<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C.  20549
                                   FORM 10-K/A

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
     EXCHANGE ACT OF 1934

     For the fiscal year ended December 31, 1996                 

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 
     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from                    to

                         Commission file number 1-14280

                               HOST FUNDING, INC.
               ---------------------------------------------------
               (Exact name of Company as specified in its charter)

         Maryland                                              52-1907962     
--------------------------------                           -------------------
(State or other jurisdiction of                             (I.R.S. Employer  
 incorporation or organization)                            Identification No.)


6116 N. Central Expressway, Suite 1313, Dallas, Texas            75206        
-----------------------------------------------------      -------------------
(Address of principal executive offices)                       (Zip Code)     

Company's telephone number, including area code              (214) 750-0760   
                                                           -------------------

Securities registered pursuant to Section 12(b) of the Act:  None 
                                                             ---- 

Securities registered pursuant to Section 12 (g) of the Act.

                     Class A Common Stock - $0.01 par value                  
                     -------------------------------------- 
                                (Title of Class)

Indicate by check mark whether the Company (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 Company 
was required to file such reports), and (2) has been subject to such filing 
requirements for the past 90 days.  Yes   X     No        
                                       -------    ------- 

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

The aggregate market value of the voting stock held by non-affiliates of the 
Company (totaling 789,999 shares) was $7,801,240 (based upon the closing bid 
of the Company's common stock on the AMEX on February 28, 1997 of $9.875 per 
share).  The term affiliates is deemed, for this purpose only, to refer only 
to directors, officers and principal stockholders of the Company.

Indicate the number of shares outstanding of each of the Company's classes of 
common stock, as of the latest practicable date.

The number of outstanding shares of the Company's Class A Common Stock was 
1,374,049 and Class B Common Stock 140,000 as of February 28, 1997.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part III: Proxy Statement for the 1997 Annual Meeting of Stockholders to be 
held May 21, 1997.

<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K

          On March 31, 1997, the Registrant filed its Annual Report on Form 10-K
          for the fiscal year ended December 31, 1996 in which the Registrant
          disclosed the acquisition of a Super 8 Hotel located in Flagstaff, 
          Arizona (the "Flagstaff Super 8") for a gross purchase price of
          $5,125,000 excluding closing expenses.  The effective closing date of
          the Flagstaff Super 8 was March 14, 1997.  Reference is made to the
          Annual Report on Form 10-K filed by the Registrant on March 31, 1997
          which includes a more detailed description of the acquisition of the
          Flagstaff Super 8.
          
          The financial statements of the Flagstaff Super 8 and the pro forma
          financial information of the Registrant which were not available on
          the date of filing of the Annual Report on Form 10-K are attached to
          this Report on Form 10-K/A.  The information set forth in this Report
          supplements the information previously provided in the Annual Report
          on Form 10-K and should be read in accordance therewith.
          
(a)  The following financial statements are filed as part of this Form 10-K/A:

     (1)  Financial Statements:

          The Report of Independent Accountants and the following consolidated
          Financial Statements of the Company are included herein:
          
          Consolidated Balance Sheet--December 31, 1996 and December 31, 1995.
          
          Consolidated Statement of Operations--Year ended December 31, 1996 and
          nine months ended December 31, 1995.
          
          Consolidated Statement of Shareholders' Equity (Deficit)--Year ended
          December 31, 1996 and nine months ended December 31, 1995.
          
          Consolidated Statement of Cash Flows--Year ended December 31, 1996 and
          nine months ended December 31, 1995.
          
          Notes to Consolidated Financial Statements
     
     (2)  Historical Summaries of Acquired Properties
     
     Attached to this Report are the Historical Summaries of Gross Revenues 
     and Direct Operating Expenses of the Flagstaff Super 8 in compliance with 
     the rules and regulations of the Securities and Exchange Commission.

                                      2 
<PAGE>

     (3)  Pro Forma Financial Information

     Attached to this Report are the pro forma condensed financial statements of
     the Registrant prepared in accordance with Article 11 of Regulation S-X.


(b)  Exhibits.

Exhibit Number                         Description 
--------------                         ----------- 
     10.1          Agreement to Purchase Motel between Teacher's Retirement 
                   System of the State of Illinois, as Seller, and Host Funding,
                   Inc., as Purchaser, as from time to time amended by the 
                   parties thereto (Flagstaff, Arizona) (incorporated by 
                   reference to Exhibit 10.1 to Registrant's Annual Report on 
                   Form 10-K filed on March 31, 1997).

     10.2          Assignment of Agreement to Purchase Motel dated effective 
                   as of May 14, 1997, by and between Host Funding, Inc., as 
                   Assignor, and Host Ventures, Inc., as Assignee (Flagstaff, 
                   Arizona) (incorporated by reference to Exhibit 10.2 to
                   Registrant's Annual Report on Form 10-K filed on March 31, 
                   1997).

     10.3          Lease Agreement dated March 14, 1997 by and between Host 
                   Ventures, Inc., as Lessor, and Crossroads Hospitality Tenant
                   Company, L.L.C., as Lessee (Flagstaff, Arizona) (incorporated
                   by reference to Exhibit 10.6 to Registrant's Annual Report on
                   Form 10-K filed on March 31, 1997).








                                      3 
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Host Funding, Inc.


By:  /s/  MICHAEL S. McNULTY 
   -------------------------------- 
          Michael S. McNulty 
Title:    President

Date:     May 30, 1997

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.

        Signature                     Title                       Date 
        ---------                     -----                       ---- 

/s/  WILLIAM M. BIRDSALL 
-----------------------------------  Chairman of the Board    May 30, 1997 
William M. Birdsall                


/s/  MICHAEL S. McNULTY 
-----------------------------------  President and Director   May 30, 1997 
Michael S. McNulty


/s/  BONA K. ALLEN 
-----------------------------------  Chief Financial and      May 30, 1997 
Bona K. Allen                        Accounting Officer 


/s/  DON W. COCKROFT 
-----------------------------------  Director                 May 30, 1997 
Don W. Cockroft


/s/  GUY E. HATFIELD 
-----------------------------------  Director                 May 30, 1997 
Guy E. Hatfield


/s/  CHARLES R. DUNN 
-----------------------------------  Director                 May 30, 1997 
Charles R. Dunn 


                                      4 
<PAGE>

                          INDEX TO FINANCIAL STATEMENTS

                               HOST FUNDING, INC.

<TABLE>
I.  HOST FUNDING, INC. FINANCIAL STATEMENTS
 <S>  <C>                                                                   <C>
 A.  Host Funding, Inc.'s Pro Forma Financial Statements
     Introduction to Estimated Pro Forma Financial Statements. . . . . . . .        F-3
     Unaudited Estimated Pro Forma Statement of Income for the year
       ended December 31, 1996, the twelve months ended March 31, 1997
       and the Three months ended March 31, 1997 and March 31, 1996. . . . .  F-4 - F-7
     Notes to Unaudited Estimated Pro Forma Financial Statements . . . . . .  F-8 - F-9

 B.  Host Funding, Inc.'s Financial Statements for the year ended
       December 31, 1996
      Report of Independent Accountants. . . . . . . . . . . . . . . . . . .        F-10
      Consolidated Balance Sheet as of December 31, 1996 and 1995. . . . . .        F-11
      Consolidated Statement of Operations for the year ended
        December 31, 1996 and the nine months ended December 31, 1995. . . .        F-12
      Consolidated Statement of Shareholders' Equity (Deficits) for
        the year ended December 31, 1996 and the nine months ended
        December 31, 1995. . . . . . . . . . . . . . . . . . . . . . . . . .        F-13
      Consolidated Statement of Cash Flows for the year ended
        December 31, 1996 and the nine months ended December 31, 1995. . . . F-14 - F-15
      Notes to Consolidated Financial Statements . . . . . . . . . . . . . . F-16 - F-30
      Schedule III - Real Estate and Accumulated Depreciation. . . . . . . .        F-31

 C.  Host Funding, Inc.'s Financial Statements for the three months ended
       March 31, 1997 and 1996 (unaudited) (included in Host Funding, Inc.'s
       previously filed Form 10-Q for the quarter ended March 31, 1997,
       incorporated by reference)
        Consolidated Balance Sheets as of March 31, 1997 (unaudited) and
          December 31, 1996
        Consolidated Statements of Operations for the three months ended
          March 31, 1997 and 1996 (unaudited)
        Consolidated Statements of Shareholders' Equity for the three months
          ended March 31, 1997 and 1996 (unaudited)
        Consolidated Statements of Cash Flows for the three months ended
          March 31, 1997 and 1996 (unaudited)


II. SUPER 8 MOTEL - FLAGSTAFF

 A.  Historical Summary of Gross Revenue and Direct Operating Expenses 
       for the year ended December 31, 1996, the period January 1 to 
       March 14, 1997 (unaudited) and the three months ended March 31,
       1996 (unaudited)
        Independent Auditor's Report . . . . . . . . . . . . . . . . . . . .        F-32


                                    F-1 
<PAGE>

        Historical Summary of Gross Revenue and Direct Operating Expenses 
          (Excluding Income Taxes) for the year ended December 31, 1996, 
          the period January 1 to March 14, 1997 (unaudited) and the three
          months ended March 31, 1997 (unaudited). . . . . . . . . . . . . .        F-33
        Notes to Historical Summaries. . . . . . . . . . . . . . . . . . . . F-34 - F-37

 B.  Financial Statements for the period March 15 to March 31, 1997
       (unaudited)
      Statement of Revenues and Expenses (Excluding Income Taxes) for the
        period March 15 to March 31, 1997 (unaudited). . . . . . . . . . . .        F-38
      Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-39 - F-40
</TABLE>





                                    F-2 
<PAGE>

                               HOST FUNDING, INC.

                UNAUDITED ESTIMATED PRO FORMA STATEMENT OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 1996
                     THE TWELVE MONTHS ENDED MARCH 31, 1997
               AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996



     The following unaudited estimated pro forma statements of income give
effect to: (i) the acquisition of Mission Bay; (ii) the acquisition of the
four Acquired Properties; (iii) the commencement of the Transfer Leases with
Crossroads; (iv) the commencement of the Acquired Properties Leases with
Crossroads; (v) the acquisition of Flagstaff; and (vi) certain other
transactions described in the notes hereto as though such transactions
occurred on January 1, 1996.

     The estimated pro forma information is based in part upon the historical
statements of income or operations of the Company, the Initial Hotels,
Mission Bay, the Acquired Properties and Flagstaff.  Such information should
be read in conjunction with all of the financial statements and notes thereto
included in this Form 10-KA.  In the opinion of management, all adjustments
necessary to reflect the effects of the transactions discussed above have
been reflected in the estimated pro forma data.

     The following unaudited estimated pro forma data is not necessarily
indicative of what the actual financial position or results of operations for
the Company would have been as of the date or for the period indicated, or
does it purport to represent the results of operations for the Company for
future periods.






                                     F-3

<PAGE>

                                   HOST FUNDING, INC.
                         ESTIMATED PRO FORMA STATEMENT OF INCOME
                                      (UNAUDITED)

<TABLE>
                                                                 Twelve Months Ended
                                                                  December 31, 1996
                                                     --------------------------------------------
                                                                     Pro Forma
                                                     Historical     Adjustments        Pro Forma
<S>                                                  <C>            <C>                <C>
Revenues:
  Lease revenue - related party                      $   278,453    $  (278,453)(A)   $
  Lease revenue - Crossroads                           1,262,165      2,464,222 (B)     3,726,387
  Interest income - related parties                      219,467         18,214 (B)       237,681
  Interest income                                          8,698         (8,698)(C)
                                                     -----------    -----------       -----------
      Total revenues                                   1,768,783      2,195,285         3,964,068
                                                     -----------    -----------       -----------

Expenses:
  Interest                                               780,015      1,513,777 (D)     2,293,792
  Depreciation and amortization                          289,098        592,471 (E)       881,569
  Administrative expenses - related parties              224,000       (224,000)(F)
  Administrative expenses - other                        427,980        120,420 (G)       548,400
  Advisory fees - related parties                         21,083        (21,083)(H)
  Property taxes                                         138,675        141,325 (I)       280,000
  Amortization of unearned directors' compensation        37,208         16,792 (J)        54,000
                                                     -----------    -----------       -----------
      Total expenses                                   1,918,059      2,139,702         4,057,761
                                                     -----------    -----------       -----------
Estimated net income                                 $  (149,276)   $    55,583       $   (93,693)
                                                     -----------    -----------       -----------
                                                     -----------    -----------       -----------

Estimated net income per share                                                        $     (0.06)
                                                                                      -----------
                                                                                      -----------

Estimated weighted average shares outstanding                                           1,514,049
                                                                                      -----------
                                                                                      -----------
</TABLE>

                   See notes to estimated pro forma financial statements.

