SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

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

                                       OR

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

     For the Fiscal Year Ended January 3, 1997 Commission File No. 33-95058

                              HMH PROPERTIES, INC.


                               Delaware 52-1822042
        (State of Incorporation) (I.R.S. Employer Identification Number)

                               10400 Fernwood Road
                            Bethesda, Maryland 20817
                                 (301) 380-9000

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

                                 Title of Class
                        $600,000,000 (principal amount at
                             maturity) Senior Notes


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


                       Document Incorporated by Reference

   Host Marriott Corporation Notice of 1997 Annual Meeting and Proxy Statement
<PAGE>

FORWARD-LOOKING STATEMENTS

Certain  matters  discussed  herein are  forward-looking  statements  within the
meaning of the  Private  Litigation  Reform Act of 1995 and as such may  involve
known and unknown  risks,  uncertainties,  and other factors which may cause the
actual  results,  performance  or  achievements  of HMH  Properties,  Inc.  (the
"Company") to be different from any future results,  performance or achievements
expressed or implied by such  forward-looking  statements.  Although the Company
believes the expectations reflected in such forward-looking statements are based
upon reasonable  assumptions it can give no assurance that its expectations will
be attained. These risks are detailed from time to time in the Company's filings
with  the  Securities  and  Exchange  Commission.   The  Company  undertakes  no
obligation   to  publicly   release  the  result  of  any   revisions  to  these
forward-looking  statements  that may be made to reflect  any  future  events or
circumstances.

ITEMS 1. AND 2.  BUSINESS AND PROPERTIES 

General 

The Company is a direct  wholly-owned  subsidiary of Host Marriott  Hospitality,
Inc.  ("Hospitality") which is a direct wholly-owned subsidiary of Host Marriott
Corporation ("Host Marriott").  The Company's assets principally  consist of the
Company's 32 full-service  hotel  properties,  one partnership  investment and a
note  receivable  from an  affiliate.  All but four of the  Company's 32 lodging
properties   are   managed   by   Marriott   International,    Inc.   ("Marriott
International")  and all but one are operated under the Ritz-Carlton or Marriott
brands,  which are among the most respected and widely recognized in the lodging
industry.  Based  on  industry  data,  the  Company  believes  that  its  hotels
consistently  outperform the industry's  average occupancy rate by a significant
margin,  and  averaged  77.8%  occupancy  for 1996  compared to a 71.1%  average
occupancy for competing  full-service hotels in the upscale full-service segment
of the  lodging  industry  (the  segment  which  is most  representative  of the
Company's full-service hotels during the period).

The lodging industry as a whole, and the upscale and luxury  full-service  hotel
segments  in  particular,  are  benefiting  from an  improved  supply and demand
relationship  in the United States.  Management  believes that demand  increases
have  resulted   primarily  from  an  improved   economic   environment   and  a
corresponding  increase in business  travel.  In spite of  increased  demand for
rooms, the room supply growth rate in the  full-service  segment has diminished.
Management  believes  that  this  decrease  in the  supply  growth  rate  in the
full-service  segment is  attributable  to many  factors  including  the limited
availability of attractive  building sites for full-service  hotels, the lack of
available financing for new full-service hotel construction and the availability
of existing full-service  properties for sale at a discount to their replacement
cost. The relatively  high occupancy rates of the Company's  hotels,  along with
the increased demand for  full-service  hotel rooms have allowed the managers of
the Company's hotels to increase average daily room rates by primarily replacing
certain  discounted  group  business  with  higher-  rated  group and  transient
business and by  selectively  raising room rates.  As a result,  on a comparable
basis,  room revenues per available room ("REVPAR") for full-service  properties
increased  approximately  9% for 1996 over the  comparable  period for the prior
year.  Furthermore,  because the lodging  property  operations have a high-fixed
cost component, increases in REVPAR generally yield greater percentage increases
in EBITDA (as  defined  herein).  Accordingly,  the  approximate  9% increase in
REVPAR resulted in an approximate 12% increase in comparable full- service hotel
EBITDA in 1996. The Company expects this supply/demand  imbalance,  particularly
in the upscale and luxury full-service segments to continue, which should result
in improved REVPAR and EBITDA at its hotel properties in the near term, however,
there can be no assurance that REVPAR and EBITDA will continue to improve.

Business Strategy

The  Company's  business  strategy  is to continue  to focus on  maximizing  the
profitability of its existing full- service  portfolio and acquiring  additional
high-quality,  full-service  hotel  properties as  conditions,  principally  the
availability  of  capital,  permit.  The Company  believes  that the upscale and
luxury  full-service  segment of the market  offers  numerous  opportunities  to
acquire assets at attractive multiples of cash flow and at substantial discounts
to

<PAGE>

replacement value,  including  under-performing  hotels which can be improved by
conversion to the Marriott or Ritz- Carlton brands.

There is a very  limited  new supply of upscale  and luxury  full-service  hotel
rooms currently under  construction.  According to Smith Travel  Research,  from
1988 to 1991, upscale full-service room supply for the Company's competitive set
increased  an  average  of  approximately  4%  annually  which  resulted  in  an
oversupply of rooms in the industry.  However,  this growth slowed to an average
of approximately 1.0% from 1992 to 1996.  According to Coopers & Lybrand,  hotel
supply in the upscale  full-service segment is expected to grow annually at 1.8%
to 1.9%  through  1998.  Management  believes the lead time from  conception  to
completion of a full-service  hotel is generally five years or more in the types
of markets the Company is  principally  pursuing,  which will  contribute to the
continued low growth of supply in the upscale and luxury  full-service  segments
through 2000.

The  Company  intends  to grow its  full-service  hotel  portfolio  as cash flow
becomes available from operations or through  additional  financing as permitted
under the senior notes  indenture.  In carrying out this  strategy,  the Company
evaluates  each  opportunity  on an  individual  basis and may from time to time
elect to acquire  controlling  interests in a hotel joint  venture,  rather than
pursue the outright  acquisition  of a property,  when it believes its return on
investment  will be  maximized  by so doing.  However,  under the  senior  notes
indenture,  the ability to invest in joint ventures is limited.  The Company may
make acquisitions directly or through its subsidiaries depending on a variety of
factors,   including  the  existence  of  debt,  the  form  of  investment,  the
restrictions  and  requirements  of its bond indenture and the  availability  of
funds.

The Company  believes it is well qualified to pursue its  acquisition  strategy.
Management  has  extensive   experience  in  acquiring  and  financing   lodging
properties  and  believes its industry  knowledge,  relationships  and access to
market information provide a competitive  advantage with respect to identifying,
evaluating  and  acquiring  hotel  assets.  In  addition,  the  Company  is well
positioned  to convert  acquired  properties  to the high  quality  Marriott and
Ritz-Carlton brand names due to its relationship with Marriott International.

Host  Marriott  and the  Company  have  acquired  a number  of  properties  from
inadvertent  owners at  significant  discounts to  replacement  cost,  including
luxury hotels  operating  under the  Ritz-Carlton  brand.  Many desirable  hotel
properties  are currently held by  inadvertent  owners such as banks,  insurance
companies  and other  financial  institutions  which are  motivated  and willing
sellers.  While in the  Company's  experience  to date,  these sellers have been
primarily  United  States  financial  organizations,  the Company  believes that
numerous  international  financial  institutions are also inadvertent  owners of
lodging  properties and have only recently begun to dispose of such  properties.
The  Company  expects  that there  will be  increased  opportunities  to acquire
lodging properties from international financial institutions.

In 1996, the Company acquired seven full-service properties with 2,350 rooms for
approximately $249 million, including the acquisition, through foreclosure, of a
controlling  interest in the 250-room Newport Beach Marriott Suites.  Subsequent
to year end, the Company acquired the 306-room Ritz-Carlton, Marina del Rey, for
approximately  $57 million.  The Company acquired four  full-service  properties
(1,944 rooms) for  approximately  $240 million in 1995. During 1994, the Company
acquired  two  full-service  properties  with 959  rooms for  approximately  $80
million.  The Company also  provided  100%  financing  totaling $35 million to a
partnership,  in which a  related  party of the  Company  owns the sole  general
partner interest,  for the partnership's  acquisition of two full-service hotels
with 684 rooms.  The Company  accounts for these  properties as owned hotels for
accounting purposes.

Consistent  with its  strategy of focusing  on the  full-service  segment of the
lodging  industry,  the  Company  has  opportunistically  sold  certain  of  its
properties. During 1994, the Company sold 26 of its 30 Fairfield Inns and all of
its 14 senior living  communities.  During the first and third quarters of 1995,
the Company  sold to and leased back from an  unrelated  real estate  investment
trust (the "REIT") 37 of its Courtyard  properties.  Also, in the second quarter
of 1995, the Company sold its remaining four Fairfield Inns for approximately $6
million in cash. In the first and second  quarters of 1996, the Company  entered
into an agreement with the REIT and sold and leased back 16 Courtyard properties
and 18  Residence  Inns  for  approximately  $349  million  (10%  of  which  was
deferred). Host Marriott purchased the Company's rights to the deferred proceeds
and  obligations  under the lease for the 16 Courtyard  properties at their fair
market value. With the completion of these  transactions,  100% of the Company's
owned  properties are in the  full-service  segment.  The Company has reinvested
substantially  all of the proceeds in the  acquisition of  full-service  lodging
properties.

