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SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the fiscal year ended December 31, 2002

Commission file number 0-23732

WINSTON HOTELS, INC.

(919) 510-6010

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

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. [x]

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

WINSTON HOTELS, INC.

Form 10-K Annual Report

INDEX

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PART I.

ITEM  1.    BUSINESS

General Development of Business

     Winston Hotels, Inc. (“WHI”), headquartered in Raleigh, North Carolina, operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. During 1994, WHI completed an initial public offering of its common stock (“Common Stock”), utilizing the majority of the proceeds to acquire one hotel and a general partnership interest (as the sole general partner) in WINN Limited Partnership (the “Partnership”). The Partnership used a substantial portion of the proceeds to acquire nine additional hotel properties. These ten hotels were acquired from affiliates of WHI. WHI and the Partnership (collectively the “Company”) began operations as a REIT on June 2, 1994. As of December 31, 2002, WHI’s ownership in the Partnership was 93.95%.

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

Acquisition of Leasehold Interests

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

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

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

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

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Narrative Description of Business

Growth Strategy

     The Company’s growth strategy is to enhance shareholder value by increasing cash available for distribution per share of Common Stock through: (i) aggressive asset management; (ii) acquiring, either directly or through joint ventures, additional hotels, or ownership interests in hotels, that meet the Company’s investment criteria; (iii) generating development and asset management fee income from joint ventures; (iv) mezzanine financing activities whereby the Company initiates hotel loans to third party hotel owners; (v) selectively developing new hotels and making additions to the hotels as market conditions warrant; and (vi) selectively disposing of hotels that no longer meet the Company’s long-term investment objectives.

      Aggressive Asset Management

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

      Acquisitions

     The Company intends to acquire additional hotels, or ownership interests in hotels, with strong national franchise affiliations in the “mid-scale without food and beverage”, “upscale” and “full-service” market segments, or hotel properties with the potential to obtain such franchise affiliations. In particular, the Company will consider acquiring mid-scale without food and beverage hotels, such as Hampton Inn and Fairfield Inn by Marriott; upscale hotels such as Hilton Garden Inn, Courtyard by Marriott, Holiday Inn, Homewood Suites by Hilton, Hampton Inn and Suites, Residence Inn, Spring Hill Suites by Marriott and Staybridge by Holiday Inn; and full-service hotels such as Marriott and Hilton (see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward Looking Statements”).

     The Company intends to consider investments in hotel properties that meet one or more of the following criteria: (i) properties in locations with relatively high demand for rooms, a relatively low supply of hotel properties and relatively high barriers to entry into the hotel business, such as a scarcity of suitable sites or zoning restrictions; (ii) successful hotels available at favorable prices; (iii) newly developed hotels; (iv) hotels that could benefit from repositioning; (v) hotels that could benefit from substantial rehabilitation; and (vi) hotels that could benefit from new management and additional hotel capital. The Company believes that its relationships with its lessees and franchisors will provide additional potential investment opportunities.

      Joint Ventures

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

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

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

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

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

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

      Mezzanine Financing

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

      Development

     The Company intends to pursue selective hotel development as suitable opportunities arise. The Company may finance 100% of such development or seek partners who would co-invest in development or rehabilitation joint ventures. The Company intends to consider development of hotels with strong national franchise affiliations in markets where the Company believes that carefully timed and managed development will yield returns to the Company that exceed returns from any available hotels in those markets that meet the Company’s acquisition criteria. The Company earns certain fees from its joint venture development activity and also is exploring other opportunities to use management’s expertise to earn additional fees through third party development. Since its initial public offering in 1994, the Company has developed five hotels that it now owns and has developed three hotels through joint ventures in which it owns a 49% interest.

