UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

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

For the fiscal year ended December 31, 2004

Commission file number 0-23732

WINSTON HOTELS, INC.

(919) 510-6019
(Registrant’s telephone number, including area code)

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 þ Noo

     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. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes þ Noo

     The aggregate market value of the registrant’s Common Stock, $0.01 par value per share, at June 30, 2004, held by those persons deemed by the registrant to be non-affiliates was approximately $258,235,088.

     As of March 1, 2005, there were 26,513,427 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., (the “Company”) headquartered in Raleigh, North Carolina, owns hotel properties and interests in hotel properties through joint ventures, provides loans to the hotel industry, and provides hotel development and asset management services. The Company conducts substantially all of its operations through its operating partnership, WINN Limited Partnership, (the “Partnership”). The Company and the Partnership (together with the Partnership’s wholly-owned subsidiaries, Barclay Hospitality Services Inc. (“Barclay”), Winston SPE, LLC, Winston SPE II, LLC, and Winston Finance LLC), are collectively referred to as the “Company”. As of December 31, 2004, the Company’s ownership in the Partnership was 95.31%. The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

          During 2004, the Company acquired one hotel, sold two hotels, and invested in three additional hotels through joint ventures. During 2004, the Company also made five loans to hotel owners in connection with acquisitions, developments and redevelopments. As of December 31, 2004, the Company owned or was invested in, through its equity interests in joint venture entities, 52 hotel properties in 15 states having an aggregate of 7,320 rooms. This included 45 wholly-owned properties with an aggregate of 6,397 rooms, a 49% ownership interest in one joint venture hotel with 118 rooms, a 48.78% ownership interest in one joint venture hotel with 147 rooms, and a 13.05% ownership interest in five joint venture hotels with an aggregate of 658 rooms. The Company also had issued loans to owners of eight hotels having an aggregate of 1,573 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.

Narrative Description of Business

Growth Strategies

          The Company’s primary growth strategies are designed to enhance shareholder value by increasing cash available for distribution per share of Common Stock through:

	•	improving existing hotel operations;
	•	acquiring, either directly or through joint ventures, additional hotels, or ownership interests in hotels, that meet the Company’s investment criteria;
	•	developing hotels on selected sites; and
	•	financing activities whereby the Company provides loans to third party hotel owners in connection with acquisitions and developments.

Improve Existing Hotel Operations

          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 works closely with each hotel manager to continually find ways to improve operating results by increasing revenues and decreasing expenses. The Company’s hotel managers are trained in all aspects of hotel operations, including customer service improvement strategies, rate negotiations with corporate and other clients, direct hotel sales and marketing techniques. Additionally, hotel managers seek to take advantage of all available advertising and marketing programs, both national and regional, with the franchisors of the Company’s hotels. 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 $32.9 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 $27.3 million spent on repairs and maintenance items during that same period.

Operations and Property Management. As of December 31, 2004, Alliance managed 42 of the Company’s 52 hotels, Concord managed four hotels, Hilton managed three hotels, and New Castle, Prism, and Noble each managed one hotel. One wholly-owned property was operated under a long-term lease with Prime until March 2004, when the Company negotiated the transfer of this lease to Barclay.

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          The information below, regarding the hotel managers of the Company’s hotels, is as of December 31, 2004:

          Alliance, a hotel management company, operated 42 of the Company’s hotels.

          Concord, a hotel development and management company, operated a total of 43 hotels in ten states and Canada.

          Hilton, a New York Stock Exchange listed company, is a developer, owner, manager or franchisor of 2,216 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 Hotels, Hampton Inn, Hampton Inn & Suites, Homewood Suites by Hilton, Hilton Garden Inn, Hilton Grand Vacation Company and Conrad.

          Prism, a hotel management company, operated a total of 29 hotels in 10 states.

          Noble, a hotel development and management company, operated 23 upscale, full service, mid-market and all-suites hotels in six states. Noble holds a 79% ownership interest in Alliance.

          New Castle Hotels & Resorts, a hotel management company, operated a total of 20 hotels in seven states and Canada.

Franchise Agreements. All of the Company’s hotels operate under franchise licenses from national hotel franchisors including Marriott International, Inc., Hilton Hotels Corporation, Intercontinental Hotels Group PLC, (formerly 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 including 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 Company must comply. The franchise licenses obligate the Company to comply with the franchisors’ standards and requirements with respect to training of operational personnel, safety, 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, 2004, of the 52 hotels’ franchise licenses, including seven joint venture hotels, one expires 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, eight expire in 2018, one expires in 2020, four expire in 2022, two expire in 2023, four expire in 2024 and one expires in 2025. The franchise agreements provide for termination at the franchisor’s option upon the occurrence of certain events, including the Company’s 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 or maintain applicable standards in the operation and condition of the relevant hotel. The franchise agreements will not renew automatically upon expiration. The Company is responsible for making all payments under the franchise agreements to the franchisors. Under the franchise agreements, the Company pays 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.

          The Company’s franchisors periodically inspect the Company’s hotels to ensure that they meet certain brand standards primarily pertaining to the condition of the property and its guest service scores. In connection with these routine reviews, as of June 30, 2004, the Company had received default notices from the franchisor for two of its hotels. As of December 31, 2004, both of these properties have been reinspected. One has received an acceptable rating. The other hotel passed the reinspection for all product improvement issues, but received an unacceptable rating due to its customer service scores falling below brand standards. We believe this decline in customer service scores was due, in part, to the ongoing construction to comply with the brand’s product improvement requirements. The Company expects to cure this deficiency to comply with the franchisor’s standards and expects to receive an acceptable rating for the hotel. Since June 30, 2004, the Company has received default notices from the franchisor for five other hotels. Four of these notices pertain to low guest service scores while the other notice was received for failure to complete a product improvement plan on schedule. The Company is currently in the process of curing these deficiencies to comply with the franchisor’s standards and expects to receive an acceptable rating for all hotels.

Acquisitions of Additional Hotels

          One of the Company’s primary growth strategies is the acquisition of additional hotels. The Company is continually looking for acquisition opportunities to either wholly-own additional hotels or to own additional interests in hotels through joint ventures. The Company focuses on acquiring additional hotels, or ownership interests in hotels, with strong national franchise affiliations in the

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“mid-scale without food and beverage”, “upscale”, and “upper upscale” market segments, or hotel properties with the potential to obtain these franchise affiliations. In particular, the Company will consider acquiring mid-scale without food and beverage hotels, such as Hampton Inn, Hampton Inn & Suites, Holiday Inn, and Fairfield Inn by Marriott; upscale hotels such as Hilton Garden Inn, Courtyard by Marriott, Homewood Suites by Hilton, Residence Inn by Marriott, SpringHill Suites by Marriott and Staybridge by Holiday Inn; and upper upscale hotels such as full service Marriott, Hilton, Embassy Suites and Sheraton.

          The Company intends to consider investments in hotel properties that meet one or more of the following criteria:

	•	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;
	•	successful hotels available at favorable prices;
	•	newly developed hotels;
	•	hotels that could benefit from repositioning;
	•	hotels that could benefit from substantial rehabilitation; and
	•	hotels that could benefit from new management and additional hotel capital.

          The Company believes that its relationships with its managers and franchisors will provide additional potential investment opportunities.

Direct Hotel Investment. In December 2004, the Company acquired the Courtyard by Marriott hotel in Roanoke, VA for $12.1 million. Also in December 2004, the Company acquired an historic residential building in Kansas City, MO for $3.1 million. The property will undergo extensive renovations and is expected to be converted to a Courtyard by Marriott hotel in the second quarter of 2006, with an expected total cost of $16.7 million, net of tax credits totaling $7.7 million.