In connection with the May 1995 debt offering, Host Marriott Travel Plazas, Inc.
("HMTP"),  a subsidiary of Hospitality,  transferred two full-service  hotels to
the Company,  and the Company  transferred  certain  undeveloped land parcels, a
note  receivable  and certain  leases and the deferred  proceeds  related to the
Company's Courtyard properties sold in 1995 to subsidiaries of Hospitality.

Hotel Lodging Industry 

The lodging industry as a whole, and the upscale and luxury full-service segment
in particular,  is benefiting from a cyclical recovery as well as a shift in the
supply/demand relationship with supply relatively flat and demand strengthening.
The lodging  industry  posted  strong gains in revenues and profits in 1996,  as
demand  growth  continued  to outpace  additions  to supply.  Based on Coopers &
Lybrand data,  the Company  expects  hotel room supply growth to remain  limited
through 1998 and for the foreseeable future thereafter. Accordingly, the Company
believes this  supply/demand  imbalance  will result in improving  occupancy and
room rates which should result in improved REVPAR and operating profit.

Following a period of significant  overbuilding  in the mid-to-late  1980s,  the
lodging  industry   experienced  a  severe  downturn.   Since  1991,  new  hotel
construction,  excluding casino related construction,  has been modest,  largely
offset by the number of rooms taken out of service each year. Due to an increase
in travel and an improving economy,  hotel occupancy has grown steadily over the
past  several  years,  and room  rates  have  improved.  According  to Coopers &
Lybrand,  room demand for upscale  full-service  properties  is expected to grow
approximately 2.4% annually through 1998. Increased room demand should result in
increased  hotel occupancy and room rates.  According to Smith Travel  Research,
upscale full-service occupancy for the Company's competitive set grew in 1996 to
72.4%,  while  room rate  growth  continued  to exceed  inflation.  The  Company
believes  that  these  recent  trends  will  continue  with  overall   occupancy
increasing  slightly  and room rates  increasing  at more than one and one- half
times the rate of inflation in each of the next two years.

While room demand has been  rising,  new hotel supply  growth has slowed.  Smith
Travel  Research data shows that from 1988 to 1991,  upscale  full-service  room
supply  increased an average of  approximately  4% annually.  According to Smith
Travel Research, this growth slowed to an approximate 1.0% average annual growth
rate from 1990 through 1996.  Through  1998,  upscale  full-service  room supply
growth is expected to increase to  approximately  1.8%  annually,  according  to
Coopers & Lybrand.  The  increase  in room demand and slow down in growth of new
hotel  supply  has also led to  increased  room  rates.  According  to Coopers &
Lybrand,  room rates for such hotels are expected to grow approximately 4% to 5%
annually through 1998.

As a result of the  over-building in the mid-to-late  1980s,  many  full-service
hotels built have not performed as originally  planned.  Cash flow has often not
covered debt service  requirements,  causing  lenders  (e.g.,  banks,  insurance
companies,  and savings and loans) to foreclose and become "inadvertent  owners"
who are  motivated to sell these assets.  In the  Company's  experience to date,
these sellers have been  primarily  U.S.  financial  organizations.  The Company
believes that numerous international financial institutions are also inadvertent
owners of lodging  properties and expects there will be increased  opportunities
to acquire lodging properties from international financial  institutions.  While
the interest of inadvertent  owners to sell has created  attractive  acquisition
opportunities  with  strong  current  yields,  the  lack of  supply  growth  and
increasing room night demand should  contribute to higher  long-term  returns on
invested  capital.  Given  the  relatively  long  lead  time to  develop  urban,
convention  and  resort  hotels,  as well  as the  lack  of  project  financing,
management  believes  the growth in room supply in this  segment will be limited
for an extended period of time.


<PAGE>

Hotel Lodging Properties 

The  Company's  hotel  lodging  properties   represent  quality  assets  in  the
full-service lodging segments. All but one of the Company's hotel properties are
operated under the Marriott or Ritz-Carlton  brand names. The Company's  lodging
portfolio consists of 32 properties with 12,432 rooms as of February 28, 1997.

One  commonly  used  indicator of market  performance  for hotels is revenue per
available room, or REVPAR, which measures daily room revenues generated on a per
room basis. This does not include food and beverage or other ancillary  revenues
generated by the property.  REVPAR  represents  the  combination  of the average
daily room rate charged and the average daily  occupancy  achieved.  The Company
has reported annual increases in REVPAR since 1993.

To maintain  the  overall  quality of the  Company's  lodging  properties,  each
property  undergoes  refurbishments  and  capital  improvements  on a  regularly
scheduled basis. Typically,  refurbishing has been provided at intervals of five
years,  based on an annual review of the condition of each  property.  In fiscal
years 1996,  1995 and 1994,  the Company spent $24 million,  $19 million and $29
million,  respectively,  on capital  improvements to existing  properties.  As a
result of these expenditures, the Company has been able to maintain high quality
rooms at its properties.

Full-Service  Hotels.  All but  four of the  full-service  hotels  owned  by the
Company  are  managed  by  Marriott  International  and all but one are  part of
Marriott  International's  full-service hotel system. Hotel facilities typically
include  meeting and banquet  facilities,  a variety of restaurants and lounges,
swimming pools, gift shops and parking  facilities.  The Company's  full-service
hotels  primarily  serve  business and pleasure  travelers and group meetings at
locations in downtown and suburban areas,  near airports and at resort locations
throughout the United States. The average age of the full-service  properties is
12 years, several of which have had substantial renovations or major additions.

During 1996, the Company acquired seven full-service properties with 2,350 rooms
for approximately $249 million.  In 1995, the Company acquired four full-service
properties  with 1,944  rooms for  approximately  $240  million,  including  $94
million of mortgage  debt on two of the  properties.  During  1994,  the Company
acquired  two  full-service  properties  with 959  rooms for  approximately  $80
million.  The Company also  provided  100%  financing  totaling $35 million to a
partnership,  in which a  related  party of the  Company  owns the sole  general
partner interest,  for the partnership's  acquisition of two full-service hotels
with 684 rooms.  The Company  accounts for these  properties as owned hotels for
accounting purposes.

The chart below sets forth performance  information for the Company's comparable
full-service hotels:

<TABLE>
<CAPTION>
                                                                                  1996              1995
                                                                                ---------         -------
<S>                                                                             <C>               <C>    

    Number of properties. . . . . . . . . . . . . . . . . . . . . . . .              18               18
    Number of rooms . . . . . . . . . . . . . . . . . . . . . . . . . .           7,281            7,281
    Average daily rate. . . . . . . . . . . . . . . . . . . . . . . . .         $100.76           $95.53
    Occupancy % . . . . . . . . . . . . . . . . . . . . . . . . . . . .            77.5%            74.8%
    REVPAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $78.06           $71.51
    REVPAR % change . . . . . . . . . . . . . . . . . . . . . . . . . .             9.2%              --
 
</TABLE>

<PAGE>

The chart below sets forth  performance  information for the Company's  existing
full-service hotels for fiscal years 1994 through 1996.

<TABLE>
<CAPTION>
                                                                                    1996(1)  1995 (1)(2)  1994 (1) 
                                                                                -----------  -----------  --------
<S>                                                                             <C>          <C>          <C>

    Number of properties. . . . . . . . . . . . . . . . . . . . . . . . . . . .      30          20           16
    Number of rooms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  11,871       8,071        6,699
    Average daily rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $107.98      $95.24       $83.47
    Occupancy % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    77.8%       74.7%        77.4%
    REVPAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $84.01      $71.15       $64.64
    REVPAR % change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    18.1%       10.1%         6.5%

</TABLE>
                
(1)  Excludes  the  information  related to the  255-room Elk Grove Suites hotel
     which is leased to a national  hotel chain through  1997.
(2)  Excludes  the  information  related to the  820-room  Marriott  World Trade
     Center acquired in the last week of 1995.

