UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

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

For the fiscal year ended December 31, 2003

Commission file number 0-23732

WINSTON HOTELS, INC.

(Exact name of registrant as specified in its charter)

(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 x No o

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

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

     The aggregate market value of the registrant’s Common Stock, $0.01 par value per share, at June 30, 2003, held by those persons deemed by the registrant to be non-affiliates was approximately $154,382,412.

     As of March 1, 2004, there were 26,340,292 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’s primary source of revenue is room revenue generated from its hotel ownership interests. 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, and providing loans to the hotel industry. The Company conducts substantially all of its operations through its operating partnership, WINN Limited Partnership, (the “Partnership”). The Company operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes.

     During 2003, the Company invested in two additional properties through its joint venture with Charlesbank Capital Partners, LLC. The Company owns an indirect 13.05 percent interest in these hotels. As of December 31, 2003, the Company owned or was invested in 50 hotel properties in 16 states having an aggregate of 7,028 rooms. This included 44 wholly owned properties with an aggregate of 6,170 rooms, a 49 percent ownership in two joint venture hotels with an aggregate of 296 rooms, a 57.65 percent ownership in one joint venture hotel with 157 rooms, and an indirect 13.05 percent ownership interest in three joint venture hotels with an aggregate of 405 rooms. The Company also had issued mezzanine loans to owners of three hotels with an aggregate of 391 rooms. The Company also held a 48.78 percent ownership interest in another joint venture that is currently constructing a 147-room Courtyard by Marriott hotel that is scheduled to open in the third quarter of 2004. The Company does not hold an ownership interest in any of the hotels for which it has provided mezzanine financing. All of the Company’s hotels are operated under franchises from nationally recognized franchisors including Marriott International, Inc., Hilton Hotels Corporation, Six Continents PLC and Choice Hotels International.

Acquisition of Leasehold Interests

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

     Effective July 1, 2002, the Company, through its wholly owned taxable REIT subsidiary, Barclay Hospitality Services Inc. (“Barclay”), acquired the leasehold interests for 45 wholly owned hotels and two joint venture hotels, for total consideration of approximately $19.5 million. During 2003, the Company assumed the leasehold interests for one wholly owned hotel and, along with its joint venture partner, the leasehold interests for one joint venture hotel, at no cost.

     As of December 31, 2003, 43 of the Company’s 44 wholly owned hotels and two of its six joint venture hotels, the Evanston, IL Hilton Garden Inn and the Ponte Vedra, FL Hampton Inn, were operated under leases with Barclay. The other wholly owned hotel, the Secaucus, NJ Holiday Inn, continued to be operated under a lease with a third party lessee. (In March 2004, the Company negotiated the transfer of this lease to Barclay at no cost). One joint venture hotel, the Windsor, CT Hilton Garden Inn, was leased to an entity owned 57.65 percent by Barclay. The remaining three joint venture hotels, the West Des Moines, IA Fairfield Inn & Suites, the Beachwood, OH Courtyard by Marriott, and the Houston, TX Best Western Park Place Suites, did not operate under leases.

     As of December 31, 2003, Alliance Hospitality Management, LLC (“Alliance”) managed 41 of the Company’s 50 hotels, Concord Hospitality Enterprises Company (“Concord”) managed three hotels, Promus Hotels, Inc., an affiliate of Hilton Hotels Corporation (“Hilton”) managed two hotels, and Sage Hospitality Resources, LLC (“Sage”), Prism Hospitality, L.P. (“Prism”), Noble Investment Group, Ltd. (“Noble”) and Prime Hospitality Corp. (“Prime”) 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 Interstate under the leases and gives the Company (i) more control over the operations of these hotels, (ii) the benefits from any operating margin improvements and risk of any operating margin deterioration at these hotels, and (iii) more flexibility, in that these hotels are no longer encumbered by long term leases 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.

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Follow-on Common Stock Offering

     The Company raised net proceeds of approximately $50.5 million as a result of a follow-on Common Stock offering in which the Company sold an additional 6,037,500 common shares. The follow-on offering was completed in October 2003 with the exercise of the underwriters’ over-allotment option, which included 787,500 common shares of the total 6,037,500 common shares. The Company initially used the net proceeds to pay down its then outstanding balance under its $125 million line of credit, and plans to use the resulting availability under the line to fund the Company’s hotel lending business, to acquire hotels or interests in hotels through joint ventures, and/or for general corporate purposes.

Narrative Description of Business

Growth Strategy

     The Company’s primary growth strategy is designed to enhance shareholder value by increasing cash available for distribution per share of Common Stock through: (i) improving hotel operating results; (ii) acquiring, either directly or through joint ventures, additional hotels, or ownership interests in hotels, that meet the Company’s investment criteria; and (iii) financing activities whereby the Company initiates hotel loans to third party hotel owners.

