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SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

|                                                  |  |                               
|------------------------------------------------- |  | ------------------------------
|For the quarterly period ended September 30, 2003 |  | Commission file number 0-23732

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

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

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

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

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

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

The number of shares of Common Stock, $.01 par value, outstanding on October
31, 2003 was 26,230,879.



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WINSTON HOTELS, INC.
Index

|        |  |                                                                                       |  |                                                                                                        |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ----
|        |  |                                                                                       |  |                                                                                                        |  | Page
|        |  |                                                                                       |  |                                                                                                        |  |     
|PART I  |  | FINANCIAL INFORMATION                                                                 |  |                                                                                                       
|        |  |                                                                                       |  |                                                                                                        |  |     
|Item 1. |  | Financial Statements                                                                  |  |                                                                                                       
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  | WINSTON HOTELS, INC.                                                                  |  |                                                                                                       
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  |                                                                                       |  | Consolidated Balance Sheets as of September 30, 2003 (unaudited)
and December 31, 2002                 |  | 3   
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  |                                                                                       |  | Unaudited Consolidated Statements of Operations for the three months ended
September 30, 2003 and 2002 |  | 4   
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  |                                                                                       |  | Unaudited Consolidated Statements of Operations for the nine months ended
September 30, 2003 and 2002  |  | 5   
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  |                                                                                       |  | Unaudited Consolidated Statement of Shareholders Equity for the nine months ended
September 30, 2003  |  | 6   
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  |                                                                                       |  | Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002  |  | 7   
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  |                                                                                       |  | Notes to Consolidated Financial Statements                                                             |  | 8   
|        |  |                                                                                       |  |                                                                                                        |  |     
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results
of Operations |  | 17                                                                                                    
|        |  |                                                                                       |  |                                                                                                        |  |     
|Item 3. |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 32                                                                                                    
|        |  |                                                                                       |  |                                                                                                        |  |     
|Item 4. |  | Controls and Procedures                                                               |  | 33                                                                                                    
|        |  |                                                                                       |  |                                                                                                        |  |     
|PART II |  | OTHER INFORMATION                                                                     |  |                                                                                                       
|        |  |                                                                                       |  |                                                                                                        |  |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 34                                                                                                    
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  | SIGNATURES                                                                            |  | 35                                                                                                    
|        |  |                                                                                       |  |                                                                                                        |  |     
|        |  | EXHIBIT INDEX                                                                         |  | 36                                                                                                    

2



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##### 



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

ASSETS

|                                                                                                                                           |                                    |   |                    |         |                   |   |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------- | - | ------------------ | ------- | ----------------- | - | ------- | ------- | 
|                                                                                                                                           |                                    |   | September 30, 2003 |         | December 31, 2002
|                                                                                                                                           |                                    |   |                    |         |                  
|                                                                                                                                           |                                    |   | (unaudited)        |         |                   |   |        
|                                                                                                                                          
|Land                                                                                                                                       |                                    | $ | 38,723             |         |                   | $ | 39,348  |        
|Buildings and improvements                                                                                                                 |                                    |   | 343,000            |         |                   |   | 345,511 |        
|Furniture and equipment                                                                                                                    |                                    |   | 45,508             |         |                   |   | 44,332  |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|Operating properties                                                                                                                       |                                    |   | 427,231            |         |                   |   | 429,191 |        
|Less accumulated depreciation                                                                                                              |                                    |   | 120,103            |         |                   |   | 109,152 |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|                                                                                                                                           |                                    |   | 307,128            |         |                   |   | 320,039 |        
|Properties under development                                                                                                               |                                    |   | 2,544              |         |                   |   | 1,800   |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|                                                                                                                                           | Net investment in hotel properties |   |                    | 309,672 |                   |   |         | 321,839 | 
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|Assets held for sale                                                                                                                       |                                    |   | 2,100              |         |                   |   |        |        
|Corporate FF&E, net                                                                                                                        |                                    |   | 692                |         |                   |   | 735     |        
|Cash                                                                                                                                       |                                    |   | 22,984             |         |                   |   | 1,510   |        
|Accounts receivable                                                                                                                        |                                    |   | 3,692              |         |                   |   | 1,958   |        
|Notes receivable                                                                                                                           |                                    |   | 5,016              |         |                   |   | 5,016   |        
|Investment in joint ventures                                                                                                               |                                    |   | 9,280              |         |                   |   | 9,117   |        
|Deferred expenses, net                                                                                                                     |                                    |   | 2,961              |         |                   |   | 2,954   |        
|Prepaid expenses and other assets                                                                                                          |                                    |   | 8,558              |         |                   |   | 6,988   |        
|Deferred tax asset                                                                                                                         |                                    |   | 9,094              |         |                   |   | 7,325   |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|Total assets                                                                                                                               |                                    | $ | 374,049            |         |                   | $ | 357,442 |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|                                                                                                                                          
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                      
|Long-term debt                                                                                                                             |                                    | $ | 65,384             |         |                   | $ | 66,406  |        
|Due to banks                                                                                                                               |                                    |   | 50,954             |         |                   |   | 72,300  |        
|Accounts payable and accrued expenses                                                                                                      |                                    |   | 12,818             |         |                   |   | 11,679  |        
|Distributions payable                                                                                                                      |                                    |   | 5,746              |         |                   |   | 4,951   |        
|Minority interest in consolidated joint venture                                                                                            |                                    |   | 2,090              |         |                   |   |        |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|Total liabilities                                                                                                                          |                                    |   | 136,992            |         |                   |   | 155,336 |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|Minority interest in Partnership                                                                                                           |                                    |   | 7,785              |         |                   |   | 7,591   |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|Shareholders equity:                                                                                                                      |                                    |   |                    |         |                   |   |         |        
|Preferred stock, $.01 par value, 10,000,000 shares authorized,
3,000,000 shares issued and outstanding (liquidation preference of
$76,734) |                                    |   | 30                 |         |                   |   | 30      |        
|Common stock, $.01 par value, 50,000,000 shares authorized,
25,443,379 and 20,148,334 shares issued and outstanding                        |                                    |   | 254                |         |                   |   | 201     |        
|Additional paid-in capital                                                                                                                 |                                    |   | 300,569            |         |                   |   | 256,720 |        
|Accumulated other comprehensive loss                                                                                                       |                                    |   | (86                | )       |                   |   |        |        
|Unearned compensation                                                                                                                      |                                    |   | (607               | )       |                   |   | (596    | )      
|Distributions in excess of earnings                                                                                                        |                                    |   | (70,888            | )       |                   |   | (61,840 | )      
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|Total shareholders equity                                                                                                                 |                                    |   | 229,272            |         |                   |   | 194,515 |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        
|Total liabilities and shareholders equity                                                                                                 |                                    | $ | 374,049            |         |                   | $ | 357,442 |        
|                                                                                                                                           |                                    |   |                    |         |                   |   |         |        

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

3



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##### 



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

|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |        |        | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------ | ------ | ------------------ | ------ | ------ | ------ | 
|                                                                                                                                                              |                                                         |                                                     |        | Three Months Ended |        | Three Months Ended
|                                                                                                                                                              |                                                         |                                                     |        | September 30, 2003 |        | September 30, 2002
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                   
|Revenue:                                                                                                                                                      |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              | Rooms                                                   |                                                     | $      | 30,537             |        |                    | $      | 29,414 |       
|                                                                                                                                                              | Food and beverage                                       |                                                     |        | 1,640              |        |                    |        | 1,845  |       
|                                                                                                                                                              | Other operating departments                             |                                                     |        | 1,021              |        |                    |        | 1,182  |       
|                                                                                                                                                              | Percentage lease revenue                                |                                                     |        | 535                |        |                    |        | 8,886  |       
|                                                                                                                                                              | Interest and other income                               |                                                     |        | 407                |        |                    |        | 300    |       
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              |                                                         | Total revenue                                       |        |                    | 34,140 |                    |        |        | 41,627 | 
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|Hotel operating expenses:                                                                                                                                     |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              | Rooms                                                   |                                                     |        | 7,105              |        |                    |        | 6,949  |       
|                                                                                                                                                              | Food and beverage                                       |                                                     |        | 1,337              |        |                    |        | 1,437  |       
|                                                                                                                                                              | Other operating departments                             |                                                     |        | 783                |        |                    |        | 788    |       
|Undistributed operating expenses:                                                                                                                             |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              | Property operating expenses                             |                                                     |        | 6,587              |        |                    |        | 6,271  |       
|                                                                                                                                                              | Real estate taxes and property and casualty insurance   |                                                     |        | 1,552              |        |                    |        | 1,536  |       
|                                                                                                                                                              | Franchise costs                                         |                                                     |        | 2,219              |        |                    |        | 2,092  |       
|                                                                                                                                                              | Maintenance and repair                                  |                                                     |        | 1,733              |        |                    |        | 1,609  |       
|                                                                                                                                                              | Management fees                                         |                                                     |        | 745                |        |                    |        | 637    |       
|                                                                                                                                                              | Percentage lease expense                                |                                                     |        | 1,216              |        |                    |        | 1,086  |       
|                                                                                                                                                              | General and administrative                              |                                                     |        | 1,094              |        |                    |        | 1,224  |       
|                                                                                                                                                              | Depreciation                                            |                                                     |        | 4,293              |        |                    |        | 4,715  |       
|                                                                                                                                                              | Amortization                                            |                                                     |        | 224                |        |                    |        | 215    |       
|                                                                                                                                                              | Lease/management agreement acquisition                  |                                                     |        | 1,300              |        |                    |        |       |       
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              |                                                         | Total operating expenses                            |        |                    | 30,188 |                    |        |        | 28,559 | 
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|Operating income                                                                                                                                              |                                                         |                                                     | 3,952  |                    |        |                    | 13,068 |       
|                                                                                                                                                              | Interest expense                                        |                                                     |        | 1,883              |        |                    |        | 2,642  |       
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|Income before allocation to minority interest, allocation
to consolidated joint ventures, income taxes, and equity
in income of unconsolidated joint ventures |                                                         |                                                     | 2,069  |                    |        |                    | 10,426 |       
|                                                                                                                                                              | Income allocation to minority interest                  |                                                     |        | 132                |        |                    |        | 549    |       
|                                                                                                                                                              | Income (loss) allocation to consolidated joint ventures |                                                     |        | (10                | )      |                    |        |       |       
|                                                                                                                                                              | Income tax benefit                                      |                                                     |        | (1,059             | )      |                    |        | (458   | )     
|                                                                                                                                                              | Equity in income of unconsolidated joint ventures       |                                                     |        | 499                |        |                    |        | 25     |       
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|Income from continuing operations                                                                                                                             |                                                         |                                                     | 3,505  |                    |        |                    | 10,360 |       
|Discontinued operations:                                                                                                                                      |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              | Income (loss) from discontinued operations              |                                                     |        | (39                | )      |                    |        | (24    | )     
|                                                                                                                                                              | Loss on sale of discontinued operations                 |                                                     |        |                   |        |                    |        | (622   | )     
|                                                                                                                                                              | Loss on impairment of asset held for sale               |                                                     |        | (2,366             | )      |                    |        |       |       
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              | Net income                                              |                                                     |        | 1,100              |        |                    |        | 9,714  |       
|Preferred stock distribution                                                                                                                                  |                                                         |                                                     | (1,734 | )                  |        |                    | (1,734 | )     
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              |                                                         | Net income (loss) applicable to common shareholders |        | $                  | (634   | )                  |        | $      | 7,980  | 
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|Income (loss) per common share:                                                                                                                               |                                                         |                                                     |        |                    |        |                    |        |       
|Basic and diluted:                                                                                                                                            |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              | Income from continuing operations                       |                                                     | $      | 0.09               |        |                    | $      | 0.43   |       
|                                                                                                                                                              | Loss from discontinued operations                       |                                                     |        | (0.12              | )      |                    |        | (0.03  | )     
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                              | Net income (loss) per common share                      |                                                     | $      | (0.03              | )      |                    | $      | 0.40   |       
|                                                                                                                                                              |                                                         |                                                     |        |                    |        |                    |        |       

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

4



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

|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |        |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------- | ------ | ------------------ | ------ | ------------------ | ------ | ------ | ------ | -
|                                                                                                                                                                            |                                                          |                                                     |        | Nine Months Ended  |        | Nine Months Ended 
|                                                                                                                                                                            |                                                          |                                                     |        | September 30, 2003 |        | September 30, 2002
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                   
|Revenue:                                                                                                                                                                    |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            | Rooms                                                    |                                                     | $      | 86,529             |        |                    | $      | 29,414 |       
|                                                                                                                                                                            | Food and beverage                                        |                                                     |        | 5,287              |        |                    |        | 1,845  |       
|                                                                                                                                                                            | Other operating departments                              |                                                     |        | 3,172              |        |                    |        | 1,181  |       
|                                                                                                                                                                            | Percentage lease revenue                                 |                                                     |        | 2,083              |        |                    |        | 28,037 |       
|                                                                                                                                                                            | Interest and other income                                |                                                     |        | 1,138              |        |                    |        | 998    |       
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            |                                                          | Total revenue                                       |        |                    | 98,209 |                    |        |        | 61,475 |  
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|Hotel operating expenses:                                                                                                                                                   |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            | Rooms                                                    |                                                     |        | 19,968             |        |                    |        | 6,949  |       
|                                                                                                                                                                            | Food and beverage                                        |                                                     |        | 4,053              |        |                    |        | 1,437  |       
|                                                                                                                                                                            | Other operating departments                              |                                                     |        | 2,224              |        |                    |        | 788    |       
|Undistributed operating expenses:                                                                                                                                           |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            | Property operating expenses                              |                                                     |        | 18,616             |        |                    |        | 6,271  |       
|                                                                                                                                                                            | Real estate taxes and property and casualty insurance    |                                                     |        | 4,962              |        |                    |        | 4,869  |       
|                                                                                                                                                                            | Franchise costs                                          |                                                     |        | 6,204              |        |                    |        | 2,092  |       
|                                                                                                                                                                            | Maintenance and repair                                   |                                                     |        | 5,020              |        |                    |        | 1,609  |       
|                                                                                                                                                                            | Management fees                                          |                                                     |        | 2,014              |        |                    |        | 637    |       
|                                                                                                                                                                            | Percentage lease expense                                 |                                                     |        | 3,426              |        |                    |        | 1,086  |       
|                                                                                                                                                                            | General and administrative                               |                                                     |        | 4,049              |        |                    |        | 4,094  |       
|                                                                                                                                                                            | Depreciation                                             |                                                     |        | 13,435             |        |                    |        | 14,174 |       
|                                                                                                                                                                            | Amortization                                             |                                                     |        | 666                |        |                    |        | 616    |       
|                                                                                                                                                                            | Lease/management agreement acquisition                   |                                                     |        | 1,300              |        |                    |        | 17,668 |       
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            |                                                          | Total operating expenses                            |        |                    | 85,937 |                    |        |        | 62,290 |  
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|Operating income (loss)                                                                                                                                                     |                                                          |                                                     | 12,272 |                    |        |                    | (815   | )     
|                                                                                                                                                                            | Interest expense                                         |                                                     |        | 5,758              |        |                    |        | 8,001  |       
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|Income (loss) before allocation to minority interest, allocation
to consolidated joint ventures, income taxes, and equity
in income (loss) of unconsolidated joint ventures |                                                          |                                                     | 6,514  |                    |        |                    | (8,816 | )     
|                                                                                                                                                                            | Income (loss) allocation to minority interest            |                                                     |        | 232                |        |                    |        | (445   | )     
|                                                                                                                                                                            | Income (loss) allocation to consolidated joint ventures  |                                                     |        | (10                | )      |                    |        |       |       
|                                                                                                                                                                            | Income tax benefit                                       |                                                     |        | (1,679             | )      |                    |        | (7,172 | )     
|                                                                                                                                                                            | Equity in income (loss) of unconsolidated joint ventures |                                                     |        | 553                |        |                    |        | (26    | )     
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|Income (loss) from continuing operations                                                                                                                                    |                                                          |                                                     | 8,524  |                    |        |                    | (1,225 | )     
|Discontinued operations:                                                                                                                                                    |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            | Income (loss) from discontinued operations               |                                                     |        | (128               | )      |                    |        | 97     |       
|                                                                                                                                                                            | Loss on sale of discontinued operations                  |                                                     |        |                   |        |                    |        | (1,364 | )     
|                                                                                                                                                                            | Loss on impairment of asset held for sale                |                                                     |        | (2,366             | )      |                    |        |       |       
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            | Net income (loss)                                        |                                                     |        | 6,030              |        |                    |        | (2,492 | )     
|Preferred stock distribution                                                                                                                                                |                                                          |                                                     | (5,203 | )                  |        |                    | (5,203 | )     
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            |                                                          | Net income (loss) applicable to common shareholders |        | $                  | 827    |                    |        | $      | (7,695 | )
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|Income (loss) per common share:                                                                                                                                             |                                                          |                                                     |        |                    |        |                    |        |       
|Basic and diluted:                                                                                                                                                          |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            | Income (loss) from continuing operations                 |                                                     | $      | 0.16               |        |                    | $      | (0.33  | )     
|                                                                                                                                                                            | Loss from discontinued operations                        |                                                     |        | (0.12              | )      |                    |        | (0.07  | )     
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       
|                                                                                                                                                                            | Net income (loss) per common share                       |                                                     | $      | 0.04               |        |                    | $      | (0.40  | )     
|                                                                                                                                                                            |                                                          |                                                     |        |                    |        |                    |        |       