          As the Company acquires hotels, or interests in hotels, the Company also continually evaluates its portfolio and considers selling hotels that no longer meet its long-term investment objectives. The Company sold two hotels in 2004 for gross proceeds, in the aggregate, totaling approximately $10.9 million.

Investment in Hotels Through Joint Ventures. The Company currently has investments in the following joint ventures:

	•	The Company owns 49% of the Marsh Landing joint venture that owns the 118-room Hampton Inn in Ponte Vedra, FL.
	•	The Company owns an indirect 13.05% interest in the WCC Project Company LLC joint venture that owns four hotels:

	•	the 102-room Fairfield Inn & Suites in West Des Moines, IA;
	•	the 113-room Courtyard by Marriott in Beachwood, OH;
	•	the 190-room SpringHill Suites by Marriott in Houston, TX; and
	•	the 95-room Quality Suites in West Des Moines, IA that is in the process of being renovated and is expected to be converted to a SpringHill Suites by Marriott during the second quarter of 2005.

	•	The Company owns an indirect 13.05% interest in the WNC Project Company LLC joint venture that owns one hotel, the 158-room Courtyard by Marriott in Shelton, CT. The joint venture completed its renovations and conversion of this hotel to a Courtyard by Marriott during the first quarter of 2005.
	•	The Company owns 48.78% of the Chapel Hill joint venture that owns a 147-room Courtyard by Marriott in Chapel Hill, NC that opened in September of 2004.

          Under the terms of the joint ventures, the Company has provided property development and purchasing services and will continue to provide ongoing asset management services for additional fees. The Company receives cash distributions of the joint venture’s operating profits, if any, on a quarterly basis.

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Developing Hotels on Selected Sites

          The Company has the in-house capability to develop hotels. Since its initial public offering in 1994, the Company has developed several of its wholly-owned hotels, and has completed major renovations for certain hotels owned through joint ventures and for certain hotels for which the Company has provided financing. As noted above, the Company owns 48.78% of the Chapel Hill joint venture that owns a 147-room Courtyard by Marriott in Chapel Hill, NC that opened in September of 2004. The Company developed this hotel for the joint venture and earned development fees totaling $0.7 million during construction. Also in December 2004, the Company acquired an historic residential building in Kansas City, MO for $3.1 million. The property will undergo extensive renovations and is expected to be converted to a Courtyard by Marriott hotel in the second quarter of 2006, with an expected total cost of $16.7 million, net of tax credits totaling $7.7 million. The Company typically earns development fees for its services provided to develop joint venture hotels. The Company is continually looking to develop additional hotel properties, either to wholly-own or to own through joint ventures, which meet its investment criteria.

Hotel Financing

          As of December 31, 2004, the Company had issued eight loans to third party hotel owners with an aggregate outstanding principal balance totaling approximately $30.8 million. The Company issued five of these loans totaling $25.8 million during 2004. The Company plans to continue to expand its hotel lending business in the future. The Company’s lending program is designed to provide loans to the hotel industry, primarily by either originating single loans, or through the purchase of the first loss piece of collateralized mortgage backed securities (“CMBS”) transactions which typically contain multiple hotel properties. However, the Company may also issue whole loans and then potentially sell the senior portion of the loan. The Company’s loan amount is typically 10% to 25% of the project’s all-in cost, ranging from approximately $1 million to approximately $15 million. The Company will primarily provide financing between 60% and 85% of the lesser of the project’s all-in cost or fair market value. Loans will typically be issued for hotels with between 100 and 450 rooms. We continue to seek additional prudent financing opportunities where the Company can capitalize on its hotel underwriting and development expertise. The Company expects to use a portion of the availability under its $155 million line of credit with General Electric Capital Corporation (“GECC”) and the $50 million line of credit with Marathon Structured Finance Fund, LP to provide loans to the hotel industry.

Recent Developments

Hotel Sales

          The Company sold two hotels during January 2005. The Chester, VA Comfort Inn was sold for $5.2 million in cash, net of closing costs. The Greenville, SC Comfort Inn was sold for $1.8 million, net of closing costs, of which the Company received approximately $0.4 million in cash proceeds and a note receivable for $1.425 million. The note requires fixed principal payments over five years and bears interest at a rate of prime plus 1.5%. Both of these properties were held for sale as of December 31, 2004. Estimated impairment losses have been recorded during 2004 and 2003 on these two hotels such that no material gain or loss will be recognized in 2005 related to these sales.

Hotel Loans

          Albany, NY Hampton Inn & Suites. In February 2005, the Company issued a $3.375 million mezzanine loan to finance the development of a 165-room Hampton Inn & Suites in Albany, NY. M&T Realty provided an $11.5 million first mortgage loan. The Company’s loan is subordinate to the M&T Realty first mortgage loan. The term of the Company’s loan is 6.5 years. During the term of the loan, interest will be payable at 30-day LIBOR plus 9.41%. In addition during this period, interest in the amount of 4.00% shall accrue and be added to the outstanding principal balance thereof, and shall be due and payable upon repayment of the loan. Interest will not be paid on the accrued interest.

          Florida Hotels. In March 2005, the Company purchased from Lehman Brothers $2.8 million of B-notes for $2.3 million. The fixed-rate notes are secured by second mortgages on three hotels with a weighted average yield at the time of purchase of 9.3%, and have a remaining term of approximately six years. The three B-Notes, which are debt subordinated to the first mortgage “A” note, are cross-collateralized. The A note is secured by the first mortgages on each of the three assets, which are held in a CMBS trust. The loans are secured by a 146-room Springhill Suites and a 91-room TownePlace Suites, both in Boca Raton, FL, and a 95-room TownePlace Suites in Fort Lauderdale, FL.

GECC Line of Credit

          On March 11, 2005, the Company, through its wholly-owned subsidiary, Winston SPE II LLC (“SPE II”), entered into a five-year credit facility with GECC (the “GE Line”). The Company subsequently borrowed funds under the GE Line on March 14, 2005

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and used these funds to pay off all outstanding debt under the Company’s previous $125 million line of credit, terminating this prior credit facility. The GE Line provides for revolving loan commitments and letters of credit up to $155 million. The GE Line bears interest at rates from LIBOR plus 1.75% to 2.50%, based on the ratio of the underwritten net operating income of the hotels that collateralize the GE Line to the outstanding principal debt balance. The current rate is LIBOR plus 2.00%.

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 and the managers of the Company’s 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, 2005. We believe that our relations with our employees are good.

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 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 in Garland (Dallas), Texas and the Courtyard by Marriott in Houston, Texas. In 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 indirect 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 opened for business in April 2003. Because black mold is a naturally occurring fungus, the spores of

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which can be transported by outside air currents, there can be no assurance 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.

          Portions of the soil and groundwater under the Durham, NC Hampton Inn have been contaminated by one or more leaking underground storage tanks from an adjacent property owned by a third-party. The North Carolina Department of Environmental and Natural Resources classified the adjacent property as “low risk” and issued a “No Further Action” determination in November 2003. A Phase II ESA file review was conducted in February 2005 to review and obtain regulatory files related to the leaking underground tanks on the adjacent property. The Phase II indicated that the Durham, NC Hampton Inn is restricted from use of groundwater and recommended additional investigation to determine the extent of contamination, if any, from the leaking tanks. We expect to conduct such additional investigation in the near future. We believe liability for future cleanup, if any, of this subsurface contamination most likely would be imposed on the third-party owner of the leaking underground storage tanks and not us. We could, however, be responsible for cleanup of this site if, for instance, the owner of the leaking tanks refused or were financially unable to conduct a cleanup. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could adversely affect the funds available for distribution to our shareholders. We can make no assurances that (1) future laws or regulations will not impose material environmental liabilities or (2) the current environmental condition of our hotel properties will not be affected by the condition of the properties in the vicinity of our hotel properties (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.