Improve 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 increase operating results through 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 $27.8 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 $26.8 million spent on repairs and maintenance items during that same period.

Acquisitions

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

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

     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 one hotel in 2001 and four hotels in 2002 for approximately $17.6 million. The Company did not sell any hotels during 2003.

Joint Ventures

     During the fourth quarter of 2002, the Company formed a joint venture (the “Charlesbank Venture”) with Boston-based Charlesbank Capital Partners, LLC (“Charlesbank”). The Charlesbank Venture intends to acquire more than $100 million of hotel assets. Charlesbank is a private investment firm managing capital on behalf of institutional investors. The Company owns 15% of the Charlesbank Venture and Charlesbank owns 85%. The Charlesbank Venture focuses on acquisitions that the partners believe have

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turnaround or upside potential and can benefit from additional capital and aggressive asset management, which often includes renovating, repositioning, rebranding and/or a change in management. As of December 31, 2003, the Charlesbank Venture had invested in three hotels through a joint venture (“WCC Project Company LLC”) comprised of Concord Hospitality Enterprises Company (“Concord”) and the Charlesbank Venture. The first hotel was a vacant building located in the Beachwood suburb of Cleveland, OH that was converted into a 113-room Courtyard by Marriott in the second quarter of 2003. The second hotel was a 102-room Fairfield Inn & Suites by Marriott located in Des Moines, IA, which was converted from a Wingate Inn during the summer of 2002. The third hotel was a Best Western located in Houston, TX, which was purchased in the fourth quarter of 2003 and is expected to be converted to a Spring Hill Suites by Marriott in the second quarter of 2004. Concord owns a 13% interest in the projects acquired by WCC Project Company LLC, while the Charlesbank Venture owns 87%, so that the Company has an indirect 13.05% ownership interest in WCC Project Company LLC. The total cost of these three hotels is approximately $30 million. The Company earns an asset management fee equal to 0.50% of the total cost of the assets purchased by the Charlesbank Venture.

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

     During the third quarter of 2003, the Company entered into a joint venture agreement (the “Chapel Hill Joint Venture”) with Chapel Hill Investments, LLC to develop and own hotel properties. The Chapel Hill Joint Venture is currently developing a Courtyard by Marriott hotel in Chapel Hill, NC, (the “Chapel Hill Courtyard”) which is expected to open in the summer of 2004. The Company currently owns a 48.78 percent interest in the Chapel Hill Joint Venture, while Chapel Hill Investments, LLC owns a 51.22 percent interest. The Company also has provided an additional $1,453 to capitalize the development of the hotel in the form of a preferred membership interest (“Preferred Contribution”). The Company will receive $700 for development services provided during construction. Chapel Hill Investments, LLC is owned 52 percent by Charles Winston and James Winston, both of whom are directors of the Company, and 48 percent by three unrelated private investors.

     In the fourth quarter of 2002, the Company funded a $3,500 mezzanine loan for the purchase and conversion of a historic office building into a 116-room Hampton Inn & Suites hotel in Baltimore, MD’s Inner Harbor (the “Baltimore Hotel”). Subsequently, the Company entered into a joint venture agreement (the “Hall Joint Venture”), with an affiliate of Hall Financial Group, (“Hall”). The Company assigned the $3,500 mezzanine loan to the Hall Joint Venture and retained a 50% interest (or $1,750) in the note through the joint venture. The total cost of the Baltimore Hotel, which opened in the first quarter of 2004, was approximately $13,100, net of historic tax credits of $6,000. The Company owns 50% of the Hall Joint Venture, and Hall owns the remaining 50%.

     In addition to the joint ventures described above, the Company has entered into two joint ventures with Regent Partners, Inc. (“Regent”) and one joint venture with Marsh Landing Investment, L.L.C. (the “Marsh Landing Joint Venture”). As of December 31, 2003, the Company owned a 49% interest in one joint venture with Regent and a 57.65% interest in the other joint venture, each of which owned one hotel. These hotels consist of a Hilton Garden Inn located in Evanston, IL, and a Hilton Garden Inn located in Windsor, CT, having a combined total of 453 rooms. The Company owns a 49% interest in its Marsh Landing Joint Venture, which owns a 118-room Hampton Inn located in Ponte Vedra, FL. Two of our directors, Charles M. Winston and James H. Winston, own the remaining 51% of the joint venture. During 2003 the Company earned asset management fees equal to 1.0% of the total revenues of each of these three joint venture hotels. We continue to seek additional prudent joint venture opportunities where the Company can leverage its hotel asset management and development expertise into attractive investments.