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

5



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##### 



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

|                                           |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |     |             |   |   |         |   |       | 
|------------------------------------------ | ----------------------------------------------------- | -------------------------- | ----- | --------------- |  | ------------ | -- | ---------- |  | -------- | ------ | ------------ |  | ------------- | --- | ------------- |  | ----- | ------- | ------ |  | - | ---- | - |  | - | ------- | ----- |  | - | --- | ----------- | - | - | ------- | - | ----- | 
|                                           |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |     | Accumulated |   |   |         |  
|                                           |                                                       |                            |       | Preferred Stock |  | Common Stock |    | Additional |  |          |        |              |  | Distributions |     | Other         |  | Total
|                                           |                                                       |                            |       |                 |  |              |    | Paid-in    |  | Unearned |        | In Excess of |  | Comprehensive |     | Shareholders'
|                                           |                                                       |                            |       | Shares          |  | Dollars      |    | Shares     |  | Dollars  |        | Capital      |  | Compensation  |     | Earnings      |  | Loss  |         | Equity
|                                           |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |       
|Balances at December 31, 2002              |                                                       |                            | 3,000 |                 |  | $            | 30 |            |  |          | 20,149 |              |  | $             | 201 |               |  | $     | 256,720 |        |  | $ | (596 | ) |  | $ | (61,840 | )     |  |   |    |             |   | $ | 194,515 |  
|Issuance of shares  restricted stock      |                                                       |                            |      |                 |  |              |   |            |  |          | 44     |              |  |               | 1   |               |  |       | 351     |        |  |   | (352 | ) |  |   |        |       |  |   |    |             |   |   |        |  
|Secondary stock offering                   |                                                       |                            |      |                 |  |              |   |            |  |          | 5,250  |              |  |               | 52  |               |  |       | 44,205  |        |  |   |     |   |  |   |        |       |  |   |    |             |   |   | 44,257  |  
|Distributions ($0.45 per common share)     |                                                       |                            |      |                 |  |              |   |            |  |          |       |              |  |               |    |               |  |       |        |        |  |   |     |   |  |   | (9,875  | )     |  |   |    |             |   |   | (9,875  | )
|Distributions ($1.734 per preferred share) |                                                       |                            |      |                 |  |              |   |            |  |          |       |              |  |               |    |               |  |       |        |        |  |   |     |   |  |   | (5,203  | )     |  |   |    |             |   |   | (5,203  | )
|Unearned compensation amortization         |                                                       |                            |      |                 |  |              |   |            |  |          |       |              |  |               |    |               |  |       |        |        |  |   | 341  |   |  |   |        |       |  |   |    |             |   |   | 341     |  
|Minority interest equity adjustment        |                                                       |                            |      |                 |  |              |   |            |  |          |       |              |  |               |    |               |  |       | (707    | )      |  |   |     |   |  |   |        |       |  |   |    |             |   |   | (707    | )
|Comprehensive income:                      |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |     |             |   |   |         |  
|                                           | Net income                                            |                            |       |                |  |              |    |           |  |          |        |             |  |               |     |              |  |       |         |       |  |   |      |  |  |   |         | 6,030 |  |   |     |            |   |   |         |   |      
|                                           | Unrealized holding loss arising on interest rate swap |                            |       |                |  |              |    |           |  |          |        |             |  |               |     |              |  |       |         |       |  |   |      |  |  |   |         |      |  |   |     | (86         | ) |   |         |   |      
|                                           |                                                       | Total comprehensive income |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |     |             |   |   |         |   | 5,944 | 
|                                           |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |     |             |   |   |         |  
|Balances at September 30, 2003             |                                                       |                            | 3,000 |                 |  | $            | 30 |            |  |          | 25,443 |              |  | $             | 254 |               |  | $     | 300,569 |        |  | $ | (607 | ) |  | $ | (70,888 | )     |  | $ | (86 | )           |   | $ | 229,272 |  
|                                           |                                                       |                            |       |                 |  |              |    |            |  |          |        |              |  |               |     |               |  |       |         |        |  |   |      |   |  |   |         |       |  |   |     |             |   |   |         |  

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

6



---



##### 



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

|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |         |       |         |  
|------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------------------------------------------------------- | ------- | ------------------ | ------ | ------------------ | ------- | ----- | ------- | -
|                                                        |                                                                                                                             |                        |                                                         |         | Nine Months Ended  |        | Nine Months Ended 
|                                                        |                                                                                                                             |                        |                                                         |         | September 30, 2003 |        | September 30, 2002
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                   
|Cash flows from operating activities:                   |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|                                                        | Net income (loss)                                                                                                           |                        | $                                                       | 6,030   |                    |        | $                  | (2,492  | )    
|                                                        | Adjustments to reconcile net income (loss) to net cash
provided by operating activities:                                    |                        |                                                         |         |                    |        |                    |         |      
|                                                        |                                                                                                                             |                        | Income (loss) allocation to minority interest           |         |                    | 71     |                    |         |       | (521    | )
|                                                        |                                                                                                                             |                        | Income (loss) allocation to consolidated joint ventures |         |                    | (10    | )                  |         |       |        |  
|                                                        |                                                                                                                             |                        | Depreciation                                            |         |                    | 13,627 |                    |         |       | 14,938  |  
|                                                        |                                                                                                                             |                        | Amortization                                            |         |                    | 666    |                    |         |       | 625     |  
|                                                        |                                                                                                                             |                        | Income tax benefit                                      |         |                    | (1,769 | )                  |         |       | (7,076  | )
|                                                        |                                                                                                                             |                        | Mezzanine loan loss provision                           |         |                    |       |                    |         |       | 250     |  
|                                                        |                                                                                                                             |                        | Loss on sale or impairment of hotel properties          |         |                    | 2,518  |                    |         |       | 1,452   |  
|                                                        |                                                                                                                             |                        | (Income) loss allocations from joint ventures           |         |                    | (553   | )                  |         |       | 26      |  
|                                                        |                                                                                                                             |                        | Distributions from joint ventures                       |         |                    | 1,254  |                    |         |       | 835     |  
|                                                        |                                                                                                                             |                        | Unearned compensation amortization                      |         |                    | 341    |                    |         |       | 497     |  
|                                                        | Changes in assets and liabilities:                                                                                          |                        |                                                         |         |                    |        |                    |         |      
|                                                        |                                                                                                                             |                        | Lease revenue receivable                                |         |                    |       |                    |         |       | 4,786   |  
|                                                        |                                                                                                                             |                        | Accounts receivable                                     |         |                    | (1,734 | )                  |         |       | (2,787  | )
|                                                        |                                                                                                                             |                        | Deferred percentage lease revenue                       |         |                    |       |                    |         |       | (1,022  | )
|                                                        |                                                                                                                             |                        | Prepaid expenses and other assets                       |         |                    | (1,570 | )                  |         |       | (1,920  | )
|                                                        |                                                                                                                             |                        | Accounts payable and accrued expenses                   |         |                    | 1,053  |                    |         |       | 7,146   |  
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|                                                        |                                                                                                                             |                        | Net cash provided by operating activities               |         |                    | 19,924 |                    |         |       | 14,737  |  
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|Cash flows from investing activities:                   |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|                                                        | Minority interest contribution to consolidated joint venture                                                                |                        |                                                         | 2,100   |                    |        |                    |        |      
|                                                        | Deferred acquisitions/disposition costs                                                                                     |                        |                                                         |        |                    |        |                    | (177    | )    
|                                                        | Investment in hotel properties, net                                                                                         |                        |                                                         | (6,035  | )                  |        |                    | (3,369  | )    
|                                                        | Investment in joint ventures                                                                                                |                        |                                                         | (864    | )                  |        |                    | (2,641  | )    
|                                                        | Sale of hotel properties                                                                                                    |                        |                                                         |        |                    |        |                    | 6,918   |      
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|                                                        |                                                                                                                             |                        | Net cash provided by (used in) investing activities     |         |                    | (4,799 | )                  |         |       | 731     |  
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|Cash flows from financing activities:                   |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|                                                        | Fees paid in connection with financing activities                                                                           |                        |                                                         | (673    | )                  |        |                    | (548    | )    
|                                                        | Proceeds from issuance of common shares, net                                                                                |                        |                                                         | 44,257  |                    |        |                    | 26,897  |      
|                                                        | Payment of distributions to shareholders                                                                                    |                        |                                                         | (14,283 | )                  |        |                    | (13,717 | )    
|                                                        | Payment of distributions to minority interest                                                                               |                        |                                                         | (584    | )                  |        |                    | (585    | )    
|                                                        | Net decrease in due to banks                                                                                                |                        |                                                         | (21,346 | )                  |        |                    | (25,300 | )    
|                                                        | Decrease in long-term debt                                                                                                  |                        |                                                         | (1,022  | )                  |        |                    | (949    | )    
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|                                                        |                                                                                                                             |                        | Net cash provided by (used in) financing activities     |         |                    | 6,349  |                    |         |       | (14,202 | )
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|Net increase in cash                                    |                                                                                                                             |                        | 21,474                                                  |         |                    |        | 1,266              |        
|Cash at beginning of period                             |                                                                                                                             |                        | 1,510                                                   |         |                    |        | 887                |        
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|Cash at end of period                                   |                                                                                                                             | $                      | 22,984                                                  |         |                    | $      | 2,153              |        
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|Supplemental disclosure:                                |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|                                                        |                                                                                                                             | Cash paid for interest |                                                         | $       | 6,424              |        |                    | $       | 7,931 |        
|                                                        |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|Summary of non-cash investing and financing activities: |                                                                                                                             |                        |                                                         |         |                    |        |                    |        
|                                                        | Distributions to shareholders declared but not paid                                                                         |                        | $                                                       | 5,552   |                    |        | $                  | 4,764   |      
|                                                        | Distributions to minority interest declared but not paid                                                                    |                        |                                                         | 195     |                    |        |                    | 195     |      
|                                                        | Deferred equity compensation                                                                                                |                        |                                                         | 352     |                    |        |                    | 1,003   |      
|                                                        | Fair market value adjustment of interest rate swap                                                                          |                        |                                                         | 86      |                    |        |                    | 1,318   |      
|                                                        | Minority interest payable adjustment due to the
issuance of common shares and accumulated other
comprehensive income (loss) |                        |                                                         | 707     |                    |        |                    | 487     |      