          The Company believes that its hotels have been operated 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 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.

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 its equity holders.

Executive Officers of the Company

          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 40 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 November 4, 2003. 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 President of the Company since November 4, 2003, 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 has served as Chief Operating Officer of the Company since November 4, 2003. Mr. Crockett served as the Company’s Executive Vice President of Development from January 1998 through November 5, 2003 and also served as the Company’s Senior Vice President of Development from September 1995 through 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 Raleigh, North Carolina.

          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 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.

          James P. Frey. Mr. Frey has served as Vice President of the Company since January 2000. Prior to joining the Company he worked for Hilton Hotels Corporation in various capacities, where his responsibilities included overseeing the construction of 35 hotels and administering annual capital refurbishment and expenditures totaling $35 million per year. Mr. Frey has over 40 years experience in the hotel industry.

Available Information

          The Company maintains a Web site, http://www.winstonhotels.com, which contains additional information concerning the Company. The Company makes available free of charge through its Web 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. The Company’s Corporate Governance Guidelines and Code of Business Conduct and Ethics and the charters of the Audit, Compensation and Nominating and Corporate Governance Committees are also available on the Company’s Web site at www.winstonhotels.com, and are available in print to any shareholder upon request in writing to Winston Hotels, Inc., c/o Vice President and Chief Accounting Officer, 2626 Glenwood Avenue, Suite 200, Raleigh, NC 27608. Information on the Company’s Web site is neither part of nor incorporated into this report on Form 10-K.

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ITEM 2. PROPERTIES

          Our principal executive offices are located at 2626 Glenwood Avenue, Suite 200, Raleigh, North Carolina 27608. We carry out all aspects of our businesses at that location. We lease approximately 18,900 square feet at our headquarters building, of which approximately 7,900 square feet is sub-leased to other parties. We believe that our present facilities, together with current options to extend lease terms and occupy additional space, are adequate for our current and presently projected needs. As of December 31, 2004, the Company owned 45 hotels with an aggregate of 6,397 rooms. The following table sets forth, by franchise affiliation, certain unaudited information with respect to our wholly-owned hotels for the years ended December 31, 2004 and 2003.

See Note 7 to Notes to Consolidated Financial Statements for further discussion of debt that encumbers these hotels.

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          In addition to our wholly-owned hotels, we maintain investments in joint ventures that in the aggregate owned interests in seven hotels as of December 31, 2004. The following table sets forth certain unaudited information about the hotels owned through joint ventures with third parties for the years ended December 31, 2004 and 2003.

Each hotel is encumbered by a first mortgage loan.

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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. Alliance, who managed 42 of the Company’s hotels as of December 31, 2004, has advised the Company that there are no such proceedings known to be contemplated by government authorities, and it currently is 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 hotel management companies 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 the Company’s security holders during the fourth quarter of the fiscal year ended December 31, 2004.

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PART II.

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

          The Company’s Common Stock trades on the New York Stock Exchange (“NYSE”) under the symbol “WXH.” As of March 1, 2005, the Company had 743 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 on the NYSE 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 expects to make regular quarterly distributions in comparable amounts to its shareholders in the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

Equity Compensation Plan Information

     The following table sets forth information as of December 31, 2004 with respect to compensation plans under which equity securities of the Company are authorized for issuance. The Company has no such plans that were not approved by security holders.

          The Company has not sold any of its unregistered equity securities or purchased any of its registered equity securities in the twelve months ended December 31, 2004.

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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, 2004, 2003, 2002, 2001, and 2000
(in thousands, except per share amounts)

(2) Per the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), the Company consolidated the balance sheets of some of its joint ventures as of December 31, 2003. The Company began consolidating the operations of the Chapel Hill joint venture on July 1, 2003. As such, there is limited comparability between the balance sheet data for 2004, 2003 and prior years (see Note 4 to consolidated financial statements).

(3) The Company reports Funds From Operations (“FFO”) in accordance with the definition of the National Association of Real Estate Investment Trusts (“NAREIT”). NAREIT defines FFO as net income (loss) (determined in accordance with generally accepted accounting principles, or “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 subtracts preferred stock dividends from FFO to calculate FFO available to common shareholders. FFO available to common shareholders is a performance measure used by the Company in its budgeting and forecasting models, it is discussed during Board

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meetings, it is considered when making decisions regarding acquisitions, sales of properties, and other investments, and the Company’s compensation committee determines executive incentive compensation, in part, based on this measure Actual results are compared to budget and forecast on a monthly basis. The calculation of FFO and FFO available to common shareholders may vary from entity to entity, and as such the presentation of FFO and FFO available to common shareholders by the Company may not be comparable to other similarly titled measures of other reporting companies. FFO and FFO available to common shareholders are not intended to represent cash flows for the period. FFO and FFO available to common shareholders have not been presented as an alternative to operating income, 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 FFO available to common shareholders (combined with the Company’s primary GAAP presentations required by the SEC) help improve our investors’ ability to understand the Company’s operating performance. Shown below is a reconciliation of net income to FFO and FFO available to common shareholders.

WINSTON HOTELS, INC.
Reconciliation and Calculation of FFO and FFO Available to Common Shareholders
For the years ended December 31, 2004, 2003, 2002, 2001 and 2000
(in thousands)

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     Winston Hotels, Inc., (the “Company”) headquartered in Raleigh, North Carolina, owns hotel properties and interests in hotel properties through joint ventures, provides loans to the hotel industry and provides hotel development and asset management services. As of December 31, 2004, the Company owned or was invested in, through its equity interests in joint venture entities, 52 hotel properties in 15 states having an aggregate of 7,320 rooms. This includes 45 wholly-owned properties with an aggregate of 6,397 rooms, a 49% ownership interest in one joint venture hotel with 118 rooms, a 48.78% ownership interest in one joint venture hotel with 147 rooms, and a 13.05% ownership interest in five joint venture hotels with an aggregate of 658 rooms. The Company also had issued mezzanine loans to owners of eight hotels with an aggregate of 1,573 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.

     The Company’s primary source of revenue is room revenue generated from its hotel ownership interests. The Company also generates revenue primarily through food and beverage, telephone, parking, and other hotel sales and interest income from hotel loans. Operating expenses consist of the costs to provide these services as well as corporate general and administrative costs, real and personal property taxes, property and casualty insurance costs, income taxes of our consolidated taxable REIT subsidiary, depreciation, amortization, and other costs. The Company has significant fixed-costs associated with owning and operating hotels, which do not necessarily decrease when market factors cause a reduction in revenue for the property. As a result, changes in RevPAR can result in a greater percentage change in the Company’s earnings and cash flows. The Company seeks to maximize the value of its portfolio through aggressive asset management, by directing the managers of its hotels to reduce operating costs and increase revenues, and by completing selective capital improvements.

     The Company’s primary growth strategies include improving operations at the hotels in which it holds an ownership interest, acquiring additional hotels or ownership interests in hotels through joint ventures, developing hotels on selected sites, and providing loans to the hotel industry.