                                            F-4

<PAGE>

                                   HOST FUNDING, INC.
                         ESTIMATED PRO FORMA STATEMENT OF INCOME
                                      (UNAUDITED)

<TABLE>
                                                                 Twelve Months Ended
                                                                    March 31, 1997
                                                     --------------------------------------------
                                                                     Pro Forma
                                                     Historical     Adjustments        Pro Forma
<S>                                                  <C>            <C>                <C>
Revenues:
  Lease revenue - related party                      $    77,941    $   (77,941)(A)   $
  Lease revenue - Crossroads                           2,011,322      1,712,867 (B)     3,724,189
  Interest income - related parties                      233,992          3,689 (B)       237,681
  Interest income                                          9,706         (9,706)(C)
                                                     -----------    -----------       -----------
      Total revenues                                   2,332,961      1,628,909         3,961,870
                                                     -----------    -----------       -----------
Expenses:
  Interest                                             1,196,533      1,097,259 (D)     2,293,792
  Depreciation and amortization                          430,562        451,007 (E)       881,569
  Administrative expenses - related parties               44,000        (44,000)(F)
  Administrative expenses - other                        702,296       (153,896)(G)       548,400
  Advisory fees - related parties                         23,583        (23,583)(H)
  Property taxes                                         183,682         96,318 (I)       280,000
  Amortization of unearned directors' compensation        50,708          3,292 (J)        54,000
                                                     -----------    -----------       -----------
      Total expenses                                   2,631,364      1,426,397         4,057,761
                                                     -----------    -----------       -----------
Estimated net income                                 $  (298,403)   $   202,512       $   (95,891)
                                                     -----------    -----------       -----------
                                                     -----------    -----------       -----------

Estimated net income per share                                                        $     (0.06)
                                                                                      -----------
                                                                                      -----------

Estimated weighted average shares outstanding                                           1,514,049
                                                                                      -----------
                                                                                      -----------
</TABLE>

                   See notes to estimated pro forma financial statements.

                                            F-5

<PAGE>

                                    HOST FUNDING, INC.
                         ESTIMATED PRO FORMA STATEMENT OF INCOME
                                      (UNAUDITED)


<TABLE>
                                                                 Three Months Ended
                                                                    March 31, 1997
                                                     --------------------------------------------
                                                                     Pro Forma
                                                     Historical     Adjustments        Pro Forma
<S>                                                  <C>            <C>                <C>
Revenues:
  Lease revenue - related party                      $      -       $         0 (A)   $
  Lease revenue - Crossroads                             749,157        143,646 (B)       892,803
  Interest income - related parties                       59,420              0 (B)        59,420
  Interest income                                          1,008         (1,008)(C)
                                                     -----------    -----------       -----------
      Total revenues                                     809,585        142,638           952,223
                                                     -----------    -----------       -----------
Expenses:
  Interest                                               519,149         54,299 (D)       573,448
  Depreciation and amortization                          177,401         42,991 (E)       220,392
  Administrative expenses - related parties                 -                 0 (F)
  Administrative expenses - other                        274,316       (137,216)(G)       137,100
  Advisory fees - related parties                          2,500         (2,500)(H)
  Property taxes                                          61,585          8,415 (I)        70,000
  Amortization of unearned directors' compensation        13,500              0 (J)        13,500
                                                     -----------    -----------       -----------
      Total expenses                                   1,048,451        (34,011)        1,014,440
                                                     -----------    -----------       -----------
Estimated net income                                 $  (238,866)   $   176,649       $   (62,217)
                                                     -----------    -----------       -----------
                                                     -----------    -----------       -----------

Estimated net income per share                                                        $     (0.04)
                                                                                      -----------
                                                                                      -----------

Estimated weighted average shares outstanding                                           1,514,049
                                                                                      -----------
                                                                                      -----------
</TABLE>

                   See notes to estimated pro forma financial statements.

                                            F-6

<PAGE>

                                   HOST FUNDING, INC.
                         ESTIMATED PRO FORMA STATEMENT OF INCOME
                                      (UNAUDITED)


<TABLE>
                                                                 Three Months Ended
                                                                    March 31, 1997
                                                     --------------------------------------------
                                                                     Pro Forma
                                                     Historical     Adjustments        Pro Forma
<S>                                                  <C>            <C>                <C>
Revenues:
  Lease revenue - related party                      $   200,512    $  (200,512)(A)   $
  Lease revenue - Crossroads                                -           888,589 (B)       888,589
  Interest income - related parties                       44,895         14,525 (B)        59,420
  Interest income                                           -                 0 (C)
  FF&E reserve income - related parties                                       0
                                                     -----------    -----------       -----------
      Total revenues                                     245,407        702,602           948,009
                                                     -----------    -----------       -----------

Expenses:                                                                       (D)
  Interest                                               102,631        470,817 (E)       573,448
  Depreciation and amortization                           35,937        184,455 (F)       220,392
  Administrative expenses - related parties              180,000       (180,000)(G)
  Administrative expenses - other                           -           137,100 (H)       137,100
  Advisory fees - related parties                           -                 0 (I)
  Property taxes                                          16,578         53,422 (J)        70,000
  Amortization of unearned directors' compensation          -            13,500 (S)        13,500
  Provision for income taxes                                                  0 (T)          -
                                                     -----------    -----------       -----------
      Total expenses                                     335,146        679,294         1,014,440
                                                     -----------    -----------       -----------
Estimated net income                                 $   (89,739)   $    23,308       $   (66,431)
                                                     -----------    -----------       -----------
                                                     -----------    -----------       -----------

Estimated net income per share                                                        $     (0.04)
                                                                                      -----------
                                                                                      -----------

Estimated weighted average shares outstanding                                           1,514,049
                                                                                      -----------
                                                                                      -----------
</TABLE>

                   See notes to estimated pro forma financial statements.

                                            F-7

<PAGE>


                              HOST FUNDING, INC.
               NOTES TO ESTIMATED PRO FORMA FINANCIAL STATEMENTS
                                (UNAUDITED)


     (A) Represents the effect of the reversal of the lease revenue - related
party, which leases were terminated upon the completion of the Stock Offering.

     (B) Represents the effect of the Transferred, Acquired Properties and
Flagstaff Leases with Crossroads, Unsecured Directors' Compensation Notes and
Related Party Note Receivable on revenues. Rent is derived from annual base
rent and percentage rent calculated based upon various revenue and percentage
levels for individual leases on individual hotels as follows:

<TABLE>
                                                        Twelve                            Three          Three
                                                       Mo. Ended      Year Ended        Mo. Ended      Mo. Ended
                                                       March 31,      December 31,      March 31,      March 31,
                                                         1997             1996            1997           1996
                                                     ------------     ------------     -----------    ----------
     <S>                                            <C>               <C>              <C>            <C>
     Base and Percentage Rent                        $  3,724,189     $  3,726,387     $   892,803    $   888,589
     Less:  Amounts included in historical
          operating results                            (2,011,322)      (1,262,165)       (749,157)            0
                                                     ------------     ------------     -----------    ----------
                                                     $  1,712,867     $  2,464,222     $   143,646    $  888,589
                                                     ------------     ------------     -----------    ----------
                                                     ------------     ------------     -----------    ----------
Interest Income - related parties is as follows:
     Related party note receivable                   $    237,681     $    237,681     $    59,420    $   59,420
     Less:  Amounts included in historical
          operating results                              (233,992)        (219,467)        (59,420)      (44,895)
                                                     ------------     ------------     -----------    ----------
                                                     $      3,689     $     18,214     $         0    $   14,525
                                                     ------------     ------------     -----------    ----------
                                                     ------------     ------------     -----------    ----------
</TABLE>

In addition, the Company is responsible for replacement reserve expenditures
under the Transferred, Acquired Properties and Flagstaff Leases with
Crossroads, which amounts are equal to 6% of Transferred Property gross
revenues, 4% of Acquired Properties gross revenues and 5% of Flagstaff gross
revenues.

     (C) For Pro Forma estimated purposes, no interest income is recognized.

     (D) Represents the effects of payments due and amortization of loan fees
for the Cross Host and Host Ventures Loan Facilities after the Acquired
Properties and Flagstaff acquisitions as follows:

<TABLE>
                                                        Twelve                            Three          Three
                                                       Mo. Ended      Year Ended        Mo. Ended      Mo. Ended
                                                       March 31,      December 31,      March 31,      March 31,
                                                         1997             1996            1997           1996
                                                     ------------     ------------     -----------    ----------
     <S>                                            <C>               <C>              <C>            <C>
     Interest Expense                                $  2,293,792     $  2,293,792     $   573,448    $  573,448
     Less:  Amounts included in historical
       operating results                               (1,196,533)        (780,015)       (519,149)     (102,631)
                                                     ------------     ------------     -----------    ----------
                                                     $  1,097,259     $  1,513,777     $    54,299    $  470,817
                                                     ------------     ------------     -----------    ----------
                                                     ------------     ------------     -----------    ----------
</TABLE>

                                            F-8

<PAGE>

     (E) Represents the effect of the acquisition of the Initial Hotels,
Mission Bay, the Acquired Properties and Flagstaff on depreciation and
amortization expense.  Depreciation expense is calculated on a straight line
basis over the estimated lives of buildings, improvements and equipment of up
to 35 years.  Franchise fee amortization is calculated on a straight-line
basis over the life of the franchise agreement.

<TABLE>
                                                        Twelve                            Three          Three
                                                       Mo. Ended      Year Ended        Mo. Ended      Mo. Ended
                                                       March 31,      December 31,      March 31,      March 31,
                                                         1997             1996            1997           1996
                                                     ------------     ------------     -----------    ----------
     <S>                                            <C>               <C>              <C>            <C>
     Depreciation and amortization expense           $    881,569     $   881,569      $   220,392    $  220,392
     Less:  Amounts included in historical
       operating results                                 (430,562)        (289,098)       (177,401)      (35,937)
                                                     ------------     ------------     -----------    ----------
                                                     $    451,007     $    592,471     $    42,991    $  184,455
                                                     ------------     ------------     -----------    ----------
                                                     ------------     ------------     -----------    ----------
</TABLE>

      (F) Represents the reversal of the administrative expenses - related
parties, which agreement was canceled upon completion of the Stock Offering.

      (G) Represents estimated general and administrative expenses of Host
Funding related to independent trustee fees, legal, accounting, employment
agreements and other administrative expenses as detailed below.

<TABLE>
                                                        Twelve                            Three          Three
                                                       Mo. Ended      Year Ended        Mo. Ended      Mo. Ended
                                                       March 31,      December 31,      March 31,      March 31,
                                                         1997             1996            1997           1996
                                                     ------------     ------------     -----------    ----------
     <S>                                            <C>               <C>              <C>            <C>
     Independent trustee fees                        $     20,000     $     20,000     $     5,000    $    5,000
     Legal fees                                            40,000           40,000          10,000        10,000
     Accounting fees                                       40,000           40,000          10,000        10,000
     Employment agreements                                335,000          335,000          83,750        83,750
     Other administrative expense                         113,400          113,400          28,350        28,350
     Less:  Amounts included in historical
       operating results                                 (702,296)        (427,980)       (274,316)            0
                                                     ------------     ------------     -----------    ----------
                                                     $   (153,896)    $    120,420     $  (137,216)   $  137,100
                                                     ------------     ------------     -----------    ----------
                                                     ------------     ------------     -----------    ----------
</TABLE>

These amounts have been estimated by Host Funding based on management's
experience and/or discussions with service providers.

     (H) Represents the reversal of the Advisory fees - related parties which
agreement was terminated February 1, 1997.

     (I) Represents the estimated property taxes due after execution of the
Transferred, Acquired Properties and Flagstaff Leases, which expense is the
obligation of the lessor.

     (J) Represents amortization of unearned director's compensation for
independent directors pursuant to vesting provisions in the share purchase
plan agreements and the assumption the directors will become fully vested.


                                            F-9

<PAGE>

                    REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Shareholders of
  Host Funding, Inc.


We have audited the consolidated financial statements and the financial
statement schedule of Host Funding, Inc. and subsidiary listed in the index on
page 31 of this Form 10-K.  These financial statements and schedule are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Host Funding, Inc.
at December 31, 1996 and December 31, 1995 and the results of its operations and
its cash flows for the year ended December 31, 1996 and the nine months ended
December 31, 1995, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information required
to be included therein.

COOPERS & LYBRAND, L.L.P.