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

7



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##### 



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



|1. |  | ORGANIZATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Winston Hotels, Inc. (WHI), headquartered in Raleigh, North Carolina,
operates so as to qualify as a real estate investment trust (REIT) for
federal income tax purposes. During 1994, WHI completed an initial public
offering of its common stock (Common Stock), utilizing the majority of the
proceeds to acquire one hotel and a general partnership interest (as the
sole general partner) in WINN Limited Partnership (the Partnership). The
Partnership used a substantial portion of the proceeds to acquire nine
additional hotel properties. WHI and the Partnership (together with the
Partnerships wholly owned subsidiaries, Barclay Hospitality Services Inc.
(Barclay), Winston SPE, LLC, and Winston Finance LLC), are collectively
referred to as the Company. As of September 30, 2003, WHIs ownership in
the Partnership was 95.14 percent.                                                                                                                                                                                                                                                                  
|  
|   |  | The accompanying unaudited consolidated financial statements reflect, in the
opinion of management, all adjustments necessary for a fair presentation of
the interim financial statements. All such adjustments are of a normal and
recurring nature. Certain reclassifications have been made to the 2002
financial statements to conform with the 2003 presentation. These
reclassifications have no effect on net income or shareholders equity
previously reported. Due to the seasonality of the hotel business and the
revenue recognition requirements of Staff Accounting Bulletin No. 101 (SAB
101), the information for the three and nine months ended September 30,
2003 and 2002 is not necessarily indicative of the results for a full year.
SAB 101 effectively defers percentage lease revenue from the first and
second quarters to the third and fourth quarters. This Form 10-Q should be
read in conjunction with the Companys Annual Report on Form 10-K for the
year ended December 31, 2002.                                                                                                                       
|  
|   |  | As of September 30, 2003, the Company held an ownership interest in 50 hotel
properties in 16 states having an aggregate of 6,997 rooms. This included
44 wholly owned properties with an aggregate of 6,139 rooms, a 49 percent
ownership interest in two joint venture hotels with an aggregate of 296
rooms, a 57.65 percent ownership interest in one joint venture hotel with
157 rooms, and a 13.05 percent ownership interest in three joint venture
hotels with an aggregate of 405 rooms, (collectively, the Joint Venture
Hotels). The Company also had issued mezzanine loans to owners of three
hotels with an aggregate of 391 rooms. The Company does not hold an
ownership interest in any of the hotels for which it has provided mezzanine
financing. All of the Companys hotels are operated under franchises from
nationally recognized franchisors including Marriott International, Inc.,
Hilton Hotels Corporation, Intercontinental Hotels Group PLC, (formerly Six
Continents PLC) and Choice Hotels International.                                                                                                 
|  
|2. |  | ACQUISITION OF LEASEHOLD INTERESTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|  
|   |  | Effective July 1, 2002, the Company, through its wholly owned taxable REIT
subsidiary, Barclay, acquired the leasehold interests for 47 of its hotels
from CapStar Winston Company, L.L.C., a wholly owned subsidiary of MeriStar
Hotels & Resorts, Inc. (MeriStar). MeriStar has since merged with and
become Interstate Hotels & Resorts, Inc. (Interstate). The acquisition
included leasehold interests for 45 wholly owned hotels and two Joint
Venture Hotels. Under the REIT Modernization Act, which became effective
January 1, 2001, the Company is permitted to lease its hotels to wholly
owned taxable REIT subsidiaries, provided that the subsidiary lessees engage
a third-party management company to manage the hotels. Simultaneous with
acquiring the leasehold interests, Barclay entered into new management
contracts with Interstate for 39 of the 47 hotels covered by the leases.
These five-year contracts were terminable by Barclay after June 30, 2003,
subject to certain conditions and limitations. Effective July 1, 2003, the
Company terminated its management contracts with Interstate (See Note 11).
|  
|   |  | The acquisition of the leasehold interests from Interstate entitles Barclay
to retain the operating profits or losses from the related hotels, which
previously accrued to Interstate under the leases and gives the Company (i)
more control over the operations of its hotels, (ii) the benefits from any
operating margin improvements and risk of                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

8



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##### 





|   |  | any operating margin deterioration at its hotels, and (iii) more
flexibility, in that its hotels are no longer encumbered by long term leases
that are difficult to amend and expensive to terminate. All of the hotels
continue to operate under the same franchise affiliations as prior to the
acquisition of the leasehold interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|3. |  | DERIVATIVE INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | The Companys financing facilities consist of a $125,000 variable rate line
of credit that matures in December 2004, and a $71,000 fixed rate (7.375
percent) loan with a ten-year maturity, due December 1, 2008, and a
twenty-five-year amortization period. The Line, which expires in December
2004, bears interest generally at rates from 30-day LIBOR plus 1.75% to
30-day LIBOR plus 2.50%, based on the Companys consolidated debt leverage
ratio as of the end of each calendar quarter. The Companys interest rate
as of September 30, 2003 was 30-day LIBOR (1.12% as of September 30, 2003)
plus 2.00%. The Companys interest rate beginning October 1, 2003 changed
to 30-day LIBOR plus 1.75%. To reduce overall interest rate risk, the
Company uses interest rate hedging instruments to convert a portion of its
variable-rate debt to fixed-rate debt. Interest rate differentials that
arise under these instruments are recognized as interest expense over the
life of the contracts. Currently, the Companys only such instrument is the
interest rate swap instrument described below, the term of which started
March 31, 2003 and ends February 27, 2004.
|  
|   |  | The following table summarizes the notional value and fair value of the
Companys interest rate swap instrument. The notional value at September 30,
2003 provides an indication of the extent of the Companys involvement with
derivative financial instruments at that time, but does not represent the
Companys overall exposure to credit, interest rate or market risks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|                      |  |          |        |          |  |          |       |            |  |  |         |  |  |   |     |  
|--------------------- |  | -------- | ------ | -------- |  | -------- | ----- | ---------- |  |  | ------- |  |  | - | --- | -
|                      |  | Notional |        | Interest |  |          |       |            |  |  |         | 
|At September 30, 2003 |  | Value    |        | Rate     |  | Maturity |       | Fair Value
|                      |  |          |        |          |  |          |       |           
|Interest rate swap    |  | $        | 50,000 |          |  |          | 1.505 | %          |  |  | 02/2004 |  |  | $ | (86 | )



|   |  | The interest rate swap instrument effectively replaces the Companys
variable interest rate based on 30-day LIBOR on $50,000 of the Line with a
fixed interest rate based on a base rate of 1.505% until February 27, 2004,
and is therefore characterized as a cash flow hedge. The Lines interest
rate spread is currently 1.75%, equating to an effective fixed rate of
3.255% on $50,000 until February 27, 2004. Cash flow hedges address the
risk associated with future cash flows of debt transactions. On September
30, 2003 the derivative instruments fair value was $(86) and is included in
Accounts payable and accrued expenses on the Companys Consolidated
Balance Sheets. Offsetting adjustments are represented as deferred gains or
losses in Accumulated other comprehensive loss. Over time, the unrealized
losses held in Accumulated other comprehensive loss will be reclassified
into earnings in the same periods in which the hedged interest payments
affect earnings.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|4. |  | EARNINGS PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|  
|   |  | The following is a reconciliation of the amounts used in calculating basic
and fully diluted earnings per share for income (loss) from continuing
operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

9



---



##### 



|                                                                           |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                           |  | Three Months Ended |        | Nine Months Ended
|                                                                           |  | September 30,      |        | September 30,    
|                                                                           |  |                    |        |                  
|                                                                           |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                                           |  |                    |        |                   |  |      |        |     
|Income (loss) from continuing operations                                   |  | $                  | 3,505  |                   |  | $    | 10,360 |      |  | $ | 8,524  |   |  | $ | (1,225 | )
|Less: preferred stock distribution                                         |  |                    | (1,734 | )                 |  |      | (1,734 | )    |  |   | (5,203 | ) |  |   | (5,203 | )
|                                                                           |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations
applicable to common shareholders |  |                    | 1,771  |                   |  |      | 8,626  |      |  |   | 3,321  |   |  |   | (6,428 | )
|Plus: income allocation to minority interest                               |  |                    | 132    |                   |  |      | 549    |      |  |   | 232    |   |  |   |       |  
|                                                                           |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Income (loss) from continuing operations -
assuming dilution               |  |                    | 1,903  |                   |  |      | 9,175  |      |  |   | 3,553  |   |  |   | (6,428 | )
|                                                                           |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares                                   |  |                    | 20,783 |                   |  |      | 20,202 |      |  |   | 20,320 |   |  |   | 19,174 |  
|Minority interest units with redemption rights                             |  |                    | 1,298  |                   |  |      | 1,298  |      |  |   | 1,298  |   |  |   |       |  
|Stock options                                                              |  |                    | 11     |                   |  |      |       |      |  |   |       |   |  |   |       |  
|                                                                           |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares
assuming dilution                 |  |                    | 22,092 |                   |  |      | 21,500 |      |  |   | 21,618 |   |  |   | 19,174 |  
|                                                                           |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  



| |  | The number of potential common shares (represented by minority interest and
outstanding options) for the nine months ended September 30, 2002 totaled
1,298.   
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following is a reconciliation of the amounts used in calculating basic
and fully diluted earnings per share for income (loss) from discontinued
operations:

|                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                               |  | Three Months Ended |        | Nine Months Ended
|                                                               |  | September 30,      |        | September 30,    
|                                                               |  |                    |        |                  
|                                                               |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                               |  |                    |        |                   |  |      |        |     
|Income (loss) from discontinued operations                     |  | $                  | (2,405 | )                 |  | $    | (646   | )    |  | $ | (2,494 | ) |  | $ | (1,267 | )
|Plus: income allocation to minority interest                   |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       |  
|                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Income (loss) from discontinued operations -
assuming dilution |  |                    | (2,405 | )                 |  |      | (646   | )    |  |   | (2,494 | ) |  |   | (1,267 | )
|                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares                       |  |                    | 20,783 |                   |  |      | 20,202 |      |  |   | 20,320 |   |  |   | 19,174 |  
|Minority interest units with redemption rights                 |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       |  
|Stock options                                                  |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       |  
|                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares
assuming dilution     |  |                    | 20,783 |                   |  |      | 20,202 |      |  |   | 20,320 |   |  |   | 19,174 |  
|                                                               |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  



| |  | The number of potential common shares (represented by minority interest and
outstanding options) for the nine months ended September 30, 2003 and 2002
totaled 1,309 and 1,298, respectively. The number of potential common
shares (represented by minority interest and outstanding options) for the
three months ended September 30, 2003 and 2002 totaled 1,298 and 1,298,
respectively.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following is a reconciliation of the amounts used in calculating basic
and fully diluted earnings per share for net income (loss) per common share:                                                                                                                                                                                                                                     

10



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##### 



|                                                                        |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                        |  | Three Months Ended |        | Nine Months Ended
|                                                                        |  | September 30,      |        | September 30,    
|                                                                        |  |                    |        |                  
|                                                                        |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                                        |  |                    |        |                   |  |      |        |     
|Net income                                                              |  | $                  | 1,100  |                   |  | $    | 9,714  |      |  | $ | 6,030  |   |  | $ | (2,492 | )
|Less: preferred stock distribution                                      |  | $                  | (1,734 | )                 |  | $    | (1,734 | )    |  | $ | (5,203 | ) |  | $ | (5,203 | )
|                                                                        |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Net income (loss) applicable to common
shareholders                     |  |                    | (634   | )                 |  |      | 7,980  |      |  |   | 827    |   |  |   | (7,695 | )
|Plus: income allocation to minority interest                            |  |                    |       |                   |  |      | 513    |      |  |   | 72     |   |  |   |       |  
|                                                                        |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Net income (loss) applicable to common
shareholders  assuming dilution |  |                    | (634   | )                 |  |      | 8,493  |      |  |   | 899    |   |  |   | (7,695 | )
|                                                                        |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares                                |  |                    | 20,783 |                   |  |      | 20,202 |      |  |   | 20,320 |   |  |   | 19,174 |  
|Minority interest units with redemption rights                          |  |                    |       |                   |  |      | 1,298  |      |  |   | 1,298  |   |  |   |       |  
|Stock options                                                           |  |                    |       |                   |  |      |       |      |  |   |       |   |  |   |       |  
|                                                                        |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Weighted average number of common shares
assuming dilution              |  |                    | 20,783 |                   |  |      | 21,500 |      |  |   | 21,618 |   |  |   | 19,174 |  
|                                                                        |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  



|   |  | The number of potential common shares (represented by minority interest and
outstanding options) for the three months ended September 30, 2003 totaled
1,309. The number of potential common shares (represented by minority
interest and outstanding options) for the nine months ended September 30,
2002 totaled 1,298.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company declared quarterly cash dividends of $0.15 per common share and
$0.578125 per preferred share during the first, second and third quarter of
2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|5. |  | INCOME TAXES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|   |  | The Company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting
for Income Taxes. Under SFAS 109, the Company accounts for income taxes
using the asset and liability method under which deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. The income tax
benefit for the nine months ended September 30, 2003 consists of a deferred
federal income tax benefit of $1,629 and a deferred state income tax benefit
of $140.                                                                                                                                                                                            
|  
|   |  | The benefit from income taxes and related deferred tax asset were calculated
using an effective tax rate of 38 percent applied to the loss of Barclay.
The deferred tax asset also relates to the cost of acquiring the leases for
47 of the Companys hotel properties from Interstate, which was expensed for
financial reporting purposes in 2002. For tax purposes, this payment is
being amortized over the lives of the leases. The Company believes that
Barclay will generate sufficient future taxable income to realize in full
the deferred tax asset. Accordingly, no valuation allowance has been
recorded as of September 30, 2003.                                                                                                                                                                                                                                             
|  
|6. |  | STOCK-BASED COMPENSATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | At September 30, 2003, the Company has one stock-based employee compensation
plan, the Winston Hotels, Inc. Stock Incentive Plan. The Company accounts
for this plan under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected in
net income (loss) for the issuance of options, as all options granted under
those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table
illustrates the effect on net income (loss) applicable to common
shareholders and net income (loss) per share as if the Company had applied
the fair value recognition provisions of FASB Statement No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.

11



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##### 



|                                                                                                                                            |  |                    |       |                   |  |      |       |      |  |   |      |  |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | ----------------- |  | ---- | ----- | ---- |  | - | ---- |  |  | - | ------ | -
|                                                                                                                                            |  | Three Months Ended |       | Nine Months Ended
|                                                                                                                                            |  | September 30,      |       | September 30,    
|                                                                                                                                            |  |                    |       |                  
|                                                                                                                                            |  | 2003               |       | 2002              |  | 2003 |       | 2002
|                                                                                                                                            |  |                    |       |                   |  |      |       |     
|Net income (loss) applicable to common shareholders,
as reported                                                                            |  | $                  | (634  | )                 |  | $    | 7,980 |      |  | $ | 827  |  |  | $ | (7,695 | )
|Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects |  |                    | 5     |                   |  |      | 23    |      |  |   | 14   |  |  |   | 68     |  
|                                                                                                                                            |  |                    |       |                   |  |      |       |      |  |   |      |  |  |   |        |  
|Pro forma net income (loss) applicable to common
shareholders                                                                               |  |                    | (639  | )                 |  |      | 7,957 |      |  |   | 813  |  |  |   | (7,763 | )
|                                                                                                                                            |  |                    |       |                   |  |      |       |      |  |   |      |  |  |   |        |  
|Earnings (loss) per share:                                                                                                                  |  |                    |       |                   |  |      |       |      |  |   |      |  |  |   |        |  
|Basic and diluted  as reported                                                                                                             |  | $                  | (0.03 | )                 |  | $    | 0.40  |      |  | $ | 0.04 |  |  | $ | (0.40  | )
|                                                                                                                                            |  |                    |       |                   |  |      |       |      |  |   |      |  |  |   |        |  
|Basic and diluted  pro forma                                                                                                               |  | $                  | (0.03 | )                 |  | $    | 0.39  |      |  | $ | 0.04 |  |  | $ | (0.40  | )
|                                                                                                                                            |  |                    |       |                   |  |      |       |      |  |   |      |  |  |   |        |  



|7. |  | ACCOUNTING FOR LONG-LIVED ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | The Company evaluates the potential impairment of individual long-lived
assets, principally the hotel properties. The Company records an impairment
charge when it believes an investment in hotels has been impaired, such that
future undiscounted cash flows, together with an anticipated liquidation
amount, would not recover the then current carrying value of the investment
in the hotel property. The Company considers many factors and makes certain
assumptions when making this assessment, including but not limited to
general market and economic conditions, operating results over the past
several years, the performance of similar properties in the same market and
expected future operating results based on a variety of assumptions. Future
adverse changes in market conditions or poor operating results of underlying
investments could result in losses or an inability to recover the carrying
value of the investments that may not be reflected in an investments
carrying value, thereby possibly requiring an impairment charge in the
future. In addition, if the Companys assumptions regarding future
undiscounted cash flows and anticipated liquidation amounts are incorrect, a
future impairment charge may be required.
|  
|   |  | During the third quarter of 2003, the Company recorded a $2.5 million,
non-cash impairment charge to earnings relating to one hotel which is
classified as held for sale on our balance sheet. This charge is recorded
under discontinued operations on the unaudited consolidated statements of
operations for the three and nine months ended September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|8. |  | SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|  
|   |  | The Company participates in five joint venture agreements to develop and own
hotel properties, two with Regent Partners, Inc. (Regent), one with Marsh
Landing Investment, L.L.C. (Marsh Landing), one with Charlesbank Capital
Partners, LLC (Charlesbank) and Concord Hospitality Enterprises Company
(Concord), and one with Chapel Hill Investments, LLC. The Company entered
into the joint ventures with Regent and Marsh Landing during 1999 and 2000,
respectively, with Charlesbank and Concord during the fourth quarter of
2002, and with Chapel Hill Investments, LLC during the third quarter of
2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|  
|   |  | The Company currently owns a 49 percent interest in the joint venture with
Marsh Landing that owns the Ponte Vedra, FL Hampton Inn. Charles Winston
and James Winston, both of whom are directors of the Company, control the
remaining 51 percent interest in the Marsh Landing joint venture. The
Company currently owns a 49 percent interest in the joint venture with
Regent that owns the Evanston, IL Hilton Garden Inn and currently owns a
57.65 percent interest in the joint venture with Regent that owns the
Windsor, CT Hilton Garden Inn (see Note 11).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