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, the Company, through its wholly-owned taxable REIT subsidiary, Barclay Hospitality Services Inc. (“Barclay”), acquired the leasehold interests for 47 hotels from CapStar Winston Company, L.L.C., a wholly-owned subsidiary of MeriStar Hotels & Resorts, Inc. (“MeriStar”) for total consideration of approximately $17.7 million. MeriStar has since merged with and become Interstate Hotels & Resorts, Inc. (“Interstate”). During 2003, the Company assumed the leasehold interests from Intercontinental Group for two additional hotels at no cost.

     In March 2004, the Company negotiated the transfer of the long-term lease with Secaucus Holding Corporation, a wholly-owned subsidiary of Prime Hospitality Corp. (“Prime”) for the Secaucus, NJ Holiday Inn to Barclay. The Company received a net payment from Prime of $269 as part of the negotiated settlement. This amount is included in percentage lease revenue in the accompanying consolidated statement of operations for the year ended December 31, 2004. With the transfer of this lease to Barclay, the Company is no longer the lessor of any hotel leases with unrelated third parties. Therefore, unless the Company enters into third party hotel leases, as the lessor, in the future, the Company will not report percentage lease revenue in the future.

     As of December 31, 2004, all of the Company’s wholly-owned hotels and one of its seven joint venture hotels, the Ponte Vedra, FL Hampton Inn, were operated under leases with Barclay. One joint venture hotel, the Chapel Hill Courtyard by Marriott, was leased to an entity owned 48.78% by Barclay. The remaining five joint venture hotels, the West Des Moines, IA Fairfield Inn & Suites, the Beachwood, OH Courtyard by Marriott, the Houston, TX SpringHill Suites, the Shelton, CT Courtyard by Marriott, and the West Des Moines, IA Quality Suites hotel, which is currently being renovated and is expected to be converted to a SpringHill Suites by Marriott during the second quarter of 2005, did not operate under leases.

     As of December 31, 2004, Alliance Hospitality Management, LLC (“Alliance”) managed 42 of the Company’s 52 hotels, Concord Hospitality Enterprises Company (“Concord”) managed four hotels, Promus Hotels, Inc., an affiliate of Hilton Hotels

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Corporation (“Hilton”) managed three hotels, and New Castle Hotels, LLC (“New Castle”), Prism Hospitality, L.P. (“Prism”) and Noble Investment Group, Ltd. (“Noble”) each managed one hotel.

     The acquisition of the leasehold interests entitles Barclay to retain the operating profits or losses from the related hotels, which previously accrued to unrelated third party lessees 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 with unrelated third parties 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.

Off-Balance Sheet Arrangements

     The Company’s off-balance sheet arrangements consist primarily of its ownership interest in its joint venture with Charlesbank. For a further discussion of this joint venture, and its effect on the Company’s financial condition, results of operations and cash flow, see “Critical Accounting Estimates”, “Recently Issued Accounting Standards” and “Liquidity and Capital Resources”.

Critical Accounting Estimates

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

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

Accounts and Notes Receivable

     The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its hotel guests, mezzanine loan borrowers, and other borrowers to make required payments. The Company reviews its accounts receivable aging report on a monthly basis and discusses the status of receivable collections with appropriate hotel personnel to determine if additional allowances are necessary. To analyze the collectibility of the notes receivable, the Company reviews the monthly operating results of each respective hotel for which it has provided financing to ensure the borrower’s equity is not being eroded. The Company also analyzes the operating results of the hotel to ensure that the estimated market value exceeds the total debt outstanding on the property. If the financial results of the respective hotels were to deteriorate, additional allowances may be required.

Accounting for Joint Ventures

     As of December 31, 2004, the Company had a 15% ownership interest in its Charlesbank joint venture, (which in turn owned an 87% ownership interest in its WCC Project Company LLC joint venture and its WNC Project Company LLC joint venture), a 49% ownership interest in its Marsh Landing joint venture, and a 48.78% interest in its Chapel Hill joint venture. The WCC Project Company LLC joint venture owned four hotels, the WNC Project Company LLC joint venture owned one hotel, the Marsh Landing joint venture owned one hotel, and the Chapel Hill joint venture owned one hotel.

     Per the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), as of December 31, 2004 and 2003, the Company determined that the Charlesbank joint venture did not have to be consolidated. The Company accounts for this joint venture under the equity method in accordance with Statement of Position 78-9, “Accounting for Investments in Real Estate Ventures”. The Company recognized its share of net income or loss from this joint venture during 2004 and 2003 and adjusted the carrying value of its investment accordingly. Accordingly, the joint ventures’ assets, liabilities, and equity are not recorded on the Company’s balance sheet as of December 31, 2004 and 2003.

     The Company determined that the Marsh Landing joint venture is considered to be a variable interest entity (“VIE”) and the Company is considered to be the primary beneficiary. Therefore, per the provisions of FIN 46, the Company has consolidated the assets and liabilities of this joint venture into its Consolidated Balance Sheet as of December 31, 2004 and 2003, and has consolidated the results of operations beginning with the first quarter of 2004. The Chapel Hill joint venture was created in August 2003 and is also considered to be a VIE and the Company is considered to be the primary beneficiary. Therefore, per FIN 46, the Company has consolidated the joint venture’s assets, liabilities, and results of operations beginning with the third quarter 2003.

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Accounting for Long-Lived Assets

     The Company evaluates the potential impairment of its individual long-lived assets, principally its wholly-owned hotel properties and the hotel properties in which it owns an interest through consolidated joint ventures in accordance with FASB No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. The Company records an impairment charge when it believes an investment in hotels has been impaired, such that the Company’s estimate of future undiscounted cash flows, together with its estimate of an anticipated liquidation amount, would not recover the then current carrying value of the investment in the hotel property, or when the Company classifies a property as “held for sale” and the carrying value exceeds fair market value. The Company considers many factors and makes certain subjective 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, 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. Further, the Company currently owns certain hotels for which the carrying value exceeds current market value. The Company does not believe an impairment charge for these hotels is appropriate since the Company’s forecast of future undiscounted cash flows, including an anticipated liquidation amount, exceeds the current carrying value. However, should the Company approve of a plan to sell these properties, an impairment charge would be required.

     The Company evaluates its investments in joint ventures for impairment by considering a number of factors including assessing current fair value of the investment to carrying value. If the current fair value of the investment is less than the carrying value, and there is either an absence of an ability to recover the carrying value of the investment, or the property does not appear to have the ability to sustain an earnings capacity that would justify the carrying amount of the investment, am impairment charge may be required.

Income Taxes

     The Company records a valuation allowance to reduce the deferred tax assets to an amount that it believes is more likely than not to be realized. Because of expected future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, the Company has not recorded a valuation allowance to reduce its deferred tax asset as of December 31, 2004. Should our estimate of future taxable income be less than expected, and/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.

Results of Operations

     Due primarily to the acquisition of the leasehold interests for 47 hotels from Interstate on July 1, 2002, the assumption of the leasehold interests for two hotels from Intercontinental Group on July 1, 2003, and the acquisition of the leasehold interest for one hotel from Prime Hospitality Corp. in March 2004, the results of operations for the years ended December 31, 2004, 2003, and 2002 do 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. Accordingly, the Company has supplemented the comparison between years with pro forma information to offer a more meaningful comparison.

     The tables below outline the Company’s wholly-owned and joint venture hotel properties as of December 31, 2004, 2003 and 2002. During 2004, the Company acquired one wholly-owned hotel, acquired its joint venture partner’s ownership in two joint ventures, and sold two wholly-owned hotels. The Company acquired ownership interests through joint ventures in three hotel properties during 2004, one hotel property during 2003, and two hotel properties during 2002.