Revenues  in 1996 for  nearly  all of the  Company's  full-service  hotels  were
improved or comparable to 1995 results.  This  improvement was achieved  through
steady  increases in customer  demand,  as well as yield  management  techniques
applied by the  managers to  maximize  REVPAR on a  property-by-property  basis.
REVPAR for comparable  properties  increased 9% as average room rates  increased
over 5% and average occupancy increased almost three percentage points. Overall,
this  resulted  in strong  house  profit  margins,  which  increased  almost two
percentage  points,  and excellent growth in sales,  which expanded at a 9% rate
for  comparable  hotels.  The  Company  believes  that its  hotels  consistently
outperform the  industry's  average  REVPAR growth rates.  The  relatively  high
occupancy  rates of the  Company's  hotels,  along  with  increased  demand  for
full-service  hotel rooms,  have allowed the managers of the Company's hotels to
increase  average room rates by primarily  replacing  certain  discounted  group
business  with  higher-rated  group and  transient  business and by  selectively
raising room rates.  The Company  believes  that these  favorable  REVPAR growth
trends  should  continue due to the limited new  construction  of full-  service
properties.

The Company's focus is on maximizing  profitability  throughout the portfolio by
concentrating  on key objectives.  The Company works with the manager to achieve
these key objectives,  which include evaluating marginal restaurant  operations,
exiting low rate  airline  room  contracts in  strengthening  markets,  reducing
property-  level  overhead by sharing  management  positions  with other jointly
managed hotels in the vicinity,  and selectively  making additional  investments
where favorable incremental returns are expected.

The  Company  and the  managers  will  continue  to focus on cost  control in an
attempt  to ensure  that  hotel  sales  increases  serve to  maximize  house and
operating profit.  While control of fixed costs serves to improve profit margins
as hotel sales increase,  it also results in more properties  reaching financial
performance  levels that allow the managers to share in growth of profits in the
form of  incentive  management  fees.  The Company  believes  this is a positive
development as it  strengthens  the alignment of the Company's and the managers'
interests.

Residence  Inns.  The  Company's  leased   Residence  Inns  are   extended-stay,
limited-service  hotels which cater  primarily to business and family  travelers
who stay more than five consecutive nights.  Residence Inns typically have 80 to
130 studio and two-story penthouse suites.  Residence Inns generally are located
in  suburban  settings  throughout  the United  States  and  feature a series of
residential   style   buildings  with   landscaped   walkways,   courtyards  and
recreational  areas.   Residence  Inns  do  not  have  restaurants,   but  offer
complimentary  continental breakfast. In addition, most Residence Inns provide a
complimentary  evening  hospitality  hour.  Each suite contains a fully equipped
kitchen, and many suites have woodburning fireplaces.  The Residence Inns leased
by the Company are among the newest in the Residence Inn system,  averaging only
six years old.


<PAGE>

The table below sets forth  performance  information  for the Residence Inns for
fiscal years 1994 through 1996.

<TABLE>
<CAPTION>
                                                                                 1996          1995         1994
                                                                                -------      -------       ------
<S>                                                                             <C>          <C>           <C>

    Number of properties. . . . . . . . . . . . . . . . . . . . . . . . . . . .     18           18            18
    Number of rooms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  2,178        2,178         2,178
    Average daily rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $90.82       $85.07        $79.58
    Occupancy % . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   85.1%        86.6%         85.6%
    REVPAR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $77.29       $73.67        $68.12
    REVPAR % change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    4.9%         8.2%          7.9%
</TABLE>

For 1996,  the Company's  Residence  Inns  performed  well with advances in room
rates of almost 7%, although  occupancy  decreased by over one percentage point.
Continued  popularity of this product with  customers  combined with  increasing
business  travel  resulted  in  superior  performance  for 1996.  At an  average
occupancy  rate of 85.1% for 1996,  these  properties  were near full  occupancy
during the business week and enjoyed high occupancy  during the weekends.  Given
this strong demand, the Company's Residence Inns were able to improve room rates
through managing their mix of business.

During  the first and second  quarters  of 1996,  the  Company  entered  into an
agreement  with the REIT and sold and leased back 18 of the Company's  Residence
Inns for approximately  $172 million.  The Company received net proceeds of $155
million and will  receive  approximately  $17  million  upon  expiration  of the
leases.

Courtyard.  During the first and third  quarters  of 1995,  37 of the  Company's
Courtyard  properties  were sold to and leased  back from the REIT.  The Company
transferred  its rights to receive the  deferred  proceeds  and  obligations  to
perform  under the leases to a  subsidiary  of Host  Marriott  in the second and
third quarters of 1995.

During the first and second  quarters of 1996,  the Company sold and leased back
16 additional  Courtyard properties from the REIT. A subsidiary of Host Marriott
purchased the Company's  rights to the deferred  proceeds and obligations  under
the lease for the  properties  at their fair market value of  approximately  $13
million.  Through the date of their  disposition,  1996  revenues and  operating
profit for the Courtyard properties were comparable to 1995.

Marketing 

All but four of the  Company's  hotel  properties,  at February  28,  1997,  are
managed by Marriott  International  as Marriott or  Ritz-Carlton  brand  hotels.
Three of the four remaining  hotels are operated as a Marriott brand hotel under
a franchise agreement with Marriott International. The Company believes that its
lodging  properties will continue to enjoy competitive  advantages  arising from
their  participation  in  the  Marriott  International  hotel  system.  Marriott
International's nationwide marketing programs and reservation systems as well as
the advantage of increasing  customer preference for Marriott brands should also
help these  properties to maintain or increase their premium over competitors in
both  occupancy  and room rates.  Repeat guest  business in the  Marriott  hotel
system is enhanced by the  Marriott  Honored  Guest  Awards  program as Marriott
Honored  Guest Awards and its companion  program,  Marriott  Miles,  continue to
expand their memberships, and now include more than nine million members.

The  Marriott  reservation  system was  upgraded  significantly  in 1994  giving
Marriott  reservation  agents  complete  descriptions of the rooms available for
sale, and more up-to-date rate information from the properties.  The reservation
system also  features  improved  connectivity  to airline  reservation  systems,
providing travel agents with greater access to available rooms inventory for all
Marriott and  Ritz-Carlton  lodging  properties.  In  addition,  new software at
Marriott's  centralized  reservations  centers  enables  agents  to  immediately
identify  the  nearest  Marriott  brand  property  with  available  rooms when a
caller's first choice is fully occupied.

<PAGE>

Properties 

The  following  table sets forth  certain  information  as of February  28, 1997
relating to each of the Company's  hotels.  All of the  properties  are operated
under  Marriott  or  Ritz-Carlton  brands  by  Marriott  International,   unless
otherwise indicated.

Location                                                               Rooms
---------                                                              -----
California
  Newport Beach . . . . . . . . . . . . . . . . . . . . . . . . .        570
  Newport Beach Suites(7) . . . . . . . . . . . . . . . . . . . .        250
  Marina Beach(3)(8). . . . . . . . . . . . . . . . . . . . . . .        368
  The Ritz-Carlton,
     Marina del Rey(11) . . . . . . . . . . . . . . . . . . . . .        306
Colorado
  Denver West(8). . . . . . . . . . . . . . . . . . . . . . . . .        307
Connecticut
  Hartford--Rocky Hill(8) . . . . . . . . . . . . . . . . . . . .        251
Florida
  Jacksonville(5)(10)(8). . . . . . . . . . . . . . . . . . . . .        256
  Miami Airport(8). . . . . . . . . . . . . . . . . . . . . . . .        782
  Palm Beach Gardens(5)(10) . . . . . . . . . . . . . . . . . . .        279
  Tampa Airport(8). . . . . . . . . . . . . . . . . . . . . . . .        295
  Tampa Westshore(1). . . . . . . . . . . . . . . . . . . . . . .        309
Georgia
  Atlanta Norcross. . . . . . . . . . . . . . . . . . . . . . . .        222
  Atlanta Perimeter(8). . . . . . . . . . . . . . . . . . . . . .        400
  The Ritz-Carlton, Atlanta(5). . . . . . . . . . . . . . . . . .        447
Illinois
  Chicago-Deerfield Suites(4) . . . . . . . . . . . . . . . . . .        248
  Chicago-Elk Grove Suites(4)(9). . . . . . . . . . . . . . . . .        255
  Chicago-Downtown Courtyard. . . . . . . . . . . . . . . . . . .        334
Maryland 
  Bethesda(8). . . . . . . . . . . . . . . . . . . . . . . . . .         407
  Gaithersburg-Washingtonian Center. . . . . . . . . . . . . . .         284
  Missouri
  Kansas City Airport(8) . . . . . . . . . . . . . . . . . . . .         382
New Jersey
  Newark Airport(8). . . . . . . . . . . . . . . . . . . . . . .         590
New York
  Marriott World Trade Center(3)(8). . . . . . . . . . . . . . .         820
North Carolina
  Raleigh Crabtree Valley(1) . . . . . . . . . . . . . . . . . .         375
Oklahoma
  Oklahoma City(5) . . . . . . . . . . . . . . . . . . . . . . .         354
Texas
  Houston Airport (8). . . . . . . . . . . . . . . . . . . . . .         566
  J.W. Marriott Houston(2) . . . . . . . . . . . . . . . . . . .         503
  Plaza San Antonio(3)(10) . . . . . . . . . . . . . . . . . . .         252
  San Antonio Riverwalk (3)(8) . . . . . . . . . . . . . . . . .         500
Utah
  Salt Lake City(5)(8) . . . . . . . . . . . . . . . . . . . . .         510
Virginia
  Pentagon City(6) . . . . . . . . . . . . . . . . . . . . . . .         300
  Washington-Dulles Suites(5). . . . . . . . . . . . . . . . . .         254
Washington, D.C.
  Washington Metro Center(2) . . . . . . . . . . . . . . . . . .         456
              