12



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##### 





|   |  | The Company entered into the joint venture agreement with Charlesbank with
the intention to acquire more than $100,000 of hotel assets (the
Charlesbank Venture). Charlesbank is a private investment firm that
manages capital on behalf of a range of institutional investors. During the
fourth quarter of 2002, the Charlesbank Venture and Concord subsequently
formed a new joint venture entity, WCC Project Company LLC. The Charlesbank
Venture is the managing member of WCC Project Company LLC. The West Des
Moines, IA Fairfield Inn & Suites, the Beachwood Courtyard, and the Houston,
TX Best Western Park Place Suites are owned by WCC Project Company LLC.
Charlesbank owns 73.95 percent of WCC Project Company LLC, Concord owns 13
percent and the Company owns 13.05 percent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | During the third quarter of 2003, the Company entered into a joint venture
agreement (the Chapel Hill Joint Venture) with Chapel Hill Investments,
LLC to develop and own hotel properties. The Chapel Hill Joint Venture is
currently developing a Courtyard by Marriott hotel in Chapel Hill, NC, which
is expected to open in the summer of 2004. The Company currently owns a
48.78 percent interest in the Chapel Hill Joint Venture, while Chapel Hill
Investments, LLC owns a 51.22 percent interest. The Company also has
provided an additional $1,453 to capitalize the development of the hotel in
the form of a preferred membership interest (Preferred Contribution). The
Companys Preferred Contribution requires paid monthly dividends to the
Company during construction of the hotel at an annual yield of 30-day LIBOR
plus 5.885 percent, plus an accrued dividend at an annual yield of 8
percent. Once the hotel opens, and until the Preferred Contribution and all
dividends payable and accrued thereon are paid in full, the Companys
Preferred Contribution requires a paid monthly dividend to the Company equal
to a floating rate equal to 30-day LIBOR plus that percentage that will
generate an annual dividend yield of 10 percent. The percentage rate to be
added to 30-day LIBOR will not be known until the day the hotel opens. The
Company will receive $700 for development services provided during
construction. Chapel Hill Investments, LLC is owned 52 percent by Charles
Winston and James Winston, both of whom are directors of the Company, and 48
percent by three unrelated private investors. The results of operations and
balance sheet of this joint venture are consolidated in the Companys
consolidated financial statements and all intercompany accounts are
eliminated pursuant to FASB Interpretation No. 46 (See Note 9).
|  
|   |  | As of September 30, 2003, total assets of the four unconsolidated joint
ventures were $68,468, total liabilities were $42,624, and total equity was
$25,844. For the three and nine months ended September 30, 2003, total
revenue of the four unconsolidated joint ventures was $3,603 and $6,906,
respectively, total expenses were $2,283 and $5,432, respectively, resulting
in net income of $1,320 and $1,474, respectively. On July 1, 2003, the
Company acquired a 57.65% ownership interest in Windsor Lessee Company, LLC,
the lessee of the Windsor, CT Hilton Garden Inn. For both the three and
nine months ended September 30, 2003, Windsor Lessee Company, LLC had a loss
of $(157). The Companys resulting share of net income from its
unconsolidated joint ventures for the three and nine months ended September
30, 2003 was $499 and $553, respectively. Pursuant to the requirements of
SAB 101, $(404) and $748 of total revenue was deferred during the three and
nine months ended September 30, 2003, respectively. The remaining balance
of deferred revenue as of September 30, 2003 equaled $344 and will be
recognized during the fourth quarter of 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  
|   |  | As of September 30, 2003, total assets of the one consolidated joint venture
(Chapel Hill Joint Venture) were $6,099, total liabilities were $2,019, and
total equity was $4,080. For both the three and nine months ended September
30, 2003, total revenue of the one consolidated joint venture was $0, total
expenses were $20, resulting in a net loss of $(20). The Companys
resulting share of the net loss was $(10).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|9. |  | RECENT ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest
Entities, an interpretation of Accounting Research Bulletin No. 51 (ARB No.
51), was issued in January 2003. This Interpretation clarifies the
application of ARB No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated
financial support from other parties, referred to as                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

13



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##### 





| |  | variable interest
entities (VIE). FIN 46 explains the concept of a VIE and generally
requires consolidation by the party that has a majority of the risk and/or
rewards, referred to as the primary beneficiary.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | This Interpretation is intended to achieve more consistent application of
consolidation policies to variable interest entities and, thus, to improve
comparability between enterprises engaged in similar activities even if some
of those activities are conducted through variable interest entities.
Including the assets, liabilities, and results of activities of variable
interest entities in the consolidated financial statements of their primary
beneficiaries will provide more complete information about the resources,
obligations, risks, and opportunities of the consolidated enterprise.
Disclosures about variable interest entities in which an enterprise has a
significant variable interest but does not consolidate will help financial
statement users assess the enterprise  ́s risks.                                                                                                                                                                                                                       
|
| |  | This Interpretation applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which
an enterprise obtains a variable interest after that date. It applies in
the first fiscal year or interim period ending after December 15, 2003, to
variable interest entities in which an enterprise holds a variable interest
that it acquired before February 1, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | As discussed in Note 8 above, the Company participates in five joint venture
agreements to develop and own hotel properties. The Company has also issued
three mezzanine loans to owners of three hotels. The management of the
Company has analyzed the terms and provisions of each of these arrangements,
and has determined the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | Marsh Landing Joint
Venture:
This joint venture is considered to be a VIE and the Company is considered
to be the primary beneficiary. Therefore, the Company, which owns a 49
percent interest, will consolidate the balance sheet of the Marsh Landing
Joint Venture as of December 31, 2003, and will consolidate the results of
operations beginning with the first quarter of 2004. For the nine months
ended September 30, 2003, total revenue was $883, total expenses were $606,
resulting in a net income of $277. Deferred revenue for the same nine month
period totaled $218, per the provisions of SAB 101, all of which will be
recognized during the last quarter of 2003. As of September 30, 2003, total
assets were $7,476, total liabilities were $5,270, resulting in
stockholders equity totaling $2,206. The Companys equity balance exposed
to loss as a result of its involvement in this joint venture totaled $1,081
as of September 30, 2003.                                                              
|
| |  | Charlesbank and Concord Joint
Venture:
Due to the complexity of the new guidance and the evolving interpretation
among accounting professionals, including currently pending interpretations
from the Financial Accounting Standards Board, the Company is still in the
process of evaluating the provisions of FIN 46 and has not yet determined if
it is considered to be a VIE and if so, which party is considered to be the
primary beneficiary. It is possible that this joint venture will be
consolidated with the Company. For the nine months ended September 30,
2003, total revenue of the Charlesbank and Concord Joint Ventures was
$2,871, total expenses were $2,622, resulting in net income of $249. As of
September 30, 2003, total assets were $24,786, total liabilities were
$14,666, resulting in stockholders equity totaling $10,120. The Companys
equity balance exposed to loss as a result of its involvement in this joint
venture totaled $1,347 as of September 30, 2003.                              
|
| |  | Regent Joint
Ventures:
These two joint ventures own the Windsor, CT Hilton Garden Inn (the Windsor
Joint Venture) and the Evanston, IL Hilton Garden Inn (the Evanston Joint
Venture). Due to the complexity of the new guidance and the evolving
interpretation among accounting professionals, including currently pending
interpretations from the Financial Accounting Standards Board, the Company
is still in the process of evaluating the provisions of FIN 46 and has not
yet determined if it is considered to be a VIE and if so, which party is
considered to be the primary beneficiary in either case. It is possible
that one or both of these joint ventures will be consolidated with the
Company. For the nine months ended September 30, 2003, total revenue of the
Windsor Joint Venture and the Evanston Joint Venture was $1,325 and $1,827,
respectively, total expenses were $930 and $1,273, respectively, resulting
in net income of $395 and $554, respectively. Deferred revenue for the same
nine month

14



---



##### 





| |  | periods totaled $31 and $499, respectively, per the provisions of
SAB 101, all of which will be recognized during the last quarter of 2003.
As of September 30, 2003, total assets were $15,727 and $20,479,
respectively, total liabilities were $9,681 and $13,006, respectively, resulting in
stockholders equity totaling $6,046 and $7,473, respectively. The
Companys equity balance exposed to loss as a result of its involvement in
these joint ventures totaled $7,147 as of September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company also has a 57.65% interest in Windsor Lessee Company, LLC, the
lessee of the Windsor, CT Hilton Garden Inn. For the nine months ended
September 30, 2003, Windsor Lessee Company, LLC incurred a net loss of
$(157).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Chapel Hill Joint
Venture:
This joint venture is considered to be a VIE, the Company is considered to
be the primary beneficiary and it was created in August 2003 (after January
31, 2003). Therefore, the Company, which owns a 48.78% interest, has
consolidated the joint ventures results of operations and balance sheet
beginning with the third quarter 2003. For the nine months ended September
30, 2003, total revenue was $0, total expenses were $20, resulting in a net
loss of $20. As of September 30, 2003, total assets were $6,099, total
liabilities were $2,019, including $154 due to banks, resulting in
stockholders equity totaling $4,080. The Companys equity balance exposed
to loss as a result of its involvement in this joint venture totaled $1,990
as of September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Noble Investment Group
Mezzanine Loans:
In July 2000, the Company provided a $1,080 mezzanine loan for a Hilton
Garden Inn in Atlanta and in February 2001 provided a $2,186 mezzanine loan
for a Hilton Garden Inn in Tampa. Noble Investment Group, Ltd. (Noble)
provided the remainder of the funding and owns and operates the hotels.
These two mezzanine loan arrangements are considered to be variable
interests in the entities that own the hotels, both of which are VIEs.
However, the Company is not considered to be the primary beneficiary.
Therefore, the Company will not consolidate the results of operations of the
hotels for which it has provided financing. The Companys total outstanding
loan balances exposed to loss as a result of its involvement in these
mezzanine loans totaled $3,266 as of September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Baltimore, MD Hampton Inn
& Suites Mezzanine Loan;
In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan to
an unrelated third party owner for the purchase and conversion of a historic
office building into a 116-room Hampton Inn & Suites hotel in Baltimore,
MDs Inner Harbor (the Baltimore Hotel). Subsequently, the Company sold
50 percent of the loan to an affiliate of Hall Financial Group at face
value, or $1,750. This mezzanine loan arrangement is considered to be a
variable interest in the entity that owns the hotel, which is a VIE.
However, the Company is not considered to be the primary beneficiary.
Therefore, the Company will not consolidate the results of operations of the
hotel for which it has provided financing. The Companys total outstanding
loan balance exposed to loss as a result of its involvement in this
mezzanine loan totaled $1,750 as of September 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | In April 2003, FASB issued Statement of Financial Accounting Standards No.
149 Amendment of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS No. 149). FASB Statements No. 133 Accounting for
Derivative Instruments and Hedging Activities and No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, establish
accounting and reporting standards for derivative instruments including
derivatives embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. SFAS No. 149 amends Statement 133
for certain decisions made by the Board as part of the Derivatives
Implementation Group (DIG) process. This Statement contains amendments
relating to FASB Concepts Statement No. 7, Using Cash Flow Information and
Present Value in Accounting Measurements, and FASB Statements No. 65,
Accounting for Certain Mortgage Banking Activities, No. 91 Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans
and Initial Direct Costs of Leases, No. 95, Statement of Cash Flows, and
No. 126, Exemption from Certain Required Disclosures about Financial
Instruments for Certain Nonpublic Entities. The adoption of SFAS No. 149
did not have a material impact on the Company.