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WHOLLY-OWNED HOTELS:

JOINT VENTURE HOTELS:

Actual Results — Years Ended December 31, 2004, 2003 and 2002

  Revenue

     Rooms, Food and Beverage and Other Operating Departments Revenue – The increase in hotel revenues from 2002 to 2003 is a result of the acquisition of the leasehold interests from Interstate and Intercontinental Group. 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. The increase in hotel revenues from 2003 to 2004 is due, in part, to the acquisition of the leasehold interest for one hotel from Prime Hospitality Corp. (“Prime”) in March 2004, plus the acquisition of our joint venture partner’s ownership interests in

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another hotel in March 2004. The increase is also a result of increases in both occupancy and average daily rates. Occupancy increased 3.5% to 68.6% and average daily rate increased 3.4% to $81.44 during 2004.

     Percentage Lease Revenue – Percentage lease revenue declined from 2002 to 2003 and from 2003 to 2004 due to the acquisition of the leasehold interests from Interstate on July 1, 2002, the assumption of the leasehold interests for two hotels from Intercontinental Group on July 1, 2003, and the acquisition of the leasehold interest for one hotel from Prime Hospitality Corp. in March 2004. The Company sold the Las Vegas, NV Hampton Inn during 2004, one of the hotels for which the lease was assumed from Intercontinental Group during 2003. Therefore, 2002 includes twelve months of percentage lease revenue for the Secaucus, NJ Holiday Inn and only six months of percentage lease revenue for all hotels for which the leasehold interest were acquired in July 2002. The year ended December 31, 2003 includes twelve months of percentage lease revenue for the Secaucus, NJ, Holiday Inn and the year ended December 31, 2004 includes three months of percentage lease revenue for the Secaucus, NJ Holiday Inn. The Company is no longer the lessor of any hotel leases with unrelated third parties, thus will no longer report percentage lease revenue.

     Interest and Other Income –Interest and other income increased from 2002 to 2003 and from 2003 to 2004. These increases were driven primarily by interest income earned on our hotel loans. The Company plans to continue to expand its hotel lending business in the future.

  Expenses

     Rooms, Food and Beverage, Other Operating Departments Expenses – The increase in these hotel expenses from 2002 to 2003 is a result of the acquisition of the leasehold interests from Interstate and Intercontinental Group. 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. The increase in these hotel expenses from 2003 to 2004 is due, in part, to the acquisition of the leasehold interest for one hotel from Prime plus the acquisition of our joint venture partner’s ownership interests in another hotel. The increase is also a result of increases in various operating expenses consistent with the increase in occupancy.

     Property Operating Costs, Franchise Costs, Maintenance and Repair Costs and Management Fees – The increase in these hotel expenses from 2002 to 2003 is a result of the acquisition of the leasehold interests from Interstate and Intercontinental Group. The operating results of the 47 hotels, for which the leasehold interests were acquired, are reflected on the Company’s consolidated statements of operations beginning July 1, 2002. The increase in these hotel expenses from 2003 to 2004 is due, in part, to the acquisition of the leasehold interest for one hotel from Prime plus the acquisition of our joint venture partner’s ownership interests in another hotel. The increase in property operating costs and maintenance and repair costs are also due to increases in labor costs, utilities, printing, telecommunications, landscaping and other various costs consistent with the increase in occupancy. The increases in franchise costs and management fees are due to the related increases in revenues.

     Real Estate Taxes and Property and Casualty Insurance – Real estate taxes and property insurance costs decreased from 2002 to 2003 and increased from 2003 to 2004. The decrease from 2002 to 2003 is due to a decrease in property taxes due to successful tax appeals and downward property valuation trends associated with lower revenues, and a decrease in ground rent expense as a result of lower room revenues at the corresponding hotel, offset by an increase in insurance premiums. The increase from 2003 to 2004 is due primarily to the consolidation of the operating results of the certain joint ventures beginning January 1, 2004, offset by a decrease in insurance premiums.

     Percentage Lease Expense – Beginning July 1, 2002, this expense represented the lease expense Barclay, as lessee, paid to third party owners of two joint venture hotels, including the Evanston, IL Hilton Garden Inn and the Ponte Vedra, FL Hampton Inn. Beginning January 1, 2004, the operating results of these two joint ventures have been consolidated thereby eliminating this expense.

     General and Administrative – General and administrative expense increased from 2002 to 2003 and from 2003 to 2004. The increases in 2003 and 2004 were primarily attributable to increases in legal, accounting and other professional fees, and payroll costs. The increases in legal fees were primarily attributable to activity related to the Company’s efforts to buy and sell hotels as well as issue loans to the hotel industry. The increase in accounting and other professional fees is due, in part, to additional costs of complying with the Sarbanes-Oxley Act of 2002.

     Depreciation and Amortization – Depreciation expense decreased from 2002 to 2003 and increased from 2003 to 2004. The decrease in depreciation expense from 2002 to 2003 was due to the amount of assets exceeding their useful life of five years outpacing new additions. The increase from 2003 to 2004 is due primarily to the consolidation of the operating results of certain joint ventures beginning January 1, 2004. Amortization expense increased from 2002 to 2003 and again from 2003 to 2004 due to the capitalization of financing costs in 2003 to amend the Company’s $125 million line of credit and in 2004 to establish a $50 million master repurchase agreement with Marathon Stuctured Finance Fund, LP. (See Note 7 to Notes to Consolidated Financial Statements).

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     Interest – Interest expense decreased from 2002 to 2003 and from 2003 to 2004. The decrease from 2002 to 2003 was due to a decline in weighted average interest rates, from 6.85% in 2002 to 5.55% in 2003, as well as a decline in the weighted average outstanding debt balance from $152,879 in 2002 to $130,807 in 2003. Weighted average interest rates increased from 5.55% in 2003 to 6.04% in 2004 and the weighted average outstanding debt balance continued to decline to $103,439. The weighted average outstanding debt balance decreased primarily due to the sale of 3.162 million shares of common stock in March and April 2002, and the sale of 6.038 million shares of common stock in September and October of 2003. The Company used the net cash proceeds totaling $26,900 and $50,500, respectively, to repay the then outstanding debt balance.

     Income/(loss)Allocation to Minority Interest in Consolidated Joint Ventures – Income/(loss) allocation to minority interest in consolidated joint ventures increased from 2003 to 2004, due to the Company’s adoption of FIN 46 and the resulting consolidation of the operations of certain joint ventures beginning in the first quarter of 2004. (See Note 4 to Notes to Consolidated Financial Statements).

     Income Tax Benefit – The income tax benefit for 2003 and 2004 was a result of the net loss experienced by Barclay during 2003 and 2004. The income tax benefit for 2002 was primarily the 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, as well as the net loss experienced by Barclay during 2002.

     Equity in Income of Unconsolidated Joint Ventures – Equity in income of unconsolidated joint ventures increased from 2002 to 2003. The increase from 2002 to 2003 is due to an increase in earnings from the Evanston and Marsh Landing joint ventures related to improved hotel operations, an increase in earnings from the Charlesbank joint venture due to the addition of two hotels in 2003, offset by a decline in earnings from the Windsor joint venture due to diminishing operations and acquisition of the lease for that hotel in July 2003. The Windsor joint venture assumed the lease of the Windsor Hilton Garden Inn hotel on July 1, 2003 at no cost. Equity in income of unconsolidated joint ventures decreased from 2003 to 2004, due to the Company’s adoption of FIN 46, and the resulting consolidation of the operations of the Evanston, Marsh Landing and Windsor joint ventures beginning in the first quarter of 2004. The Company will continue to account for the Charlesbank Joint Venture as an unconsolidated joint venture under the equity method of accounting. (See Note 4 to Notes to Consolidated Financial Statements).