San Diego, California
February 14, 1997, except as to the information presented in Note 8,
  for which the date is March 14, 1997



                                      F-10

<PAGE>

                               HOST FUNDING, INC.
                           CONSOLIDATED BALANCE SHEET

<TABLE>
-------------------------------------------------------------------------------------------------
                                                                      December 31,   December 31,
                                                                          1996           1995
-------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>
                                     ASSETS

LAND, PROPERTY AND EQUIPMENT - AT COST:
  Building and improvements                                            $12,644,239    $ 1,813,261
  Furnishings and equipment                                              1,952,233        285,929
  Less accumulated depreciation                                           (391,009)      (103,663)
                                                                       -----------    -----------
                                                                        14,205,463      1,995,527
  Land                                                                   4,808,047        642,287
                                                                       -----------    -----------

       Land, property and equipment - net                               19,013,510      2,637,814

CASH AND CASH EQUIVALENTS                                                  218,693            500

RESTRICTED CASH                                                            128,952           -

RENT RECEIVABLE - CROSSROADS                                               223,160           -

DUE FROM RELATED PARTIES                                                    30,390         35,234

LONG-TERM ADVANCES TO CROSSROADS                                           225,000           -

LOAN COMMITMENT FEES - Net                                                 502,338         21,146

FRANCHISE FEES - Net                                                        58,250           -

PREPAID AND OTHER ASSETS                                                    35,282           -
                                                                       -----------    -----------

       TOTAL                                                           $20,435,575    $ 2,694,694
                                                                       -----------    -----------
                                                                       -----------    -----------

                      LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
LONG-TERM DEBT                                                         $15,500,000    $ 4,155,321

NOTES PAYABLE                                                                 -            75,244

ACCOUNTS PAYABLE                                                            38,354           -

ACCRUED INTEREST                                                           114,886         40,963

ACCRUED PROPERTY TAXES                                                      78,940           -

ACCOUNTS PAYABLE - STOCK ISSUANCE COSTS                                       -           325,000

DEFERRED INCOME TAXES                                                         -           163,000
                                                                       -----------    -----------

       Total liabilities                                                15,732,180      4,759,528
                                                                       -----------    -----------

COMMITMENTS AND CONTINGENCIES

SHAREHOLDERS' EQUITY (DEFICIT):
  Class A Common stock, at December 31, 1996 and 1995, $.01 par
    value; authorized 50,000,000 and 1,000, respectively; issued and
    outstanding 1,234,049 and 100 shares, respectively                      12,340               1
  Class B Common stock, at December 31, 1996, $.01 par value;
    authorized 4,000,000 shares; issued and outstanding
    140,000 shares                                                           1,400           -
  Class C Common stock, at December 31, 1996, $.01 par value;
    authorized 4,000,000 shares; issued and outstanding
    140,000 shares                                                           1,400           -
  Additional Paid in Capital                                             7,501,494           -
  Accumulated Deficit                                                     (744,772)      (259,160)
  Less: Related party note receivable                                   (1,805,675)    (1,805,675)
  Less: Unearned directors' compensation                                  (262,792)          -
                                                                       -----------    -----------

       Total shareholders' equity (deficit)                              4,703,395     (2,064,834)
                                                                       -----------    -----------

       TOTAL                                                           $20,435,575    $ 2,694,694
                                                                       -----------    -----------
                                                                       -----------    -----------
</TABLE>

                 See accompanying notes to financial statements.
--------------------------------------------------------------------------------
                                      F-11
<PAGE>

                               HOST FUNDING, INC.

                      CONSOLIDATED STATEMENT OF OPERATIONS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
                       NINE MONTHS ENDED DECEMBER 31, 1995

                                                             TWELVE AND
                                                         NINE MONTHS ENDED
                                                             DECEMBER 31,
                                                          1996           1995
                                                       ------------------------
REVENUES:
   Lease revenue - related party                       $  278,453    $  806,670
   Lease revenue - Crossroads                           1,262,165          -
   Interest income - related parties                      219,467       135,673
   Interest income                                          8,698          -
                                                       ----------    ----------
        Total revenue                                   1,768,783       942,343
                                                       ----------    ----------
 EXPENSES:
   Interest expense                                       780,015       322,461
   Depreciation and amortization                          289,098       111,099
   Administrative expenses - related party                224,000       540,000
   Administrative expenses - other                        427,980          -
   Advisory fees - related party                           21,083          -
   Property taxes                                         138,675          -
   Amortization of unearned directors' compensation        37,208          -
                                                       ----------    ----------
        Total expenses                                  1,918,059       973,560
                                                       ----------    ----------
LOSS  BEFORE INCOME TAXES                                (149,276)      (31,217)

BENEFIT FOR INCOME TAXES                                     -           (3,000)
                                                       ----------    ----------
NET  LOSS                                              $ (149,276)   $  (28,217)
                                                       ----------    ----------
                                                       ----------    ----------
NET LOSS PER SHARE                                     $    (0.12)   $    (0.04)
                                                       ----------    ----------
                                                       ----------    ----------
WEIGHTED AVERAGE NUMBER OF
 COMMON SHARES OUTSTANDING                              1,244,668       690,000
                                                       ----------    ----------
                                                       ----------    ----------

                 See accompanying notes to financial statements.
--------------------------------------------------------------------------------
                                      F-12
<PAGE>

                               HOST FUNDING, INC.
            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
                  FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE
                       NINE MONTHS ENDED DECEMBER 31, 1995

<TABLE>
                                      Class A   Class B   Class C   Additional
                                       Common    Common    Common     Paid in
                                       Stock     Stock     Stock      Capital
                                      -------    ------    ------   ----------
<S>                                   <C>        <C>       <C>      <C>
CONTRIBUTION OF NET ASSETS AND
LIABILITIES FOR COMMON STOCK AND
ACCUMULATED DEFICIT ON APRIL 1, 1995  $     1    $   -     $   -    $     -

REDUCTION IN STOCK ISSUANCE COSTS          -         -         -          -
NET LOSS                                   -         -         -          -
                                      -------    ------    ------   ----------
BALANCE,  December 31, 1995                 1        -         -          -

COMMON STOCK ISSUED IN PUBLIC
STOCK OFFERING                          3,000        -         -     2,697,000

COMMON STOCK ISSUED IN PRIVATE
PLACEMENT                               2,000        -         -     1,798,000

COMMON STOCK ISSUED PURSUANT TO
MISSION BAY ACQUISITION AGREEMENT       2,520        -         -     2,517,970

COMMON STOCK ISSUED TO PARTNERS
OF AAG                                  4,099     1,400     1,400       (6,899)

COMMON STOCK ISSUED TO INDEPENDENT
DIRECTORS                                 300        -         -       299,700

COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE                420        -         -       338,205

RECLASS OF STOCK ISSUANCE COSTS
AGAINST ADDITIONAL PAID IN CAPITAL         -         -         -       (64,943)

INCREASE IN STOCK ISSUANCE COSTS           -         -         -       (77,539)

AMORTIZATION OF UNEARNED DIRECTORS'
COMPENSATION                               -         -         -          -

ELIMINATION OF DEFERRED INCOME
TAXES FROM CONVERSION TO REIT              -         -         -          -

DISTRIBUTIONS PAID                         -         -         -          -

NET LOSS                                   -         -         -          -
                                      -------    ------    ------   ----------
BALANCE, December 31, 1996            $12,340    $1,400    $1,400   $7,501,494
                                      -------    ------    ------   ----------
                                      -------    ------    ------   ----------

<CAPTION>
                                                      Related      Unearned        Total
                                      Accumulated    Party Note    Directors'    Shareholders'
                                        Deficit      Receivable   Compensation  Equity (Deficit)
                                      -----------   -----------   ------------  ----------------
<S>                                   <C>           <C>           <C>           <C>
CONTRIBUTION OF NET ASSETS AND
LIABILITIES FOR COMMON STOCK AND
ACCUMULATED DEFICIT ON APRIL 1, 1995   $(305,943)   $(1,805,675)   $     -       $(2,111,617)

REDUCTION IN STOCK ISSUANCE COSTS         75,000            -            -            75,000
NET LOSS
                                       ---------    -----------    ---------     -----------
BALANCE,  December 31, 1995             (259,160)    (1,805,675)         -        (2,064,834)
                                        
COMMON STOCK ISSUED IN PUBLIC
STOCK OFFERING                                -             -            -         2,700,000

COMMON STOCK ISSUED IN PRIVATE
PLACEMENT                                     -             -            -         1,800,000

COMMON STOCK ISSUED PURSUANT TO
MISSION BAY ACQUISITION AGREEMENT             -             -            -         2,520,490

COMMON STOCK ISSUED TO PARTNERS
OF AAG                                        -             -            -                 0

COMMON STOCK ISSUED TO INDEPENDENT
DIRECTORS                                     -             -       (300,000)              0

COMMON STOCK ISSUED FOR ACQUIRED
PROPERTIES ACQUISITION FEE                    -             -            -           338,625

RECLASS OF STOCK ISSUANCE COSTS
AGAINST ADDITIONAL PAID IN CAPITAL        64,943            -            -                 0

INCREASE IN STOCK ISSUANCE COSTS              -             -            -           (77,539)

AMORTIZATION OF UNEARNED DIRECTORS'
COMPENSATION                                  -             -         37,208          37,208

ELIMINATION OF DEFERRED INCOME
TAXES FROM CONVERSION TO REIT            163,000            -            -           163,000

DISTRIBUTIONS PAID                      (564,279)           -            -          (564,279)

NET LOSS                                (149,276)           -            -          (149,276)
                                       ---------    -----------    ---------     -----------
BALANCE, December 31, 1996             $(744,772)   $(1,805,675)   $(262,792)    $ 4,703,395
                                       ---------    -----------    ---------     -----------
                                       ---------    -----------    ---------     -----------
</TABLE>

                 See accompanying notes to financial statements.
--------------------------------------------------------------------------------
                                      F-13
<PAGE>

                               HOST FUNDING, INC.
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
                     THE NINE MONTHS ENDED DECEMBER 31, 1995

<TABLE>
------------------------------------------------------------------------------------------
                                                                    1996           1995
------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>
OPERATING ACTIVITIES:
   Net loss                                                     $   (149,276)   $ (28,217)
   Adjustments to reconcile net loss to net cash:
       provided by operating activities
       Depreciation and amortization                                 289,098      111,099
       Deferred taxes                                                      -       (3,000)
       Amortization of loan fees                                     216,500         -
       Amortization of unearned directors' compensation               37,208         -
   Changes in operating assets and liabilities:
       Rent and interest receivable - due from related parties         4,844      (35,234)
       Rent receivable - Crossroads                                 (223,160)        -
       Payment of loan fees                                         (697,692)        -
       Prepaid and other assets                                      (14,800)
       Accounts payable and accrued expenses                         191,217       40,963
                                                                ------------    ---------
       Net cash (used in) provided by operating activities          (346,061)      85,611
                                                                ------------    ---------
INVESTING ACTIVITIES:
   Acquisition of land, property and equipment                   (13,803,929)        -
   Restricted cash                                                  (128,952)        -
   Long-term advances to Crossroads                                 (225,000)        -
   Franchise fees                                                    (60,000)
   Prepaid and other assets                                          (20,482)        -
                                                                ------------    ---------
       Net cash used in investing activities                     (14,238,363)           0
                                                                ------------    ---------
FINANCING ACTIVITIES:
   Borrowings on long-term debt and notes payable                 15,500,000      120,000
   Proceeds from common stock issued in Stock Offering
       and Private Placement                                       4,500,000         -
   Payments on long-term debt and notes payable                   (4,230,565)    (105,111)
   Stock issuance costs                                             (402,539)    (100,000)
   Distributions paid                                               (564,279)        -
                                                                ------------    ---------

       Net cash provided by (used in) financing activities        14,802,617      (85,111)
                                                                ------------    ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS                              218,193          500

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                         500            0
                                                                ------------    ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                      $    218,693    $     500
                                                                ------------    ---------
                                                                ------------    ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION
   Cash paid during the period for interest                     $    610,408    $ 281,498
                                                                ------------    ---------
                                                                ------------    ---------
   Cash paid during the period for income taxes                 $         0     $       0
                                                                ------------    ---------
                                                                ------------    ---------
</TABLE>

                                  (Continued)

                                      F-14
<PAGE>

                               HOST FUNDING, INC.
                             STATEMENT OF CASH FLOWS
                    FOR THE YEAR ENDED DECEMBER 31, 1996 AND
                     THE NINE MONTHS ENDED DECEMBER 31, 1995

<TABLE>
---------------------------------------------------------------------------------------------
                                                                    1996            1995
---------------------------------------------------------------------------------------------
<S>                                                             <C>             <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
   INFORMATION (Continued)
   Non-cash investing activities:
       Contribution of net assets and liabilities for
       common stock and accumulated deficit
           Land, property and equipment                         $       -       $  2,741,477
           Loan commitment fees                                         -             28,582
           Related party note receivable                                -          1,805,675
           Long-term debt                                               -         (4,215,676)
           Common Stock                                                 -                 (1)
                                                                ------------    ------------
                                                                          0          360,057
                                                                ------------    ------------
       Less:  Liabilities and accumulated deficit
       resulting from the contribution of net
       assets and liabilities
           Accounts payable stock issuance costs                        -           (500,000)
           Reduction in accounts payable stock issuance costs           -             75,000
           Deferred income taxes                                        -           (166,000)
           Accumulated deficit                                          -            305,943
           Reduction in stock issuance costs                            -            (75,000)
                                                                          0         (360,057)
                                                                ------------    ------------
           Net non-cash investing activity                      $          0    $          0
                                                                ------------    ------------
                                                                ------------    ------------
       Common stock issued pursuant to Mission Bay
       Acquisition Agreement
           Land, property and equipment                         $(2,520,490)    $       -
           Class A common stock                                       2,520             -
           Additional paid in capital                             2,517,970             -
                                                                ------------    ------------
           Net non-cash investing activity                      $          0    $          0
                                                                ------------    ------------
                                                                ------------    ------------
       Common stock issued to partners of AAG
           Class A common stock                                 $     4,099     $       -
           Class B common stock                                       1,400             -
           Class C common stock                                       1,400             -
           Additional paid in capital                                (6,899)            -
                                                                ------------    ------------
           Net non-cash investing activity                      $          0    $          0
                                                                ------------    ------------
                                                                ------------    ------------
       Common stock issued to independent directors
           Class A common stock                                 $       300     $       -
           Additional paid in capital                               299,700             -
           Unearned directors' compensation                        (300,000)            -
                                                                ------------    ------------
           Net non-cash investing activity                      $          0    $          0
                                                                ------------    ------------
                                                                ------------    ------------
       Reclass of deferred income taxes and stock issuance
        costs due to Stock Offering
           Deferred income taxes                                $   (163,000)   $       -
           Additional paid in capital                                (64,943)           -
           Retained earnings                                         227,943            -
                                                                ------------    ------------
           Net non-cash investing activity                      $          0    $          0
                                                                ------------    ------------
                                                                ------------    ------------
       Common stock issued for Acquired Properties
       Acquisition Fee
           Class A common stock                                 $        420    $       -
           Additional paid in capital                                338,205            -
           Land, property and equipment                             (338,625)           -
                                                                ------------    ------------
           Net non-cash investing activity                      $          0    $          0
                                                                ------------    ------------
                                                                ------------    ------------
</TABLE>
                                                                     (Concluded)

                 See accompanying notes to financial statements.
--------------------------------------------------------------------------------
                                      F-15 
<PAGE>

                               HOST FUNDING, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     ORGANIZATION:

     The accompanying financial statements include the accounts of Host Funding,
     Inc., a Maryland corporation ("Host Funding") and its consolidated
     subsidiary.  Host Funding was initially formed on December 22, 1994 as a
     Real Estate Investment Trust ("REIT") to acquire and then lease limited
     service hotels/motels.  Host Funding's fiscal year end is December 31.
     Host Funding was inactive from inception, December 22, 1994 to March 31,
     1995.  Host Funding intends to elect REIT status with the filing of their
     consolidated tax return for the year ending December 31, 1996 (see note 7).

     On April 1, 1995, Host Funding and All American Group, Ltd., a Delaware
     limited partnership ("AAG") entered into a Contribution and Assumption
     Agreement (the "Contribution and Assumption Agreement").  Under the
     Contribution and Assumption Agreement, AAG transferred, assigned and
     conveyed to Host Funding all of the real property, including land and
     personal property ($2,741,477) and loan commitment fees ($28,582), and Host
     Funding agreed to assume stock issuance costs payable ($425,000) and all
     real property debt ($4,215,676), at historical cost, of four (4) Super 8
     motels located and doing business in Somerset, Kentucky; Miner, Missouri;
     Poplar Bluff, Missouri; and Rock Falls, Illinois.  In addition, AAG
     contributed a note receivable (the "Related Party Note") ($1,805,675).  In
     accordance with generally accepted accounting principles, the Related Party
     Note has been offset against shareholder's equity as the Related Party Note
     was originally issued for equity in AAG.  As consideration to AAG, Host
     Funding issued 100 shares of common stock.  As of December 31, 1995, all of
     the outstanding stock of Host Funding was owned by AAG.

     On April 22, 1996, Host Funding raised additional capital via an initial
     public offering of Class A common stock (the "Stock Offering").  The Stock
     Offering issued 500,000 common shares and raised net cash proceeds totaling
     $3,997,461 (300,000 of publicly offered shares at $3,000,000 net of
     $300,000 of sales commissions and 200,000 privately placed shares at
     $1,800,000 for a total of $4,500,000, net of issuance costs of $502,539).
     Host Funding used the capital raised from the Stock Offering to pay down
     long-term debt, to pay expenses of the formation of Host Funding, and for
     working capital purposes.

     Further, on April 22, 1996, Host Funding acquired for a total purchase
     price of $2,810,000, certain assets of Mission Bay Super 8, Ltd., a
     California limited partnership ("Mission Bay"), the owner of a 117 room
     Super 8 motel located in San Diego, California, pursuant to an asset
     acquisition agreement (the "Mission Bay Acquisition Agreement").  Host
     Funding exchanged 252,049 shares of common stock at a stated value of
     $10.00 per share ($2,520,490) plus cash for a reserve for dissenters rights
     and fractional share settlements of approximately $290,000 (see note 6).

                                      F-16
<PAGE>

     Upon completion of the Stock Offering and the Mission Bay Acquisition
     Agreement, Host Funding issued additional Class A, B and C common shares to
     AAG in exchange for 100 initial shares held by AAG based upon appraised
     values of Host Funding's assets net of liabilities prior to the Stock
     Offering.  The common shares issued upon completion of the Stock Offering
     include 410,000 Class A, 140,000 Class B and 140,000 Class C, which number
     of shares were determined based upon the net appraised value of assets net
     of liabilities of $6,900,000 or $10.00 per share.  The Class B and C shares
     include certain restrictions as to the future payment of dividends and are
     convertible to Class A common shares at certain times and under certain
     circumstances as defined in the charter.  The Class C common shares
     converted into Class A common shares effective January 1, 1997.

     On September 5, 1996, Host Funding formed CrossHost, Inc., a Maryland
     Corporation ("CrossHost"), as a wholly-owned, special purpose, REIT
     qualified, subsidiary.  CrossHost was formed at the request of CS First
     Boston Mortgage Capital Corp. ("First Boston") as a condition to First
     Boston providing an acquisition and credit facility (the "Initial Loan
     Facility") to CrossHost (see note 3 and 7).  A significant portion of the
     proceeds from the Loan Facility was used by CrossHost to acquire three
     Sleep Inn Hotels located in Destin, Sarasota, and Tallahassee, Florida from
     Capital Circle Hotel Company ("Capital Circle") and one Sleep Inn Hotel
     located in Ocean Springs, Mississippi from Ocean Springs Hotel Company
     ("Ocean Springs") (collectively, the "Acquired Properties").  The effective
     closing dates for the purchase of the Acquired Properties by CrossHost from
     Capital Circle and Ocean Springs were September 13, 1996 and September 19,
     1996, respectively (see note 6).

     As a further condition to obtaining the Loan Facility, First Boston
     required Host Funding to transfer to CrossHost the five Super 8 hotel
     properties owned by Host Funding (the "Transferred Properties").
     Simultaneously with the acquisition of the Acquired Properties by
     CrossHost, Host Funding deeded the Transferred Properties to CrossHost in a
     tax free reorganization.

     Host Funding is listed on the American Stock Exchange.

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     LAND, PROPERTY AND EQUIPMENT

     Buildings and improvements are being depreciated over useful lives of 35
     years from the original historical date of acquisition using the straight-
     line method.  Hotel furnishings and equipment are being depreciated using
     primarily straight-line methods over useful lives ranging from 3 to 7 years
     from the original historical date of acquisition.

     Host Funding assesses impairment of its real estate properties based upon
     whether it is probable that undiscounted future cash flows from each
     individual property will be less than its net book value.  No impairment
     has occurred as of December 31, 1996, nor has impairment been required to
     be recorded upon implementation in 1996 of Statement of Financial
     Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
     Assets and for Long-lived Assets to Be Disposed Of."

                                      F-17
<PAGE>

     CASH AND CASH EQUIVALENTS

     Cash and cash equivalents are defined as cash on hand and in banks plus all
     short-term investments with a maturity, at the date of purchase, of three
     months or less.

     RESTRICTED CASH

     Restricted cash represents cash deposited in escrow accounts under
     contractual agreements for property taxes and capital improvements that are
     restricted as to usage.

     LOAN COMMITMENT FEES

     The loan commitment fees are amortized over the terms of the loans using
     the straight-line method which approximates the effective interest rate
     method.  Accumulated amortization of loan fees totaled $195,355 and $28,424
     as of December 31, 1996 and 1995, respectively.

     FRANCHISE FEES

     Franchise fees are being amortized on a straight-line basis over the
     fifteen (15) year life of the franchise agreements.  Accumulated
     amortization of franchise fees totaled $1,750 as of December 31, 1996.

     REVENUES

     Host Funding recognizes lease revenue on an accrual basis over the terms of
     the lease agreement.

     NET LOSS PER SHARE

     Net loss per share is based on the weighted average number of common shares
     outstanding during the year.  The weighted average number of shares
     outstanding prior to the Stock Offering were calculated as if the shares
     issued to AAG upon completion of the Stock Offering were outstanding from
     April 1, 1995.

     FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK

     The following disclosure of estimated fair value was determined by
     available market information and appropriate valuation methodologies.
     However, considerable judgment is necessary to interpret market data and
     develop the related estimates of fair value.  Accordingly, the estimates
     presented herein are not necessarily indicative of the amounts that could
     be realized upon disposition of the financial instruments.  The use of
     different market assumptions and/or estimation methodologies may have a
     material effect on the estimated fair value amounts.

     Rent receivable - Crossroads, due from related parties, long-term advances
     to Crossroads, accounts payable and accrued expenses, and accounts payable
     are carried at amounts which reasonably approximate their fair value.

     The carrying value of long-term debt approximates fair value as the related
     interest rate is variable and approximates market rates.

                                      F-18
<PAGE>

     USE OF ESTIMATES

     The preparation of financial statements in conformity with generally
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of assets and liabilities and
     disclosure of contingent assets and liabilities at the date of the
     financial statements and the reported amounts of revenues and expenses
     during the reporting period.  Actual results could differ from those
     estimates.

     INCOME TAXES

     Host Funding had adopted the provisions of Statement of Financial
     Accounting Standards No. 109, "Accounting for Income Taxes," which requires
     the use of the liability method of accounting for deferred income taxes.
     Deferred income taxes reflect the net tax effects of temporary differences
     between the carrying amount of assets and liabilities for financial
     reporting purposes and income tax purposes and operating loss and tax
     credit carry forwards.

     Deferred income tax benefit totaled $3,000 for the year ended December 31,
     1995.  The deferred income tax liability as of December 31, 1995, totaling
     $163,000, was reversed and credited to retained earnings upon consummation
     of the Stock Offering in 1996.  The reason for the reversal of the deferred
     tax liability is that upon completion of the Stock Offering, Host Funding
     will elect REIT status and intends to meet the Code requirements and be
     taxed as a REIT.  As a result, no future deferred tax liability will be
     required.

     Host Funding will elect to be treated as a REIT under the provisions of the
     Code beginning with the 1996 year.  As a result, Host Funding will not be
     subject to federal income tax on its taxable income at corporate rates to
     the extent it distributes annually 95% of its taxable income to its
     shareholders and complies with certain other requirements (see note 7).
     Host Funding is subject to state income and franchise taxes in certain
     states which it operates.  There is no provision for Federal income taxes
     for the year ended December 31, 1996, as Host Funding will elect REIT
     status and has a net operating loss carry forward of $348,000 expiring in
     2011 and 2010.  Host Funding elected not to recognize this deferred tax
     asset as future utilization of this net operating loss is uncertain.

     As of December 31, 1996, Host Funding's net assets for federal tax
     reporting purposes totaled approximately $19,900,000.

NOTE 2.  REAL ESTATE INVESTMENTS

     As described in note 1, on April 1, 1995, Host Funding acquired fee
     interests in four motels.  The motel properties were leased (the "Initial
     Leases") to Inn Fund, LLC, a Delaware limited liability company ("Inn
     Fund").  Guy D. Hatfield, the controlling partner of AAG, and approximate
     46% shareholder of Host Funding, owns 7.5% and Ian Gardner-Smith owns 92.5%
     of Inn Fund.  The four motels were operated for Inn Fund by All American
     Group, Inc., an entity 100% owned by Guy Hatfield and his wife ("AAG,
     Inc.").  Lease revenue - related party under the Initial Leases for the
     year and nine months ended December 31, 1996 and 1995, respectively,
     include $195,025 and $772,350 of base rentals and $5,487 and $34,320 of
     percentage rentals, respectively.

                                      F-19
<PAGE>

     On April 1, 1996 and on April 22, 1996, Host Funding agreed to enter into
     new motel leases for the four existing motel properties and Mission Bay,
     respectively, (the "New Leases") with a limited liability company of a
     nationally recognized hotel management company and operator, Crossroads
     Hospitality Tenant Company, a Delaware limited liability company
     ("Crossroads").  Upon execution of the New Leases, the previous leases with
     Inn Fund, which leases were similar to the New Leases, were terminated.
     The New Leases with Crossroads were transferred to CrossHost on September
     13, 1996 and amended on October 1, 1996 (the "Amended Transferred Property
     Leases").

     Further, effective as of the closing dates of the respective Acquired
     Properties, CrossHost also (i) leased each of the Acquired Properties to
     Crossroads by separate Lease Agreements (the "Acquired Property Leases")
     and (ii) entered into a Master Agreement with Crossroads and Crossroads
     Hospitality Company, LLC, a Delaware limited liability company ("Crossroads
     Hospitality") a subsidiary of Interstate Hotels, Inc. a Delaware
     Corporation, and parent company of Crossroads), relating to the Acquired
     Property Leases.

     The Amended Transferred Property Leases and the Acquired Property Leases
     (the "Combined Leases") are for a term of 15 years from the effective
     dates.  Combined total annual base rentals of $2,631,600 are due, plus
     percentage rentals ranging from 28.75% to 40% of year to date revenues less
     varying break even thresholds adjusted annually by defined percentages for
     each motel under the Combined Leases.  Base and percentage rentals under
     the Combined Leases totaled $1,091,654 and $170,511, respectively, for the
     year ended December 31, 1996.

     The annual base rentals of the Amended Transferred Property Leases are
     subject to possible additional increases annually beginning in calendar
     year 1998 and thereafter based upon increases in average room rates, as
     defined in the Amended Transferred Property Leases.

     During the first four years after the Commencement Date, Crossroads will be
     entitled to accumulate a credit of 50% of base rent paid in excess of hotel
     cash flow, if any, as defined in the Acquired Property Leases, for each of
     the Acquired Properties which may be applied towards future percentage
     rentals that may be due (the "Negative Base Rent").  Should no future
     percentage rent be due under the Acquired Property Leases during the lease
     terms, the Negative Base Rent will expire.  No Negative Base Rent credit
     was outstanding as of December 31, 1996.

     The Combined Leases generally require Crossroads to pay all operating
     expenses of the properties, including maintenance and insurance, while Host
     Funding is responsible for property taxes.

     Concurrent with the change in base rent due for each Amended Transferred
     Property Lease, the requirement for Crossroads to set aside in a
     replacement reserve $125 per room, per quarter, increased annually by
     inflation factors, was terminated.  As of December 31, 1996, Crossroads has
     on deposit in a replacement reserve account net remaining funds totaling
     approximately $80,000 which are available for capital improvements on the
     Transferred Properties.

                                      F-20
<PAGE>

     Under the Amended Transferred Property Leases, effective October 1, 1996,
     CrossHost is required to fund into a replacement reserve (the "Replacement
     Reserve") an amount equal to six percent (6%) of gross room revenue for the
     proceeding month.  In addition, under the Acquired Property Leases,
     CrossHost is required to set aside in the Replacement Reserve an amount
     equal to 4% of gross room revenue during years one (1) to four (4) and 6%
     of gross room revenue during years five (5) and thereafter.  Capital
     expenditures generally must be jointly approved by CrossHost and
     Crossroads.  Replacement Reserve contributions due from CrossHost under the
     Combined Leases totaled $75,683 for the period October 1 to December 31,
     1996.  As of December 31, 1996 Replacement Reserve contributions totaling
     $67,294 have been funded by CrossHost, which amount is included in
     restricted cash, with $8,389 in Replacement Reserve contributions due.

     Based upon an accounting of remaining furniture, fixtures and equipment
     reserve contributions due from Inn Fund under the Initial Leases to March
     31, 1996, the date of the cancellation of the Initial Leases, Inn Fund owes
     $77,941 to Host Funding.  This amount has been included in lease revenue -
     related party and was offset against an approximately equal net amount owed
     by Host Funding to affiliates of Guy E. Hatfield, an affiliate of the
     Company. (See note 5.)

     Further, should Host Funding decide to sell any of the properties leased to
     Crossroads under the Combined Leases, Crossroads will be provided a 30 day
     right of first refusal to purchase such property at the price offered Host
     Funding by the third party.  In addition, under the Acquired Property
     Leases, if Crossroads elects not to exercise its right of first refusal to
     acquire the properties and should CrossHost elect to terminate the lease,
     upon the consent of CrossHost, Crossroads and the buyer, Crossroads may be
     entitled to some portion of the sale proceeds based on a formula as
     provided in the applicable Acquired Property Lease.

     CrossHost, under the Combined Leases, was required to provide long-term
     non-interest bearing advances totaling $225,000 to Crossroads to be used
     for working capital purposes which is due back to CrossHost at the end of
     the term of each Acquired Property Lease.

     Crossroads may terminate any one lease under the Amended Transferred
     Property Leases within the first five years without damages.  Should two
     leases under the Amended Transferred Property Leases be terminated within
     the first five years, Crossroads has agreed to pay a termination fee equal
     to the previous twelve months revenue for the hotel times 18% in years one
     to three, 12% in year four and 6% in year five.  If more than two leases
     are terminated within the first five years under the Amended Transferred
     Property Leases, Host Funding has the right to terminate all remaining
     leases or to collect the termination fee as described above.

     The parent company of Crossroads has agreed to pledge as collateral 30,000
     shares of Host Funding Class A common stock acquired by Crossroads parent
     under the Stock Offering to collateralize the payment of rent due under the
     Amended Transferred Property Leases in the amount of $264,000 during the
     first three years of the lease terms.  In addition, Crossroads has agreed
     to maintain a letter of credit thereafter equal to annually calculated
     termination fees that would be due on the lease anniversary dates
     throughout the remaining terms of the Amended Transferred Property Leases.
     After the first year, Crossroads parent may substitute the letter of credit
     by guaranteeing the equivalent amounts required by the letter of credit and
     providing to Host Funding a copy of Crossroads parent's audited financial
     statements which indicate a net worth of at least 2-1/2 times the value of
     the letter of credit, with at least 40% of the net worth in cash or cash
     equivalent assets.  In addition, Crossroads parent makes certain negative
     covenants concerning maintenance of its minimum net worth levels.

                                      F-21
<PAGE>

     Minimum future base rents due under operating leases for the five years
     ending December 31, 1997 to 2001 and thereafter are as follows:

                    1997                            $ 2,631,600
                    1998                              2,992,800
                    1999                              2,992,800
                    2000                              2,992,800
                    2001                              2,992,800
                    Thereafter                       28,897,150
                                                    -----------
                    Total                           $43,499,950
                                                    -----------
                                                    -----------

NOTE 3.  LONG-TERM DEBT AND NOTES PAYABLE

     LONG-TERM DEBT:

     A summary of Host Funding's long-term debt as of December 31 follows:

                                                       1996          1995
                                                    -----------   ----------
     First mortgage note payable to bank;
     8.5% interest until March 1994, prime
     plus 1.5% but not less than 8.5%
     thereafter (prime was 9% at December 31,
     1995), adjusted annually; payments of
     $11,823 monthly, due March 1998; personal
     guarantees of Guy E. and Dorothy Hatfield      $      --     $1,094,146(A)

     First mortgage not payable to bank; 8.75%
     interest; payments of $11,244 monthly; due
     February 1998.                                        --      1,011,545(B)

     First mortgage note payable to bank; prime
     plus 2%, adjusted quarterly (prime was 9%
     at December 31, 1995); payments of $9,174
     monthly, due March 1998.                              --        889,630(A)

     First mortgage note payable to bank; prime
     plus 1/2% interest rate adjusted daily (prime
     was 9% at December 31, 1995); accrued interest
     plus principal are due on March 31, 1996.             --      1,160,000(A)

                                      F-22
<PAGE>

     First mortgage note payable, interest at
     LIBOR plus 304.5 basis points, adjusted
     monthly (LIBOR was 5.53906% at December 31,
     1996); payable monthly; due October 1997
     (for information regarding the refinancing
     see note 7).                                    15,500,000         --
                                                    -----------   ----------
                                                     15,500,000    4,155,321

     Less current portion                            15,500,000    1,251,844
                                                    -----------   ----------
                                                    $         0   $2,903,477
                                                    -----------   ----------
                                                    -----------   ----------

     (A)  Paid off from proceeds from Stock Offering in April 1996.
     (B)  Paid off from proceeds of the Initial Loan Facility in September 1996.


     From the proceeds of the Initial Loan Facility, CrossHost paid
     approximately $9,730,000 in cash to Capital Circle and approximately
     $3,555,000 in cash to Ocean Springs as consideration for the Acquired
     Properties plus closing expenses on the Acquired Properties in the
     approximate amount of $229,000.  In addition, CrossHost used approximately
     $980,000 of the loan proceeds to pay in full the mortgage relating to the
     Super 8 motel located in Rock Falls, Illinois.  Further, proceeds from the
     Initial Loan Facility were used by Host Funding and CrossHost for loan
     origination costs and other expenses relating to the acquisition of the
     Acquired Properties and the financing of the Transferred Properties in the
     approximate amount totaling $693,000, including related party loan fees and
     expense reimbursements of $232,500 and $20,000, respectively, which amount
     will be amortized over the term of the Initial Loan Facility (see note 5
     and 7).  In addition, CrossHost used approximately $60,000 of proceeds from
     the Initial Loan Facility to acquire a ten (10) year Sleep Inn franchise
     with Choice Hotels, Inc., a nationally recognized hotel franchisor.
     Additional proceeds from the Loan Facility were escrowed in restricted cash
     accounts required under the Initial Loan Facility to be used to pay
     property taxes in the approximate amount of $99,000 and for capital
     improvements in the approximate amount of $62,000.  The remaining proceeds
     from the Loan Facility in the approximate amount of $92,000 were used for
     long-term advances due Crossroads under the Acquired Property Leases (see
     note 2).  The Initial Loan Facility was collateralized by liens on
     substantially all of the assets of CrossHost, including the Acquired
     Properties and the Transferred Properties.  The Initial Loan Facility was
     refinanced on March 14, 1997 (see note 7).

     NOTES PAYABLE:

     In July 1995, Host Funding entered into a second mortgage collateralized by
     the Poplar Bluff, Missouri and Rock Falls, Illinois motels totaling
     $100,000 at an interest rate of prime plus 2% payable interest only on
     August 15, 1995 and, thereafter, in monthly installments of $12,000,
     including principal and interest, commencing September 15, 1995.  The note
     balance as of December 31, 1995 totaled $55,244.  The note was paid off
     upon completion of the Stock Offering.

     In October 1995, Host Funding entered into an unsecured note payable
     totaling $20,000.  This note bore interest at 10% and was due and payable
     March 31, 1996.  The note balance as of December 31, 1995 totaled $20,000.
     The note was paid off upon completion of the Stock Offering.

                                      F-23
<PAGE>

NOTE 4.  SHAREHOLDERS' EQUITY

     Host Funding is authorized to issue 55,000,000 shares of common stock,
     consisting of 50,000,000 shares of Class A common stock, $.01 par value per
     share, and 4,000,000 shares of Class B common stock, $.01 par value per
     share and 1,000,000 shares of Class C common stock, $.01 par value per
     share.

     Upon consummation of the Stock Offering and Mission Bay Acquisition
     Agreement, Host Funding sold to each independent director then in office
     10,000 shares of Class A common stock at a price per share equal to $10 per
     share.  The purchase price ($300,000) will be paid by them through delivery
     of a five year promissory note executed in favor of Host Funding by each
     purchaser, which shall bear interest, payable quarterly, at a fixed rate
     equal to 7% per annum.  Principal payments totaling 2% of the original
     principal will be due annually.  The shares of common stock purchased by
     each independent director will be pledged to Host Funding to collateralize
     payment of the promissory note, which shall be non-recourse to the maker,
     except to 10% of the principal amount due from directors.  Host Funding has
     agreed to forgive the promissory notes issued in exchange for the shares of
     common stock in increments of 18% of the principal amount per annum for
     each year that the maker remains a director of Host Funding.  The estimated
     annual amortization of unearned director's compensation is expected to
     total $54,000 based upon the issuance of a total of 30,000 shares to three
     directors.  Interest income - related party, paid or accrued by the
     directors, to Host Funding totaled $14,528 for the year ended December 31,
     1996.  As of December 31, 1996, $819 remains payable to Host Funding and is
     included in due from related parties.

     Host Funding also has 20,000,000 authorized preferred shares, $.01 par
     value, none of which are issued or outstanding.

     Please refer to Note 1, Organization and Summary of Significant Accounting
     Policies, for information regarding common stock issued as a result of the
     Stock Offering and the Mission Bay Acquisition Agreement.  Also, refer to
     Note 5, Related Party Transactions, for information regarding common stock
     issued under the Post-Formation Acquisition Agreement as a result of the
     purchase of the Acquired Properties.

NOTE 5.  RELATED PARTY TRANSACTIONS

     RELATED PARTY NOTE RECEIVABLE:

     As described in note 1, on April 1, 1995, AAG, as part of the Contribution
     and Assumption Agreement, contributed the Related Party Note to Host
     Funding.  The Related Party Note is due from Guy and Dorothy Hatfield and
     their two children, sole limited partners, and AAG, Inc., sole general
     partner (the "AAG Partners"), of AAG.   The principal balance of the
     Related Party Note dated March 31, 1995, as of December 31, 1996, is
     $1,805,675, with interest payable quarterly, commencing November 15, 1995,
     at 10% per annum, adjusted to 12% per annum upon completion of the Stock
     Offering, with remaining outstanding principal and unpaid accrued interest
     due and payable on March 31, 2000.  The Related Party Note was secured by
     second trust deeds on properties located in Central City, Kentucky;
     Lebanon, Kentucky; Miner, Missouri; and Dexter, Missouri.  The collateral
     for the Related Party Note was provided via a Lent Collateral Agreement
     from Hatfield Inn, Inc., a Delaware corporation ("Hatfield Inn") 100% owned
     by Guy and Dorothy Hatfield.  In September 1995, the Related Party Note was
     amended to remove the obligation of AAG to maintain real property security,
     conditioned upon the delivery to Host Funding of an unconditional guarantee
     by Guy and Dorothy Hatfield.  The Related Party Note is classified in the

                                      F-24
<PAGE>

     Shareholders' Equity (Deficit) section of the balance sheet as it was
     contributed to AAG and, in turn, Host Funding to provide equity to AAG and
     Host Funding, respectively.  Interest income - related parties, paid or
     accrued by the AAG partners to Host Funding, totaled $204,939 and $135,673
     for the year ended December 31, 1996 and for the nine months ended December
     31, 1995, respectively.  As of December 31, 1996, $33,706 of Related Party
     Note interest is payable and included in due from related parties.

     STOCK PLEDGE AGREEMENT:

     Further, on April 1, 1995, the AAG Partners entered into a Stock Pledge
     Agreement (the "Stock Pledge Agreement") with Host Funding.  Pursuant to
     the Stock Pledge Agreement, the AAG Partners agreed to pledge a security
     investment in 26.2%, or 180,780, of the fraction shares issued to AAG in
     the Stock Offering, together with all additional shares issued to the AAG
     Partners by reason of stock split or stock dividend, of common stock in
     Host Funding to secure the Related Party Note.

     RELATED PARTY CONSULTING AGREEMENT:

     Host Funding entered into a consulting agreement (The "Related Party
     Consulting Agreement") with AAG effective April 1, 1995 to provide
     advisory, accounting and other consulting services to Host Funding for a
     monthly fee of $60,000 plus annual additional compensation as mutually
     agreed upon.  Related party consulting fees totaling $224,000 and $540,000
     for the year ended December 31, 1996 and for the nine months ended December
     31, 1995, respectively, were paid or accrued to AAG under the Related Party
     Consulting Agreement.  The Related Party Consulting Agreement was canceled
     upon completion of the Stock Offering.

     RELATED PARTY ADVISORY AGREEMENT:

     Host Funding has entered into an Advisory Agreement (the "Advisory
     Agreement") with Host Funding Advisors, Inc., a Delaware corporation (the
     "Advisor") on the close of the Stock Offering.  The Advisor was formed on
     June 23, 1994.  Pursuant to the Advisory Agreement, the Advisor will
     provide information, advice, assistance, and facilities to Host Funding in
     connection with Host Funding's future investment in hotel properties.
     Additionally, the Advisor will administer the daily operations of Host
     Funding, negotiate on Host Funding's behalf, act as agent for Host funding
     in collecting funds and paying debts, and generally manage and operate Host
     Funding.  In consideration for such services, Host Funding will compensate
     the Advisor in the amount of $30,000 per year.  The Advisor is an affiliate
     of Ian Gardner-Smith, a director and officer of CrossHost, and Michael S.
     McNulty, a director and president of Host Funding and CrossHost.  Advisory
     fees totaling $21,083 were paid or accrued during the calendar year ended
     December 31, 1996.  Effective January 31, 1997, the Advisory Agreement was
     canceled for payment of a fee at $30,000 and the Registrant became self-
     administered.

     RELATED PARTY ACQUISITION AGREEMENT:

     Host Funding has entered into a Post-Formation Acquisition Agreement (as
     amended, the "Acquisition Agreement") with HMR Capital, LLC, a Delaware
     limited liability company, (the "Acquisition Company") on April 22, 1996.

     The Acquisition Company is an affiliate of Michael S. McNulty and Ian
     Gardner-Smith.  Under the terms of the Acquisition Agreement, the
     Acquisition Company is responsible for the management, coordination, and
     supervision of Host Funding's acquisition of additional hotel properties.
     The Acquisition Company sought out the Acquired Properties and negotiated
     the terms of the acquisition.

                                      F-25

<PAGE>

     The Acquisition Agreement is for a term of five years, as amended, from
     February 3, 1997 or when net fees earned by the Acquisition Company exceed
     $9 million, subject to a 30 day cancellation provision by either party. 
     Further, the Acquisition Company is entitled to receive an acquisition fee
     of no less than 2% and up to 6% of the gross purchase price of the Acquired
     Properties, subject to the 30 day cancellation provision, plus
     reimbursement of certain expenses (the "Acquired Properties Acquisition
     Fee").  The Acquired Properties Acquisition Fee is payable in cash or, at
     the option of the Acquisition Company, in the Class A Common Stock of Host
     Funding.  Host Funding and the Acquisition Company agreed that the Acquired
     Properties Acquisition Fee earned by the Acquisition Company relating to
     the Acquired Properties was 42,000 shares of the Class A Common Stock of
     the Registrant valued at $10 per share and payable as of September 19, 1996
     (the Ocean Springs closing date).  The shares of Class A Common Stock
     received by the Acquisition Company in payment of the Acquired Properties
     Acquisition Fee will be restricted securities under the Securities Act of
     1933 and subject to the resale provisions of Rule 144 promulgated under the
     Act.  The last traded price of the stock of Host Funding on the American
     Stock Exchange on September 19, 1996 was $8.0625 per share.  Host Funding
     has recorded the Acquired Properties Acquisition Fee on the Acquired
     Properties at the fair market value of the Class A Common Stock on
     September 19, 1996.  The Acquired Properties Acquisition Fee (based upon a
     value of $8.0625 per share or $338,625) represents approximately 2.5% of
     the gross purchase price totaling $13,285,000 excluding closing expenses of
     the Acquired Properties.
     
     OTHER RELATED PARTY TRANSACTIONS:
     As of the close of the Stock Offering, management of Host Funding, Inn Fund
     and AAG and the general and limited partners of AAG have offset the
     consulting fees due AAG under the Related Party Consulting Agreement
     against accrued interest receivable due under the Related Party Note and
     accrued rent receivable and remaining furniture, fixtures and equipment
     reserve contributions due under the Initial Leases with Inn Fund.  As of
     December 31, 1996, $4,135 remains payable to AAG from Host Funding and has
     been netted against and included in due from related parties.
     
     Hatfield Inn is the owner and operator of a 40 room motel adjacent to Host
     Funding's property located in Miner, Missouri.  Host Funding and Hatfield
     Inn have a shared parking agreement allowing cars to park in either
     property's parking facilities, compete for similar business, and are
     managed by the general partner of AAG.
     
     Hotel Mortgage Resources Corp. ("HMRC"), an affiliate of Mr. Ian Gardner-
     Smith and Michael S. McNulty, in connection with the Loan Facility
     discussed in Note 1 and 3, received a loan origination fee of $232,500 plus
     reimbursement of expenses of approximately $20,000 during the year ended
     December 31, 1996.  The total fees received by affiliates relating to the
     acquisition of the Acquired Properties, including loan origination fees,
     the Acquired Properties Acquisition Fee and the expense reimbursement,
     totaled approximately $591,125.
     
     HMRC, during the year ended December 31, 1996,  also received expense
     reimbursements for stock issuance costs totaling $105,679 and for travel
     and other related expenses which are included in administrative and other
     expenses totaling $23,455.  Loan application fees totaling $5,000 were paid
     to HMRC during the year ended December 31, 1996.
     
     The parent company of Crossroads, the lessee under the New Leases,
     purchased 60,000 shares of Class A common stock via the initial Private
     Placement.
     
                                      F-26 
<PAGE>

NOTE 6.  ACQUISITIONS
     
     The following unaudited pro forma information has been prepared assuming
     that the acquisition of Mission Bay and the Acquired Hotels has occurred at
     the beginning of the periods presented.  Permitted pro forma adjustments
     include only the effects of events directly attributable to a transaction
     that are factually supportable and expected to have continuing impact.  Pro
     forma adjustments reflecting anticipated "efficiencies" in operations
     resulting from a transaction are, under most circumstances, not permitted. 
     As a result of the limitations imposed with regard to the types of
     permitted pro forma adjustments, Host Funding believes that this unaudited
     pro forma information is not indicative of future results of operations,
     not the results of historical operations had the acquisition of Mission Bay
     and the Acquired Properties been consummated as of the assumed dates.


                                            (Unaudited)
                                                                Nine Months  
                                            Year Ending            Ending    
                                            December 31,        December 31, 
                                                1996                1995     
                                            ------------        ------------ 
          Revenues                           $3,318,000          $2,524,000 
          Net Income                         $  463,000          $  382,000 
          Earnings Per Share                 $     0.31          $     0.25 
          Weighted Average Number of
            Common Shares Outstanding         1,514,049           1,514,049 


NOTE 7.  COMMITMENTS AND CONTINGENCIES

     REIT STATUS:
     Host Funding, as a requirement under the Code to elect REIT status, must
     have no more than five (5) shareholders, own no more than 50% of common
     stock, common stock equivalents, or other forms of equity outstanding. 
     Host Funding has not met this requirement as of December 31, 1996.  Under
     the Code, Host Funding is allowed a six month exemption until June 30, 1997
     to meet the requirement.  While management at Host Funding intends to meet
     the Code requirements, no assurance can be given that REIT status will be
     maintained, which could result in Host Funding being taxed as a C
     corporation.
     
     FRANCHISE AGREEMENTS:
     Host Funding has been granted franchise license agreements from Super 8 and
     Sleep Inns for terms expiring in 2005 and 2011, respectively.  Pursuant to
     the terms of the agreement, Host Funding is required to pay royalty fees
     and advertising fees of 5% to 4% and 3% to 1.3%, respectively, and
     reservation fees due under the Sleep Inn agreements of 1.75%, of gross room
     revenue.  The responsibility for payment of the fees has been assigned to
     Crossroads under the Combined Leases.
     
     DIVIDEND DECLARATION:
     On January 27, 1997, Host Funding declared a cash dividend of $0.24 per
     share to  stockholders of record on February 4, 1997, which was payable on
     February 18, 1997.

                                      F-27 
<PAGE>

     TERMINATION OF ADVISORY AGREEMENT, AMENDMENT OF ACQUISITION AGREEMENT 
     AND ISSUANCE OF WARRANTS:
     On February 3, 1997, Host Funding entered into an Agreement with the
     Acquisition Company and the Advisor whereby the Acquisition Company and
     Host Funding agreed to amend the Acquisition Agreement and the Advisor and
     Host Funding terminated the Advisory Agreement (see note 5).
     
     As compensation to the Acquisition Company for amending the Acquisition
     Agreement allowing a thirty (30) day cancellation, Host Funding has agreed
     to issue 225,000 Series A Warrants (the "Series A Warrants") and 225,000
     Series B Warrants (the "Series B Warrants") to the Acquisition Company.
     
     The Series A Warrants provide warrants to purchase 225,000 shares of Host
     Funding's Class A Common Stock, $0.01 par value per share, at $9.90 per
     share, and expire on February 2, 2000.  There are additional provisions in
     the Series A Warrants that allow pari passu treatment upon recapitalization
     of Host Funding.
     
     The Series B Warrants provide warrants to purchase 225,000 shares of Host
     Funding's Class A Common Stock, $0.01 par value per share, at $10.80 per
     share, and expire on February 2, 2001.  There are additional provisions in
     the Series B Warrants that allow pari passu treatment upon recapitalization
     of Host Funding and certain restrictions within the first twenty-four
     months of issuance as to the price allowed upon exercise of the Series B
     Warrants based upon consummation of a public offering in which proceeds to
     Host Funding are not less than $50 million.
     