(1)  These  hotels are owned by an  affiliated  partnership  of the  Company.  A
     subsidiary of the Company  provided 100%  non-recourse  financing  totaling
     approximately $35 million to the partnership,  in which an affiliate of the
     Company owns the sole general  partner  interest,  for the  acquisition  of
     these hotels. The Company accounts for these properties as owned hotels for
     accounting purposes.
(2)  Property acquired by the Company in 1994. 
(3)  Property acquired by the Company in 1995. 
(4)  Transferred to the Company from a subsidiary of Hospitality in 1995.
(5)  Property acquired by the Company in 1996.
(6)  The Company completed construction and opened this property in 1996.
(7)  The Company acquired,  through  foreclosure,  a controlling interest in the
     hotel in 1996. The Company had previously  purchased an 83% interest in the
     mortgage loans secured by the hotel in 1996.
(8)  The land on which  the  hotel is built is  leased  by the  Company  under a
     long-term lease agreement.
(9)  Property  is not  operated  as  Marriott  and is not  managed  by  Marriott
     International.
(10) Property is operated as a Marriott franchised property.
(11) Property acquired by the Company in 1997.

Senior Living Communities 

Until mid-1994,  the Company owned 14 senior living communities located in seven
states.  These communities offer independent living apartments,  assisted living
services and skilled  nursing care.  Certain of these senior living  communities
are  operated  under the trade  names  Brighton  Gardens  and  Stratford  Court.
Commencing with the Distribution,  these communities were leased to and operated
by Marriott International.

During the second and third  quarters of 1994,  the  Company  sold its 14 senior
living  communities  to  an  unrelated  third  party  for  $320  million,  which
approximated the communities' carrying value.

Investments In Affiliated Partnerships and Notes Receivable 

In  connection  with the sale of seven hotels to an  affiliated  partnership  in
1984, the Company  received as proceeds $168 million ($140 million at January 3,
1997) in notes  receivable  that are secured by  non-recourse  mortgages  on the
underlying  properties.  The notes mature on December 31, 2003 and bear interest
at 9%.  These  notes  require  principal  paydown  of  approximately  44% of the
original principal amount prior to maturity.  While payments on these notes have
been current  since 1994,  there have been  instances in the past when  payments
were delinquent,  and there can be no assurance that such delinquencies will not
occur in the future.

During 1994,  Host  Marriott  transferred  to the Company a 49% limited  partner
interest  in an  affiliate  that  owns a hotel in  Santa  Clara,  California  in
exchange for $30 million in cash. The difference between the cash transferred to
Host Marriott and the  carried-over  cost basis of the 49% interest,  net of the
related  tax  effects,  has been  charged to  additional  paid-in  capital.  The
investment is accounted for using the equity method.

Competition 

The cyclical nature of the U.S. lodging industry has been  demonstrated over the
past two decades.  Low hotel profitability during the 1974-75 recession led to a
prolonged  slump in new  construction  and, over time,  high occupancy rates and
real  price  increases  in the late  1970s and early  1980s.  Changes in tax and
banking  laws  during the early  1980s  precipitated  a  construction  boom that
created an  oversupply  of hotel  rooms.  The Company  expects the U.S.  upscale
full-service hotel supply/demand  imbalance to continue to improve over the next
few years as room demand continues to grow and room supply growth is expected to
be minimal, in particular in the full-service segment.

The Company's  hotels  compete with several  other major lodging  brands in each
segment in which they operate. Competition in the industry is based primarily on
the level of service,  quality of  accommodations,  convenience of locations and
room rates.  The following  table presents key  participants  in segments of the
lodging industry in which the Company competes:

    Segment               Representative Participants
------------------       ---------------------------
Luxury/Full-Service       Ritz-Carlton; Four Seasons

Upscale/Full-Service      Marriott Hotels, Resorts and Suites; Crowne Plaza;
                          Doubletree; Hyatt; Hilton; Radisson; Red Lion;
                          Sheraton; Westin; Wyndham

Extended-Stay             Residence Inn; Homewood Suites; Embassy Suites;
                          Oakwood Apartments

Employees 

The Company has no  employees.  All of its  management  services are provided by
employees of Host Marriott.

Environmental Matters

Under  various  federal,  state  and local  environmental  laws,  ordinaces  and
regulations,  a current or previous  owner or operator of real  property  may be
liable for the costs of removal or remediation of hazardous or toxic  substances
on, under or in such property. Such laws may impose liability whether or not the
owner  or  operator  knew of,  or was  responsible  for,  the  presence  of such
hazardous or toxic  substances.  In  addition,  certain  environmental  laws and
common  law  principles  could  be used  to  impose  liability  for  release  of
asbestos-containing  materisl ("ACMs"), and third parties may seek recovery from
owners or  operators of real  properties  for personal  injury  associated  with
exposure to released ACMs.  Environmental  laws also may impose  restrictions on
the manner in which property may be used or business may be operated,  and these
restrictions may require  expenditures.  In connection with its current or prior
ownership or operation of hotels,  the Company may be potentially liable for any
such costs or  liabilities.  Although the Company is currently  not aware of any
material environmental claims pending or threatened against it, no assurance can
be given that a material  environmental  claim will not be asserted  against the
Company.


ITEM 3.  LEGAL PROCEEDINGS

The  Company  is from time to time the  subject  of, or  involved  in,  judicial
proceedings.  Management believes that any liability or loss resulting from such
matters will not have a material  adverse  effect on the  financial  position or
results of operations of the Company.


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

None.


<PAGE>

                                     PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
             MATTERS

The Company's common stock is not publicly traded.

ITEM 6.  SELECTED FINANCIAL DATA 

The  following  table  presents  selected  historical   consolidated   financial
statement data derived from the Company's  Consolidated  Financial Statements as
of and for the five  most  recent  fiscal  years  ended  January  3,  1997.  The
Company's  Consolidated  Financial  Statements  present the financial  position,
results of  operations,  and cash flows of the  Company as if it were a separate
subsidiary of Hospitality for all periods presented.  Host Marriott's historical
basis in the assets and  liabilities  of the Company have been carried over. The
amount,  maturity, dates and interest rates of the push down indebtedness repaid
with  proceeds  from the May 1995  debt  offering  have  been  reflected  in the
Company's  consolidated  financial  statements  for the  periods  subsequent  to
October  1993.  For periods prior to October 1993,  the  accompanying  financial
statements reflect the pushed down effects of an equivalent  principal amount of
Host Marriott's then outstanding  indebtedness.  The consolidated  balance sheet
data for 1992 has been derived from unaudited  consolidated financial statements
of  the  Company  which  in the  opinion  of  management  include  all  material
adjustments  necessary for those periods and were prepared as if the Company was
a separate entity for all periods presented.

<TABLE>
<CAPTION>
                                                                            Fiscal Year
                                                          ------------------------------------------------
                                                          1996(1)     1995       1994      1993       1992
                                                          -------     ----       ----      ----       ----
                                                                                                  (unaudited)
                                                                      (in millions except for ratio data)
<S>                                                       <C>        <C>        <C>        <C>        <C>

Statement of Operations Data:
   Revenues(2)
   Hotels . . . . . . . . . . . . . . . . . . . . . . .  $  210     $  189      $  199     $  378      $  406
   Senior living communities. . . . . . . . . . . . . .      --         --          14         68          62
   Net gains (losses) on property transactions. . . . .       1        (10)          1         (6)          3
   Equity in earnings of affiliate. . . . . . . . . . .       5          4           3         --          --
                                                         ------     ------      ------     ------      ------
       Total revenues . . . . . . . . . . . . . . . . .     216        183         217        440         471
   Operating profit before corporate expenses
     and interest. . . . . . . . . . .  . . . . . . . .      89         80         103         77          66
   Corporate expenses . . . . . . . . . . . . . . . . .      10         10           8          8           7
   Interest income. . . . . . . . . . . . . . . . . . .      24         15          14         14          14
   Interest expense(3). . . . . . . . . . . . . . . . .      69         61          64         60          50
   Income before extraordinary item and
       cumulative effect of accounting changes(4) . . .      20         15          28         10          14
   Net income . . . . . . . . . . . . . . . . . . . . .      20          1          28          6          14
Balance Sheet Data:
  Total assets . . . . . . . . . . . . . . . . . . . .  $ 1,285     $1,222      $1,350     $1,696      $1,815
   Total debt . . . . . . . . . . . . . . . . . . . . .     732        734         617        658         660
Other Data:
  EBITDA(5). . . . . . . . . . . . . . . . . . . . . . . $  149    $   145      $  168     $  166      $  146
   Depreciation and amortization. . . . . . . . . . . .      42         48          60         71          73
   Cash provided by operating activities. . . . . . . .      90         75         109         75          84
   Cash provided by (used in) investing activities. . .      14         41         259        (23)        (38)
   Cash used in financing activities(6) . . . . . . . .      12        100         368         52          46
   Ratio of earnings to fixed charges(7). . . . . . . .     1.4x       1.3x        1.7x       1.3x        1.3x 
   EBITDA to cash interest expense. . . . . . . . . . .     2.2x       2.5x        2.7x       2.9x        2.9x
</TABLE>
              