     Discontinued Operations – During 2004, the Company classified the Chester, VA Comfort Inn as “held for sale”, sold the Wilmington, NC Hampton Inn in February 2004, and sold the Las Vegas, NV Hampton Inn in June 2004. During 2003, the Company classified the Greenville, SC Comfort Inn as “held for sale.” 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 aggregate net loss on these sales, the loss on impairment of the assets held for sale and the operating results of all of these properties are shown as discontinued operations for all periods presented. (See Note 15 to Notes to Consolidated Financial Statements)

     Lease/Management Agreement Acquisition - Effective July 1, 2003, the Company, through Barclay, terminated its management agreements with Interstate Management & Investment Company (“IMIC”) by paying a termination fee of $1,300, which was expensed in the third quarter of 2003. Also, as discussed above, effective July 1, 2002, the Company, through Barclay, acquired the leasehold interests for 47 of its hotels from Interstate. The total consideration of approximately $19,500, as determined by the Leasehold Acquisition Agreement, was based upon a $17,000 purchase price for the leasehold interests, adjusted in part for accrued interest and related expenses totaling $668, and approximately $1,800 of working capital. The cost of the acquisition of the leasehold interests, including accrued interest and related expenses, but excluding the working capital acquired totaled $17,668. This cost represents the cancellation of an executory contract and was expensed in the second quarter of 2002. In addition, a deferred tax benefit of $6,714 was recognized in the second quarter of 2002 resulting from the timing difference of the $17,668 payment for financial reporting purposes versus tax purposes. The net effect of this transaction is a reduction in net income of $10,954, the primary reason for the increase in net income from 2002 to 2003.

     Due primarily to the acquisition of the leasehold interests from Interstate on July 1, 2002, the assumption of the leasehold interests for two hotels from Intercontinental Group on July 1, 2003, and the acquisition of the leasehold interest for one hotel from Prime in March 2004, the results of operations for the year ended December 31, 2004 versus the results of operations for the year ended December 31, 2003, and the results of operations for the year ended December 31, 2003 versus the results of operations for the year ended December 31, 2002, do not result in meaningful comparisons. 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 years ended December 31, 2004, 2003 and 2002, shown below is selected pro forma financial information on a “same store” basis for the years ended December 31, 2004, 2003 and 2002, as if the acquisition of the leasehold interests from Interstate, Intercontinental Group and Prime occurred on January 1, 2002. This information is shown for the hotels that were open for the entire periods presented and does not include discontinued operations. 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

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hotels for which the leasehold interests were acquired, as well as adjustments to undistributed property operating expenses to remove management company corporate costs, an adjustment to remove the one-time expense to acquire management agreements during 2003, and to make adjustments to management fees to reflect the fee structure per the new management agreements. Other pro forma adjustments include the removal of two hotels from 2004, one that opened in September and one that was purchased in December, the addition of one hotel for which the leasehold interest was purchased in March 2004, and the addition of one hotel that was consolidated beginning January 1, 2004. 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.

Selected Unaudited Pro Forma Financial Information — Year Ended December 31, 2004, 2003 and 2002 (in thousands)

     For purposes of this pro forma disclosure, all years shown include the 42 wholly-owned hotels that were owned during each of the years, plus one hotel owned by a joint venture (the Ponte Vedra, FL Hampton Inn, owned by the Marsh Landing joint venture), for which Barclay was the lessee on December 31, 2004 as a result of the acquisition of the leases from Interstate, Intercontinental Group, and Prime. This disclosure does not include three wholly-owned hotels as of December 31, 2004, the Roanoke, VA Courtyard by Marriott, the Greenville, SC Comfort Inn and the Chester, VA Comfort Inn. The Roanoke Courtyard by Marriott was purchased in December 2004 and the Greenville and Chester Comfort Inns were classified as “held for sale” as of December 31, 2004.

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     To help understand the differences between the pro forma information shown above, and the actual operating results of the Company, shown below is a reconciliation of the pro forma operating income to the actual operating income:

Pro Forma Revenue

     Room Revenue – Room revenue decreased from 2002 to 2003. We believe this was primarily attributable to a weak economy, as well as the addition of new competing hotels in certain of our markets, which resulted in revenue per available room (“RevPAR”) decreasing 1.8% from $53.70 in 2002 to $52.75 in 2003. Average daily rate for the year declined 2.6% from $81.71 in 2002 to $79.58 in 2003. Occupancy rates increased slightly from 65.7% in 2002 to 66.3% in 2003. Room revenue increased from 2003 to 2004. We believe this was primarily attributable to a stronger economy. RevPAR increased 6.0% from $52.75 in 2003 to $55.94 in 2004. Average daily rate for the year increased 2.4% from $79.58 in 2003 to $81.46 in 2004. Occupancy rates increased 3.6% from 66.3% in 2003 to 68.7% in 2004.

     Other Hotel Revenue – Other hotel revenue consists of food and beverage revenue and other operating departments revenue. Other hotel revenue declined from 2002 to 2003. This decrease is primarily due to a decline in food and beverage revenue consistent with the decline in room revenue as well as the continuing trend of declining telephone revenue as hotel customers rely increasingly more on their own mobile phones and calling cards for telecommunications. Other hotel revenue increased from 2003 to 2004. This increase is due to increases in food and beverage revenue due to increased occupancy, offset by the continuing trend of declining telephone revenue as hotel customers rely increasingly more on their own mobile phones and calling cards for telecommunications.

Pro Forma Expenses

     As a percentage of total hotel revenue, hotel operating expenses totaled 60.7% in 2002, 62.6% in 2003, and 62.4% in 2004. Total hotel revenue includes rooms and other hotel revenue. Hotel operating expenses include rooms and other operating expenses, as well as undistributed property operating costs and undistributed other operating costs.

     Rooms and Other Hotel Operating Expenses – Rooms and other hotel operating expenses increased from 2002 to 2003 and from 2003 to 2004. The increase from 2002 to 2003 was driven primarily by an increase in payroll costs in the rooms department. The increase from 2003 to 2004 was driven primarily by an increase in the food department payroll costs and increases in travel agent commissions and complimentary food and beverage costs, offset by a decrease in payroll costs in the rooms department.

     Undistributed Property Operating Expenses – Undistributed property operating expenses consist of general and administrative, sales and marketing, energy, repairs and maintenance, franchise fees, management fees and other costs. These costs are collectively shown as property operating costs and other operating costs in the tables above. Undistributed property operating expenses increased from 2002 to 2003 and from 2003 to 2004. The increase from 2002 to 2003 was primarily comprised of an increase in repairs and maintenance due to higher payroll costs, an increase in utility costs and an increase in general liability insurance premiums. The increase from 2003 to 2004 was primarily comprised of an increase in administrative and general payroll costs and various operating expenses consistent with the increase in occupancy, an increase in sales and marketing payroll costs, an increase in franchise fees and management fees consistent with the increase in revenues, an increase in utility costs, an

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increase in general liability insurance premiums and an increase in repairs and maintenance operating expenses consistent with the increase in occupancy.

     See “Actual Results – Years Ended December 31, 2004, 2003, and 2002” for explanations of changes in pro forma balances for the line items not explained in the pro forma discussion above.

Liquidity and Capital Resources

     The Company finances its operations from operating cash flow, which, during 2004, was principally derived from the net operating cash flows from the operations of its hotels. For the year ended December 31, 2004 and 2003, cash flow provided by operating activities was $38,548 and $25,074, respectively. The increase in cash flow provided by operations is primarily due to an increase in net income.