     EMPLOYMENT AGREEMENTS:
     Host Funding has entered into Employment Agreements (the "Employment
     Agreements") with William Birdsall, Chairman of the Board; Michael S.
     McNulty, President; and Bona K. Allen, Chief Financial Officer, for a term
     of three years from February 1997.  The Employment Agreements provide for
     base salaries of $291,000 with a minimum bonus of 15% up to a maximum of
     50%, based upon a prescribed formula in the Employment Agreements, of base
     compensation in the first year.  The Employment Agreements also provide for
     base salary increases based upon prescribed increases in Host Funding's
     asset size.  The Employment Agreements are terminable by Host Funding, for
     cause, upon thirty (30) days written notice, or upon death or disability,
     with severance payments due employees ranging from nothing to two years of
     current base salary then in effect.
     
     
NOTE 8.  SUBSEQUENT EVENTS
     
     FORMATION OF HOST VENTURES, REFINANCING OF INITIAL LOAN FACILITY AND
     ACQUISITION OF FLAGSTAFF SUPER 8:
     On March 5, 1997, Host Funding formed Host Ventures, Inc., a Maryland
     corporation ("Host Ventures"), as a wholly-owned, special purpose
     subsidiary of Host Funding.  Host Ventures was formed at the request of
     First Boston as a condition to refinancing the existing $15,500,000 Initial
     Loan Facility with CrossHost at a reduced amount of $13,000,000 (the
     "CrossHost Loan Facility") and provided an acquisition and credit facility
     to Host Ventures in the amount of $8,725,000 (the "Host Ventures Loan
     Facility").
     
                                      F-28 
<PAGE>

     The CrossHost Loan Facility is payable over twenty years in equal monthly
     installments of $120,838, including interest at a fixed rate of 9.46% per
     annum (the "Base Interest Rate") over the first ten years, with an
     increased fixed monthly payment the second ten years that fully amortizes
     remaining principal plus interest at an interest rate equal to the greater
     of 2% over the Base Interest Rate or 2% over the then-existing ten year
     U.S.Treasury Note rate, with a due date in March 2017.
     
     The Host Ventures Loan Facility is payable interest only, monthly at the
     LIBOR Rate plus 350 basis points (LIBOR Rate was 5.4375% as of March 14,
     1997), with a maturity date of April 1, 1999, at which time all unpaid
     interest plus principal are due.
     
     Aggregate principal payments under the CrossHost and Host Ventures Loan
     Facilities for the next five calendar years ended December 31 and
     thereafter are as follows:
     
                    1997                     $   150,951 
                    1998                         244,973 
                    1999                       8,994,179 
                    2000                         295,777 
                    2001                         325,004 
                    Thereafter                11,714,116 
                                             ----------- 
                    Total                    $21,725,000 
                                             ----------- 
                                             ----------- 

     A significant portion of the proceeds from the Host Ventures Loan Facility
     was used by Host Ventures to acquire a 90 room Super 8 Motel in Flagstaff,
     Arizona for $5,125,000 plus closing costs (the "Flagstaff Super 8") from
     Teachers Retirement System of the State of Illinois ("Teachers") and to pay
     down the Initial Loan Facility in the amount of $2,500,000.  The effective
     closing date for the purchase of the Flagstaff Super 8 was March 14, 1997. 
     Effective as of the closing date of the Flagstaff Super 8, Host Ventures
     also leased the Flagstaff Super 8 to Crossroads.  The CrossHost and Host
     Ventures Loan Facilities require escrows to be reserved for property taxes
     and capital expenditures.
     
     The lease agreement between Crosshost and Host Ventures for the Flagstaff
     Super 8 (the "Flagstaff Lease Agreement") is for a term of fifteen (15)
     years from March 1997 and provides for annual base rentals of $505,000 plus
     percentage rentals of 32% of gross revenues less a breakeven level of
     $925,000, adjusted annually.  Remaining terms of the Flagstaff Lease
     Agreement are similar to the Acquired Properties Leases.
     
     The Flagstaff Super 8 was acquired pursuant to terms of the Acquisition
     Agreement by and between Host Funding and the Acquisition Company. 
     Pursuant to the terms of the Acquisition Agreement, the acquisition Company
     is entitled to receive an acquisition fee of up to 6% of the gross purchase
     price of the Flagstaff Super 8 plus reimbursement of certain expenses (the
     "Flagstaff Property Acquisition Fee").  The Flagstaff property Acquisition
     Fee is payable in cash or, at the option of the Acquisition Company, in the
     Class A Common Stock of Host Funding.  Host Funding and the Acquisition
     Company agreed that the Flagstaff Property Acquisition Fee earned by the
     Acquisition Company relating to the Flagstaff Super 8 was 16,000 shares of
     the Class A Common Stock of Host Funding valued at $10 per share and
     payable as of March 31, 1997.  The shares of Class A Common Stock received
     by the Acquisition Company in payment of the Flagstaff Property Acquisition
     Fee will be restricted securities under the Securities Act of 1933 and
     subject to the resale provisions of Rule 144 promulgated under the Act. 
     The last traded price of the stock of Host 

                                      F-29 
<PAGE>

     Funding on the American Stock Exchange on March 14, 1997 was $9.50 per 
     share.  Host Funding intends to record the Flagstaff Property Acquisition
     Fee on the Flagstaff Super 8 at the fair market value of the Class A Common
     Stock on March 14, 1997.  The Flagstaff Property Acquisition Fee (based 
     upon a value of $10 and $9.50 per share or $160,000 and $152,000, 
     respectively) represents approximately 3.1% and 3.0%, respectively, of the 
     gross purchase price totaling $5,125,000 excluding closing expenses of the 
     Flagstaff Super 8.

     As a further condition to obtaining the Host Ventures Loan Facility, First
     Boston required Host Funding to transfer to Host Ventures two Sleep Inn
     properties owned by Host Funding.  The two Sleep Inns are located in
     Sarasota, Florida and Ocean Springs, Mississippi (collectively, the
     "Transferred Sleep Inns").  Simultaneously with the acquisition of the
     Flagstaff Super 8, Host Funding deeded the Transferred Sleep Inns to Host
     Ventures in a tax free reorganization.  In addition, Host Funding assigned
     to Host Ventures the lease agreements with Crossroads pertaining to each of
     the Transferred Sleep Inns.

















                                      F-30 
<PAGE>

SCHEDULE III
                                HOST FUNDING, INC.

                   REAL ESTATE AND ACCUMULATED DEPRECIATION

                                DECEMBER 31, 1996

------------------------------------------------------------------------------

<TABLE>
                                                                                  COSTS SUBSEQUENT         GROSS AMOUNT AT WHICH   
                                                  INITIAL COST TO COMPANY          TO ACQUISITION        CARRIED AT CLOSE OF PERIOD
                                                 --------------------------  --------------------------  --------------------------
                                                              BUILDINGS AND               BUILDINGS AND               BUILDINGS AND
DESCRIPTION                   ENCUMBRANCES (1)     LAND       IMPROVEMENTS      LAND      IMPROVEMENTS      LAND      IMPROVEMENTS 
-----------                   ----------------   ----------   ------------   ----------   ------------   ----------   ------------ 
<S>                           <C>                <C>          <C>            <C>          <C>            <C>          <C>          
Hotel Assets:
Super 8, Rock Falls, IL         $                $  131,627    $   491,711   $        -    $         -   $  131,627   $   491,711 
Super 8, Somerset, KY                               170,000        449,541            -              -      170,000       449,541 
Super 8, Miner, MO                                  187,660        461,494            -              -      187,660       461,494 
Super 8, Poplar Bluff, MO                           153,000        410,515            -              -      153,000       410,515 
Super 8, San Diego, CA                              702,500      1,826,500            -              -      702,500     1,826,500 
Sleep Inn, Ocean Springs, MS                        924,162      2,402,821            -              -      924,162     2,402,821 
Sleep Inn, Destin, FL                               993,429      2,582,915            -              -      993,429     2,582,915 
Sleep Inn, Sarasota, FL                             834,990      2,170,975            -              -      834,990     2,170,975 
Sleep Inn, Tallahassee, FL                          710,679      1,847,767            -              -      710,679     1,847,767 
                                -----------      ----------    -----------   ----------    -----------   ----------   ----------- 
                                $15,500,000      $4,808,047    $12,644,239   $        0    $         0   $4,808,047    12,644,239 
                                -----------      ----------    -----------   ----------    -----------   ---------- 
                                -----------      ----------    -----------   ----------    -----------   ---------- 

                                                                                           Land                         4,808,047 
                                                                                           Furniture and equipment      1,952,233 
                                                                                                                      ----------- 
                                                                                           Total hotels and land 
                                                                                            under lease               $19,404,519 
                                                                                                                      ----------- 
                                                                                                                      ----------- 

<CAPTION>


                               ACCUMULATED     
                              DEPRECIATION &     YEAR OF        DATE     
DESCRIPTION                    AMORTIZATION    CONSTRUCTION   ACQUIRED   LIFE 
-----------                   --------------   ------------   --------   ---- 
<S>                           <C>              <C>            <C>        <C>  
Hotel Assets:                                                                                                                      
Super 8, Rock Falls, IL         $ 18,099           1985        4/1/95     35 
Super 8, Somerset, KY             23,014           1985        4/1/95     35 
Super 8, Miner, MO                25,198           1985        4/1/95     35 
Super 8, Poplar Bluff, MO         23,462           1985        4/1/95     35 
Super 8, San Diego, CA            26,872           1987        4/22/96    35 
Sleep Inn, Ocean Springs, MS      15,439           1995        9/19/96    35 
Sleep Inn, Destin, FL             16,596           1992        9/13/96    35 
Sleep Inn, Sarasota, FL           13,949           1993        9/13/96    35 
Sleep Inn, Tallahassee, FL        11,873           1994        9/13/96    35 
                                -------- 
                                 174,502 



Land                                   - 
Furniture and equipment          216,507 
                                -------- 
Total hotels and land                    
 under lease                    $391,009 
                                -------- 
                                -------- 
</TABLE>

-------------------------
(1)  All hotel assets are cross collateralized and encumbered by the Initial 
     Loan Facility as of December 31, 1996.





                                       
                 See accompanying notes to financial statements.
------------------------------------------------------------------------------

                                      F-31 
<PAGE>

INDEPENDENT AUDITOR'S REPORT



To the Board of Directors Host Funding, Inc.:

I have audited the accompanying Historical Summaries of Gross Revenues and 
Direct Operating Expenses (the "Historical Summaries") of the Super 8 Motel - 
Flagstaff, as defined in Note 1 for the year ended December 31, 1996.  These 
Historical Summaries are the responsibility of Teachers, CARA and Crossroads. 
My responsibility is to express an opinion on these Historical Summaries based 
on my audit.

I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable 
assurance about whether the Historical Summaries are free of material 
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the Historical Summaries.  An audit also includes
assessing the accounting principles used and significant estimates made by 
management, as well as evaluating the overall presentation of the Historical 
Summaries.  I believe that my audit provide a reasonable basis for my opinion.

The accompanying Historical Summaries are prepared for the purpose of 
complying with the rules and regulations of the Securities and Exchange 
Commission as described in Note 1, and are not intended to be a complete 
presentation of the Super 8 Motel - Flagstaff's gross revenues and direct 
operating expenses.

In my opinion, the Historical Summaries referred to above present fairly, in 
all material respects, the assets, gross revenues and direct operating expenses
of the Super 8 Motel - Flagstaff for the year ended December 31, 1996, in 
conformity with generally accepted accounting principles.

WILLIAM H. LING



May 27, 1997
San Diego, California

                                     F-32 
<PAGE>

                            SUPER 8 MOTEL - FLAGSTAFF
  
                      HISTORICAL SUMMARIES OF GROSS REVENUE
                          AND DIRECT OPERATING EXPENSES

<TABLE>
----------------------------------------------------------------------------------------------------
                                                              Period January 1      Three Months    
                                             Year Ended         to March 14,            Ended       
                                            December 31,            1997           March 31, 1996   
                                                1996             (Unaudited)         (Unaudited)    
----------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>                  <C>              
REVENUES:
  Room Sales                               $  1,333,357          $  171,974         $  224,854 
  Telephone                                      25,019               4,780              2,911 
  Other - principally vending                     6,782                 116              1,380 
                                           ------------          ----------         ---------- 
  Total                                       1,365,158             176,870            229,145 
                                           ------------          ----------         ---------- 

EXPENSES:                                              
  Rooms                                         239,728              46,774             46,288 
  Administrative and general                     80,690              17,804             16,678 
  Franchise                                      80,002              10,319             13,492 
  Energy cost                                    66,318              11,935             13,537 
  Management fee                                 69,195               8,840             11,457 
  Repairs and maintenance                        34,316               9,372              6,761 
  Property taxes                                 50,424              14,049             12,606 
  Insurance                                       9,444               2,361              2,361 
  Marketing                                       8,421               1,116              1,812 
  Telephone                                      13,014               2,669              3,283 
                                           ------------          ----------         ---------- 

  Total                                         724,794             141,152            146,585 
                                           ------------          ----------         ---------- 

GROSS REVENUES IN EXCESS OF DIRECT
  OPERATING EXPENSES                       $    640,364          $   35,718         $   82,560 
                                           ------------          ----------         ---------- 
                                           ------------          ----------         ---------- 
</TABLE>












                 See accompanying notes to financial statements.
-------------------------------------------------------------------------------
                                     F-33 
<PAGE>

                            SUPER 8 MOTEL - FLAGSTAFF

                                      OWNER

                          NOTES TO FINANCIAL STATEMENTS

-------------------------------------------------------------------------------


NOTE 1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION AND ORGANIZATION: 

     The Super 8 Motel - Flagstaff ("Flagstaff" or "Motel") is a 90 room limited
     service motel located in Flagstaff, Arizona.  The Motel was owned by 
     the Teachers Retirement Fund of Illinois ("Teachers" or "Owner"), whose 
     asset manager is Capital Associates Realty Advisors Corp. ("CARA") and 
     whose operator was Crossroads Hospitality Tenant Company, a Delaware 
     limited liability company ("Crossroads") (see Notes 3 and 4).  As further 
     discussed in Note 4, the Motel was sold in March 1997 to Host Funding, 
     Inc., a Maryland corporation ("Host Funding").