(1)  Fiscal year 1996 includes 53 weeks.
(2)  Prior to the  Distribution  (as defined  herein) in October 1993,  revenues
     included  room sales and food and beverage  sales at hotel  properties,  as
     well as sales from senior living  communities.  Subsequent to October 1993,
     revenues  include house profit from the Company's hotel  properties,  lease
     rentals from the Company's senior living communities, net gains (losses) on
     real estate  transactions  and equity in earnings  of an  affiliate.  House
     profit  represents hotel sales,  less  property-level  expenses,  excluding
     depreciation, management fees, real and personal property taxes, ground and
     equipment rent,  insurance and certain other costs, which are classified as
     operating  costs and  expenses.  See Note 1 to the  Company's  Consolidated
     Financial Statements.
(3)  Interest expense excludes interest costs capitalized in connection with the
     Company's development and construction activities of $1 million in 1996, $2
     million in 1995, $1 million in 1994, $5 million in 1993, and $10 million in
     1992.
(4)  Statement of Financial  Accounting  Standards ("SFAS") No. 109, "Accounting
     for Income  Taxes," was adopted in the first quarter of 1993. In the second
     quarter of 1993, the Company changed its accounting  method for assets held
     for sale. The Company recorded a $24 million credit to reflect the adoption
     of SFAS No. 109 and a $28 million charge,  net of taxes of $19 million,  to
     reflect the change in its  accounting  method for assets held for sale.  In
     the second quarter of 1995, the Company recorded an  extraordinary  loss on
     the extinguishment of debt of $14 million, net of taxes, in connection with
     the redemption and defeasance of senior notes.
(5)  EBITDA,  as defined in the senior notes  indenture,  consists of the sum of
     consolidated net income, interest expense,  income taxes,  depreciation and
     amortization  and  certain  other  noncash  items   (principally   non-cash
     write-downs  of lodging  properties and equity in earnings of an affiliate,
     net of distributions received).  EBITDA data is presented because such data
     is used by certain  investors to determine  the  Company's  ability to meet
     debt service requirements and is used as part of the tests to determine the
     Company's  ability to incur debt and to make certain  restricted  payments.
     The Company  considers EBITDA to be an indicative  measure of the Company's
     operating  performance due to the significance of the Company's  long-lived
     assets and because  EBITDA can be used to measure the Company's  ability to
     service debt, fund capital  expenditures and expand its business;  however,
     such information  should not be considered as an alternative to net income,
     operating  profit,  cash flows from  operations,  or any other operating or
     liquidity  performance  measure prescribed by generally accepted accounting
     principles.  Cash  expenditures  for  various  long-term  assets,  interest
     expense and income  taxes have been,  and will be,  incurred  which are not
     reflected in the EBITDA presentations.
(6)  Cash used in  financing  activities  includes  the  transfer of asset sales
     proceeds and operating  cash to  Hospitality  for the required  Hospitality
     Notes redemptions and other Hospitality corporate uses.
(7)  The ratio of earnings to fixed  charges is computed by dividing  net income
     before  taxes,  interest  expense  and other  fixed  charges by total fixed
     charges,  including  interest expense,  amortization of debt issuance costs
     and the portion of rent expense that is deemed to represent interest.

<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

The Company was formed on October 8, 1993 in connection with Host Marriott's pro
rata distribution of Marriott  International (the  "Distribution"),  to hold the
majority of Host Marriott's lodging properties not financed by mortgage debt. At
that time,  the  Company  and Host  Marriott  entered  into  lodging  management
agreements,  a  senior  living  community  lease,  and  various  other  services
agreements  with  Marriott  International  which  have  impacted  the  Company's
operating results. The following analysis and the related consolidated financial
statements  included  elsewhere  herein are  presented  as if the Company were a
separate  subsidiary of Host Marriott for all periods  presented as discussed in
Note 1 to the Consolidated Financial Statements.

Revenues  include house profit from the Company's  hotel  properties,  net gains
(losses) on real estate transactions, equity in the earnings of an affiliate and
lease  rentals  from the  Company's  senior  living  communities.  House  profit
reflects  the  net  revenues  flowing  to the  Company  as  property  owner  and
represents hotel sales less  property-level  expenses  (excluding  depreciation,
management  fees, real and personal  property taxes,  ground and equipment rent,
insurance  and certain other costs which are  classified as operating  costs and
expenses).  The operating  costs and expenses of the senior  living  communities
consist of  depreciation  and  amortization,  while  other  operating  costs and
expenses primarily represent idle land carrying costs.

The Company's hotel operating costs and expenses are, to a great extent,  fixed.
Therefore,  the Company derives substantial operating leverage from increases in
revenue. This operating leverage is somewhat diluted,  however, by the impact of
base  management  fees which are  calculated as a percentage of sales,  variable
lease payments and incentive management fees tied to operating performance above
certain established levels.  Successful  full-service hotel performance resulted
in certain  of the  Company's  properties  reaching  levels  which  allowed  the
managers  to share in the  growth of  profits  in the form of higher  management
fees. The Company views this as a positive development as it helps to strengthen
the alignment of the managers' interest with the Company's.  The Company expects
that this  trend  will  continue  in 1997 as the  hotel  industry  continues  to
strengthen.

For the periods  discussed  herein,  the Company's  properties have  experienced
substantial  increases in room revenues  generated per available room (excluding
food and beverage and other ancillary revenue) ("REVPAR").  REVPAR is a commonly
used indicator of market performance for hotels which represents the combination
of the average daily room rate charged and the average daily occupancy achieved.
The REVPAR increase  primarily  represents strong  percentage  increases in room
rates,  while  occupancies have generally  increased  slightly or remained flat.
Increases in room rates have  generally  been  achieved by the managers  through
shifting  occupancies away from discounted group business to higher-rated  group
and transient  business.  This has been made possible by increased travel due to
improved economic conditions and by the favorable supply/demand  characteristics
existing in the hotel industry today,  particularly in the full-service segment.
The  Company  expects  this   supply/demand   imbalance,   particularly  in  the
full-service  segment,  to continue,  which management believes should result in
improved REVPAR and operating  profits at its hotel properties in the near term.
However,  there can be no assurance that REVPAR will continue to increase in the
future.

1996 Compared to 1995

Revenues.  Revenues consist of house profit from the Company's hotel properties,
net gains  (losses)  on real  estate  transactions  and equity in earnings of an
affiliate. Revenues increased $33 million, or 18%, to $216 million for 1996. The
Company's   revenue  and  operating  profit  were  impacted  by  several  items,
including:

 .    the addition of 11 full-service hotel properties during 1995 and 1996; 
 .    improved lodging results for comparable properties;
 .    the 1996 sale and leaseback of 18 of the Company's Residence Inns;
 .    the 1995 and 1996 sale of 53 of the Company's Courtyard properties; 
 .    the 1996 results including 53 weeks versus 52 weeks in 1995;
 .    the $10 million  pre-tax charge in 1995 to write down the carrying value of
     certain  Courtyard and Residence Inn properties  held for sale to their net
     realizable value; and
 .    the 1995 sale of four of the Company's Fairfield Inns.

Hotel  revenues  increased  $21 million,  or 11%, to $210 million in 1996 as the
Company's  full-service  hotels and Residence Inn properties  reported growth in
REVPAR.  Hotel sales increased $79 million,  or 16%, to $563 million  reflecting
the REVPAR  increases  for  comparable  units and the  addition of  full-service
properties, partially offset by the sale of the Courtyard properties.

Overall  1996  revenue  and  operating  profit for  nearly all of the  Company's
full-service  hotels  were  improved or  comparable  to 1995  results.  Improved
results were driven by strong increases in REVPAR of 9% for comparable units. On
a comparable  basis,  average room rates  increased 5%, while average  occupancy
increased  nearly  three  percentage  points.  Management  believes  REVPAR will
continue to grow through steady  increases in average room rates,  combined with
minor changes in occupancy rates. However, there can be no assurance that REVPAR
will continue to increase in the future.

Residence  Inn, the  Company's  extended-stay  lodging  concept,  also  reported
significant  increases  in  revenues  in 1996 due to  REVPAR  increases.  REVPAR
increased nearly 5% due primarily to an increase in average room rates of almost
7%, while average occupancy decreased over one percentage point. Due to the high
occupancy of these properties, the Company expects future increases in REVPAR to
be driven by room rate increases rather than occupancy increases. However, there
can be no assurance that REVPAR will continue to increase in the future.

The net loss on property transactions for 1995 includes the pretax charge of $10
million  to write  down the  carrying  value of five  individual  Courtyard  and
Residence Inn properties held for sale to their net realizable value.

Operating  Costs  and  Expenses.   Operating  costs  and  expenses   consist  of
depreciation,  amortization,  management fees, real and personal property taxes,
ground and equipment  rent,  insurance,  lease payments and certain other costs.
The  Company's  operating  costs and expenses for 1996  increased $24 million to
$127  million,   primarily   reflecting  the  addition  of  eleven  full-service
properties during 1995 and 1996,  increased  management fees and rentals tied to
improved operating results and properties sold and leased back, partially offset
by the  sale  of  certain  limited-service  properties.  Hotel  operating  costs
increased $25 million to $127 million. As a percentage of hotel revenues,  hotel
operating  costs and  expenses  represented  60% of  revenues in 1996 and 54% of
revenues in 1995,  reflecting the shifting  emphasis to full-service  hotels and
the impact of the lease payments of the Residence Inn properties.

Operating Profit. As a result of the changes in revenues and operating costs and
expenses discussed above, the Company's operating profit increased $9 million to
$89 million, or 41% of revenues,  from $80 million, or 44% of revenues, in 1995.
Hotel operating  profit  decreased $4 million to $83 million or 40% of revenues,
from $87 million,  or 46% of revenues,  in 1995. Across the board, the Company's
hotels recorded substantial  improvements in operating results.  Several hotels,
including the Houston Airport  Marriott and the Miami Airport  Marriott,  posted
particularly significant improvements in operating profit for the year. Portions
of the Miami Airport Marriott were converted to  limited-service  rooms in order
to increase the overall  occupancy  and operating  results of the property.  The
Company's Atlanta properties (622 rooms) also posted outstanding results due, in
part, to the 1996 Summer Olympics.

Corporate Expenses.  Corporate expenses remained unchanged at $10 million, or 5%
of revenues, for 1996.

Interest Expense. Interest expense increased $8 million to $69 million primarily
due to a full year of expense  related to debt incurred in conjunction  with the
acquisition of certain hotel properties in 1995.

Income  Before   Extraordinary   Item.  The  Company   reported   income  before
extraordinary item of $34 million which represented an $10 million increase from
$24  million in 1995.  The  increase  is due to the change in  operating  profit
discussed  above,  including  the $10  million  charge in 1995 to write down the
carrying value of certain limited service  properties held for sale to their net
realizable value.

Extraordinary  Item. In connection with the redemption and defeasance of debt in
the second quarter of 1995, the Company  recognized an extraordinary loss of $22
million ($14 million after taxes),  primarily  representing premiums paid on the
redemptions and the write-off of deferred financing fees on the debt.

Net Income.  The Company's net income was $20 million for 1996,  compared to net
income of $1 million for 1995.  The increase is primarily due to the increase in
operating profit discussed above and the $14 million  extraordinary  loss on the
redemption of debt in 1995.

1995 Compared to 1994

Revenues. The Company's 1995 revenues of $183 million represented a $34 million,
or 16%,  decrease  from 1994 results.  The  Company's  revenues were impacted by
several items, including:

 .    the addition of ten full-service  hotel properties  during 1994 and 1995; .
     improved  lodging results (see discussion  below);
 .    the 1995 sale of 37 of
     the Company's  Courtyard  properties;
 .    the $10 million  pre-tax charge in 1995 to write down the carrying value of
     certain  Courtyard and Residence Inn properties  held for sale to their net
     realizable value;
 .    the 1994 sal of the Company's senior living  communities;  and
 .    the 1994 and 1995 sales of the Company's Fairfield Inns.

Hotel  revenues  decreased  $10  million,  or 5%, to $189  million in 1995.  The
decrease in hotel revenue for 1995 reflects the sale of the Company's  Fairfield
Inns in 1994 and 1995 ($12  million  of  revenue)  and the sale of 37  Courtyard
properties in 1995 ($24 million of revenue), partially offset by the addition of
ten full-service  hotel properties in 1994 and 1995 ($22 million of revenue) and
overall improved lodging results.  Excluding the impact of these  non-comparable
items, 1995 hotel revenues increased  approximately $11 million, or 9% over 1994
levels.  Each of the Company's  lodging  segments  reported growth in REVPAR for
comparable hotels.

Overall  1995  revenue  and  operating  profit for  nearly all of the  Company's
full-service  hotels  were  improved or  comparable  to 1994  results.  Improved
results were driven by strong increases in REVPAR of 5% for comparable units. On
a comparable  basis,  average room rates increased 11%, while average  occupancy
decreased four percentage  points.  Management of the Company  believes that the
decrease in occupancies  for the period is due to a  concentrated  effort by its
managers  to displace a large  amount of deeply  discounted  group and  contract
business,  which  also  resulted  in the  substantial  increase  in room  rates.
Management  believes  REVPAR will continue to grow through  steady  increases in
average room rates,  combined  with minor changes in occupancy  rates.  However,
there can be no assurance that REVPAR will continue to increase in the future.

Courtyard, the Company's  moderate-priced lodging concept, reported increases in
comparable  revenues  in 1995  primarily  due to a 7%  increase  in  REVPAR  for
comparable  units  due to a 6%  increase  in  average  room  rates  and a slight
increase in average occupancy.

Residence  Inn, the  Company's  extended-stay  lodging  concept,  also  reported
significant  increases  in  revenues  in 1995 due to  REVPAR  increases.  REVPAR
increased  over 8% due  primarily  to an  increase  in average  room rates of 7%
combined with a one percentage point increase in average occupancy.

In the third quarter of 1994,  the Company sold 26 of its 30 Fairfield  Inns for
$114  million  and in the second  quarter  of 1995,  the  Company  sold its four
remaining  Fairfield  Inns to the  same  party  for $6  million.  Through  their
disposition, 1995 revenues and operating profit for the four remaining Fairfield
Inns were comparable to 1994.

The  Company  did not report any senior  living  communities'  revenues  in 1995
compared  to $14  million  in 1994  due to the  sale of all  the  senior  living
communities during the second and third quarters of 1994.

The net loss on property transactions for 1995 includes the pretax charge of $10
million  to write  down the  carrying  value of five  individual  Courtyard  and
Residence Inn properties held for sale to their net realizable value.

Operating  Costs and Expenses.  The Company's  operating  costs and expenses for
1995  decreased $11 million to $103 million,  primarily  reflecting  the sale of
limited-service  properties and the senior living  communities.  Hotel operating
costs  decreased $3 million to $102 million.  As a percentage of hotel revenues,
hotel operating  costs and expenses  represented 54% of revenues in 1995 and 53%
of revenues in 1994, reflecting the shifting emphasis to full- service hotels.

Operating Profit. As a result of the changes in revenues and operating costs and
expenses  discussed above, the Company's  operating profit decreased $23 million
to $80 million, or 44% of revenues,  from $103 million,  or 47% of revenues,  in
1994.  Hotel  operating  profit  decreased  $7 million to $87  million or 48% of
revenues, from $94 million, or 43% of revenues, in 1994. Excluding the impact of
the non-comparable items discussed earlier,  hotel operating profit increased $8
million, or 15%, over 1994 levels.

Corporate  Expenses.  Corporate  expenses increased $2 million to $10 million in
1995 primarily due to overall higher corporate  administrative  and travel costs
for Host Marriott  which  resulted in an increase in the allocation of corporate
expenses  to the  Company.  As a  percentage  of  revenues,  corporate  expenses
increased from 4% of revenues in 1994 to 5% of revenues in 1995.

Interest Expense. Interest expense decreased $3 million to $61 million primarily
due to the lower  interest  rate on the senior notes as a result of the May 1995
bond  offering  and the  repayment  in the second and third  quarters of 1994 of
secured debt related to certain senior living community properties.

Income  Before   Extraordinary   Item.  The  Company   reported   income  before
extraordinary  item of $15 million which represented a $13 million decrease from
$28 million in 1994.  The decrease is due primarily to the decrease in operating
profit  discussed  above,  including  the $10 million  charge in the 1995 second
quarter to write down the carrying value of certain limited  service  properties
held for sale to their net realizable value.

Extraordinary  Item. In connection with the redemption and defeasance of debt in
the second quarter of 1995, the Company  recognized an extraordinary loss of $22
million ($14 million after taxes),  primarily  representing premiums paid on the
redemptions and the write-off of deferred financing fees on the debt.

Net Income.  The Company's  net income was $1 million for 1995,  compared to net
income of $28 million for 1994. The decrease is primarily due to the decrease in
operating profit discussed above and the $22 million  extraordinary  loss on the
redemption of debt in the second quarter of 1995.