     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. In 2004, the Company declared total distributions of $23,916, $16,601 to its common shareholders and $7,315 to its preferred shareholders. As shown in the table below, based on the Company’s 2004 taxable income, the Company was required to distribute approximately $20,428 to maintain its REIT status.

     The Company declared a quarterly common share dividend of $0.15 per share for each quarter during 2004. The Company intends to monitor its dividend policy closely and to act accordingly as earnings dictate. The Company 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 the 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.

     In February 2004, the Company completed a public offering of 3,680,000 shares of its 8.00% Series B Cumulative Preferred Stock. The net proceeds raised in the offering totaled approximately $88.8 million, approximately $76.1 million of which was used to fully redeem the Company’s then outstanding 3,000,000 shares of 9.25% Series A Cumulative Preferred Stock plus accrued dividends. The Company used the remaining net proceeds of approximately $12.7 million to pay down its then outstanding balance under its $125 million line of credit.

     The Company’s net cash used in investing activities during the year ended December 31, 2004 totaled $61,509. Additional investments in the Company’s consolidated hotels totaled $36,802. This amount included capital expenditures of $23,924, including the acquisition of one wholly-owned hotel totaling $12,048 and additional capital improvements to wholly-owned hotels totaling $11,876. Investment in the Company’s consolidated hotels also included $12,878 for the Company’s consolidated joint venture hotels, $8,860 of which was for the development of the Courtyard by Marriott hotel in Chapel Hill, NC, which opened in September 2004, $3,962 of which was for the development of the Courtyard by Marriott hotel in Kansas City, MO, and $56 of which was for additional capital expenditures for the Ponte Vedra, FL Hampton Inn that is owned by the Marsh Landing joint venture. During the first quarter of 2004, the Company purchased its joint venture partner’s ownership interest in both the Evanston and Windsor joint ventures. The total purchase price of $8,163 exceeded the joint venture partner’s combined equity balance of $6,315. This additional purchase price was recorded as a capital addition during the first quarter of 2004.

     During 2003, the Company’s Board of Directors authorized management of the Company to sell the Greenville, SC Comfort Inn, which is classified as “held for sale” on the Company’s Consolidated Balance Sheet as of December 31, 2004 and 2003 in

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accordance with FASB No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. During 2004, the Company entered into a contract to sell the Chester, VA Comfort Inn and the hotel is classified as “held for sale” on the Company’s Consolidated Balance Sheet as of December 31, 2004. During the first quarter of 2005, both the Greenville, SC Comfort Inn and Chester, VA Comfort Inn were sold. The Company sold two hotels during 2004, including the Wilmington, NC Hampton Inn in February and the Las Vegas, NV Hampton Inn in June. The total net proceeds were $10,533. Periodically, the Company considers the sale of certain other hotels that lie outside the Company’s “mid-scale without food and beverage” and “upscale” segment focus and plans to use the proceeds to reduce debt, invest in hotel properties, or provide hotel loans.

Hotel Loans

     As of December 31, 2004, the Company had issued eight loans totaling approximately $30.8 million to third party hotel owners. The Company issued five of these loans totaling $25.8 million during 2004. The Company plans to continue to expand its hotel lending business in the future. For more information on these loans, as well as loans issued prior to 2004 and outstanding as of December 31, 2004, see Note 5 to Notes to Consolidated Financial Statements.

Acquisitions

     In December 2004, the Company acquired the Courtyard by Marriott hotel in Roanoke, VA for $12.1 million. Also in December 2004, the Company acquired an historic residential building in Kansas City, MO for $3.1 million. The property will undergo extensive renovations and is expected to be converted to a Courtyard by Marriott hotel in the second quarter of 2006, with an expected total cost of $16.7 million, net of tax credits totaling $7.7 million.

Joint Ventures

     The Company currently has investments in four joint ventures:

	•	The Company owns 49% of the Marsh Landing joint venture that owns the 118-room Hampton Inn in Ponte Vedra, FL.
	•	The Company owns an indirect 13.05% interest in the WCC Project Company LLC joint venture that owns four hotels, the 102-room Fairfield Inn & Suites in West Des Moines, IA, the 113-room Courtyard by Marriott in Beachwood, OH, the 190-room SpringHill Suites by Marriott in Houston, TX, and the 95-room Quality Suites in West Des Moines, IA that is in the process of being renovated and is expected to be converted to a SpringHill Suites by Marriott during the second quarter of 2005.
	•	The Company owns an indirect 13.05% interest in the WNC Project Company LLC joint venture that owns one hotel, the 158-room Courtyard by Marriott in Shelton, CT that was converted from a Ramada Plaza Hotel during the first quarter of 2005.
	•	The Company owns 48.78% of the Chapel Hill joint venture that owns a 147-room Courtyard by Marriott in Chapel Hill, NC that opened in September of 2004.

     The Company has consolidated the results of operations of the Marsh Landing and Chapel Hill joint ventures for the year ended December 31, 2004, while the results of operations of the WCC Project Company and WNC Project Company joint ventures were not consolidated. See Notes 3 and 4 in Notes to Consolidated Financial Statements for more information.

     During 2004, the Company received cash distributions from its unconsolidated joint ventures totaling $126. Under the terms of the joint venture agreements, the Company has provided property development and purchasing services and will continue to provide ongoing asset management services for additional fee income. Under the terms of the operating agreement for each joint venture, the Company and its joint venture partner must approve all major decisions, including refinancing or selling the respective hotels, making loans, changes in partners’ interests, entering into material contracts, acquiring assets, and approving all operating and capital expenditure budgets.

     In accordance with the provisions of FASB Interpretation No. 46 (“FIN 46”) Consolidation of Variable Interest Entities, during the third quarter of 2003 the Company consolidated the balance sheet and operations of its Chapel Hill Joint Venture. As of December 31, 2003, the Company also consolidated the balance sheets of the Evanston Joint Venture, the Windsor Joint Venture and the Marsh Landing Joint Venture. The operations of these joint ventures were consolidated beginning with the first quarter of 2004. During 2004, the Company acquired its joint venture partner’s interest in both the Evanston Joint Venture and the Windsor Joint Venture, resulting in the Company owning 100% of both the Evanton Hilton Garden Inn and the Windsor Hilton Garden Inn. As of December 31, 2004, the total assets of the consolidated joint ventures, including the Chapel Hill and Marsh Landing Joint Ventures, were $20,750, total liabilities were $15,081 ($14,388 of which represented long-term debt), and total equity was $5,669. For the years ended December 31, 2004 and 2003, the total revenue of the consolidated joint ventures (including the Chapel Hill, Marsh Landing,

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Evanston, and Windsor joint ventures) was $2,712 and $8,662, and total expenses were $2,414 and $6,329, resulting in net income of $298 and $2,333, respectively. During the year ended December 31, 2004, the financial statements of the consolidated joint ventures (including the Chapel Hill, Marsh Landing, Evanston, and Windsor joint ventures) reflected aggregate cash flow provided by operating activities of $1,236, cash used in investing activities of $9,498, principally for hotel additions, and cash provided by financing activities of $6,388, principally in the form of loan proceeds and capital contributions less distributions to joint venture partners. As of December 31, 2004, the total assets of the unconsolidated joint ventures (which consisted of the WCC Project Company and WNC Project Company joint ventures) were $50,528, total liabilities were $34,071 ($30,768 of which represented long-term debt), and total equity was $16,457. The Company’s share of the total assets, liabilities, long-term debt and equity of these unconsolidated joint ventures equated to $6,595, $4,448, $4,015 and $2,147, respectively. For the years ended December 31, 2004 and 2003, the total revenue of all of the unconsolidated joint ventures was $11,198 and $4,615, and total expenses were $11,519 and $4,508, resulting in net income (loss) of ($321) and $107, respectively. During the year ended December 31, 2004, the unaudited financial statements of the unconsolidated joint ventures reflected aggregate cash flow provided by operating activities of $3,091, cash used in investing activities of $23,823, principally for hotel additions, and cash provided by financing activities of $23,657, principally in the form of loan proceeds and capital contributions less distributions to joint venture partners.