      Divest Certain Properties

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

Operations and Property Management

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

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

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     The managers and the lessees seek to increase revenues by using established systems to manage the hotels for marketing, rate achievement, expense management, physical facility maintenance, human resources, accounting and internal auditing. They are trained in all aspects of hotel operations, including negotiation of prices with corporate and other clients and responsiveness to marketing requirements in their particular markets, with added emphasis placed on customer service. The lessees and the managers employ a mix of marketing techniques designed for each specific hotel, which include individual toll-free lines, cross-marketing of the hotels’ billboards and direct marketing, as well as taking advantage of national advertising by the franchisors of the hotels.

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

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

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

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

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

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

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

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

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

Franchise Agreements

     All of the Company’s hotels operate under franchise licenses from national hotel franchisors including Marriott International, Inc., Hilton Hotels Corporation, Six Continents PLC and Choice Hotels International. The Company anticipates that most of the additional hotel properties in which it invests will be operated under franchise licenses with these same franchisors. Franchisors provide a variety of benefits for franchisees which include national advertising, publicity and other marketing programs designed to increase brand awareness, training of personnel, continuous review of quality standards and centralized reservation systems.

     The hotel franchise licenses generally specify certain management, operational, record keeping, accounting, reporting and marketing standards and procedures with which the lessees must comply. The franchise licenses obligate the lessees to comply with the franchisors’ standards and requirements with respect to training of operational personnel, safety, maintaining specified insurance, the types of services and products ancillary to guest room services that may be provided, display of signs, and the type, quality and age of furniture, fixtures and equipment included in guest rooms, lobbies and other common areas.

     As of December 31, 2002, of the 48 hotels’ franchise licenses, including four joint venture hotels, two expire in 2006, two expire in 2007, four expire in 2008, three expire in 2009, two expire in 2010, three expire in 2011, one expires in 2013, one expires in 2015, two expire in 2016, 13 expire in 2017, nine expire in 2018, one expires in 2020, four expire in 2022, and one expires in 2023. The franchise agreements provide for termination at the franchisor’s option upon the occurrence of certain events, including the lessees’ failure to pay royalties and fees or perform its other covenants under the franchise agreement, bankruptcy, abandonment of the franchise, commission of a felony, assignment of the franchise without the consent of the franchisor, or failure to comply with applicable law in the operation of the relevant hotel. The franchise agreements will not renew automatically upon expiration. The lessees are responsible for making all payments under the franchise agreements to the franchisors. Under the franchise agreements, the lessees pay a franchise fee generally between 4% and 5% of room revenues, plus additional fees that amount to between 3% and 4% of room revenues from the hotels.

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Competition

     The hotel industry is highly competitive with various participants competing on the basis of price, level of service and geographic location. The Company’s hotels compete with other hotel properties in their geographic markets. Some of the Company’s competitors may have greater marketing and financial resources than the Company, the managers, and the lessees of the hotels. Several of the Company’s hotels are located in areas in which they may compete with other Company hotels for business. The Company competes for acquisition opportunities with entities that may have greater financial resources than the Company. These entities may generally be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of a hotel manager.

Employees

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

Environmental Matters

     Under various federal, state and local laws and regulations, an owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on such property. Such laws often impose such liability without regard to whether the owner knew of, or was responsible for, the presence of hazardous or toxic substances. Furthermore, a person that arranges for the disposal or transports for disposal or treatment of a hazardous substance at another property may be liable for the costs of removal or remediation of hazardous substances released into the environment at that property. The costs of remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to promptly remedy such substances, may adversely affect the owner’s ability to use or sell such real estate or to borrow using such real estate as collateral. Certain environmental laws and common law principles could be used to impose liability for the release of and exposure to hazardous substances, including asbestos-containing materials (“ACMs”) released into the air, and third parties may seek recovery from owners or operators of real properties for personal injury or property damage associated with exposure to released hazardous substances, including ACMs. In connection with the ownership and operation of its hotels, the Company, the lessees, or the property managers, as the case may be, may be potentially liable for such costs.

     Phase I environmental site assessments (“ESAs”) were obtained on all of the Company’s hotels. The Phase I ESAs were intended to identify potential sources of contamination for which the hotels may be responsible and to identify readily apparent environmental regulatory compliance concerns. The Phase I ESAs included historical reviews of the hotels, reviews of certain public records, preliminary investigations of the sites and surrounding properties, screening for the presence of asbestos, PCBs (polychlorinated biphenyls) and underground storage tanks, and the preparation and issuance of a written report. The Phase I ESAs did not include invasive procedures, such as soil sampling or ground water analysis. The Phase I ESA reports have not revealed any environmental condition, liability or compliance concern that the Company believes would have a material adverse effect on the Company’s business, assets or results of operations, nor is the Company aware of any such condition, liability or compliance concern. Nevertheless, it is possible that these reports do not reveal all environmental conditions, liabilities or compliance concerns or that there are material environmental conditions, liabilities or compliance concerns that arose at a hotel after the related Phase I ESA report was completed of which the Company is unaware. Moreover, no assurances can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability for existing conditions at the Company’s hotels, or (ii) the current environmental condition of the hotels will not be affected by the condition of the properties in the vicinity of the hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to the Company.

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

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

     The Company believes that its hotels are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances and other environmental matters. The Company has not been notified by any

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governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of its properties.

Tax Status

     The Company elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended, effective for its short taxable year ended December 31, 1994. The Company believes that it qualifies for taxation as a REIT, and with certain exceptions, the Company will not be subject to tax at the corporate level on its taxable income that is distributed to the shareholders of the Company. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income. Failure to qualify as a REIT will render the Company subject to federal income tax (including any applicable minimum tax) on its taxable income at regular corporate rates and distributions to the shareholders in any such year will not be deductible by the Company. Although the Company does not intend to request a ruling from the Internal Revenue Service (the “Service”) as to its REIT status, the Company has obtained the opinion of its legal counsel that the Company qualifies as a REIT, which opinion is based on certain assumptions and representations and is not binding on the Service or any court. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and properties.

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

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

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

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

Seasonality

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

Executive Officers of the Registrant

     The following table lists the executive officers of the Company:

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     Charles M. Winston. Charles Winston has served as Chairman of the Board of Directors since March 15, 1994. Mr. Winston is a native of North Carolina and a graduate of the University of North Carolina at Chapel Hill with an A.B. degree. Mr. Winston has more than 38 years of experience in developing and operating full service restaurants and hotels. Mr. Winston is Robert Winston’s father and brother of James Winston, a director of the Company.

     Robert W. Winston, III. Robert Winston has served as Chief Executive Officer and Director of the Company since March 15, 1994. Mr. Winston served as the Company’s President from March 15, 1994 through January 14, 1999 and from November 9, 2002 through the present time. Mr. Winston also served as Secretary for the periods from March 1994 through May 1995 and from October 1997 until May 5, 1998. Mr. Winston is a native of North Carolina and a graduate of the University of North Carolina at Chapel Hill with a B.A. degree in economics. Mr. Winston is Charles Winston’s son and nephew of James Winston, a director of the Company.

     Joseph V. Green. Mr. Green has served as Executive Vice President and Chief Financial Officer since May 18, 1999 and as Secretary since November 9, 2002. Mr. Green has also served as Executive Vice President — Acquisitions and Finance from January 1, 1998 through May 18, 1999, after having advised Winston Hospitality, Inc. on matters regarding hotel acquisitions and finance since 1993, including the initial public offering of WHI. Mr. Green is a graduate of East Carolina University, was awarded his J.D. degree from Wake Forest University School of Law and received a Master of Laws in Taxation from Georgetown University.

     Kenneth R. Crockett. Mr. Crockett was appointed Senior Vice President of Development of the Company in September 1995 and Executive Vice President of Development in January 1998. Mr. Crockett is a graduate of the University of North Carolina at Chapel Hill with a B.S. degree in Business Administration. Prior to joining the Company, Mr. Crockett was an Associate Partner for project development in commercial real estate at Capital Associates, a real estate development firm located in the Raleigh, North Carolina area.

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

AVAILABLE INFORMATION

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

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ITEM  2.    PROPERTIES

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

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ITEM  2.    PROPERTIES (continued)

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

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ITEM  3.   LEGAL PROCEEDINGS

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

ITEM  4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2002.

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PART II

ITEM  5.    MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Price of and Dividends on the Registrant’s Common Equity

     WHI’s Common Stock trades on the New York Stock Exchange (“NYSE”) under the symbol “WXH.” As of March 1, 2003, WHI had 773 holders of record of its Common Stock. The following table sets forth, for the indicated periods, the high and low closing prices for the Common Stock and the cash distributions declared per share:

     Although the declaration of distributions is within the discretion of the Board of Directors and depends on the Company’s results of operations, cash available for distribution, the financial condition of the Company, tax considerations (including those related to REITs) and other factors considered important by the Board of Directors, the Company’s policy is to make regular quarterly distributions to its shareholders.

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ITEM  6.    SELECTED FINANCIAL DATA

     The following table sets forth selected financial information for the Company that has been derived from the financial statements and notes thereto. This information should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included elsewhere in this report.

WINSTON HOTELS, INC.
Selected Historical Financial and Other Data
For the years ended December 31, 2002, 2001, 2000, 1999 and 1998
(in thousands, except per share amounts)

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		FFO is a supplemental industry-wide measure of REIT operating performance, the definition of which was first proposed by NAREIT in 1991 (and clarified in 1995, 1999 and 2002) in response to perceived drawbacks associated with net income under GAAP as applied to REITs. Since the introduction of the definition by NAREIT, the term has come to be widely used by REITs. Historical cost accounting for real estate assets implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, most industry investors have considered presentations of operating results for real estate companies that use historical GAAP cost accounting to be insufficient by themselves. Accordingly, the Company believes FFO (combined with the Company’s primary GAAP presentations required by the Securities and Exchange Commission (the “SEC”)) helps improve our equity holders’ ability to understand our operating performance and makes it easier than before to compare the results of one REIT with another. The Company only uses FFO as a supplemental measure of operating performance. See reconciliation of Net income to FFO below.
(3)		The Company computes Cash Available for Distribution (“CAD”) by subtracting capital expenditures and debt principal payments from FFO. CAD is a supplemental industry-wide measure of REIT operating performance that measures a REIT’s ability to generate cash and to distribute dividends to its shareholders. The Company believes CAD (combined with the Company’s primary GAAP presentations required by the SEC) helps improve our equity holders’ ability to understand our operating performance (including our ability to make required distributions to maintain our REIT status (see “Risk Factors; Risks Relating to REIT Status” under Item 7 below)) and makes it easier than before to compare the results of one REIT with another. The Company only uses CAD as a supplemental measure of operating performance. The calculation of CAD may vary from entity to entity and as such the presentation of CAD by the Company may not be comparable to other similarly titled measures of other reporting companies. CAD is not intended to represent cash flows for the period. CAD has not been presented as an alternative to operating income, but as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See reconciliation of FFO to CAD below.
(4)		The Company computes adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”) by adding FFO, interest expense (including the Company’s share of interest expense from its joint ventures), amortization expense, and preferred stock dividends. Adjusted EBITDA is a supplemental industry-wide measure of REIT operating performance. The Company believes Adjusted EBITDA (combined with the Company’s primary GAAP presentations required by the SEC) helps improve our equity holders’ ability to understand our operating performance and makes it easier than before to compare the results of one REIT with another. The Company only uses Adjusted EBITDA as a supplemental measure of operating performance. The calculation of Adjusted EBITDA may vary from entity to entity and as such the presentation of Adjusted EBITDA by the Company may not be comparable to other similarly titled measures of other reporting companies. Adjusted EBITDA is not intended to represent cash flows for the period. Adjusted EBITDA has not been presented as an alternative to operating income, but as an indicator of operating performance, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. See reconciliation of FFO to Adjusted EBITDA below.

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

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