15



---



##### 





|    |  | In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (SFAS No.
150). SFAS No. 150 requires issuers to classify certain freestanding
financial instruments as liabilities. These freestanding financial
instruments include mandatory redeemable financial instruments, obligations
to repurchase the issuers equity shares by transferring assets and certain
obligations to issue a variable number of shares. The provisions of SFAS
No. 150 are effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have a material
impact on the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|10. |  | DISCONTINUED OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | The Company adopted Statement of Financial Accounting Standard No. 144
(SFAS No. 144) effective January 1, 2002 which requires, among other
things, that the operating results of certain real estate assets which have
been sold subsequent to January 1, 2002, or otherwise qualify as held for
disposition (as defined by SFAS No. 144), be included in discontinued
operations in the statements of operations for all periods presented. Four
of the Companys wholly owned hotels were sold during 2002. The operating
results for these four hotels are included in discontinued operations in the
statements of operations for the three and nine months ended September 30,
2002. The Company classified one of its hotels as held for sale during the
third quarter of 2003. The operating results for this hotel are included in
discontinued operations in the statements of operations for the three and
nine months ended September 30, 2002 and 2003. The Company has not
allocated interest expense to the results of the discontinued operations in
accordance with EITF No. 87-24. This change has resulted in certain
reclassifications to the three and nine months ended September 30, 2002
financial statement amounts. Condensed financial information of the results
of operations for the three and nine months ended September 30, 2002, for
the four hotels sold during 2002 and the one hotel classified as held for
sale, consisted of total revenue of $1,285 and $2,149, respectively, total
expenses of $1,305 and $2,039, respectively, an allocation to minority
interest of $4 and $13, respectively, resulting in income (loss) from
discontinued operations of $(24) and $97, respectively. Condensed financial
information of the results of operations for the three and nine months ended
September 30, 2003, for the one hotel classified as held for sale, consisted
of total revenue of $325 and $910, respectively, total expenses of $366 and
$1,046, respectively, an allocation to minority interest of $(2) and $(8),
respectively, resulting in loss from discontinued operations of $(39) and
$(128), respectively.
|   
|11. |  | MANAGEMENT AND LEASE AGREEMENT CHANGES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | Effective July 1, 2003, the Company terminated its management contracts for
33 of its hotels managed by Interstate. Effective July 1, 2003, the Company
also terminated the management agreements under which Interstate Management
and Investment Corporation formerly operated six of the Companys properties
by paying a termination fee of $1.3 million ($0.06 per share), which was
expensed in the third quarter of 2003. The management of all of these
properties along with most of the hotels management personnel and other
employees have been transferred to Alliance Hospitality Management, LLC,
(Alliance).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | The Company terminated the lease agreements for the Las Vegas, NV Hampton
Inn and the Windsor, CT Hilton Garden Inn on July 1, 2003, both of which
were previously leased to Intercontinental Group. There were no termination
fees paid by the Company. The Windsor Hilton Garden Inn is currently owned
by a joint venture entity, Windsor Hotel Associates, LLC. Prior to the
termination of the lease agreement, the Company owned 49 percent, while
Regent Partners, Inc. (Regent) owned 36 percent and Intercontinental Group
owned 15 percent. Subsequent to the termination of the lease agreement,
Intercontinental Group forfeited its share of ownership, with the result
that the Company now owns 57.65 percent and Regent owns 42.35 percent of
Windsor Hotel Associates, LLC. The Company wholly owns the Las Vegas
Hampton Inn. The Company has replaced Intercontinental Group with a newly
formed lessee, Windsor Lessee Company LLC, owned 57.65 percent by the
Company and 42.35 percent by Regent, to lease the Windsor Hilton Garden Inn.
The Company has also replaced Intercontinental Group with Barclay as lessee
for the Las Vegas Hampton Inn. Both Barclay and Windsor Lessee Company LLC
have contracted with Alliance to manage the properties. As a result of
replacing Intercontinental Group as lessee with Barclay and Windsor Lessee
Company LLC, the Company now records                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |  | any profits or losses from the Las Vegas Hampton Inn and its share of
profits or losses from the Windsor Hilton Garden Inn (along with profits or
losses from the other 44 hotels leased 100 percent by Barclay) (See Note 2).                                                                                                                                                                                                               
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Currently, Alliance manages 41 of the Companys hotels, Concord manages
three hotels, Hilton Hotels Corporation manages two hotels, and Sage
Hospitality Resources, LLC, Noble, and Prism Hospitality, L.P. each manage
one hotel.                                                                                                                                                                                                           
|
| |  | The 41 hotels currently managed by Alliance are operated under a management
agreement with a five-year term. The Company, however, has the right to
terminate the agreement upon delivery of written notice to Alliance not less
than 90 days prior to the effective date of termination. The management fee
payable to Alliance is equal to 2.25% of total hotel revenue and is paid
monthly.                                               
|
| |  | The Companys wholly owned Secaucus, NJ Holiday Inn continues to be operated
under a long-term lease with Secaucus Holding Corporation, a wholly owned
subsidiary of Prime Hospitality Corp. (Prime). The Company is currently
in negotiations with Prime to transfer the lease to Barclay. In the event
the Company is able to complete the lease transfer, it is the Companys
intention to contract with Alliance to manage the property

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

Overview

Winston Hotels, Inc. (WHI), headquartered in Raleigh, North Carolina,
operates so as to qualify as a real estate investment trust (REIT) for
federal income tax purposes. During 1994, WHI completed an initial public
offering of its common stock (Common Stock), utilizing the majority of the
proceeds to acquire one hotel and a general partnership interest (as the sole
general partner) in WINN Limited Partnership (the Partnership). The
Partnership used a substantial portion of the proceeds to acquire nine
additional hotel properties. WHI and the Partnership (together with the
Partnerships wholly owned subsidiaries, Barclay Hospitality Services Inc.
(Barclay), Winston SPE, LLC, and Winston Finance LLC), are collectively
referred to as the Company. As of September 30, 2003, WHIs ownership in the
Partnership was 95.14 percent.

As of September 30, 2003, the Company held an ownership interest in 50 hotel
properties in 16 states having an aggregate of 6,997 rooms. This included 44
wholly owned properties with an aggregate of 6,139 rooms, a 49 percent
ownership in two joint venture hotels with an aggregate of 296 rooms, a 57.65
percent ownership in one joint venture hotel with 157 rooms, and a 13.05
percent ownership interest in three joint venture hotels with an aggregate of
405 rooms, (collectively, the Joint Venture Hotels). The Company also had
issued mezzanine loans to owners of three hotels with an aggregate of 391
rooms. The Company does not hold an ownership interest in any of the hotels
for which it has provided mezzanine financing. All of the Companys hotels are
operated under franchises from nationally recognized franchisors including
Marriott International, Inc., Hilton Hotels Corporation, Intercontinental
Hotels Group PLC, (formerly Six Continents PLC) and Choice Hotels
International.

Effective July 1, 2002, the Company, through its wholly owned taxable REIT
subsidiary, Barclay Hospitality Services Inc. (Barclay), acquired the
leasehold interests for 47 of its hotels from CapStar Winston Company, L.L.C.,
a wholly owned subsidiary of MeriStar Hotels & Resorts, Inc. (MeriStar).
MeriStar has since merged with and become Interstate Hotels & Resorts, Inc.
(Interstate). The acquisition included leasehold interests for 45 wholly
owned hotels and two Joint Venture Hotels. Under the REIT Modernization Act,
which became effective January 1, 2001, the Company is permitted to lease its
hotels to wholly owned taxable REIT subsidiaries, provided that the subsidiary
lessees engage a third-party management company to manage the hotels.
Simultaneous with acquiring the leasehold interests, Barclay entered into new
management contracts with Interstate for 39 of the 47 hotels covered by the
leases. These five-year contracts were terminable by Barclay after June 30,
2003, subject to certain conditions and limitations. Effective July 1, 2003,
the Company terminated its management contracts with Interstate.

17



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

Effective July 1, 2003, the Company terminated its management contracts for 33
of its hotels managed by Interstate. Effective July 1, 2003, the Company also
terminated the management agreements under which Interstate Management and
Investment Corporation formerly operated six of the Companys properties by
paying a termination fee of $1.3 million ($0.06 per share), which was expensed
in the third quarter of 2003. The management of all of these properties along
with most of the hotels management personnel and other employees has been
transferred to Alliance Hospitality Management, LLC, (Alliance).

The Company terminated the lease agreements for the Las Vegas, NV Hampton Inn
and the Windsor, CT Hilton Garden Inn on July 1, 2003, both of which were
previously leased to Intercontinental Group. The Windsor Hilton Garden Inn is
currently owned by a joint venture entity, Windsor Hotel Associates, LLC. Prior
to the termination of the lease agreement, the Company owned 49 percent, while
Regent Partners, Inc. (Regent) owned 36 percent and Intercontinental Group
owned 15 percent. Subsequent to the termination of the lease agreement,
Intercontinental Group forfeited its share of ownership, with the result that
the Company now owns 57.65 percent and Regent owns 42.35 percent of Windsor
Hotel Associates, LLC. The Company wholly owns the Las Vegas Hampton Inn. The
Company has replaced Intercontinental Group with a newly formed lessee, Windsor
Lessee Company LLC, owned 57.65 percent by the Company and 42.35 percent by
Regent, to lease the Windsor Hilton Garden Inn. The Company has also replaced
Intercontinental Group with Barclay as lessee for the Las Vegas Hampton Inn.
Both Barclay and Windsor Lessee Company LLC have contracted with Alliance to
operate the properties. As a result of replacing Intercontinental Group as
lessee with Barclay and Windsor Lessee Company LLC, the Company now records any
profits or losses from the Las Vegas Hampton Inn and its share of profits or
losses from the Windsor Hilton Garden Inn (along with profits or losses from
the other 44 hotels leased 100 percent by Barclay).

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

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

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

Critical Accounting Policies

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

18



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

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

Accounting for Joint Ventures
The Company currently has a 49 percent ownership interest in two joint
ventures, each of which owns one hotel, a 57.65 percent ownership interest in
one joint venture, which owns one hotel, and a 13.05% ownership interest in one
joint venture, which owns three hotels. As of September 30, 2003, the Company
determined that it did not have a controlling interest in any of these four
joint ventures during the three and nine months ended September 30, 2003 and
therefore used the equity method to recognize its share of net income or loss
from the joint ventures and adjusted the carrying value of the investment
accordingly. The joint ventures assets, liabilities, and equity are not
recorded on the Companys balance sheet as of September 30, 2003. The Company
also owns a 48.78 percent interest in one joint venture hotel, which owns one
hotel. This joint venture is considered to be a VIE, the Company is considered
to be the primary beneficiary and it was created in August 2003 (after January
31, 2003). Therefore, the Company has consolidated the joint ventures results
of operations and balance sheet beginning with the third quarter 2003. See
Notes 8 and 9 for a discussion of FIN 46 and SFAS No. 150.

The Company receives current financial information from the joint ventures and
performs an analysis to determine its share of income. This analysis includes
the review of operational data, significant assets and liabilities, and results
of operations to ensure that the Companys interests are realizable. The
Company considers many factors and makes certain assumptions when making this
assessment, including but not limited to general market and economic
conditions, operating results over the past several years, the performance of
similar properties in the same market and expected future operating results
based on a variety of assumptions. Future adverse changes in market conditions
or poor operating results of underlying investments could result in losses or
an inability to recover the carrying value of the investments that may not be
reflected in an investments carrying value, thereby possibly requiring an
impairment charge in the future. In addition, if the Companys assumptions
regarding future undiscounted cash flows and anticipated liquidation amounts
are incorrect, a future impairment charge may be required.

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

During the third quarter, the Company recorded a $2.5 million, non-cash
impairment charge to earnings relating to one hotel which is classified as
held for sale on our balance sheet.

Income Taxes
The Company records a valuation allowance to reduce the deferred tax assets to
an amount that it believes is more likely than not to be realized. In
assessing the need for the valuation allowance, future taxable income and
ongoing

19



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prudent and feasible tax planning strategies have been considered. Should our
estimate of future taxable income be less than expected, or our tax planning
strategy not be carried out as planned, we would record an adjustment to the
deferred tax asset in the period such determination was made. As of September
30, 2003, the Company has not recorded a valuation allowance.

Results of Operations

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

|                       |  |                    |    |                    |  |  |    | 
|---------------------- |  | ------------------ | -- | ------------------ |  |  | -- | 
|Service Type of Hotel  |  | September 30, 2003 |    | September 30, 2002
|                       |  |                    |    |                   
|Limited-service hotels |  |                    | 23 |                    |  |  | 25 | 
|Extended-stay hotels   |  |                    | 10 |                    |  |  | 10 | 
|Full-service hotels    |  |                    | 11 |                    |  |  | 11 | 
|                       |  |                    |    |                    |  |  |    | 
|Total                  |  |                    | 44 |                    |  |  | 46 | 
|                       |  |                    |    |                    |  |  |    | 

The Company adopted Staff Accounting Bulletin No. 101 (SAB 101) on January 1,
2000. SAB 101 requires that a lessor not recognize contingent rental income
until the lessee has achieved annual specified hurdles. SAB 101 effectively
defers percentage lease revenue from the first and second quarters to the third
and fourth quarters. Due to the acquisition of the leasehold interests from
Interstate, effective July 1, 2002, and the transfer of the Las Vegas, NV
Hampton Inn lease from Intercontinental Group effective July 1, 2003,
percentage lease payments made by Barclay to the Company (for all but one of
its wholly owned hotels), are currently eliminated in consolidation,
eliminating the effect of SAB 101 with respect to these hotels. Through
September 30, 2003 the Company continued to defer recognition of any percentage
lease revenue for the one wholly owned hotel, the Secaucus, NJ Holiday Inn,
that continued to be operated under a long term lease with Prime. In addition,
two joint ventures, in which the Company owns a 49 percent ownership interest,
and one joint venture, in which the Company owns a 57.65 percent ownership
interest, deferred recognition of any percentage lease revenue for three
hotels. SAB 101 will have no impact on the Companys Funds From Operations
(FFO), or its interim or annual cash flow from its third party lessees, and
therefore, on its ability to pay dividends.

Due to the acquisition of the leasehold interests from Interstate, the results
of operations for the nine months ended September 30, 2003 versus the results
of operations for the nine months ended September 30, 2002 does not result in a
meaningful comparison. This is due primarily to recording the operating
results of the hotels, for which the leasehold interests were acquired, on the
Companys statements of operations beginning in the third quarter of 2002.
Therefore, in an effort to make a more meaningful comparison between periods,
in addition to the comparison of actual results of operations for the three and
nine months ended September 30, 2003 and 2002, shown below is a comparison of
selected actual financial information for the nine months ended September 30,
2003 with selected pro forma financial information on a same store basis for
the nine months ended September 30, 2002, as if the acquisition of the
leasehold interests from Interstate occurred on January 1, 2002. This
information is shown for the hotels that were open during the entire periods
presented and does not include operating results for any hotels that have been
sold or have been classified as held for sale during the periods. The pro
forma adjustments include the elimination of the transaction to acquire the
leasehold interests from Interstate and the percentage lease revenue applicable
to the 45 wholly owned hotels for which the leasehold interests were acquired,
as well as adjustments to undistributed property operating expenses to remove
management company corporate costs, to make adjustments to management fees to
reflect the fee structure per the new management agreements, and to make
resulting adjustments to the allocation of earnings to minority interests. The
unaudited pro forma financial information does not purport to be indicative of
what the actual results of operations of the Company would have been had the
transaction occurred on the basis assumed above nor are they indicative of
results of future operations. The unaudited pro forma financial information is
based upon available information and upon assumptions and estimates that
management believes are reasonable under the circumstances.

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Actual Three Months Ended September 30, 2003 versus Actual Three Months Ended
September 30, 2002

REVENUE

Room Room revenue increased $1,123 from $29,414 in 2002 to $30,537 in 2003.
The increase in room revenues is primarily a result of an increase in revenue
per available room (RevPAR) of 1.1 percent, from $53.69 to $54.28. Occupancy
rates increased 3.0 percent, from 67.2 percent to 69.2 percent, and the average
daily rate (ADR) decreased 1.9 percent from $79.95 to $78.43. In addition,
on July 1, 2003, the Company acquired the lease for the Las Vegas Hampton Inn
and began recording the operating results (including room revenue) of the
hotel. Room revenue from the Las Vegas Hampton Inn totaled $519 for the three
months ended September 30, 2003.

Food and Beverage Food and beverage revenue decreased $205 from $1,845 in
2002 to $1,640 in 2003. The decrease in food and beverage revenues is
primarily a result of lower room revenues experienced at four of the Companys
full service properties. These properties experienced a 3.7 percent decline in
RevPAR, resulting in lower food and beverage revenues.

Other Operating Departments Other operating departments revenue decreased
$161 from $1,182 in 2002 to $1,021 in 2003. The decrease in other operating
departments revenues is primarily a result of lower telephone revenue as
cellular phone use continues to reduce the demand for this service.

Percentage Lease Revenue Percentage lease revenue declined $8,351 from $8,886
in 2002 to $535 in 2003. Percentage lease revenue declined primarily due to
the recognition of $8,104 in deferred percentage lease revenue during the third
quarter of 2002 that had accrued for the first six months of 2002 prior to the
acquisition of the leases from Interstate on July 1, 2002.

Interest and Other Income Interest and other income increased $107 from $300
in 2002 to $407 in 2003 primarily due to an increase in mezzanine loan interest
income and asset management fees.

EXPENSES

Rooms Rooms expenses increased $156 from $6,949 in 2002 to $7,105 in 2003.
The increase in these room expenses is primarily a result of the increase in
occupancy rate from the third quarter of 2002 to the third quarter of 2003.

Food and beverage Food and beverage expenses declined $100 from $1,437 in
2002 to $1,337 in 2003. The decrease in food and beverage expenses is
consistent with the decline in food and beverage revenues.

Other operating departments Other operating department expenses remained
consistent with the prior year period, declining $5 from $788 in 2002 to $783
in 2003.

Property Operating Costs Property operating costs increased $316 from $6,271
in 2002 to $6,587 in 2003. These costs consist of administrative and general,
sales and marketing, utility and other costs. The increase is primarily due to
increases in administrative and general labor costs of $146, utility costs of
$151, and liability insurance costs of $124, offset by lower sales and
marketing labor costs of $141.

Real Estate Taxes and Property and Casualty Insurance- Real estate taxes and
property insurance costs remained consistent with the prior year period,
increasing $16 from $1,536 in 2002 to $1,552 in 2003.

Franchise Costs-Franchise costs increased consistent with the increase in room
revenues, increasing $127 from $2,092 in 2002 to $2,219 in 2003.

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Maintenance and Repair Costs Maintenance and repair costs increased $124 from
$1,609 in 2002 to $1,733 in 2003 due to increases in labor costs.

Management Fees Management fees increased $108 from $637 in 2002 to $745 in
2003 as a result of increased hotel revenues as well as due to the management
company changes made during 2003.

Percentage Lease Expense Percentage lease expense increased $130 from $1,086
in 2002 to $1,216 in 2003. This expense represents the lease expense Barclay,
as lessee, pays to the owners of two joint ventures, the Evanston Joint Venture
and the Marsh Landing Joint Venture. The expense increased due to higher room
revenue at both joint venture properties.

General and Administrative General and administrative expense decreased $130
from $1,224 in 2002 to $1,094 in 2003. The decrease is primarily attributable
to lower new business development costs, offset by an increase in legal and
accounting fees.

Depreciation and Amortization Depreciation expense declined $422 from $4,715
in 2002 to $4,293 in 2003. Depreciation expenses declined primarily due to 5
year property acquired in 1998 and prior having become fully depreciated.
Amortization expense remained relatively consistent with the same period in the
prior year, increasing $9 from $215 in 2002 to $224 in 2003.

Interest Interest expense decreased $759 from $2,642 in 2002 to $1,883 in
2003. The decrease is due to both a decline in weighted average interest rates
as well as a decline in the weighted average outstanding debt balances. The
weighted average interest rate decreased from 6.86 percent in the third quarter
of 2002 to 5.21 percent in the third quarter of 2003, while the outstanding
debt balance decreased from $150,688 to $141,244 for the same periods.

Income (loss) Allocation to Minority Interest Income allocated to minority
interest declined from $549 in 2002 to $132 in 2003. Minority interest
weighted average share of ownership totaled 5.85% for the three months ended
September 30, 2003 and 6.04% for the three months ended September 30, 2002,
respectively.

Income Tax Benefit Income tax benefit increased $601 from $458 in 2002 to
$1,059 in 2003. The income tax benefit is a result of the net loss experienced
by Barclay during the respective quarter.

Equity in Income (loss) of Unconsolidated Joint Ventures The Companys share
of income from unconsolidated joint ventures increased $474 from $25 in 2002
to $499 in 2003. The increase is primarily a result of the increase in
earnings from both the Evanston Joint Venture and the Marsh Landing Joint
Venture, due primarily to the timing of recognition of deferred percentage
lease revenue.

Discontinued Operations Loss from discontinued operations increased $15 from
$24 in 2002 to $39 in 2003. The Company sold the Clearwater, FL Comfort Inn in
May 2002, the Southern Pines, NC Hampton Inn in August 2002, the Augusta, GA
Comfort Inn in November 2002 and the Chester, VA Hampton Inn in December 2002.
The Company also classified the Greenville, SC Comfort Inn as held for sale
during the third quarter of 2003. The operating results of these properties
are shown as discontinued operations in the respective periods.

Actual Nine Months Ended September 30, 2003 versus Actual Nine Months Ended
September 30, 2002

REVENUE

Rooms, Food and Beverage and Other Operating Departments Revenue Rooms, food
and beverage and other operating departments revenue increased $62,548 from
$32,440 in 2002 to $94,988 in 2003. The increase in hotel revenues is a result
of the acquisition of the leasehold interests from Interstate. The operating
results of the hotels, for which the leasehold interests were acquired, are
reflected on the Companys consolidated statements of operations beginning July
1, 2002.

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Percentage Lease Revenue Percentage lease revenue declined $25,954 from
$28,037 in 2002 to $2,083 in 2003. The decline is primarily due to the
acquisition of the leasehold interests from Interstate. The percentage lease
revenue for 2003 reflects only the percentage lease revenue for the Las Vegas,
NV Hampton Inn from January 1, 2003 through June 30, 2003, and for the
Secaucus, NJ Holiday Inn for the entire nine month period ended September 30,
2003.

Interest and Other Income Interest and other income increased $140 from $998
in 2002 to $1,138 in 2003. The increase is primarily due to an increase in
mezzanine loan interest income.

EXPENSES

Rooms, Food and Beverage and Other Operating Departments Expenses Rooms,
food and beverage and other operating departments expenses increased $17,071
from $9,174 in 2002 to $26,245 in 2003. The increase in these hotel expenses
is a result of the acquisition of the leasehold interests from Interstate. The
operating results of the hotels, for which the leasehold interests were
acquired, are reflected on the Companys consolidated statements of operations
beginning July 1, 2002.

Property Operating Costs, Franchise Costs, Maintenance and Repair Costs and
Management Fees Property operating costs increased $21,245 from $10,609 in
2002 to $31,854 in 2003. The increase in these hotel expenses is a result of
the acquisition of the leasehold interests from Interstate. The operating
results of the hotels, for which the leasehold interests were acquired, are
reflected on the Companys consolidated statements of operations beginning July
1, 2002.

Real Estate Taxes and Property and Casualty
Insurance Real estate taxes and
property insurance costs increased $93 from $4,869 in 2002 to $4,962 in 2003.
The increase is primarily due to higher insurance premiums and additional out
of pocket costs for the portion of losses that did not exceed deductibles
totaling $273, offset by a decrease is real estate taxes expense of $88, and a
decrease in ground lease expense of $90.

Percentage Lease Expense Percentage lease expense increased $2,340 from
$1,086 in 2002 to $3,426 in 2003. Beginning July 1, 2002, this expense
represents the lease expense Barclay, as lessee, pays to the owners of two
Joint Ventures, the Evanston Joint Venture and the Marsh Landing Joint Venture.
The increase is due to the acquisition of the leases on July 1, 2002.

General and Administrative General and administrative expense decreased $45
from $4,094 in 2002 to $4,049 in 2003. The decrease is primarily attributable
to a decline in payroll costs of $175 due to a reduction in personnel, the
write off of a mezzanine loan during 2002 totaling $250, offset by an increase
in legal fees totaling $336.

Depreciation and Amortization Depreciation expenses declined $739 from
$14,174 in 2002 to $13,435 in 2003 due primarily to 5 year property acquired in
1998 and prior having become fully depreciated. Amortization expense increased
$50 from $616 in 2002 to $666 in 2003. Amortization expense increased due to
the capitalization of additional financing costs.

Interest Interest expense decreased $2,243 from $8,001 in 2002 to $5,758 in
2003. These decreases are due to both a decline in weighted average interest
rates, from 6.80 percent in 2002 to 5.32 percent in 2003, as well as a decline
in the weighted average outstanding debt balances, from $155,175 in 2002 to
$142,645 in 2003.

Income (loss) Allocation to Minority Interest Income allocated to minority
interest increased $677 from a loss allocation of $(445) in 2002 to an income
allocation of $232 in 2003. Minority interest weighted average share of
ownership totaled 5.91% for the nine months ended September 30, 2003 and 6.06%
for the nine months ended September 30, 2002.

Income Tax Benefit Income tax benefit declined $5,493 from $7,172 in 2002 to
$1,679 in 2003. The income tax benefit for 2003 is a result of the net loss
experienced by Barclay during the nine months ended September 30, 2003.

23



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The income tax benefit for 2002 is primarily a result of the cost of acquiring
the leases from Interstate, which was expensed for financial reporting purposes
and is being amortized over the lives of the leases for tax purposes. The
income tax benefit for 2002 is also a result of the net loss experienced by
Barclay during the nine months ended September 30, 2002.

Equity in Income (loss) of Unconsolidated Joint Ventures The Companys share
of income (loss) from unconsolidated joint ventures increased $579 from a loss
of $(26) in 2002, to income of $553 in 2003. The increase is primarily a
result of the increase in the earnings from both the Evanston Joint Venture and
the Marsh Landing Joint Venture, due primarily to the timing of recognition of
deferred percentage lease revenue.

Discontinued Operations Income from discontinued operations decreased $225
from $97 in 2002 to a loss from discontinued operations of $(128) in 2003. The
Company sold the Clearwater, FL Comfort Inn in May 2002, the Southern Pines, NC
Hampton Inn in August 2002, the Augusta, GA Comfort Inn in November 2002 and
the Chester, VA Hampton Inn in December 2002. The Company also classified the
Greenville, SC Comfort Inn as held for sale during the third quarter of 2003.
The operating results of these properties are shown as discontinued operations
in the respective periods.

In an effort to make a more meaningful comparison between periods, in addition
to the comparison of actual results of operations for the three and nine months
ended September 30, 2003 and 2002 shown above, shown below is a comparison of
selected actual financial information for the nine months ended September 30,
2003 with selected pro forma financial information for the nine months ended
September 30, 2002, as if the acquisition of the leasehold interests from
Interstate occurred on January 1, 2002. This information is shown for the
hotels that were open during the entire periods presented and does not include
operating results for any hotels that have been sold or have been classified as
held for sale.

Selected Financial Information  Actual Nine Months Ended September 30, 2003
versus Pro Forma Nine Months Ended September 30, 2002

|                          |                                           |  |                   |        |             |  |   |        | 
|------------------------- | ----------------------------------------- |  | ----------------- | ------ | ----------- |  | - | ------ | 
|                          |                                           |  | Nine Months Ended
|                          |                                           |  | September 30,    
|                          |                                           |  |                  
|                          |                                           |  | 2003              |        | 2002       
|                          |                                           |  |                   |        |            
|                          |                                           |  | (actual)          |        | (pro forma)
|Revenue:                  |                                           |  |                   |        |             |  |   |       
|                          | Rooms                                     |  | $                 | 86,529 |             |  | $ | 87,553 | 
|                          | Other hotel revenue                       |  |                   | 8,459  |             |  |   | 9,243  | 
|Hotel operating expenses: |                                           |  |                   |        |             |  |   |       
|                          | Rooms and other operating expenses        |  |                   | 26,245 |             |  |   | 26,278 | 
|                          | Undistributed property operating expenses |  |                   | 31,854 |             |  |   | 30,947 | 

REVENUE

Room Revenue Room revenue decreased $1,024 to $86,529 for the nine months
ended September 30, 2003 versus $87,553 for the nine months ended September 30,
2002. RevPAR decreased 2.3% from $53.85 in 2002 to $52.63 in 2003. ADR
declined 2.8% from $80.21 in 2002 to $77.93 in 2003, while occupancy rates
increased from 67.1% to 67.5%. We believe that the decrease in RevPAR and
average daily rate in 2003 is primarily a result of the sluggish economy.

Other Hotel Revenue Other hotel revenue consists of food and beverage revenue
and other operating departments revenue. Other hotel revenue declined $784
from $9,243 in 2002 to $8,459 in 2003 for the nine months ended
September 30. These decreases are primarily due to a decrease in long distance
telephone revenue as a result of the increased use of cellular phones by
guests.

24



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EXPENSES

As a percentage of total hotel revenue, hotel operating expenses increased for
the nine months ended September 30 from 59.1% in 2002 to 61.2% in 2003.

Rooms and Other Operating Expenses Rooms and other operating expense declined
$33 for the nine months ended September 30, 2003 to $26,245, relatively flat
when compared with $26,278 for the nine months ended September 30, 2002.

Undistributed Property Operating Expenses Undistributed property operating
expenses consist of administrative and general, sales and marketing, energy,
repairs and maintenance, franchise fees, management fees and other costs.
Undistributed property operating expenses increased $907 for the nine months
ended September 30, from $30,947 in 2002 to $31,854 in 2003. The increase is
primarily due to higher administrative and general and repairs and maintenance
labor costs, higher utility costs for electricity and gas, and higher insurance
costs.

Liquidity and Capital Resources

The Company finances its operations from operating cash flow, which was
principally derived from percentage leases through June 30, 2002 and from the
operations of the hotels for which the leasehold interests were acquired
effective July 1, 2002. For the nine months ended September 30, 2003 and 2002,
cash flow provided by operating activities was $19,924 and $14,737,
respectively. The increase is primarily due to the acquisition of the
leasehold interests in 2002, which resulted in an adjustment to cash provided
by operating activities in the second quarter of 2002 totaling ($10,954), as
well as the timing of payments, both received and made.

Under federal income tax law provisions applicable to REITs, the Company is
required to distribute at least 90% of its taxable income to maintain its tax
status as a REIT. During the first three quarters of 2003, the Company
declared distributions of $9,875 to its common shareholders ($0.45 per share)
and $5,203 to its preferred shareholders ($1.734 per share). The Company
intends to monitor its dividend policy closely and to act accordingly as
results of operations dictate. The Company also intends to fund cash
distributions to shareholders out of cash flow from operating activities. The
Company may incur indebtedness to meet its dividend policy or distribution
requirements imposed on the Company under the Internal Revenue Code (including
the requirement that a REIT distribute to its shareholders annually at least
90% of its taxable income) to the extent that available capital and cash flow
from the Companys investments are insufficient to make such distributions.

The Companys net cash used in investing activities for the nine months ended
September 30, 2003 totaled $4,799. Gross capital expenditures for the
Companys consolidated hotels totaled $6,035, which includes capital
expenditures totaling $744 for the development of the Courtyard by Marriott
hotel in Chapel Hill, NC. This hotel is owned by the Chapel Hill Joint Venture
(see below), the operations of which are consolidated into the Companys
financial statements. The Company plans to spend approximately $1,500 to
renovate certain of its wholly owned hotels during the fourth quarter of 2003,
(and an additional $2,200 to continue to develop the Courtyard by Marriott
hotel in Chapel Hill during the fourth quarter of 2003). These expenditures
exceed the 5% of room revenues for its hotels (7% of room revenues and food and
beverage revenues for one of its full-service hotels) which the Company is
required to spend under its percentage leases for periodic capital improvements
and the refurbishment and replacement of furniture, fixtures and equipment at
its wholly owned hotels. These capital expenditures are funded from operating
cash flow, and possibly from borrowings under the Companys $125,000 line of
credit, sources that are expected to be adequate to fund such capital
requirements. These capital expenditures are in addition to amounts spent on
normal repairs and maintenance which have approximated 6.0% and 5.5% of room
revenues for each of the nine months ended September 30, 2003 and 2002,
respectively.

During the third quarter of 2003, the Company entered into a joint venture
agreement (the Chapel Hill Joint Venture) with Chapel Hill Investments, LLC
to develop and own hotel properties. The Chapel Hill Joint Venture is
currently developing a Courtyard by Marriott hotel in Chapel Hill, NC, (the
Chapel Hill Courtyard) which is

25



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expected to open in the summer of 2004. The
Company currently owns a 48.78 percent interest in the Chapel Hill Joint
Venture, while Chapel Hill Investments, LLC owns a 51.22 percent interest. The
Company also has provided an additional $1,453 to capitalize the development of
the hotel in the form of a preferred membership interest (Preferred
Contribution). The Companys Preferred Contribution requires paid monthly
dividends to the Company during construction of the hotel at an annual yield of
30-day LIBOR plus 5.885 percent, plus an accrued dividend at an annual yield of
8 percent. Once the hotel opens, and until the Preferred Contribution and all
dividends payable and accrued thereon are paid in full, the Companys Preferred
Contribution requires a paid monthly dividend to the Company equal to a
floating rate equal to 30-day LIBOR plus that percentage that will generate an
annual dividend yield of 10 percent. The percentage rate to be added to 30-day
LIBOR will not be known until the day the hotel opens. The Company will
receive $700 for development services provided during construction. Chapel
Hill Investments, LLC is owned 52 percent by Charles Winston and James Winston,
both of whom are directors of the Company, and 48 percent by three unrelated
private investors. The Company has consolidated the results of operations and
financial position of this joint venture beginning with the third quarter 2003.
As a result, the Companys investment balance in the Chapel Hill Joint Venture
at September 30, 2003 of $1,990 has been eliminated in consolidation.

The Company has signed a completion guarantee for the Chapel Hill Courtyard,
providing a guaranty to the lender of the full, complete and satisfactory
completion of the construction of the property. Pursuant to the completion
guarantee agreement, the construction process to develop the Chapel Hill
Courtyard is to be completed by December 28, 2004. The total cost of the
property will be approximately $14,700, including $2,000 for land. Under the
completion guarantee, upon default by the borrower, the Company is required to
(a) immediately assume responsibility for the completion of the project at its
sole cost and expense, or (b) cure or cause the borrower to cure any such
default.

During the second quarter of 2002, the Company entered into a joint venture
agreement with Concord Lodging Investment Partners (Winston), LLC, an affiliate
of Concord Hospitality Enterprises Company, (the Concord Joint Venture). The
Company purchased a 50% interest in the Concord Joint Venture. The Concord
Joint Venture subsequently purchased an operating Wingate hotel in West Des
Moines, IA, and a non-operating vacant hotel in Beachwood, OH. The Wingate
hotel has been renovated and converted to a Fairfield Inn & Suites hotel and
the Beachwood, OH hotel (Beachwood Courtyard) has been renovated and opened
as a Courtyard by Marriott hotel in April 2003.

During the fourth quarter of 2002, the Company entered into a joint venture
agreement with Charlesbank Capital Partners, LLC (Charlesbank) with the
intention to acquire more than $100,000 of hotel assets (the Charlesbank
Venture). Charlesbank is a private investment firm that manages capital on
behalf of a range of institutional investors. During the fourth quarter of
2002, the Charlesbank Venture and Concord subsequently formed a new joint
venture entity, WCC Project Company LLC. The Charlesbank Venture is the
managing member of WCC Project Company LLC. Both the West Des Moines, IA
Fairfield Inn & Suites hotel and the Beachwood Courtyard were transferred from
the Concord Joint Venture to WCC Project Company LLC. Subsequent to
Charlesbanks equity contribution in WCC Project Company LLC, Charlesbanks
ownership totals 73.95 percent, Concords ownership was reduced from 50 percent
to 13 percent and the Companys ownership was reduced from 50 percent to 13.05
percent. The Charlesbank Venture purchased its third hotel in September 2003,
the Best Western Park Place Suites in Houston, TX. The Companys investment in
this hotel totaled $864. At September 30, 2003, the Companys investment in
WCC Project Company LLC totaled $1,905.

During 2000, the Company entered into a joint venture agreement with Marsh
Landing Investment, L.L.C., (the Marsh Landing Joint Venture) to jointly
develop hotel properties. Marsh Landing Investment, L.L.C. is owned by the
Companys Chairman, Charles M. Winston and Board Member, James H. Winston. The
first hotel developed by the Marsh Landing Joint Venture, a 118-room Hampton
Inn in Ponte Vedra, FL, opened in December 2000. As of
September 30, 2003, subsequent to distributions paid to the Company from the
operations of the hotel, the Companys investment in the Marsh Landing Joint
Venture totaled $1,117.

26



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During 1999, the Company entered into a joint venture agreement with Regent
Partners, Inc., (the Regent Joint Venture) to jointly develop hotel
properties. The Regent Joint Venture has since developed two hotels, a full
service 158-room Hilton Garden Inn in Windsor, CT, which opened in September
2000, and a full service 178-room Hilton Garden Inn in Evanston, IL, which
opened in July 2001. As of September 30, 2003, subsequent to distributions
paid to the Company from the operations of the hotels, the Companys investment
in the Regent Joint Venture totaled $6,348.

As of September 30, 2003, total assets of the four unconsolidated joint
ventures were $68,468, total liabilities were $42,624, and total equity was
$25,844. For the three and nine months ended September 30, 2003, total revenue
of the four unconsolidated joint ventures was $3,603 and $6,906, respectively,
total expenses were $2,283 and $5,432, respectively, resulting in net income of
$1,320 and $1,474, respectively. On July 1, 2003, the Company acquired a
57.65% ownership interest in Windsor Lessee Company, LLC, the lessee of the
Windsor, CT Hilton Garden Inn. For both the three and nine months ended
September 30, Windsor Lessee Company, LLC had a loss of $(157). The Companys
resulting share of net income from its unconsolidated joint ventures for the
three and nine months ended September 30, 2003 was $499 and $553, respectively.
Pursuant to the requirements of SAB 101, $(404) and $748 of total revenue was
deferred during the three and nine months ended September 30, 2003,
respectively. The remaining balance of deferred revenue as of September 30,
2003 equaled $344 and will be recognized during the fourth quarter of 2003.

As of September 30, 2003, total assets of the one consolidated joint venture
(Chapel Hill Joint Venture) were $6,099, total liabilities were $2,019, and
total equity was $4,080. For both the three and nine months ended September
30, 2003, total revenue of the one consolidated joint venture was $0, total
expenses were $20, resulting in a net loss of $(20). The Companys resulting
share of the net loss was $(10).

Under the terms of each of its joint venture agreements, the Company receives
ongoing asset management fees. The Company also receives cash distributions of
the Joint Ventures operating profits, if any, on a quarterly basis. The
Company continues to seek additional joint venture opportunities.

In July 2000, the Company provided a $1,080 mezzanine loan for a Hilton Garden
Inn in Atlanta and in February 2001 provided a $2,186 mezzanine loan for a
Hilton Garden Inn in Tampa. Noble Investment Group, Ltd. (Noble) provided
the remainder of the funding and owns and operates the hotels. The Atlanta
hotel opened in April 2001 and the Tampa hotel opened in February 2002. In
connection with the alliance, the Company co-developed the Atlanta project with
Noble, provided all development services for the Tampa project, and accordingly
received fees for its development services. During the third quarter of 2003,
the Company continued to receive interest income from these mezzanine loans.

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

The Companys net cash provided by financing activities during the nine months
ended September 30, 2003 totaled $6,349. This amount included net proceeds of
$44,257 as a result of a follow-on common stock offering in which the Company
sold an additional 5,250,000 common shares. The Company raised additional net
proceeds totaling $6,735 in early October as a result of the underwriters
exercise of their over-allotment option. The net cash provided by financing
activities for the nine months ended September 30, 2003 also included the
payment of distributions to shareholders of $14,283, the payment of
distributions to the Partnerships minority interest of $584, long-term debt
payments of $1,022, and a net decrease of $21,500 in the outstanding balance
under the Companys $125,000 line of credit (the Line) from $72,300 at
December 31, 2002 to $50,800 at September 30, 2003.

The Companys availability under the Line totaled approximately $71,906 as of
September 30, 2003. Availability is calculated each quarter on a trailing
twelve-month basis based upon certain valuation criteria contained within the

27



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Line. The Line requires the Company to maintain certain financial ratios
including maximum leverage, minimum interest coverage and minimum fixed charge
coverage, as well as certain levels of unsecured and secured debt and tangible
net worth, all of which the Company was in compliance with as of September 30,
2003. The failure to comply with any of these covenants would cause a default
under the Line. Furthermore, the Line provides that any default under, or
acceleration of, any of our other debt, any debt of WINN Limited Partnership or
any debt of our subsidiaries, including any default under the Companys
fixed-rate loan with GE Capital Corporation or otherwise, will constitute a
default under the Line. Any of these defaults, if not waived, could result in
the acceleration of the indebtedness under the Line. If this occurs, we may not
be able to repay our debt or borrow sufficient funds to refinance it, in which
case our assets may be subject to foreclosure, we would not be able to make
distributions to our shareholders and could lose REIT status, which would
result in the Company not being allowed to deduct its distributions to
shareholders in computing its taxable income and would subject the Company to
federal income tax, including any applicable alternative minimum tax, on its
taxable income at regular corporate rates. The Line bears interest generally
at rates from 30-day LIBOR plus 1.75% to 30-day LIBOR plus 2.50%, based on the
Companys consolidated debt leverage ratio as of the end of each calendar
quarter. The Companys interest rate as of September 30, 2003 was 30-day LIBOR
(1.12% as of September 30, 2003) plus 2.00%. The Companys interest rate
beginning October 1, 2003 changed to 30-day LIBOR plus 1.75%.

The Company had $65,384 in debt at September 30, 2003 that was subject to a
fixed interest rate and fixed monthly payments with GE Capital Corporation.
This debt, a ten-year loan with a 25-year amortization period, carries an
interest rate of 7.375%. All unpaid principal and interest payments are due on
December 1, 2008.

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

During the third quarter of 2003, the Company amended the Line. The amendment
increased the funds available under the Line by approximately $10,000 through
an increase in the advance ratio from 55 percent to 60 percent. The advance
ratio is the percentage that is multiplied by the capitalized value of the 30
hotels which secure the Line, to determine the balance available under the
Line. The amendment also increased the amount of funds that the Company can
borrow under the Line for investments in joint ventures and for subordinate
loans. For so long as these investments are held by Winston Hotels, Inc., the
funds that can be borrowed increased from 10 percent to 30 percent of total
value, as defined in the Line Agreement (Total Value). If these assets are
contributed, or held by, a wholly owned subsidiary, the funds that can be
borrowed under the Line decreases to 20 percent of Total Value. Total Value as
of September 30, 2003 totaled approximately $356,000. The amendment also
limits the amount of real estate loans the Company can issue to $250,000 and
placed certain restrictions on the geographic concentration of the hotels that
secure the Line, as well as restrictions on the brand types of these
properties. The fee paid by the Company to amend the Line totaled $488.

Effective March 31, 2003, the Company completed an interest rate swap on
$50,000 of its outstanding variable rate debt under the Line. This transaction
effectively replaced the Companys variable interest rate based on 30-day LIBOR
on $50,000 of outstanding debt under the Line with a fixed interest rate based
on a base rate of 1.505% until February 27, 2004. The Lines interest rate
spread is currently 1.75%, equaling a fixed rate of 3.255% on $50,000 of the
Companys debt until February 27, 2004.

As of September 30, 2003, the Companys contractual obligations and commitments
(excluding obligations and commitments pursuant to the Companys joint
ventures) were as follows:

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|                              |                               |       |        |          |  |             |       |             |  |         |        |        |  |   |       |       |  |   |        |        | 
|----------------------------- | ----------------------------- | ----- | ------ | -------- |  | ----------- | ----- | ----------- |  | ------- | ------ | ------ |  | - | ----- | ----- |  | - | ------ | ------ | 
|                              |                               |       |        |          |  |             |       |             |  |         |        |        |  |   |       |       |  |   | After 
|Contractual Obligations       |                               | Total |        | < 1 Year |  | 1 - 3 Years |       | 3 - 5 Years |  | 5 Years
|                              |                               |       |        |          |  |             |       |             |  |        
|Long-term debt                |                               | $     | 65,384 |          |  | $           | 1,453 |             |  | $       | 3,248  |        |  | $ | 3,763 |       |  | $ | 56,920 |       
|Corporate office lease        |                               |       | 528    |          |  |             | 370   |             |  |         | 158    |        |  |   |      |       |  |   |       |       
|                              |                               |       |        |          |  |             |       |             |  |         |        |        |  |   |       |       |  |   |        |       
|                              | Total contractual obligations |       | $      | 65,912   |  |             | $     | 1,823       |  |         | $      | 3,406  |  |   | $     | 3,763 |  |   | $      | 56,920 | 
|                              |                               |       |        |          |  |             |       |             |  |         |        |        |  |   |       |       |  |   |        |       
|                             
|                              |                               |       |        |          |  |             |       |             |  |         |        |        |  |   |       |       |  |   | After 
|Other
Commercial Commitments  |                               | Total |        | < 1 Year |  | 1 - 3 Years |       | 3 - 5 Years |  | 5 Years
|                              |                               |       |        |          |  |             |       |             |  |        
|Line of credit                |                               | $     | 50,800 |          |  | $           |      |             |  | $       | 50,800 |        |  | $ |      |       |  | $ |       |       
|Chapel Hill construction loan |                               |       | 154    |          |  |             |       |             |  |         | 154    |        |  |   |       |       |  |   |        |       
|                              |                               |       |        |          |  |             |       |             |  |         |        |        |  |   |       |       |  |   |        |       
|                              | Total commercial commitments  |       | $      | 50,954   |  |             | $     |            |  |         | $      | 50,954 |  |   | $     |      |  |   | $      |       | 
|                              |                               |       |        |          |  |             |       |             |  |         |        |        |  |   |       |       |  |   |        |       

The Company intends to continue to seek additional mezzanine loan opportunities
and to acquire and develop additional hotel properties that meet its investment
criteria and is continually evaluating such opportunities. It is expected that
future mezzanine loans and hotel acquisitions would be financed, in whole or in
part, from additional follow-on common stock offerings, from borrowings under
the Line, through joint venture agreements, from the net sale proceeds of hotel
properties and/or from the issuance of other debt or equity securities. There
can be no assurances that the Company will make any further mezzanine loans or
any investment in additional hotel properties, or that any hotel development
will be undertaken, or if commenced, that it will be completed on schedule or
on budget. Further, there can be no assurances that the Company will be able
to obtain any additional financing.

Seasonality

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

Funds From Operations

Funds from operations (FFO), as defined by the National Association of Real
Estate Investment Trusts (NAREIT), is net income (loss) (determined in
accordance with generally accepted accounting principles (GAAP)), excluding
gains (losses) from sales of property, plus depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures (which are
calculated to reflect FFO on the same basis). The Company further adjusts FFO
by adding lease/management agreement acquisition expense, loss on impairment of
asset held for sale, and the change in deferred revenue during the period to
eliminate the impact of Staff Accounting Bulletin No. 101 (SAB 101), and
subtracting income tax benefit. The Company refers to this further adjustment
to FFO as Adjusted Funds From Operations or AFFO. The Company further
subtracts preferred share distributions from AFFO to arrive at AFFO Available
to Common Shareholders. The calculations of FFO and AFFO may vary from entity
to entity and as such the presentation of FFO and AFFO by the Company may not
be comparable to other similarly titled measures of other reporting companies.
The Company supplementally provides AFFO due to the fact that the acquisition
of the Companys leasehold interests from Interstate Hotels and Resorts in July
2002 may not result in a meaningful comparison, and would not be an accurate
reflection of the operating activity of the nine months ended September 30,
2003 compared with the nine months ended September 30, 2002. This is primarily
due to significant amounts of deferred revenue which accrued throughout the
first two quarters of 2002 and were recognized in the third quarter of 2002
pursuant to SAB 101. FFO and AFFO are not intended to represent cash flows for
the period. FFO and AFFO have not been presented as an alternative to
operating income, but as an

29



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indicator of operating performance, and should not be considered in isolation
or as a substitute for measures of performance prepared in accordance with
GAAP.

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

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WINSTON HOTELS, INC.
Reconciliation of Net Income (loss) to FFO, AFFO and AFFO Available to Common Shareholders
For the Three and Nine Months Ended September 30, 2003 and 2002
($ in thousands)

|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                         |  | Three Months Ended |        | Nine Months Ended
|                                                                         |  | September 30,      |        | September 30,    
|                                                                         |  |                    |        |                  
|                                                                         |  | 2003               |        | 2002              |  | 2003 |        | 2002
|                                                                         |  |                    |        |                   |  |      |        |     
|Net income (loss)                                                        |  | $                  | 1,100  |                   |  | $    | 9,714  |      |  | $ | 6,030  |   |  | $ | (2,492 | )
|Loss on sale of discontinued operations                                  |  |                    |       |                   |  |      | 662    |      |  |   |       |   |  |   | 1,452  |  
|Depreciation                                                             |  |                    | 4,293  |                   |  |      | 4,715  |      |  |   | 13,435 |   |  |   | 14,174 |  
|Depreciation  discontinued operations                                   |  |                    | 64     |                   |  |      | 202    |      |  |   | 192    |   |  |   | 764    |  
|Depreciation from joint ventures                                         |  |                    | 219    |                   |  |      | 215    |      |  |   | 617    |   |  |   | 594    |  
|Minority interest allocation                                             |  |                    | 132    |                   |  |      | 549    |      |  |   | 232    |   |  |   | (445   | )
|Minority interest allocation -
discontinued operations                   |  |                    | (2     | )                 |  |      | (36    | )    |  |   | (8     | ) |  |   | (76    | )
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|FFO                                                                      |  | $                  | 5,806  |                   |  | $    | 16,021 |      |  | $ | 20,498 |   |  | $ | 13,971 |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Lease/management agreement acquisition expense                           |  |                    | 1,300  |                   |  |      |       |      |  |   | 1,300  |   |  |   | 17,668 |  
|Loss on impairment of asset held for sale                                |  |                    | 2,518  |                   |  |      |       |      |  |   | 2,518  |   |  |   |       |  
|Minority interest allocation  loss on
impairment of asset held for sale |  |                    | (152   | )                 |  |      |       |      |  |   | (152   | ) |  |   |       |  
|Deferred revenue                                                         |  |                    |       |                   |  |      | (8,095 | )    |  |   |       |   |  |   | (1,022 | )
|Deferred revenue from joint ventures                                     |  |                    | (196   | )                 |  |      | 357    |      |  |   | 369    |   |  |   | 919    |  
|Income tax benefit                                                       |  |                    | (1,059 | )                 |  |      | (458   | )    |  |   | (1,679 | ) |  |   | (7,172 | )
|Income tax expense (benefit) from
discontinued operations                |  |                    | (27    | )                 |  |      | 96     |      |  |   | (90    | ) |  |   | 96     |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|AFFO                                                                     |  | $                  | 8,190  |                   |  | $    | 7,921  |      |  | $ | 22,764 |   |  | $ | 24,460 |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|Preferred stock dividend                                                 |  |                    | (1,734 | )                 |  |      | (1,734 | )    |  |   | (5,203 | ) |  |   | (5,203 | )
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  
|AFFO Available to Common Shareholders                                    |  | $                  | 6,456  |                   |  | $    | 6,187  |      |  | $ | 17,561 |   |  | $ | 19,257 |  
|                                                                         |  |                    |        |                   |  |      |        |      |  |   |        |   |  |   |        |  

Forward Looking Statements

This report contains certain forward looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements include, among
other things, the Companys expected termination of the lease with Prime and
the intention to enter into a replacement management contract with Alliance,
its belief that Barclay will generate sufficient taxable income to fully
realize the deferred tax asset, its assumed future undiscounted cash flows and
liquidation values for each hotel used in its periodic impairment analysis, its
intentions to invest in over $100 million of hotel assets through the
Charlesbank Venture, its plans for renovation expenditures, and the adequacy of
current funding sources for capital expenditures. You can identify these
statements by use of words like guidance, project, target, may, will,
expect, anticipate, estimate, believes, continue or similar
expressions. These statements represent the Companys judgment and are subject
to risks and uncertainties that could cause actual operating results to differ
materially from those expressed or implied in the forward looking statements,
including but not limited to the following risks: changes in general economic
conditions, properties held for sale will not sell, financing risks

31



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including the inability to obtain financing on favorable terms, if at all, development
risks including the risks of construction delays and cost overruns, lower than
expected occupancy and average daily rates, non-issuance or delay of issuance
of governmental permits, zoning restrictions, the increase of development costs
in connection with projects that are not pursued to completion, non-payment of
mezzanine loans, the failure to make additional mezzanine debt investments and
investments in hotel assets, and failure to attract joint venture
opportunities. From time to time, these and additional risks are discussed in
the Companys filings with the Securities and Exchange Commission, including
but not limited to its Form S-3 Registration Statements, and its Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q and its other periodic reports.

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

As of September 30, 2003, the Companys exposure to market risk for a change in
interest rates related solely to debt outstanding under the Line. Debt
outstanding under the Line totaled $50,800 at September 30, 2003. The Line,
which expires in December 2004, bears interest generally at rates from 30-day
LIBOR plus 1.75% to 30-day LIBOR plus 2.50%, based on the Companys
consolidated debt leverage ratio as of the end of each calendar quarter. The
Companys interest rate as of September 30, 2003 was 30-day LIBOR (1.12% as of
September 30, 2003) plus 2.00%. The Companys interest rate beginning October
1, 2003 changed to 30-day LIBOR plus 1.75%. Effective March 31, 2003, the
Company completed an interest rate swap on $50,000 of its outstanding variable
rate debt under the Line. The agreement is a contract to exchange floating
rate interest payments for fixed rate interest payments periodically over the
life of the agreement without the exchange of the underlying notional amounts.
This transaction effectively replaces the Companys variable interest rate
based on 30-day LIBOR on $50,000 of the Line with a fixed interest rate based
on a base rate of 1.505% until February 27, 2004. The Lines interest rate
spread is currently 1.75%, equating to an effective fixed rate of 3.255% on
$50,000 until February 27, 2004. The differential actually paid or received on
interest rate agreements is recognized as an adjustment to interest expense
over the life of the swap. Including the impact of the interest rate swap, the
weighted average interest rate on the Line for the nine months ended September
30, 2003 was 3.48%. At September 30, 2003, the Company had $800 of variable
rate debt outstanding under the Line that was exposed to fluctuations in the
market rate of interest.

The definitive extent of the Companys interest rate risk under the Line is not
quantifiable or predictable because of the variability of future interest rates
and business financing requirements. If interest rates increased by 100 basis
points, the Companys interest expense for the three months ended September 30,
2003 would have increased by approximately $64, based on the weighted-average
amount of variable rate debt outstanding and exposed to fluctuations in the
market rate of interest. The Company does not enter into derivative or interest
rate transactions for speculative purposes.

The following table presents the aggregate maturities and historical cost
amounts of the Companys GE Capital Corporation fixed rate debt principal and
interest rates by maturity dates at September 30, 2003:

|              |      |                 |        |               |  |  |       |       |  
|------------- | ---- | --------------- | ------ | ------------- |  |  | ----- | ----- | -
|Maturity Date |      | Fixed Rate Debt |        | Interest Rate
|              |      |                 |        |              
|              | 2003 |                 | $      | 353           |  |  |       | 7.375 | %
|              | 2004 |                 |        | 1,480         |  |  |       | 7.375 | %
|              | 2005 |                 |        | 1,594         |  |  |       | 7.375 | %
|              | 2006 |                 |        | 1,715         |  |  |       | 7.375 | %
|              | 2007 |                 |        | 1,846         |  |  |       | 7.375 | %
|Thereafter    |      |                 | 58,396 |               |  |  | 7.375 | %    
|              |      |                 |        |               |  |  |       |      
|              |      | $               | 65,384 |               |  |  | 7.375 | %    
|              |      |                 |        |               |  |  |       |      

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Item 4  Controls and Procedures

(a)  Evaluation of disclosure controls and procedures.

The Company carried out an evaluation with the participation of the Companys
management, including its Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)) as of the end of the period covered by this report.
Based upon that evaluation, the Companys Chief Executive Officer and Chief
Financial Officer concluded that the Companys disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Companys periodic SEC
filings. There has been no change in the Companys internal control over
financial reporting during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the
Companys internal control over financial reporting.

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##### 



PART II  OTHER INFORMATION

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

(a)  Exhibits

|     |  |                                                                                                                                                                                                                              
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Amendment No. 7 dated as of October 10, 2003 to the Second
Amended and Restated Agreement of Limited Partnership of WINN
Limited Partnership                                                                                 
|     |  |                                                                                                                                                                                                                              
|31.1 |  | Certification of Principal Executive Officer of Periodic
Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                 
|     |  |                                                                                                                                                                                                                              
|31.2 |  | Certification of Principal Financial Officer of Periodic
Report Pursuant to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                 
|     |  |                                                                                                                                                                                                                              
|32.1 |  | Certification of Robert W. Winston, III, Chief Executive
Officer of Winston Hotels, Inc., pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
and dated November 12, 2003
|     |  |                                                                                                                                                                                                                              
|32.2 |  | Certification of Joseph V. Green, Chief Financial Officer of
Winston Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and dated
November 12, 2003       

(b)  Reports on Form 8-K.



| |     |  | The Company filed the following reports on Form 8-K during the
quarter ended September 30, 2003:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (1) |  | The Company filed a current report on Form 8-K dated
August 7, 2003, pursuant to Item 12 (Disclosure of Results of
Operations and Financial Condition) of Form 8-K. Included in
the Form 8-K was the Companys press release announcing its
operating results for the second quarter ended June 30, 2003,
attached as Exhibit 99.1.                                                                                                                                                                                                                                                                             
|
| | (2) |  | The Company filed a current report on Form 8-K dated
September 4, 2003, pursuant to Item 5 of Form 8-K. Included in
the Form 8-K was the Companys press release announcing that its
joint venture with Charlesbank Capital Partners, LLC had an
agreement to acquire the 190-room Best Western Park Place Suites
near the Houston Medical Center in Houston, Texas for $10
million. In addition, the press release announced a $2.5
million, non-cash impairment charge that the Company recorded in
the third quarter relating to one of its hotels. A copy of the
press release was attached as Exhibit 99.1.
|
| | (3) |  | The Company filed a current report on Form 8-K dated
September 8, 2003, pursuant to Item 5 of Form 8-K. Included in
the Form 8-K was the Fifth Amendment to Second Amended and
Restated Syndicated Credit Agreement, which was attached as
Exhibit 10.1.                                                                                                                                                                                                                                                                                                                                                        

34



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##### 



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|     |  |                   |  |                                                     
|---- |  | ----------------- |  | ----------------------------------------------------
|     |  |                   |  | WINSTON HOTELS, INC                                 
|     |  |                   |  |                                                     
|Date |  | November 12, 2003 |  | /s/ Joseph V. Green                                 
|     |  |                   |  |                                                     
|     |  |                   |  | Joseph V. Green                                     
|     |  |                   |  | President and Chief Financial Officer               
|     |  |                   |  | (Authorized officer and Principal Financial Officer)

35



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##### 



EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                              
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                                                  
|        |  |                                                                                                                                                                                                                              
|10.1    |  | Amendment No. 7 dated as of October 10, 2003 to the Second Amended and
Restated Agreement of Limited Partnership of WINN Limited Partnership                                                                                 
|        |  |                                                                                                                                                                                                                              
|31.1    |  | Certification of Principal Executive Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                 
|        |  |                                                                                                                                                                                                                              
|31.2    |  | Certification of Principal Financial Officer of Periodic Report Pursuant
to Rule 13a-14(a) or Rule 15d-14(a)                                                                                                                 
|        |  |                                                                                                                                                                                                                              
|32.1    |  | Certification of Robert W. Winston, III, Chief Executive Officer of
Winston Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and dated
November 12, 2003
|        |  |                                                                                                                                                                                                                              
|32.2    |  | Certification of Joseph V. Green, Chief Financial Officer of Winston
Hotels, Inc., pursuant to 18 U.S.C. Section 1350 as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 and dated November 12, 2003       

36