     During 2004, the Company spent $11,876 or 9.2% of room revenue, in connection with the renovation of its wholly-owned hotels and plans to spend approximately $13,400 during 2005. Approximately $5,600 of the total capital expenditures expected to be made during 2005 is related to certain franchisor requirements. These capital expenditures are funded from operating cash flow, and possibly from borrowings under the Company’s $155,000 line of credit with GECC (the “ GE Line”), 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 were approximately 6.0% and 6.1% of room revenues in 2004 and 2003, respectively.

     The Company’s net cash provided by financing activities during the year ended December 31, 2004 totaled $21,453. This amount included net proceeds of $88,794 as a result of the issuance of 3,680,000 shares of Series B Preferred Stock, of which the Company used $75,000 to redeem the 3,000,000 shares of Series A Preferred stock and $1,059 to pay the accrued dividends. The net cash provided by financing activities also included the payment of additional distributions to shareholders of $21,954, the payment of distributions to the Partnership’s minority interest of $779, the payment of distributions to consolidated joint venture’s minority interest of $859, net long-term debt payments of $3,209, the payment of $2,131 of fees in connection with financing facilities and a net increase of $37,650 in the outstanding balance under the corporate line of credit from $29,200 at December 31, 2003 to $66,850 at December 31, 2004.

     During each quarter of 2004, the Company declared quarterly cash dividends of $0.15 per common share. During the first quarter of 2004 the Company declared cash dividends of $0.353 per Series A preferred share for the period from January 1, 2004 through February 24, 2004 and $0.20 per Series B preferred share for the period from February 24, 2004 (the issuance date of the new Series B cumulative preferred stock) through March 31, 2004. During each of the second, third and fourth quarters of 2004, the Company declared cash dividends of $0.50 per Series B preferred share. In addition, on an annual basis, the Company expects to have adequate cash flow from operations and from borrowings to fund its expected debt service, capital expenditures, and dividend obligations during 2005.

     The Company’s $125,000 line of credit (the “ Wachovia Line”) bore interest at rates from LIBOR plus 1.75% to 2.50%, based on the Company’s consolidated debt leverage ratio. As of December 31, 2004, the Wachovia Line was collateralized with 28 of the Company’s hotels, with a net book value of $182,679. During 2004, the Company increased the outstanding balance under its the Wachovia Line by $37,650, from $29,200 to $66,850. The Company’s articles of incorporation limit its debt to 60% of the cost of its investment in hotel properties, or approximately $294,000 as of December 31, 2004. As noted under “Recent Developments” above, on March 11, 2005, the Company, through its wholly-owned subsidiary, Winston SPE II LLC (“SPE II”,) entered into a five-year credit facility with General Electric Capital Corporation (“GECC”) (the “GE Line”). The Company subsequently borrowed $77.5 million under the GE Line on March 14, 2005 and used these funds to pay off all outstanding debt under the Company’s Wachovia Line, terminating this prior credit facility. The GE Line provides for revolving loan commitments and letters of credit up to $155,000. The GE Line bears interest at rates from LIBOR plus 1.75% to 2.50%, based on the ratio of the underwritten net operating income of the hotels that collateralize the credit facility to the outstanding principal debt balance. The current interest rate under the GE Line is LIBOR plus 2.00%.

     The Company’s availability under the GE Line totaled approximately $152,400 as of March 14, 2005. Total borrowings of $77,500 plus a $5,000 letter of credit were outstanding. Availability is calculated each quarter on a trailing twelve-month basis based primarily upon the underwritten net operating income of the hotels that collateralize the GE Line divided by 13%. If at any time the outstanding balance of the borrowings exceeds the lesser of $155,000 or SPE II’s trailing twelve-month underwritten net operating income, the Company must repay the total outstanding advances to the extent required to eliminate such excess. The GE Line contains customary special purpose restrictions on SPE II. As long as there is no event of default, there are no restrictions on the use of the loan proceeds, and the proceeds can be used as the Company determines. The GE Line includes usual and customary events of default for facilities of this nature and provides that, upon and during the continuation of an event of default, all outstanding loans

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under the line of credit may be accelerated, GECC’s commitments to make any further loans may be terminated and GECC may foreclose on the collateral. In addition, upon the occurrence of certain insolvency or bankruptcy related events of default, all outstanding loans under the GE Line will automatically become due and payable and the lender’s commitments to make any further loans will automatically terminate. The Company has guaranteed the payment and performance by SPE II of certain obligations under the GE Line. Borrowings under the GE Line are collateralized by 23 hotel properties owned by the Company located in nine states.

     In October 2004, the Company’s wholly-owned subsidiary, Winston Finance Partners LLC (“Winston Finance”), entered into a $50,000 master repurchase agreement with Marathon Structured Finance Fund, LP (“Marathon”) to finance the Company’s hotel loan investments (“assets”) on a short-term basis. Under the agreement, Winston Finance will sell assets to Marathon and agree to repurchase those assets on a date certain. Typically, the sale and repurchase price will be no more than 65% of the value of the asset, except for development and redevelopment assets where the limit is 45% of the asset value. In general, the repurchase price will equal the original sales price of the asset plus accrued but unpaid interest. The Company typically will pay interest to Marathon at LIBOR plus 450 basis points for loans made by the Company to acquire existing hotels, and LIBOR plus 550 basis points, plus one percent of the total loan amount as an origination fee, for loans made by the Company to develop new hotels or redevelop existing hotels. Marathon gets a security interest in each asset subject to the facility. For more information regarding the Marathon repurchase agreement and other debt facilities of the Company, see Note 7 to Notes to Consolidated Financial Statements.

     The Company had $63,550 in debt at December 31, 2004 that was subject to a fixed interest rate and fixed monthly payments with GE Capital Corporation. This debt, a ten-year loan with a 25-year amortization period, carries an interest rate of 7.375%. All unpaid principal and interest are due on December 1, 2008. The GE Capital loan was collateralized with 14 of the Company’s hotels with a net book value of $108,923 as of December 31, 2004.

     The Company recorded consolidated debt from joint ventures totaling $12,935 as of December 31, 2004. For further discussion of these debt facilities, see Note 7 to Notes to Consolidated Financial Statements.

     As required by the GE Line, on March 14, 2005, the Company entered into an interest rate cap agreement to eliminate the exposure to increases in 30-day LIBOR over 6.42% on principal balances up to $155,000 outstanding. The interest rate cap agreement terminates on October 2, 2006. On January 31, 2003, the Company completed an interest rate swap on $50,000 of its outstanding variable rate debt under the Wachovia Line. This swap began on March 31, 2003 and matured on February 27, 2004. This transaction effectively replaced the Company’s variable interest rate based on 30-day LIBOR on $50,000 of the line of credit with a fixed interest rate of 1.505%.

     As of December 31, 2004, the Company’s contractual obligations and commitments (excluding obligations and commitments pursuant to the Company’s unconsolidated joint ventures) were as follows: