         and November 4, 1998. These hotels include the Winston-Salem, North
         Carolina Courtyard by Marriott hotel and the Durham, North Carolina
         Homewood Suites hotel. The addition of these two new hotels brings the
         Company's total portfolio to 51 hotels. The Company currently has three
         hotels in various stages of development. If completed, all three
         development projects will represent a total investment of approximately
         $40 million.

3.       PRO FORMA FINANCIAL INFORMATION

         These unaudited pro forma condensed statements of income of the Company
         are presented as if the September 1997 Preferred Stock offering had
         occurred January 1, 1997 and the Company had acquired all 49 of the
         hotels owned as of September 30, 1998 on the later of January 1, 1997,
         or the hotel opening date for the eight hotels which opened in the
         first nine months of 1998. These unaudited pro forma condensed
         statements of income are not necessarily indicative of what actual
         results of operations of the Company would have been assuming such
         transactions had been completed as of the dates described above, nor do
         they purport to represent the results of operations for future periods.

<TABLE>
<CAPTION>
                                                                           PRO FORMA FOR THE
                                                                     NINE MONTHS ENDED SEPTEMBER 30,
                                                                          1998         1997
                                                                         -------      -------
         <S>                                                             <C>          <C>
         Percentage lease and other revenue                              $42,949      $37,412
                                                                         -------      -------
         Expenses:
            Real estate taxes and property and casualty insurance          3,841        2,999
            General and administrative                                     3,166        1,650
            Interest expense                                               5,194        3,348
            Depreciation                                                  11,930        9,282
            Amortization                                                     260          157
                                                                         -------      -------
              Total expense                                               24,391       17,436
                                                                         -------      -------
              Income before allocation to minority interest               18,558       19,976
                                                                         -------      -------

          Income allocation to minority interest                           1,295        1,698
          Preferred stock distribution                                     5,203        5,203
                                                                         -------      -------
              Net income applicable to common shareholders               $12,060      $13,075
                                                                         -------      -------

         Net income per common share                                     $  0.74      $  0.82
                                                                         =======      =======

         Net income per common share assuming dilution                   $  0.74      $  0.82
                                                                         =======      =======

         Weighted average number of common shares                         16,280       15,923
                                                                         =======      =======

         Weighted average number of common shares assuming dilution       18,050       17,974
                                                                         =======      =======
</TABLE>



                                       6
<PAGE>   7

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


4.       EARNINGS PER SHARE

         The Company adopted Statement of Financial Accounting Standards (SFAS)
         No. 128, "Earnings Per Share," on December 31, 1997. SFAS No. 128
         requires the Company to change its method of computing, presenting and
         disclosing earnings per share information. All prior period data
         presented has been restated to conform to the provisions of SFAS No.
         128.

         The following is a reconciliation of the net income applicable to
         common shareholders used in the net income per common share calculation
         to the income before allocation to minority interest used in the net
         income per common share - assuming dilution calculation.

<TABLE>
<CAPTION>
                                               Three Months          Three Months         Nine Months           Nine Months
                                                   Ended                Ended                Ended                 Ended
                                              Sept. 30, 1998         Sept. 30,1997       Sept. 30, 1998       Sept. 30, 1997
                                              --------------         -------------       --------------       --------------
         <S>                                  <C>                    <C>                 <C>                  <C>
         Net income                                $5,681               $4,889               $16,245               $12,622
         Less: preferred stock distribution         1,735                  366                 5,203                   366
                                                   ------               ------               -------               -------
         Net income applicable to common
              shareholders                          3,946                4,523                11,042                12,256
         Plus: income allocation to
              minority interest                       420                  490                 1,187                 1,100
                                                   ------               ------               -------               -------
         Net income assuming dilution              $4,366               $5,013               $12,229               $13,356
                                                   ======               ======               =======               =======
</TABLE>

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

<TABLE>
<CAPTION>
                                               Three Months         Three Months        Nine Months          Nine Months
                                                   Ended               Ended               Ended                Ended
                                              Sept. 30, 1998       Sept. 30, 1997      Sept. 30, 1998      Sept. 30, 1997
                                              ----------------     ---------------     ---------------     ----------------
         <S>                                  <C>                  <C>                 <C>                 <C>
         Weighted average number of common
              shares                              16,314               16,129               16,280               15,923
         Units with redemption rights              1,738                1,671                1,749                1,402
         Stock options                                 2                   78                   21                   70
                                                  ======               ======               ======               ======
         Weighted average number of common
              shares assuming dilution
                                                  18,054               17,878               18,050               17,395
                                                  ======               ======               ======               ======
</TABLE>

5.       DUE TO BANKS

         On October 30, 1998, the Company signed a $45,000 revolving demand
         note. This note bears interest at the prime rate and is collateralized
         by six of the Company's hotel properties. The note matures at the
         earliest of (i) lender's written demand for repayment, (ii) any default
         under the note, (iii) the closing of any refinancing or the
         acceleration of indebtedness evidenced by the Company's Credit
         Agreement dated October 29,1996 or (iv) May 1, 1999. The note proceeds
         were used to repay outstanding balances under the five 90-day unsecured
         demand notes totaling $42,900, which the Company signed during the
         second quarter of 1998.

         On November 3, 1998, the Company entered into a loan agreement totaling
         $71,000. The loan bears interest at a fixed rate of 7.375% and is
         collateralized by 14 of the Company's hotel properties. Principal and
         interest payments are due monthly based upon a 25-year amortization
         schedule. The loan is anticipated to be repaid in full by December 1,
         2008 ("the Anticipated Payment Date"). If the loan is not repaid by the
         Anticipated Payment Date, the outstanding principal balance of the loan
         shall bear interest at an annual rate equal to the greater of (i)




                                       7
<PAGE>   8

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


         7.375% plus 3%, or (ii) the rate derived by calculating the yields on
         noncallable United States Treasury obligations with terms (one longer
         and one shorter) most nearly approximating the period from such date of
         determination to December 1, 2023, plus 3%. Proceeds from this loan
         were used to repay a portion of the outstanding balances under the
         Company's $125,000 line of credit as well as a portion of outstanding
         balances under the $45,000 revolving demand note mentioned above.


6.       ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS:

         The Company adopted Statement of Financial Accounting Standards No. 130
         "Reporting Comprehensive Income" ("SFAS 130") effective January 1,
         1998. SFAS 130 requires the Company to display an amount representing
         the total comprehensive income for the period in a financial statement
         which is displayed with the same prominence as other financial
         statements. The Company does not have any items representing
         differences between net income and comprehensive income and therefore
         has not presented a Statement of Comprehensive Income in the
         accompanying financial statements.

         The Company will adopt Statement of Financial Accounting Standards No.
         131 "Disclosure about Segments of an Enterprise and Related
         Information" ("SFAS 131") effective December 31, 1998. SFAS 131
         requires the Company to report selected information about operating
         segments in its financial reports issued to shareholders. It also
         establishes standards for related disclosures about products and
         services, geographic areas and major customers. This statement is not
         expected to have a material impact on the Company's financial
         statements.



                                       8
<PAGE>   9


                         CAPSTAR WINSTON COMPANY, L.L.C.
                                 BALANCE SHEETS
                                ($ IN THOUSANDS)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                             September 30, 1998          December 31, 1997
                                                                             ------------------          -----------------
                                                                                (unaudited)
<S>                                                                          <C>                         <C>
Current assets:                                                                
     Cash and cash equivalents                                                   $ 4,383                        $ 3,393
     Accounts receivable                                                           4,039                          1,614
     Due from Winston Hospitality, Inc.                                               --                          1,636
     Due from CapStar Management Company, L.P.                                     6,377                            385
     Deposits and other assets                                                       331                            197
                                                                                 -------                        -------
                  Total current assets                                            15,130                          7,225

Furniture, fixtures and equipment, net of accumulated
  depreciation of $51 and $5                                                         290                            241
Intangible assets, net of accumulated amortization of $781 and $93                33,442                         34,088
Deferred franchise costs, net of accumulated amortization of $55 and $7              553                            601
                                                                                 -------                        -------

                                                                                 $49,415                        $42,155
                                                                                 =======                        =======


                        LIABILITIES AND MEMBERS' CAPITAL

Current liabilities:
     Accounts payable                                                            $ 1,700                        $ 1,459
     Accrued expenses                                                              3,511                          2,920
     Percentage lease payable                                                     10,474                          5,682
     Advance deposits                                                                225                            135
                                                                                 -------                        -------
                  Total current liabilities                                       15,910                         10,196


Members' capital                                                                  33,505                         31,959
                                                                                 -------                        -------

                                                                                 $49,415                        $42,155
                                                                                 =======                        =======
</TABLE>

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


                                       9
<PAGE>   10


                         CAPSTAR WINSTON COMPANY, L.L.C.
                         UNAUDITED STATEMENTS OF INCOME
                                ($ IN THOUSANDS)

<TABLE>
<CAPTION>
                                                      Three Months                 Nine Months
                                                         Ended                        Ended
                                                   September 30, 1998          September 30, 1998
                                                   ------------------          ------------------
<S>                                                <C>                         <C>
Revenue:
     Rooms                                              $32,244                      $85,083
     Food and beverage                                    1,944                        4,649
     Telephone and other operating departments            1,464                        4,121
                                                        -------                      -------
              Total revenue                              35,652                       93,853
                                                        -------                      -------

Operating costs and expenses:
     Rooms                                                7,168                       18,655
     Food and beverage                                    1,434                        3,492
     Telephone and other operating departments              684                        1,898
Undistributed expenses:
     Lease expense                                       15,268                       40,133
     Administrative and general                           2,832                        8,218
     Sales and marketing                                  1,339                        3,362
     Franchise fees                                       2,344                        6,180
     Repairs and maintenance                              1,632                        4,398
     Energy                                               1,597                        3,706
     Other                                                  469                        1,483
     Depreciation and amortization                          263                          782
                                                        -------                      -------
              Total expenses                             35,030                       92,307
                                                        -------                      -------

              Net income                                $   622                      $ 1,546
                                                        =======                      =======
</TABLE>


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


                                       10
<PAGE>   11


                         CAPSTAR WINSTON COMPANY, L.L.C.
                        UNAUDITED STATEMENT OF CASH FLOWS
                                ($ IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                               Nine Months
                                                                                                  Ended
                                                                                            September 30, 1998
                                                                                            ------------------
<S>                                                                                         <C>
Cash flows from operating activities:
     Net income                                                                                 $ 1,546
     Adjustments to reconcile net income to net cash provided by operating activities:
         Depreciation and amortization                                                              782
         Loss on sale of fixed assets                                                                 2
         Increase in accounts receivable and due from Winston Hospitality, Inc.                    (789)
         Increase in due from CapStar Management Company, L.P.                                   (5,992)
         Increase in deposits and other assets                                                     (134)
         Increase in accounts payable and accrued expenses                                          832
         Increase in percentage lease payable                                                     4,792
         Increase in advance deposits                                                                90
                                                                                                -------
Net cash provided by operating activities                                                         1,129
                                                                                                -------

Cash flows from investing activities:
     Additions of furniture, fixtures and equipment                                                (112)
     Additions to intangible assets                                                                 (42)
     Proceeds from sale of fixed assets                                                              15
                                                                                                -------
Net cash used in investing activities                                                              (139)
                                                                                                -------

Net increase in cash and cash equivalents                                                           990
Cash and cash equivalents at beginning of period                                                  3,393
                                                                                                -------

Cash and cash equivalents at end of period                                                      $ 4,383
                                                                                                =======
</TABLE>


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


                                       11
<PAGE>   12


                         CAPSTAR WINSTON COMPANY, L.L.C.
                          NOTES TO FINANCIAL STATEMENTS


The accompanying unaudited financial statements are prepared by and are the sole
responsibility of CapStar Winston Company, L.L.C. CapStar Winston Company,
L.L.C. leased 47 of the Company's 49 hotels as of September 30, 1998 and other
than this lessee relationship, is not affiliated with the Company. These
financial statements reflect, in the opinion of CapStar Winston Company L.L.C.
management, all adjustments necessary for a fair presentation of the interim
financial statements. All such adjustments are of a normal and recurring nature.

During November 1997, CapStar Management Company ("CMC") and CapStar Hotel
Company purchased substantially all of the assets and assumed certain
liabilities of Winston Hospitality, Inc., including 38 hotel leases, certain
operating assets and liabilities, goodwill and other intangible assets.
Concurrent with the purchase, CMC contributed/assigned the assets purchased and
liabilities assumed in the transaction to CapStar Winston Company, L.L.C.

On August 1, 1998, CapStar Hotel Company and American General Hospitality
Corporation merged to form MeriStar Hospitality Corporation and MeriStar Hotels
& Resorts, Inc. As a result of the merger, MeriStar Hospitality Operating
Partnership, L.P. replaced CapStar Management Company L.P. as the 99% member of
CapStar Winston Company, L.L.C.



                                       12
<PAGE>   13



                            WINSTON HOSPITALITY, INC.
                         UNAUDITED STATEMENTS OF INCOME
                                ($ IN THOUSANDS)


<TABLE>
<CAPTION>
                                                 Three Months Ended          Nine Months Ended
                                                 September 30, 1997          September 30, 1997
                                                 ------------------          ------------------
<S>                                              <C>                         <C>
Revenue:
   Rooms                                              $22,098                      $58,911
   Food and beverage                                      700                        2,088
   Telephone and other operating departments            1,043                        2,809
                                                      -------                      -------
         Total revenue                                 23,841                       63,808
                                                      -------                      -------

Operating costs and expenses:
   Rooms                                                4,574                       12,100
   Food and beverage                                      507                        1,455
   Telephone and other operating departments              461                        1,419
Undistributed expenses:
   Lease                                               10,328                       27,098
   Administrative and general                           2,731                        7,334
   Sales and marketing                                    781                        2,198
   Franchise fees                                       1,592                        4,171
   Repairs and maintenance                              1,044                        2,969
   Energy                                                 957                        2,376
   Other                                                  341                        1,127
   Depreciation and amortization                            7                           61
                                                      -------                      -------
         Total expenses                                23,323                       62,308
                                                      -------                      -------
         Net income                                   $   518                      $ 1,500
                                                      =======                      =======
</TABLE>

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


                                       13
<PAGE>   14


                            WINSTON HOSPITALITY, INC.
                        UNAUDITED STATEMENT OF CASH FLOWS
                                ($ IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                               Nine Months
                                                                                  Ended
                                                                           September 30, 1997
                                                                           ------------------
<S>                                                                        <C>
Cash flows from operating activities:
      Net income                                                                  $ 1,500
      Adjustments to reconcile net income to net cash provided
         by operating activities:
            Depreciation                                                               61
      Changes in assets and liabilities:
            Accounts receivable - trade                                              (981)
            Prepaid expenses and other assets                                         (54)
            Accounts payable - trade                                                  158
            Percentage lease payable to Lessor                                      2,985
            Accrued expenses and other liabilities                                    577
                                                                                  -------
                        Net cash provided by operating activities                   4,246
                                                                                  -------

Cash flows from investing activities:
      Purchases of furniture, fixtures and equipment                                  (72)
      Advances to lessor, affiliates and shareholders                                 683
                                                                                  -------
                        Net cash used in investing activities                         611
                                                                                  -------

Cash flows from financing activities:
      Distributions to shareholders                                                  (600)
                                                                                  -------

Net increase in cash and cash equivalents                                           4,257
Cash and cash equivalents at beginning of the period                                5,463
                                                                                  -------

Cash and cash equivalents at end of period                                        $ 9,720
                                                                                  =======
</TABLE>

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


                                       14
<PAGE>   15


                            WINSTON HOSPITALITY, INC.
                          NOTES TO FINANCIAL STATEMENTS

The accompanying unaudited financial statements reflect, in the opinion of
Winston Hospitality, Inc. management, all adjustments necessary for a fair
presentation of the interim financial statements. All such adjustments are of a
normal and recurring nature.

During November 1997, CapStar Management Company ("CMC") and CapStar Hotel
Company purchased substantially all of the assets and assumed certain
liabilities of Winston Hospitality, Inc., including 38 hotel leases, certain
operating assets and liabilities, and goodwill and other intangible assets.
Concurrent with the purchase, CMC contributed/assigned the assets purchased and
liabilities assumed in the transaction to CapStar Winston Company, L.L.C.

Certain reclassifications have been made to the 1997 financial statements to
conform with the 1998 presentation as shown in the CapStar Winston Company,
L.L.C. financial statements. These reclassifications have no effect on net
income or shareholders' equity previously reported.



                                       15
<PAGE>   16



ITEM 2 -  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATIONS
           ($ AMOUNTS IN THOUSANDS)

OVERVIEW

Winston Hotels, Inc. (the "Company"), which consummated an underwritten initial
public offering ("IPO") in June 1994, follow-on Common Stock offerings in May
1995 and in June 1996, and a Preferred Stock offering in September 1997,
operates as a real estate investment trust ("REIT") to invest in hotel
properties. The Company owned 49 hotels (the "Current Hotels") as of September
30, 1998. The Company owned 16 hotels as of December 31, 1994 (the "1994
Hotels"), purchased five hotels in 1995 (the "1995 Acquired Hotels"), acquired
10 hotels in 1996 (the "1996 Acquired Hotels"), acquired seven hotels in 1997
(the "1997 Acquired Hotels") and acquired eight hotels and opened three
internally developed hotels in the first nine months of 1998 (the "1998
Hotels"). It currently leases 47 of the total 49 Current Hotels to CapStar
Winston Company, L.L.C. (the "Lessee"), one of the Current Hotels to Bristol
Hotel Company and one of the Current Hotels to Prime Hospitality Corporation
pursuant to leases that provide for rent payments based, in part, on revenues
from the Current Hotels (the "Percentage Leases").


RESULTS OF OPERATIONS

The table below outlines the Company's investment in hotel properties for the
nine months ended September 30, 1998 and 1997.

<TABLE>
<CAPTION>
                                   Nine Months Ended                     Nine Months Ended
                                  September 30, 1998                     September 30, 1997
                             ------------------------------    ----------------------------------
                               Additions      Properties            Additions       Properties
                                 during        owned at             during           owned at
 Type of Hotel                 the period    September 30          the period      September 30
 -------------                 ----------    ------------          ----------      ------------
<S>                            <C>           <C>                   <C>             <C>
 Limited-service hotels             1             36                   6                34
 Extended-stay hotels               5              7                  --                 2
 Full-service hotels                5              6                  --                 1
                                   --             --                  --                --
 Total                             11             49                   6                37
                                   ==             ==                  ==                ==
</TABLE>

In order to present a more meaningful comparison of operations, in addition to
the comparison of actual results of the Company and the Lessee for the three and
nine months ended September 30, 1998 versus actual results for the three and
nine months ended September 30, 1997, the Company has also provided an analysis
of the pro forma results of the Company for the three and nine months ended
September 30, 1998 versus pro forma results for the three and nine months ended
September 30, 1997. These pro forma results are shown as if the 1997 Preferred
Stock offering and the 1997 and 1998 acquisitions had occurred on the later of
January 1, 1997, or the hotel opening date for the five acquired and three
internally-developed hotels which opened in the first nine months of 1998.

THE COMPANY

ACTUAL - THREE MONTHS ENDED SEPTEMBER 30, 1998 VS ACTUAL - THREE MONTHS ENDED
SEPTEMBER 30, 1997

The Company had revenues of $16,305 in 1998, consisting of $16,229 of Percentage
Lease revenues and $76 of interest and other income. Percentage Lease revenues
increased $5,901 to $16,229 in 1998 from $10,328 in 1997. This increase was
comprised of an increase in Percentage Lease revenue of (i) $4,081 due to the
1998 Hotels; (ii) $613 due to the 1997 Hotels; and (iii) $1,207 due to the
hotels acquired prior to 1997.

Real estate taxes and property insurance costs incurred in 1998 were $1,343, an
increase of $673 from $670 in 1997. This increase was primarily attributable to
the 1997 Acquired Hotels and the 1998 Hotels that were not owned in the third
quarter of 1997, as well as increased property tax assessments and tax rates
from 1997 to 1998. General and administrative expenses increased $672 to $1,395
in 1998 from $723 in 1997. The increase was attributable to the increase in size
and activities of the Company in 1998. Interest expense increased by $1,884 to
$2,861 in 1998 from $977 in 1997. This increase was primarily attributable to an
increase of $103,327 in the weighted-average outstanding debt balance from




                                       16
<PAGE>   17


$58,442 in 1997 to $161,769 in 1998. Interest rates remained constant between
the two quarters. Depreciation expense increased $1,914 to $4,526 in 1998 from
$2,612 in 1997, primarily due to depreciation related to the 1997 Acquired
Hotels, the 1998 Hotels and renovations completed during 1997 and 1998.

PRO FORMA - THREE MONTHS ENDED SEPTEMBER 30, 1998 VS PRO FORMA - THREE MONTHS
ENDED SEPTEMBER 30, 1997

The Company had revenues of $15,819 for the three months ended September 30,
1998, consisting of $15,743 of Percentage Lease revenues and $76 of interest and
other income. Percentage Lease revenues increased $2,552 to $15,743 in 1998 from
$13,191 in 1997. This increase was primarily due to the opening of eight hotels
in 1998.

Real estate taxes and property insurance costs incurred in 1998 were $1,343, an
increase of $355 from $988 in 1997. The increase was due primarily to increased
property tax assessments and tax rates from 1997 to 1998 as well as additional
taxes and insurance costs incurred due to the opening of eight hotels in 1998.
General and administrative expenses increased $654 to $1,394 in 1998 from $740
in 1997. The increase was primarily attributable to the increase in size and
activities of the Company from 1997 to 1998. Interest expense increased $1,746
to $2,861 in 1998 from $1,115 in 1997. The increase was attributable to $1,796
of additional interest expense related primarily to borrowings under the line of
credit to fund acquisitions of the five new hotels which opened in 1998 as well
as the development of three additional hotels which opened in 1998. This
increase was offset by a reduction in line of credit fees totaling $50.
Depreciation expense increased $1,347 to $4,525 in 1998 from $3,178 in 1997
primarily due to the opening of eight hotels in 1998 and renovations and other
capital expenditures during 1997 and 1998.

ACTUAL - NINE MONTHS ENDED SEPTEMBER 30, 1998 VS ACTUAL - NINE MONTHS ENDED
SEPTEMBER 30, 1997

The Company had revenues of $41,491 in 1998, consisting of $41,301 of Percentage
Lease revenues and $190 of interest and other income. Percentage Lease revenues
increased $14,203 to $41,301 in 1998 from $27,098 in 1997. This increase was
comprised of an increase in percentage lease revenue of (i) $7,632 due to the
1998 Hotels, (ii) $5,164 due to the 1997 Hotels, and (iii) $1,407 due to the
hotels acquired prior to 1997.

Real estate taxes and property insurance costs incurred in 1998 were $3,605, an
increase of $1,779 from $1,826 in 1997. This increase was primarily attributable
to the 1997 Acquired Hotels and 1998 Hotels that were not owned during the first
nine months of 1997, as well as increased property tax assessments and tax rates
from 1997 to 1998. General and administrative expenses increased $1,573 to
$3,158 in 1998 from $1,585 in 1997. The increase was attributable to the
increase in size and activities of the Company in 1998. Interest expense
increased by $2,652 to $5,440 in 1998 from $2,788 in 1997. This increase was
primarily attributable to an increase of $60,412 in the weighted average
outstanding debt balance from $53,642 in 1997 to $114,054 in 1998, offset by an
increase in capitalized interest costs related to development and renovation
projects. Interest rates remained constant between the two periods. Depreciation
expense increased $4,418 to $11,600 in 1998 from $7,182 in 1997, primarily due
to depreciation related to the 1997 Acquired Hotels, the 1998 Hotels and
renovations completed during 1997 and 1998.

PRO FORMA - NINE MONTHS ENDED SEPTEMBER 30, 1998 VS PRO FORMA - NINE MONTHS
ENDED SEPTEMBER 30, 1997

The Company had revenues of $42,949 for the nine months ended September 30,
1998, consisting of $42,759 of Percentage Lease revenues and $190 of interest
and other income. Percentage Lease revenues increased $5,574 to $42,759 in 1998
from $37,185 in 1997. Of this increase, $4,727 was attributable to the opening
of eight hotels in 1998 and $847 was primarily attributable to higher room rates
in 1998 than 1997.

Real estate taxes and property insurance costs incurred in 1998 were $3,841, an
increase of $842 from $2,999 in 1997. The increase was due primarily to
increased property tax assessments and tax rates from 1997 to 1998 as well as
additional taxes and insurance costs incurred due to the opening of eight hotels
in 1998. General and administrative expenses increased $1,516 to $3,166 in 1998
from $1,650 in 1997. The increase was primarily attributable to the increase in
size and activities of the Company from 1997 to 1998. Interest expense increased
by $1,846 to $5,194 in 1998 from $3,348 in 1997. The increase was attributable
to $2,518 of additional interest expense related primarily to borrowings under
the line of credit to fund acquisitions of the five new hotels which opened in
1998 as well as the development of three additional hotels which opened in 1998.
This increase was offset by both the increase in capitalization of additional
interest costs, totaling $586, in connection with the development and certain
renovation projects during the respective periods, as well as a reduction in
line of credit fees totaling $86. Depreciation expense increased $2,648 to
$11,930 in 1998 from $9,282 in



                                       17
<PAGE>   18


1997 primarily due to the opening of eight hotels in 1998 and renovations and
other capital expenditures during 1997 and 1998.

THE LESSEE

During November 1997, CapStar Management Company ("CMC") and CapStar Hotel
Company purchased substantially all of the assets and assumed certain
liabilities of Winston Hospitality, Inc., including 38 hotel leases, certain
operating assets and liabilities, and goodwill and other intangible assets.
Concurrent with the purchase, CMC contributed/assigned the assets purchased and
liabilities assumed in the transaction to CapStar Winston Company, L.L.C. (the
"Lessee").

Since the Lessee was not operating prior to the November 1997 Winston
Hospitality, Inc. purchase transaction, no comparative data is available for the
period January 1, 1997 through September 30, 1997. However, for purposes of this
management's discussion and analysis, the financial information of the Lessee
for the three and nine months ended September 30, 1998 will be compared with the
financial information of Winston Hospitality, Inc. for the three and nine months
ended September 30, 1997. The Winston Hospitality, Inc. financial information
for the three and nine months ended September 30, 1997 contained in the tables
below has been reclassified and grouped according to the Lessee format in order
to facilitate a comparison of the data.

ACTUAL - THREE MONTHS ENDED SEPTEMBER 30, 1998 VS ACTUAL - THREE MONTHS ENDED
SEPTEMBER 30, 1997

The following table sets forth certain historical financial information for the
Current Hotels for the periods indicated:

<TABLE>
<CAPTION>
                                                      Three Months Ended           Three Months Ended
                                                      September 30, 1998           September 30, 1997
                                                      ------------------           ------------------
<S>                                                 <C>             <C>          <C>             <C>
Revenue:
   Rooms                                            $32,244         90.4%        $22,098         92.7%
   Food and beverage                                  1,944          5.5%            700          2.9%
   Telephone and other operating departments          1,464          4.1%          1,043          4.4%
                                                    -------        -----         -------        -----
         Total revenue                               35,652        100.0%         23,841        100.0%
                                                    -------        -----         -------        -----

Operating costs and expenses:
   Rooms                                              7,168         20.1%          4,574         19.2%
   Food and beverage                                  1,434          4.0%            507          2.1%
   Telephone and other operating departments            684          1.9%            461          1.9%
Undistributed expenses:
   Lease                                             15,268         42.8%         10,328         43.3%
   Administrative and general                         2,832          7.9%          2,731         11.5%
   Sales and marketing                                1,339          3.8%            781          3.3%
   Franchise fees                                     2,344          6.6%          1,592          6.7%
   Repairs and maintenance                            1,632          4.6%          1,044          4.4%
   Energy                                             1,597          4.5%            957          4.0%
   Other                                                469          1.3%            341          1.4%
   Depreciation and amortization                        263          0.8%              7           --
                                                    -------        -----         -------        -----
         Total expenses                              35,030         98.3%         23,323         97.8%
                                                    =======        =====         =======        =====
         Net income                                 $   622          1.7%        $   518          2.2%
                                                    =======        =====         =======        =====
</TABLE>

The Lessee had room revenues of $32,244 in 1998, an increase of $10,146 from
$22,098 for Winston Hospitality, Inc. in 1997. The increase was comprised of an
increase of (i) $6,634 for the 1998 Hotels, (ii) $3,323 for the 1997 Acquired
Hotels, and (iii) $189 for the 1996 Acquired Hotels, the 1995 Acquired Hotels
and the 1994 Hotels. Food and beverage revenue increased $1,244, to $1,944 in
1998 from $700 for Winston Hospitality, Inc. in 1997, primarily due to the 1998
Hotels and the 1997 Acquired Hotels. Telephone and other operating departments
revenue increased $421 to $1,464 in 1998 from $1,043 for Winston Hospitality,
Inc. in 1997, primarily due to an increase in revenue associated with long
distance phone calls and in-room movies.


                                       18
<PAGE>   19


The Lessee had total expenses in 1998 of $35,030, an increase of $11,707 from
$23,323 for Winston Hospitality, Inc. in 1997. The increase in all expense
categories except depreciation and amortization expense was primarily
attributable to the operation of a greater number of hotels for the three months
ended September 30, 1998 as compared with the same period of 1997. Although
administrative and general expenses increased in 1998 from 1997, these expenses
decreased as a percentage of total revenue from 1997 to 1998 as a result of
efficiencies developed within the management company, decreasing the incremental
cost per hotel. Depreciation and amortization expense increased due to
amortization related to goodwill and other intangible assets arising out of the
purchase of Winston Hospitality, Inc. by CMC and CapStar Hotel Company.

Net income increased $104 to $622 for 1998 from $518 for 1997. The 35 hotels
operating prior to September 30, 1997 generated income, excluding amortization
of goodwill of $248 not present in 1997, totaling $756 for the third quarter, a
4.6% increase from the prior year. The five hotels acquired by the Company
subsequent to September 30, 1997 generated income of $204 for the third quarter
of 1998. Seven new hotels opened during the first and second quarters of 1998.
These development hotels endured losses during their first few months of
operation. These losses totaled $90 for the third quarter of 1998. These
properties are gaining exposure in their respective markets and are expected to
add to the Lessee's net income in the near future.

ACTUAL - NINE MONTHS ENDED SEPTEMBER 30, 1998 VS ACTUAL - NINE MONTHS ENDED
SEPTEMBER 30, 1997

The following table sets forth certain historical financial information for the
Current Hotels for the periods indicated:

<TABLE>
<CAPTION>
                                                      Nine Months Ended            Nine Months Ended
                                                     September 30, 1998           September 30, 1997
                                                     ------------------           ------------------
<S>                                                 <C>             <C>          <C>             <C>
Revenue:
   Rooms                                            $85,083         90.7%        $58,911         92.3%
   Food and beverage                                  4,649          4.9%          2,088          3.3%
   Telephone and other operating departments          4,121          4.4%          2,809          4.4%
                                                    -------        -----         -------        -----
         Total revenue                               93,853        100.0%         63,808        100.0%
                                                    -------        -----         -------        -----

Operating costs and expenses:
   Rooms                                             18,655         19.9%         12,100         19.0%
   Food and beverage                                  3,492          3.7%          1,455          2.3%
   Telephone and other operating departments          1,898          2.0%          1,419          2.2%
Undistributed expenses:
   Lease                                             40,133         42.8%         27,098         42.5%
   Administrative and general                         8,218          8.8%          7,334         11.5%
   Sales and marketing                                3,362          3.6%          2,198          3.4%
   Franchise fees                                     6,180          6.6%          4,171          6.5%
   Repairs and maintenance                            4,398          4.7%          2,969          4.7%
    Energy                                            3,706          3.9%          2,376          3.7%
   Other                                              1,483          1.6%          1,127          1.8%
   Depreciation and amortization                        782          0.8%             61          0.1%
                                                    -------        -----         -------        -----
         Total expenses                              92,307         98.4%         62,308         97.7%
                                                    =======        =====         =======        =====
         Net income                                 $ 1,546          1.6%        $ 1,500          2.3%
                                                    =======        =====         =======        =====
</TABLE>

The Lessee had room revenues of $85,083 in 1998, an increase of $26,172 from
$58,911 for Winston Hospitality, Inc. in 1997. The increase was comprised of an
increase of (i) $11,728 for the 1998 Hotels (ii) $13,481 for the 1997 Acquired
Hotels, and (iii) $963 for the 1996 Acquired Hotels, the 1995 Acquired Hotels
and the 1994 Hotels. Food and beverage revenue increased $2,561, to $4,649 in
1998 from $2,088 for Winston Hospitality, Inc. in 1997, primarily due to the
1998 Hotels and the 1997 Acquired Hotels. Telephone and other operating
departments revenue increased $1,312 to $4,121 in 1998 from $2,809 for Winston
Hospitality, Inc. in 1997, primarily due to an increase in revenue associated
with long distance phone calls and in-room movies.

The Lessee had total expenses in 1998 of $92,307, an increase of $29,999 from
$62,308 for Winston Hospitality, Inc. in 1997. The increase in all expense
categories except depreciation and amortization expense was primarily
attributable to the



                                       19
<PAGE>   20


operation of a greater number of hotels for the nine months ended September 30,
1998 as compared with the same period of 1997. Although administrative and
general expenses increased in 1998 from 1997, these expenses decreased as a
percentage of total revenue from 1997 to 1998 as a result of efficiencies
developed within the management company, decreasing the incremental cost per
hotel. Depreciation and amortization expense increased due to amortization
related to goodwill and other intangible assets arising out of the purchase of
Winston Hospitality, Inc. by CMC and CapStar Hotel Company.

Net income increased $46 to $1,546 for 1998 from $1,500 for 1997. The 35 hotels
operating prior to September 30, 1997 generated income, excluding amortization
of goodwill of $736 not present in 1997, totaling $2,469 for the nine months
ended September 30, 1998, a 64.6% increase from the prior year. The five hotels
acquired by the Company subsequent to September 30, 1997 generated income of
$819 for the nine months ended September 30, 1998. Seven new development hotels
opened during the first and second quarters of 1998. These new hotels endured
losses during their first few months of operation. These losses totaled $1,006
for the nine months ended September 30, 1998. These properties are gaining
exposure in their respective markets and are expected to add to the Lessee's net
income in the near future.

LIQUIDITY AND CAPITAL RESOURCES

The Company finances its operations from operating cash flow, which is
principally derived from Percentage Leases. For the nine months ended September
30, 1998, cash flow provided by operating activities was $25,121. Funds from
operations, as defined below, was $8,892 for the quarter ended September 30,
1998 and $23,829 for the nine months ended September 30, 1998. Under Federal
income tax law provisions applicable to REITs, the Company is required to
distribute at least 95% of its taxable income to maintain its tax status as a
REIT. For the nine months ended September 30, 1998, the Company declared
distributions of $19,823 to its shareholders. Because the Company's annual cash
flow from operating activities is expected to exceed its annual taxable income
due to depreciation and amortization expenses, the Company expects to be able to
meet its distribution requirements out of cash flow from operating activities.

The Company's net cash used in investing activities for the nine months ended
September 30, 1998 totaled $124,858. This use of cash was primarily for
investments in hotel properties including $93,863 related to the acquisition of
eight of the 1998 Hotels, $8,618 related to the development of three of the 1998
Hotels, $10,126 for hotel renovations and $12,007 for the development of five
additional hotels, two of which opened by November 4, 1998 (see Note 2). If the
remaining three development projects are completed, the expected additional
costs are approximately $40,000. The Company also purchased corporate assets
totaling $253 during the period.

The Company plans to spend approximately $3,227 to renovate certain of its
Current Hotels during the next twelve months. These expenditures are in addition
to the reserve of 5% of room revenues for its limited-service hotels and 7% of
room revenues and food and beverage revenues for its full-service hotels which
the Company is required to set aside under its Percentage Leases for periodic
capital improvements and the refurbishment and replacement of furniture,
fixtures and equipment at its Current Hotels. In the nine months ended September
30, 1998, the Company set aside $4,556 for such reserves. These reserves are in
addition to amounts spent on normal repairs and maintenance which have
approximated 5.2% and 5.0% of room revenues for the nine months ended September
30, 1998 and 1997, respectively, and are paid by the Lessee.

The Company's net cash provided by financing activities during the nine months
ended September 30, 1998 totaled $99,709 including an increase of $76,895 in the
line of credit borrowings, an increase of $42,900 in demand note borrowings and
$588 of net proceeds from the issuance of common stock related to the exercise
of stock options. These cash receipts were offset by the payment of
distributions to shareholders of $18,756 and the payment of distributions to
minority interest holders of $1,408. The Company also paid $510 in connection
with obtaining the $71,000 long-term fixed-rate loan explained below.

The Company's outstanding bank debt balance as of September 30, 1998 was
$163,876. This amount consisted of $120,976 outstanding under its $125,000 line
of credit as well as $42,900 outstanding under five 90-day demand notes. On
October 30, 1998, the Company signed a $45,000 revolving demand note, which is
collateralized by six of the Company's hotel properties. The note proceeds were
used to repay outstanding balances under the five 90-day unsecured demand notes
totaling $42,900, which the Company signed during the second quarter of 1998. On
November 3, 1998, the Company entered into a loan agreement totaling $71,000,
which is collateralized by 14 of the Company's hotel properties. The loan bears
interest at a fixed rate of 7.375%. Approximately $55,000 of the net proceeds
was used to repay a portion of the outstanding balances under the Company's
$125,000 line of credit and approximately $12,000 of the net proceeds was used
to repay a portion of the



                                       20
<PAGE>   21


outstanding balances under the $45,000 revolving demand note (see Note 5 in the
accompanying Notes to Consolidated Financial Statements). The Company is
currently in negotiations to refinance its $125 million line of credit. The
Company anticipates finalizing these negotiations by the end of the current
fiscal year, however, there can be no assurances that the Company will be
successful in these efforts.

As of September 30, 1998, the Company has collateralized $120,884 of its
$125,000 line of credit with 28 of its Current Hotels. This amount is calculated
quarterly, and increases if cash flow attributable to the collateral hotels
increases and/or the Company adds additional hotels as collateral. The total
additional, non-collateralized line availability accessible to the Company as of
September 30, 1998 was $4,116. The Company's Articles of Incorporation limit its
total amount of indebtedness to 45% of the purchase prices paid by the Company
for its investments in hotel properties, as defined. As of September 30, 1998,
the Company had additional borrowing capacity under the debt limitation of
approximately $56,550 assuming it invests all borrowings in additional hotels.

The Company is continually evaluating its hotel portfolio and acquisition
opportunities and intends to acquire and develop additional hotel properties
that meet its investment criteria. As part of this analysis, the Company is also
considering selling certain assets as attractive opportunities present
themselves. It is expected that future hotel acquisitions will be financed, in
whole or in part, from additional follow-on offerings, borrowings under the line
of credit or additional demand notes, joint venture agreements, proceeds from
the disposition of hotels and/or the issuance of other debt or equity
securities. There can be no assurances that the Company will acquire any
additional hotels, 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.

SEASONALITY

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

FUNDS FROM OPERATIONS

The Company considers Funds From Operations ("FFO") a widely used and
appropriate measure of performance for an equity REIT. FFO, as defined by the
National Association of Real Estate Investment Trusts ("NAREIT"), is income
(loss) before minority interest (determined in accordance with generally
accepted accounting principles), excluding gains (losses) from debt
restructuring and sales of property, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint
ventures. FFO is presented to assist investors in analyzing the performance of
the Company. The Company's method of calculating FFO may be different from
methods used by other REITs and, accordingly, may not be comparable to such
other REITs. FFO (i) does not represent cash flows from operating activities as
defined by generally accepted accounting principles, (ii) is not indicative of
cash available to fund all cash flow and liquidity needs, including the
Company's ability to make distributions, and (iii) should not be considered as
an alternative to net income (as determined in accordance with generally
accepted accounting principles) for purposes of evaluating the Company's
operating performance.


                                       21
<PAGE>   22


The following presents the Company's calculation of FFO and FFO per share (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                   Three Months Ended            Nine Months Ended
                                                      September 30,                September 30,
                                                  ------------------            -----------------
                                                 1998           1997           1998           1997
                                                -------        -------        -------        -------
<S>                                             <C>            <C>            <C>            <C>
Net income before allocation to minority
   interest                                     $ 6,101        $ 5,379        $17,432        $13,722
Plus: depreciation                                4,526          2,612         11,600          7,182
Less: preferred stock dividends                   1,735            366          5,203            366
                                                -------        -------        -------        -------

FFO                                             $ 8,892        $ 7,625        $23,829        $20,538
                                                =======        =======        =======        =======

Weighted average number of common shares
   assuming dilution                             18,054         17,878         18,050         17,395
                                                -------        -------        -------        -------

FFO per share                                   $  0.49        $  0.43        $  1.32        $  1.18
                                                =======        =======        =======        =======
</TABLE>

YEAR 2000 MANAGEMENT

The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year. If the computer
programs, with date-sensitive functions, of the Company or one of its service
providers, contractors, or suppliers, are not Year 2000 compliant, they may
recognize a date using "00" as the Year 1900 rather than the Year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, receive lease payments or engage in similar normal business
activities.

The Company has identified its Year 2000 risk in three categories: internal
software and imbedded chip technology, external noncompliance by service
providers, contractors and suppliers, and external noncompliance by franchisors
and lessees.

Internal Software and Imbedded Chip Technology

The Company will begin its data gathering and testing phase with regard to
internal software and imbedded chip technology during the fourth quarter of
1998, with the assistance of its systems integration consultants. Virtually all
of the Company's internal software are current versions of off-the-shelf,
name-brand software. The Company's hardware systems, which includes computer
hardware, a phone system, copiers and facsimile machines, also contain imbedded
chip technology which could pose a risk of noncompliance. Because the majority
of this hardware has been installed in the last twelve months, the cost of
achieving Year 2000 compliance is not expected to be material. If any of the
Company's current software or hardware is not Year 2000 compliant and is not
repairable, the Company plans to replace the respective software or hardware
with readily available Year 2000 compliant software or hardware. Full compliance
is expected by the third quarter of 1999.

External Noncompliance by Service Providers, Contractors and Suppliers

The Company is in the process of identifying and contacting its significant
service providers, contractors and suppliers to determine the extent to which
the Company is vulnerable to those third parties' failure to remedy their own
Year 2000 issues. It is expected that identification of any Year 2000 exposure
with these parties will be completed by April 30, 1999. To the extent that
responses to Year 2000 readiness are unsatisfactory, the Company will attempt to
change significant service providers, contractors or suppliers to those who have
demonstrated Year 2000 readiness but cannot be assured that it will be
successful in finding such alternative service providers, contractors or
suppliers. The Company does not currently have any formal information concerning
the Year 2000 compliance status of its significant service providers,
contractors or suppliers, but has received indications that most are working on
Year 2000 compliance. In the event that any of the Company's significant service
providers, contractors or suppliers do not successfully and timely achieve Year
2000 compliance, and the Company is unable to replace them with alternate
service providers, contractors or suppliers, the Company's business or
operations could be materially and adversely affected.


                                       22
<PAGE>   23


External Noncompliance by Franchisors and Lessees

The Company has significant relationships with certain nationally recognized
hotel franchisors and lessees. These franchisors have national reservation
systems on which the Company relies to receive a significant portion of its
Percentage Lease revenue. The Company is in the process of contacting its
franchisors and lessees to identify the extent to which the Company is
vulnerable to those third parties' failure to remedy their own Year 2000 issues.
The Company does not currently have any formal information concerning the Year
2000 compliance status of these franchisors and lessees, but has received
indications that most are working on Year 2000 compliance. In the event that any
of these franchisors and lessees do not successfully and timely achieve Year
2000 compliance, the Company's business or operations could be materially and
adversely affected.

FORWARD LOOKING STATEMENTS

This report, including Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains certain "forward looking"
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, including, but not limited to, those paragraphs relating to
development and acquisition of hotels in this section. These statements
represent the Company's judgment concerning the future and are subject to risks
and uncertainties that could cause actual operating results and financial
condition to differ materially from those expressed or implied in the forward
looking statements. Such forward looking statements can be identified by the use
of forward looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "believe," or "continue" or the negative thereof, or other
variations thereof or comparable terminology. Important factors that could cause
actual results to differ include, but are not limited to the following: (i) risk
associated with the Company's acquisition of hotels with little or no operating
history, including the risk that such hotels will not achieve the level of
revenue assumed by the Company in calculating the respective Percentage Rent
formula; (ii) development risk, including risk of construction delay, cost
overruns, receipt of zoning, occupancy and other required governmental permits
and authorizations and the incurrence of development costs in connection with
projects that are not pursued through completion; and (iii) factors identified
in the Company's filings with the Securities and Exchange Commission, including
the factors listed in the Company's Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on August 1, 1997.



                                       23
<PAGE>   24


PART II - OTHER INFORMATION

Item 6.   Exhibits and Reports on Form 8-K.

          (a)      Exhibits.

                    3.01(1)       Restated Articles of Incorporation

                   10.01(1)       Loan Agreement By and Between Winston SPE LLC
                                  and CMF Capital Company, LLC, dated as of
                                  November 3, 1998

                   10.02(1)       Promissory note dated November 3, 1998 by and
                                  between Winston SPE LLC and CMF Capital
                                  Company, LLC

                   27.            Financial Data Schedule (For SEC use only)

          (b)      Reports on Form 8-K.

                   No reports on Form 8-K were filed during the quarter ended
                   September 30, 1998.

------------------------
          (1)      Previously filed with Form 10-Q filed on November 16, 1998.


                                       24
<PAGE>   25

                                   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   February 23, 1999                     /s/ James D. Rosenberg
       -----------------                     -----------------------------------
                                             James D. Rosenberg
                                             President, Chief Financial Officer
                                             and Chief Operating Officer
                                             (Authorized officer and Principal
                                             Financial Officer)



                                       25
<PAGE>   26


                              WINSTON HOTELS, INC.
               FORM 10-Q for the quarter ended September 30, 1998

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit
Number                     Description of Exhibit
------                     ----------------------
<S>                        <C>
27.                        Financial Data Schedule (For SEC use only).
</TABLE>