     The Historical Summaries have been prepared to substantially comply with 
     the rules and regulations of the Securities and Exchange Commission for 
     business combinations accounted for as a purchase.  Historical financial 
     statement summaries, rather than full audited financial statements, are 
     presented for the Super 8 Motel - Flagstaff because the Super 8 Motel - 
     Flagstaff was acquired from an unaffiliated third party in a negotiated 
     transaction and the seller of the Super 8 Motel - Flagstaff would not 
     allow Host Funding access to records supporting hotel historical costs, 
     indebtedness and equity of the Super 8 Motel - Flagstaff.  Because it was
     not practicable to obtain full audited financial statements of the Super 8
     Motel - Flagstaff, the historical summaries of gross revenue and direct 
     operating expenses do not include certain historical expenses of the 
     Super 8 Motel - Flagstaff such as interest, depreciation, and amortization 
     and indirect costs.  Therefore, the Historical Summaries are not 
     representative of the actual operations for the periods presented.


                                      F-34 
<PAGE>

     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

     REVENUES
     Revenue is recognized as earned.  Earned is generally defined as the date 
     upon which a guest occupies a room and/or utilized the hotel's services.  
     Ongoing credit evaluations are performed and potential credit losses are 
     expensed at the time the account receivable is estimated to be 
     uncollectible.  Historically, credit losses have not been material to the 
     Motel's results of operations.

     USE OF ESTIMATES
     The preparation of Historical Summaries in conformity with generally 
     accepted accounting principles requires management to make estimates and
     assumptions that affect the reported amounts of gross revenues and direct
     operating expenses during the reporting period.  Actual results could 
     differ from those estimates.


NOTE 2.  FRANCHISE AGREEMENTS

     Flagstaff has been granted a License Agreement ("License Agreement") by 
     Super 8 Motels, Inc. for a 20-year term expiring in 2008.  Pursuant to the
     terms of the License Agreement, Flagstaff is required to pay a royalty fee
     and an advertising fee equal to 4% and 2%, respectively, of gross room 
     revenue.  This royalty fee and advertising fee totalled approximately 
     $53,000 and $27,000 in 1996, respectively.


NOTE 3.  MANAGEMENT AGREEMENT

     Teachers had entered into a Management Agreement ("Management Agreement") 
     with Crossroads, which is a subsidiary of Interstate Hotels, Inc. a 
     Delaware corporation and nationally recognized hotel operator, to manage 
     Flagstaff.  Under this management agreement, Crossroads operates and 
     manages the Motel and receives a management fee of 5% of gross revenue and
     an incentive fee of 20% of the increase in profits over the preceding 
     fiscal year, as defined in the Management Agreement.  The management fee
     totalled approximately $69,000 in 1996, with no incentive fee due.




                                     F-35 
<PAGE>

NOTE 4.  SUBSEQUENT EVENT

     In 1997, Teachers entered into an "Agreement to Purchase Motel" ("Purchase
     Agreement") with Host Ventures, Inc., a Maryland corporation ("Host 
     Ventures"), a wholly-owned, special purpose subsidiary of Host Funding.  
     Per the terms of the Purchase Agreement, Teachers sold the land, buildings
     and equipment to Host Ventures for $5,150,000.  This sale closed effective
     March 14, 1997.

     Effective as of the closing date of Flagstaff, Host Ventures also leased
     Flagstaff to Crossroads.  The lease agreement between Crossroads and Host
     Ventures for Flagstaff is for a term of fifteen (15) years from March 1997
     and provides for annual base rentals of $505,000 plus percentage rentals of
     32% of gross revenues less a breakeven level of $925,000, adjusted 
     annually.

     Flagstaff was acquired pursuant to terms of an Acquisition Agreement (the
     "Acquisition Agreement") by and between Host Funding and HMR Capital, LLC,
     a Delaware limited liability company (the "Acquisition Company").  The 
     Acquisition Company was an affiliate of Michael S. McNulty, president and
     a director of Host Funding.  Under the terms of the Acquisition Agreement,
     the Acquisition Company is responsible for the management, coordination, 
     and supervision of Host Funding's acquisition of additional hotel 
     properties.  The Acquisition Company sought out Flagstaff and negotiated 
     the terms of the acquisition.

     Pursuant to the terms of the Acquisition Agreement, the Acquisition Company
     is entitled to receive an acquisition fee of up to 6% of the gross purchase
     price of Flagstaff plus reimbursement of certain expenses (the "Flagstaff 
     Property Acquisition Fee").  The Flagstaff Property Acquisition Fee is 
     payable in cash or, at the option of the Acquisition Company, in the Class 
     A Common Stock of Host Funding.  Host Funding and the Acquisition Company 
     agreed that the Flagstaff Property Acquisition Fee earned by the 
     Acquisition Company relating to Flagstaff was 16,000 shares of the Class A 
     Common Stock of Host Funding valued at $10 per share.  The shares of Class 
     A Common Stock received by the Acquisition Company in payment of the 
     Flagstaff Property Acquisition Fee will be restricted securities under the
     Securities Act of 1933 and subject to the resale provision of Rule 144 
     promulgated under the Act.  The last traded price of the stock of Host 
     Funding on the American Stock Exchange on March 14, 1997 was $9.50 per 
     share.  Host Funding intends to record the Flagstaff Property Acquisition
     Fee on Flagstaff at the fair market value of the Class A Common Stock on 
     March 14, 1997.  The Flagstaff Property Acquisition Fee (based upon a value
     of $10 and $9.50 per share or $160,000 and $152,000, respectively) 
     represents approximately 3.1% and 3.0%, respectively, of the gross purchase
     price totaling $5,150,000 excluding closing expenses of Flagstaff.

                                     F-36 
<PAGE>

                            SUPER 8 MOTEL - FLAGSTAFF

                                     LESSEE

                       STATEMENT OF REVENUES AND EXPENSES
                            (EXCLUDING INCOME TAXES)
                    FOR THE PERIOD MARCH 15 TO MARCH 31, 1997
                                   (UNAUDITED)
-------------------------------------------------------------------------------

REVENUES:
  Room Sales                                                        $72,225
  Telephone                                                           1,334
  Other - principally vending                                            59
                                                                    -------
  Total                                                              73,618
                                                                    -------

EXPENSES:
  Rooms                                                              10,046
  Administrative and general                                          4,586
  Franchise                                                           3,611
  Energy cost                                                         2,703
  Management fee                                                      3,681
  Repairs and maintenance                                               778
  Insurance                                                             886
  Marketing                                                           2,992
  Telephone                                                             524
  Rent                                                               22,986
                                                                    -------
  Total                                                              52,793
                                                                    -------

NET REVENUE OVER EXPENSES                                           $20,825
                                                                    -------
                                                                    -------


            See accompanying notes to unaudited financial statements.
-------------------------------------------------------------------------------
                                      F-37
<PAGE>

                            SUPER 8 MOTEL - FLAGSTAFF

                                     LESSEE

                     NOTES TO UNAUDITED FINANCIAL STATEMENTS

NOTE 1.   ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Super 8 Motel - Flagstaff ("Flagstaff" or "Motel") is a 90 room limited
service motel located in Flagstaff, Arizona.  The Motel was owned by the
Teachers Retirement Fund of Illinois ("Teachers" or "Owner"), whose asset
manager is Capital Associates Realty Advisors Corp. ("CARA") and whose operator
was Crossroads Hospitality Tenant Company, a Delaware limited liability company
("Crossroads" or "Lessee") (see Note 4).  The Motel was sold on March 14, 1997
to Host Funding, Inc., a Maryland corporation ("Host Funding") and leased to
Crossroads (see Note 2).

The accompanying financial statements have been prepared for Flagstaff for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the 10-KA filing of Host Funding.

The accompanying financial statement provides only the unaudited revenues and
expenses excluding income taxes of Flagstaff for the period March 15 to March
31, 1997.  The accompanying financial statement includes no provision related to
federal or state income taxes because Flagstaff and Crossroads did not pay
income taxes and Crossroads does not allocate or charge these expenses to its
individual units.  Accordingly, the accompanying financial statements are not
intended to be a complete presentation of Flagstaff's revenues and expenses, nor
do they reflect or intend to reflect the operations of Crossroads.

The Motel's fiscal year end is December 31.

REVENUES

Revenue is recognized as earned.  Earned is generally defined as the date upon
which a guest occupies a room and/or utilized the hotel's services.  Ongoing
credit evaluations are performed and potential credit losses are expensed at the
time the account receivable is estimated to be uncollectible.  Historically,
credit losses have not been material to the Motel's results of operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. 
Actual results could differ from those estimates.

                                      F-38
<PAGE>

NOTE 2.  ACQUISITION AND LEASES

In 1997, Teachers entered into an "Agreement to Purchase Motel" ("Purchase
Agreement") with Host Ventures, Inc., a Maryland corporation ("Host Ventures"),
a wholly-owned, special purpose subsidiary of Host Funding.  Per the terms of
the Purchase Agreement, Teachers sold the land, buildings and equipment to Host
Ventures for $5,150,000.  This sale closed effective March 14, 1997.

Effective as of the closing date of Flagstaff, Host Ventures also leased
Flagstaff to Crossroads.  The lease agreement between Crossroads and Host
Ventures for Flagstaff is for a term of fifteen (15) years from March 1997 and
provides for annual base rentals of $505,000 plus percentage rentals of 32% of
gross revenues less a breakeven level of $925,000, adjusted annually.  Under the
terms of the lease, the lessor is responsible for paying for replacements and
property taxes.

Flagstaff was acquired pursuant to terms of an Acquisition Agreement (the
"Acquisition Agreement") by and between Host Funding and HMR Capital, LLC, a
Delaware limited liability company (the "Acquisition Company").  The Acquisition
Company was an affiliate of Michael S. McNulty, president and a director of Host
Funding.  Under the terms of the Acquisition Agreement, the Acquisition Company
is responsible for the management, coordination, and supervision of Host
Funding's acquisition of additional hotel properties.  The Acquisition Company
sought out Flagstaff and negotiated the terms of the acquisition.

Pursuant to  the terms of the Acquisition Agreement, the Acquisition Company is
entitled to receive an acquisition fee of up to 6% of the gross purchase price
of Flagstaff plus reimbursement of certain expenses (the "Flagstaff Property
Acquisition Fee").  The Flagstaff Property Acquisition Fee is payable in cash
or, at the option of the Acquisition Company, in the Class A Common Stock of
Host Funding.  Host Funding and the Acquisition Company agreed that the
Flagstaff Property Acquisition Fee earned by the Acquisition Company relating to
Flagstaff was 16,000 shares of the Class A Common Stock of Host Funding valued
at $10 per share.  The shares of Class A Common Stock received by the
Acquisition Company in payment of the Flagstaff Property Acquisition Fee will be
restricted securities under the Securities Act of 1933 and subject to the resale
provision of Rule 144 promulgated under the Act.  The last traded price of the
stock of Host Funding on the American Stock Exchange on March 14, 1997 was $9.50
per share.  Host Funding intends to record the Flagstaff Property Acquisition
Fee on Flagstaff at the fair market value of the Class A Common Stock on March
14, 1997.  The Flagstaff Property Acquisition Fee (based upon a value of $10 and
$9.50 per share or $160,000 and $152,000, respectively) represents approximately
3.1% and 3.0%, respectively, of the gross purchase price totaling $5,150,000
excluding closing expenses of Flagstaff.

NOTE 3.  FRANCHISE AGREEMENT

Flagstaff has been granted a License Agreement ("License Agreement") by Super 8
Motels, Inc. ("Super 8") for a 10-year term expiring in 2007.  Pursuant to the
terms of the License Agreement, Flagstaff is required to pay a royalty fee and
an advertising fee equal to 4% and 2%, respectively, of gross room revenue.

                                      F-39