SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

WINSTON HOTELS, INC.

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

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

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

The number of shares of Common Stock, $.01 par value, outstanding on April 30, 2004 was 26,340,292.

WINSTON HOTELS, INC.
Index

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

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

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

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

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WINSTON HOTELS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(in thousands, except per share amounts)

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

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

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

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

1.		ORGANIZATION
		Winston Hotels, Inc. (the “Company”), headquartered in Raleigh, North Carolina, operates so as to qualify as a real estate investment trust (“REIT”) for federal income tax purposes. During 1994, the Company completed an initial public offering of its common stock (“Common Stock”), utilizing the majority of the proceeds to acquire one hotel and a general partnership interest (as the sole general partner) in WINN Limited Partnership (the “Partnership”). The Partnership used a substantial portion of the proceeds to acquire nine additional hotel properties. The Company and the Partnership (together with the Partnership’s wholly owned subsidiaries, Barclay Hospitality Services Inc. (“Barclay”), Winston SPE, LLC, and Winston Finance LLC), are collectively referred to as the “Company”. As of March 31, 2004, the Company’s ownership in the Partnership was 95.30 percent.
		The accompanying unaudited consolidated financial statements reflect, in the opinion of management, all adjustments necessary for a fair presentation of the interim financial statements. All such adjustments are of a normal and recurring nature. Certain reclassifications have been made to the 2003 financial statements to conform to the 2004 presentation. These reclassifications have no effect on net income or shareholders’ equity previously reported. Due to the seasonality of the hotel business, the information for the three months ended March 31, 2004 and 2003 is not necessarily indicative of the results for a full year. This Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.
		As of March 31, 2004, the Company owned or was invested in 50 hotel properties in 16 states having an aggregate of 7,069 rooms. This included 45 wholly owned properties with an aggregate of 6,388 rooms, a 49 percent ownership interest in one joint venture hotel with an aggregate of 118 rooms, and a 13.05 percent ownership interest in four joint venture hotels with an aggregate of 563 rooms. The Company also had issued mezzanine loans to owners of four hotels with an aggregate of 591 rooms. The Company also held a 48.78% 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, Intercontinental Hotels Group PLC, (formerly Six Continents PLC) and Choice Hotels International.
		Currently, Alliance Hospitality Management, LLC manages 40 of the Company’s 50 hotels, Concord Hospitality Enterprises Company manages three hotels, Promus Hotels, Inc., an affiliate of Hilton Hotels Corporation manages three hotels, and New Castle Hotels, Sage Hospitality Resources, LLC, Noble Investment Group, Ltd., and Prism Hospitality Corp. each manage one hotel.
		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 unaudited consolidated statement of operations for the three months ended March 31, 2004. Alliance manages the hotel. 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 record percentage lease revenue in its consolidated statement of operations.

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2.		MINORITY INTEREST
		Minority interest as of March 31, 2004 and December 31, 2003, consists of Minority Interest in the Partnership of $7,461 and $7,671, respectively, and minority interest in consolidated joint ventures of $3,220 and $9,818, respectively.
		Minority Interest in the Partnership. Certain hotel properties have been acquired, in part, by the Partnership, through the issuance of limited partnership units of the Partnership. The equity interest in the Partnership created by these transactions represents the Company’s minority interest liability. The Company’s minority interest liability is: (i) increased or decreased by its pro-rata share of the net income or net loss, respectively, of the Partnership; (ii) decreased by distributions to unit holders; (iii) decreased by redemption of Partnership units for the Company’s Common Stock; and (iv) adjusted to equal the net equity of the Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Partnership and/or Common Stock of the Company through an adjustment to additional paid-in capital. Income (loss) is allocated to minority interest based on the weighted average percentage ownership throughout the year.
		Minority Interest in Consolidated Joint Ventures. Certain ownership interests in hotel properties have been acquired, in part, by the Company, through joint venture agreements. The equity interests of the Company’s joint venture partners of the consolidated joint ventures represent the Company’s minority interest liability (see Note 9). The Company’s minority interest liability is: (i) increased or decreased by its joint venture partners’ pro-rata share of the net income or net loss of the respective joint venture, and (ii) decreased by distributions to its joint venture partners. Income (loss) is allocated to minority interest in accordance with the provisions of each joint venture’s operating agreement.
3.		DERIVATIVE INSTRUMENTS
		The Company’s financing facilities consist of a $125,000 variable rate line of credit that matures in December 2004 (the “Line”); a $71,000 fixed rate (7.375 percent) loan with a ten-year maturity, due December 1, 2008, and a twenty-five-year amortization period; a $5,100 variable rate (LIBOR +3%) loan with a ten-year maturity, due February 1, 2011, and a twenty-five-year amortization period; a $12,300 variable rate (LIBOR +3%) loan with a ten-year maturity, due August 1, 2011, and a twenty-year amortization period; and a $9,147 variable rate (LIBOR + 3.8% during construction) construction loan with a funding cutoff date of October 1, 2004, at which time the interest rate will be fixed and the payments will be determined. The Line, which expires in December 2004, bears interest generally at rates from 30-day LIBOR plus 1.75% to 30-day LIBOR plus 2.50%, based on the Company’s consolidated debt leverage ratio as of the end of each previous calendar quarter. The Company’s interest rate as of March 31, 2004 was 30-day LIBOR (1.109% as of March 31, 2004) plus 1.75%. The Company’s interest rate beginning April 1, 2004 and for the second quarter remained at 30-day LIBOR plus 1.75%.
		To seek to manage overall interest rate risk, the Company uses interest rate hedging instruments to convert a portion of its variable-rate debt to fixed-rate debt. Interest rate differentials that arise under these instruments are recognized as interest expense over the life of the contracts. The Company’s only such instrument during the quarter ended March 31, 2004 was an interest rate swap instrument, the term of which started March 31, 2003 and ended February 27, 2004. The interest rate swap instrument effectively replaced the Company’s variable interest rate based on 30-day LIBOR on $50,000 of the Line with a fixed interest rate based on a base rate of 1.505% until February 27, 2004, and was therefore characterized as a cash flow hedge. The Line’s interest rate spread was 1.75% equating to an effective fixed rate of 3.255% on $50,000 from January 1, 2004 to February 27, 2004.

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4.		EARNINGS PER SHARE
		The following is a reconciliation of net income (loss) applicable to common shareholders used in the net income (loss) per common share calculation to the net income (loss) assuming dilution used in the net income (loss) per common shares – assuming dilution calculation:

The following is a reconciliation of the weighted average shares used in net income (loss) per common share to the weighted average shares used in net income (loss) per common share – assuming dilution:

		As of March 31, 2003, there were 1,298,480 Partnership units outstanding, 795,000 stock options outstanding, and 119,773 unvested stock grants outstanding, which were antidilutive.
		During the first quarter of 2004, the Company declared quarterly cash dividends of $0.15 per common share, $0.578125 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.
5.		INCOME TAXES
		The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under SFAS 109, the Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The income tax benefit for the three months ended March 31, 2004 consists of a deferred federal income tax benefit of $593 and a deferred state income tax benefit of $51.

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		The benefit from income taxes and related deferred tax asset were calculated using an effective tax rate of 38 percent applied to the loss of Barclay. The deferred tax asset also relates to the cost of acquiring the leases for 47 of the Company’s hotel properties from Interstate, which was expensed for financial reporting purposes in 2002. For tax purposes, this payment is being amortized over the lives of the leases. The Company believes that Barclay, through strategic tax planning, will generate sufficient future taxable income to realize in full the deferred tax asset. Accordingly, no valuation allowance has been recorded as of March 31, 2004.
6.		STOCK-BASED COMPENSATION
		The Company has one stock-based employee compensation plan, the Winston Hotels, Inc. Stock Incentive Plan. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No stock-based employee compensation cost is reflected in net income (loss) for the issuance of options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income (loss) applicable to common shareholders and net income (loss) per share as if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

7.		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 joint ventures in accordance with FASB No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FASB No. 144”). The Company records an impairment charge when it believes an investment in a hotel 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” pursuant to FASB No. 144 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

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		amount, exceeds the current carrying value. However, should the Company approve of a plan to sell these properties, an impairment charge would be required.
8.		SUMMARIZED FINANCIAL STATEMENT INFORMATION FOR JOINT VENTURES
		The Company participates in four joint venture agreements to develop and own hotel properties, one with Marsh Landing Investment, L.L.C. (“Marsh Landing”), one with Charlesbank Capital Partners, LLC (“Charlesbank”) and Concord Hospitality Enterprises Company (“Concord”), one with Charlesbank and Shelton III Hotel Equity LLC, owned in part by New Castle Hotels LLC (“New Castle”), and one with Chapel Hill Investments, LLC. The Company entered into the joint ventures with Marsh Landing during 2000, with Charlesbank and Concord during the fourth quarter of 2002, with Chapel Hill Investments, LLC during the third quarter of 2003, and with Charlesbank and New Castle during the first quarter of 2004.
		The Company currently owns a 49 p