     Pursuant to the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), 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 has consolidated the balance sheets of the Evanston Joint Venture, the Windsor Joint Venture and the Marsh Landing Joint Venture, and began to consolidate the operations of these three joint ventures on January 1, 2004. Per the provisions of FIN 46, the Company has not consolidated the balance sheet or operations of either the Hall Joint Venture or the Charlesbank joint venture as of December 31, 2003, and does not expect to do so in the future.

Hotel Financing

     As of December 31, 2003, the Company had issued three mezzanine loans. In addition to the Hall mezzanine loan, the Company had two other mezzanine loans outstanding, totaling approximately $3.3 million to third party hotel owners. In February 2004, the Company issued its fourth mezzanine loan in the amount of $2.4 million. 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%

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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 leverage its hotel underwriting and development expertise into attractive investments. The Company expects to use a portion of the $50.5 million in cash proceeds from its follow-on common stock offering in October 2003, a portion of the $12.9 million in net cash proceeds remaining from its Series B Cumulative Preferred Stock offering in February 2004, (see “Recent Developments” below) and possibly a portion of the remaining availability under its $125 million line of credit to provide loans to the hotel industry.

Recent Developments

     In February 2004, the Company sold its 118-room Hampton Inn in Wilmington, NC for net cash proceeds of $3.4 million, resulting in a gain of approximately $0.3 million. The Company also issued its fourth mezzanine loan, totaling $2.4 million, to the owner of the 200-room Sheraton hotel in Atlantic Beach, NC.

     In February 2004, the Charlesbank Venture invested in a fourth hotel through a joint venture with Shelton III Hotel Equity LLC, owned in part by New Castle Hotels LLC (“New Castle”) and the Charlesbank Venture (“WNC Project Company LLC”). This hotel is a Ramada Inn that the partners expect to convert to a Courtyard by Marriott in early 2005. The total cost of the project is expected to be approximately $14 million (including approximately $5 million in renovation costs), approximately $9 million of which is financed through debt. New Castle owns a 13% interest in the project while the Charlesbank Venture owns 87%, so that the Company has an indirect 13.05% ownership interest in WNC Project Company LLC.

     In February 2004, the Company completed the issuance of 3,680,000 shares of its 8.00% Series B Cumulative Preferred Stock. The net proceeds raised totaled approximately $89 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 proceeds of approximately $12.9 million to pay down its then outstanding balance under its $125 million line of credit, and plans to use the resulting availability under the line to fund the Company’s hotel lending business, to acquire hotels or interests in hotels through joint ventures, and/or for general corporate purposes.

     The costs capitalized as part of the issuance of the Series A Cumulative Preferred Stock in September 1997 totaled approximately $1.7 million as of February 2004 and will be recorded as a reduction in net income (loss) available to common shareholders in the first quarter of 2004.

     In March 2004, the Company purchased its joint venture partner’s ownership interest in both the Evanston, IL Hilton Garden Inn hotel and the Windsor, CT Hilton Garden Inn hotel. Prior to the purchase, Regent Partners, Inc. owned 51 percent of the Evanston hotel and 42.35 percent of the Windsor hotel. The amount paid for Regent’s ownership interest in the Evanston Hilton Garden Inn totaled approximately $6.9 million, and was based on a value of $25.25 million for the sale of the hotel, net of debt assumed of approximately $11.8 million, such assumption being subject to the approval of the lenders under our $125 million line of credit. The amount paid for Regent’s ownership interest in the Windsor Hilton Garden Inn totaled approximately $1.2 million, and was based on a value of $12.25 million for the sale of the hotel, net of debt paid off of approximately $9.3 million. As a result of the purchases, the Company owns 100 percent of the equity in the entities that own the Evanston, IL Hilton Garden Inn and the Windsor, CT Hilton Garden Inn hotels. Prior to the purchase, Barclay leased the Evanston hotel and Windsor Lessee Company LLC leased the Windsor hotel. Barclay will continue to lease the Evanston hotel and, as a result of the purchase, Barclay will assume the lease of the Windsor hotel from Windsor Lessee Company LLC.

     As of December 31, 2003, one wholly owned property, the Secaucus, NJ Holiday Inn, continued to be operated under a long-term lease with Prime. In March 2004, the Company negotiated the transfer of this lease to Barclay at no cost. The Company also expects to receive payment from Prime of approximately $300 as part of the negotiated settlement. The Secaucus, NJ Holiday Inn produced a net loss to Prime of approximately $160 for the year ended December 31, 2003.

Operations and Property Management

     As of December 31, 2003, Alliance managed 41 of the Company’s 50 hotels, Concord managed three hotels, Hilton managed two hotels, and Sage, Prism, and Noble each managed one hotel. One wholly owned property continued to be operated under a long-term lease with Prime. In March 2004, the Company negotiated the transfer of this lease to Barclay at no cost.

     The information below, regarding the hotel managers and third party lessee of the Company’s hotels, is as of December 31, 2003:

     Alliance, a hotel management company, operated 41 of the Company’s hotels.

     Concord, a hotel development and management company, operated a total of 37 hotels in eight states and Canada.

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     Hilton, a New York Stock Exchange listed company, is a developer, owner, manager or franchisor of 2,100 hotels, resorts and vacation ownership properties. Its portfolio includes many of the world’s best known and most highly regarded hotel brands, including Hilton, Doubletree, Embassy Suites, Hampton Inn, Homewood Suites by Hilton, Red Lion Hotels & Inns and Conrad International.

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

     Prism, a hotel management company, operated a total of 40 hotels in 13 states.

     Noble, a hotel development and management company, operated 20 upscale, full service, mid-market and all-suites hotels in six states. Noble holds a 79 percent ownership interest in Alliance.

     Prime, a New York Stock Exchange listed company, owned, operated, managed or franchised over 240 hotels throughout North America. Prime, one of the nation’s premier lodging companies, operates three proprietary brands, Prime Hotels & Resorts (full-service), AmeriSuites (all-suites) and Wellesley Inns & Suites (limited-service). It also owns and/or manages hotels operated under franchise agreements with national hotel chains.

Franchise Agreements

     All of the Company’s hotels operate under franchise licenses from national hotel franchisors including Marriott International, Inc., Hilton Hotels Corporation, Six Continents PLC and Choice Hotels International. The Company anticipates that most of the additional hotel properties in which it invests will be operated under franchise licenses with these same franchisors. Franchisors provide a variety of benefits for franchisees 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, 2003, of the 50 hotels’ franchise licenses, including six joint venture hotels, two expire in 2006, two expire in 2007, four expire in 2008, three expire in 2009, two expire in 2010, three expire in 2011, one expires in 2013, one expires in 2015, two expire in 2016, 13 expire in 2017, nine expire in 2018, one expires in 2020, four expire in 2022, two expire in 2023 and one expires in 2024. 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.

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 14 employees as of March 1, 2004. We believe that our relations with our employees are good.

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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-Garland (Dallas), Texas and the Comfort Inn-Greenville, South Carolina. In each of the asbestos surveys, the consultants discovered the presence of ACMs. The Company is monitoring the presence of the ACMs with the assistance of its consultants.

     During 2002, the Company invested in the Beachwood, OH Courtyard by Marriott hotel, which is currently owned by WCC Project Company LLC. The Company’s current 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 which can be transported by outside air currents, there can be no assurances that black mold will not again enter and grow in this hotel or that it will not be found in the Company’s other hotel properties.

     The Company believes that its hotels are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances and other environmental matters. The Company has not been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental substances in connection with any of its properties.

Tax Status

     The Company elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended, effective for its short taxable year ended December 31, 1994. The Company believes that it qualifies for taxation as a REIT, and with certain exceptions, the Company will not be subject to tax at the corporate level on its taxable income that is distributed to the shareholders of the Company. A REIT is subject to a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income. Failure to qualify as a REIT will render the Company subject to federal income tax (including any applicable minimum tax) on its taxable income at regular corporate rates and distributions to the shareholders in any such year will not be deductible by the Company. Although the Company does not intend to request a ruling from the Internal Revenue Service (the “Service”) as to its REIT status, the Company, in connection with its February 2004 preferred stock offering, has obtained the opinion of its legal counsel that the Company qualifies as a REIT, which opinion is based on certain assumptions and

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representations and is not binding on the Service or any court. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income and properties.

     Under the RMA, the Company may now own up to 100% of one or more taxable REIT subsidiaries (“TRS”). A TRS is a taxable corporation that may lease hotels under certain circumstances, provide services to the Company, and perform activities such as third party management, development, and other independent business activities. Overall, no more than 20% of the value of the Company’s assets may consist of securities of one or more TRSs. In addition, no more than 25% of the Company’s gross income for any year, excluding all TRS revenues, but including any dividends received from TRSs, may consist of dividends from one or more TRSs and other income that is not derived from real estate sources.

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

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

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

Seasonality

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

Executive Officers of the Company

     The following table lists the executive officers of the Company:

     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 39 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.

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     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.

Available Information

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

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ITEM 2. PROPERTIES

     As of December 31, 2003, the Company owned 44 hotels with an aggregate of 6,170 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, 2003 and 2002.

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     In addition to our wholly-owned hotels, we maintain investments in joint ventures that in the aggregate owned six hotels as of December 31, 2003. The following table sets forth certain unaudited information about the hotels owned through joint ventures with third parties for the years ended December 31, 2003 and 2002.