Liquidity and Capital Resources 

The Company funds its capital  requirements with a combination of operating cash
flow, debt financing and proceeds from sales of selected properties. The Company
utilizes  these  sources  of capital to acquire  new  properties,  fund  capital
additions and  improvements  and make  principal  payments on debt.  The Company
believes that the financial  resources generated from ongoing operations will be
sufficient to enable it to meet its capital  expenditure  and debt service needs
for  the  foreseeable  future.  However,  certain  events  such  as  significant
acquisitions would require additional financing.

On May 25,  1995,  the  Company  issued $600  million of 9.5% senior  notes (the
"Senior Notes") to several initial  purchasers (the "Offering").  The Company is
required to make semi-annual cash interest payments on the Senior Notes at their
stated interest rate. The Company is not required to make principal  payments on
the Senior Notes until  maturity  except in the event of (i) certain  changes in
control or (ii) certain asset sales in which the proceeds are not  reinvested in
other hotel properties within a specified period of time. In addition, under the
terms of the Senior Notes indenture, the Company has the ability to enter into a
revolving  credit  facility of up to $35 million,  which would be available  for
working  capital  and  other  general  corporate  purposes,  and to incur  other
indebtedness as specified in the Senior Notes indenture.

The  Senior  Notes  will  mature  in 2005  and  are  fully  and  unconditionally
guaranteed  (limited only to the extent necessary to avoid such Guarantees being
considered a fraudulent conveyance under applicable law), on a joint and several
basis, by certain of the Company's  subsidiaries  and are secured by a pledge of
the stock of certain of the Company's  subsidiaries.  The Senior Notes indenture
contains  covenants that,  among other things,  limit the ability of the Company
and its subsidiaries to incur additional indebtedness and issue preferred stock,
pay  dividends  or  make  other  distributions,   repurchase  capital  stock  or
subordinated indebtedness, create certain liens, enter into certain transactions
with  affiliates,  sell  certain  assets,  issue or sell stock of the  Company's
subsidiaries, and enter into certain merger and consolidations subsequent to the
consummation of the Offering.  Distributions of the Company's equity,  including
earnings  accumulated  subsequent to the Offering (but excluding an amount equal
to  capital  contributions  made  by its  parent  or  pursuant  to a sale of the
Company's  capital  stock) are  restricted  but are available for the payment of
dividends to the extent that the  cumulative  amount of such  dividends from the
date of the Senior  Notes  indenture  does not exceed $25 million plus an amount
equal to the excess of the Company's EBITDA over 200% of the Company's  interest
expense.  The  Company  paid  dividends  to Host  Marriott of $9 million and $36
million in 1996 and 1995,  respectively,  as  permitted  under the Senior  Notes
indenture.

Prior to the Offering,  all of the Company's  net cash flow was  transferred  to
Hospitality, and therefore, the Company maintained no cash balances.  Subsequent
to the Offering,  the Company has  established  and does maintain  separate cash
balances.  If  amounts  are  outstanding  under  Host  Marriott's  $225  million
revolving line of credit ("New Line of Credit") with Marriott International, the
Company is required to  dividend to Host  Marriott  the lesser of (i) the sum of
the outstanding  balance under the line of credit and debt maturities of certain
recourse  debt of Host  Marriott  in the next  six  months  or (ii)  the  amount
permitted  under the  restricted  payments  covenant  (the  excess of EBITDA (as
defined herein) over 200% of the Company's interest expense). The Company's cash
flow  provided by  operations  in fiscal years 1996,  1995 and 1994 totalled $90
million, $75 million and $109 million, respectively.

The Company's cash provided by investing activities was $14 million, $41 million
and $259  million  in  fiscal  years  1996,  1995 and  1994,  respectively.  The
Company's  cash  provided by  investing  activities  consists  primarily  of net
proceeds  of sales of certain  assets,  offset by the  acquisition  of hotel and
other real estate assets, and other capital expenditures.

During 1996, the Company acquired seven full-service  properties totalling 2,350
rooms for  approximately  $249 million.  The  acquisition  of the Salt Lake City
Marriott for $67 million included the purchase of a 20% general partner interest
from Host Marriott. The difference between the cash transferred to Host Marriott
and the  carried-  over cost basis of the 20%  interest,  net of the related tax
effect,  has been  charged to  additional  paid-in  capital.  The  Company  also
completed construction and opened the Pentagon City Residence Inn in April 1996.

During the first and second  quarters of 1996, the Company  completed a sale and
leaseback  with  a real  estate  investment  trust  (the  "REIT")  for 16 of its
Courtyard  properties  and 18 of its Residence Inn  properties  for $349 million
(10% of which was deferred).  During the second  quarter of 1996,  Host Marriott
purchased the Company's  rights to the deferred  proceeds and obligations  under
the lease for the 16 Courtyard  properties for $13 million. The Company retained
its rights to the deferred  proceeds and obligations  under the lease for the 18
Residence Inns.

During 1995, the Company acquired four full-service  properties  totalling 1,944
rooms for  approximately  $240 million  (including $94 million of first mortgage
financing on two of the hotels).

During  1995,  the  Company  sold to and  leased  back  from  the REIT 37 of its
Courtyard  properties  for a total of $330 million (10% of which was  deferred).
The  Company  transferred  its  rights to  receive  the  deferred  proceeds  and
obligations  to perform under the leases to a subsidiary of  Hospitality  during
1995. Also,  during 1995, the Company sold its remaining four Fairfield Inns for
net cash proceeds of approximately $6 million.

During the second and third  quarters of 1994, the Company sold 14 senior living
communities  to an unrelated  party for $320 million.  Additionally,  during the
third quarter of 1994, the Company sold 26 of its Fairfield Inns to an unrelated
party.  The net proceeds from the sale of these hotels were  approximately  $114
million,  which exceeded the carrying value of the hotels by  approximately  $12
million.  Approximately $27 million of the proceeds was payable in the form of a
note from the  purchaser  due in 2001.  The gain on the sale of these hotels has
been  deferred.  The note  receivable  and  deferred  gain were  transferred  to
Hospitality in connection with the Offering.

During  the  second  and  third  quarters  of 1994,  the  Company  acquired  two
full-service  hotels totalling 959 rooms for approximately  $80 million,  one of
which was  converted to the  Marriott  brand.  A subsidiary  of the Company also
provided 100%  financing  totalling  approximately  $35 million to an affiliated
partnership,  in which a  related  party of the  Company  owns the sole  general
partner  interest,  for the  acquisition of two  full-service  hotels  totalling
another  684  rooms.  These  hotels  are  treated  by the  Company  as owned for
accounting  purposes.  Additionally,  in the first  quarter of 1994 the  Company
acquired from Host Marriott a 49% limited partner  interest in an affiliate that
owns a hotel in Santa Clara, California for $30 million.

The  Company's  capital  expenditures  in  fiscal  years  1996,  1995  and  1994
(excluding the acquisition of properties)  totalled $45 million, $41 million and
$27 million,  respectively.  The Company anticipates spending  approximately $35
million  to  $40  million  in  capital   expenditures  for  the  renovation  and
refurbishment of the Company's existing properties in 1997.

The Company's cash used in financing  activities  was $12 million,  $100 million
and $368  million  in  fiscal  years  1996,  1995 and  1994,  respectively.  The
Company's cash used in financing activities consists primarily of cash transfers
to Hospitality, as well as the issuance and repayment of debt as a result of the
Offering.  In 1995 and 1994,  the  Company  transferred  $151  million  and $345
million,  respectively, of cash to Hospitality,  including $100 million and $292
million  in 1995 and 1994,  respectively,  from  asset  sales  proceeds  used by
Hospitality for redemption of senior notes by Hospitality ("Hospitality Notes").
As the net proceeds from the Offering were used to repay Hospitality Notes and a
portion  of the  outstanding  balance on Host  Marriott's  former  $630  million
revolving  line of credit with  Marriott  International  ("Line of Credit")  the
Company's historical financial statements present the pushed down portion of the
Hospitality  Notes and Line of Credit so  repaid.  Pursuant  to the  Hospitality
Notes Indenture,  Hospitality  Notes were required to be repaid to the extent of
50% to 75% of the  net  proceeds  from  certain  asset  sales  and  100%  of net
refinancing proceeds.

The net proceeds  from the  Offering,  along with the net  proceeds  from a $400
million concurrent offering by Host Marriott Travel Plazas, Inc. ("HMTP"),  were
used to defease all of the  remaining  Hospitality  Notes not redeemed  with the
asset sales proceeds discussed above and to repay indebtedness under the Line of
Credit.  In connection  with the  redemptions  and defeasance of the Hospitality
Notes,  the Company  recognized an  extraordinary  loss in the second quarter of
1995 of $14 million, net of taxes of $8 million, primarily representing premiums
of $11 million paid on the redemptions  and the write-off of deferred  financing
fees and discounts on the debt.

EBITDA

The Company believes that consolidated Earnings Before Interest Expense,  Taxes,
Depreciation,  Amortization  and  other  non-cash  items  (principally  non-cash
writedowns of lodging properties and equity in earnings of an affiliate,  net of
distribution  received)  ("EBITDA")  is a  meaningful  measure of its  operating
performance due to the significance of the Company's  long-lived assets (and the
related  depreciation  thereon).  EBITDA  can be used to measure  the  Company's
ability to service debt, fund capital  expenditures  and expand its business and
is used in the  Senior  Notes  indenture  as part of the tests  determining  the
Company's ability to incur debt and to make certain restricted payments.  EBITDA
information should not be considered as an alternative to net income,  operating
profit,  cash  flows  from  operations,  or any  other  operating  or  liquidity
performance measure prescribed by generally accepted accounting principles.

EBITDA  increased  $4 million to $149 million in 1996 from $145 million in 1995.
Hotel  EBITDA  decreased  $7 million to $128  million for 1996.  The decrease in
hotel EBITDA is due to the sales of limited-service  properties in 1995 and 1996
the proceeds from which could not be immediately reinvested, partially offset by
the  increase in  comparable  full-service  EBITDA of 12% and the addition of 11
full-service  hotels in 1995 and 1996.  Full-service  hotel EBITDA increased $44
million,  or 62%, to $114  million for 1996.  As a percentage  of hotel  EBITDA,
full- service hotel EBITDA  represented  89% of hotel EBITDA in 1996 compared to
52% of hotel EBITDA in 1995. In 1997, the Company anticipates that nearly all of
its hotel EBITDA will be from full-service properties.

The Company's ratio of EBITDA to cash interest expense (defined as GAAP interest
expense less  amortization of deferred  financing  costs) was 2.2 to 1.0, 2.5 to
1.0 and 2.7 to 1.0 in fiscal years 1996, 1995 and 1994, respectively.  The ratio
of earnings to fixed charges was 1.4 to 1.0, 1.3 to 1.0 and 1.7 to 1.0 in fiscal
years 1996, 1995 and 1994, respectively.

The following is a reconciliation of EBITDA to income before  extraordinary item
(in millions):

<TABLE>
<CAPTION>
                                                                                Fifty-three Weeks       Fifty-two Weeks
                                                                                    Ended                    Ended
                                                                                January 3, 1997         December 29, 1995
                                                                                -----------------       -----------------
<S>                                                                             <C>                                <C>

EBITDA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $           149         $          145
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (69)                   (61)
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . .             (42)                   (48)
Income taxes applicable to operations . . . . . . . . . . . . . . . . . . . . .             (14)                    (9)
Gain (loss) on dispositions of assets and
     other non-cash charges, net. . . . . . . . . . . . . . . . . . . . . . . .              (4)                   (12)
                                                                                ---------------         -------------- 
     Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . $            20         $           15
                                                                                ===============         ==============

</TABLE>

Inflation 

The Company's lodging properties are impacted by inflation through its effect on
increasing  costs and on the managers'  ability to increase  room rates.  Unlike
other real estate operations,  hotels have the ability to change room rates on a
daily basis,  so the impact of higher  inflation  generally  can be passed on to
customers.

New Accounting Standards 

The Company  adopted SFAS No. 121  "Accounting  for the Impairment of Long-Lived
Assets and for Long- Lived  Assets to be Disposed  Of" and SFAS 114  "Accounting
for  Creditors  for  Impairment  of a Loan" during  1995.  The adoption of these
standards did not have a material effect on the Company's consolidated financial
statements.



<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The following financial information is included on the pages indicated:


<TABLE>
<CAPTION>
                                                                                 Page
                                                                                 ----
<S>                                                                               <C>

Report of Independent Public Accountants . . . . . . . . . . . . . . . . . . . .  22
Consolidated Balance Sheets at January 3, 1997 and December 29, 1995 . . . . . .  23
Consolidated Statements of Operations for Fiscal Years Ended January 3, 1997,
   December 29, 1995 and December 30, 1994 . . . . . . . . . . . . . . . . . . .  24
Consolidated Statements of Shareholder's Equity for the Fiscal Years
   Ended January 3, 1997, December 29, 1995 and December 30, 1994. . . . . . . .  25
Consolidated Statements of Cash Flows for Fiscal Years Ended January 3, 1997,
   December 29, 1995, and December 30, 1994. . . . . . . . . . . . . . . . . . .  26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . .  27
</TABLE>


<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 


To HMH Properties, Inc.: 

We have audited the accompanying  consolidated balance sheets of HMH Properties,
Inc. and  subsidiaries  as of January 3, 1997 and  December  29,  1995,  and the
related  consolidated  statements of operations,  shareholder's  equity and cash
flows for each of the three fiscal  years in the period  ended  January 3, 1997.
These  financial   statements  and  the  schedule  referred  to  below  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 an audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  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 consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of HMH Properties, Inc.
and  subsidiaries as of January 3, 1997 and December 29, 1995 and the results of
their  operations and their cash flows for each of the three fiscal years in the
period ended January 3, 1997, in conformity with generally  accepted  accounting
principles.

Our  audits  were  made for the  purpose  of  forming  an  opinion  on the basic
financial  statements taken as a whole. The schedule listed in the index at Item
14(a)(2)  (Schedule III Real Estate and Accumulated  Depreciation)  is presented
for purposes of complying with the Securities  and Exchange  Commission's  rules
and is not  part of the  basic  financial  statements.  This  schedule  has been
subjected to the auditing procedures applied in the audit of the basic financial
statements  and, in our  opinion,  fairly  states in all  material  respects the
financial  data  required  to be set  forth  therein  in  relation  to the basic
financial statements taken as a whole.



Washington, D.C. 
February 28, 1997 


<PAGE>

<TABLE>
<CAPTION>

                                                                                         1996                  1995
                                                                                     ------------          ------------ 
                                    ASSETS
<S>                                                                                 <C>                    <C>

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . .     $         944          $        999
Note receivable from affiliate. . . . . . . . . . . . . . . . . . . . . . . . .               140                   145
Due from hotel managers . . . . . . . . . . . . . . . . . . . . . . . . . . . .                19                    25
Investment in affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . .                17                    16
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                57                    21
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . .               108                    16
                                                                                    -------------          ------------
                                                                                    $       1,285          $      1,222
                                                                                    =============          ============

                      LIABILITIES AND SHAREHOLDER'S EQUITY

Senior Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $         600          $        600
Notes secured by real estate assets . . . . . . . . . . . . . . . . . . . . . .                98                   100
Other notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                34                    34
                                                                                    -------------          ------------
           Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               732                   734
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                71                    78
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                72                    26
                                                                                    -------------          ------------
           Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . .               875                   838
                                                                                    -------------          ------------
Shareholder's equity
    Common stock, 100 shares issued and outstanding, no par value . . . . . . .                --                    --
    Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . .               412                   397
    Accumulated loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                (2)                  (13) 
                                                                                    -------------          ------------  
           Total shareholder's equity . . . . . . . . . . . . . . . . . . . . .               410                   384
                                                                                    -------------          ------------
                                                                                    $       1,285          $      1,222
                                                                                    =============          ============


</TABLE>

















                 See Notes to Consolidated Financial Statements.

<PAGE>

                     HMH PROPERTIES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
             FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
                             AND DECEMBER 30, 1994
                                 (in millions)

<TABLE>
<CAPTION>

                                                                                   1996             1995           1994
                                                                                   ----             ----           ----
<S>                                                                             <C>              <C>            <C>

REVENUES
    Hotels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $       210      $      189     $      199
    Senior living communities (received from Marriott International). . . . .            --              --             14
    Net gains (losses) on property transactions . . . . . . . . . . . . . . .             1             (10)             1
    Equity in earnings of affiliate . . . . . . . . . . . . . . . . . . . . .             5               4              3
                                                                                -----------      ----------     ----------
                                                                                        216             183            217
                                                                                -----------      ----------     ----------

OPERATING COSTS AND EXPENSES
    Hotels (including Marriott International management fees of $32 million,
        $28 million and $23 million in 1996, 1995 and 1994, respectively) . .           127             102            105
    Senior living communities . . . . . . . . . . . . . . . . . . . . . . . .            --              --              5
    Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            --               1              4
                                                                                -----------      ----------     ----------
                                                                                        127             103            114
                                                                                -----------      ----------     ----------

OPERATING PROFIT BEFORE CORPORATE EXPENSES
    AND INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            89              80            103
Corporate expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (10)            (10)            (8) 
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           (69)            (61)           (64) 
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            24              15             14
                                                                                -----------      ----------     ----------
INCOME BEFORE INCOME TAXES AND
    EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . . . . . . . . . .            34              24             45
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . . . . . .           (14)             (9)           (17)
                                                                                -----------      ----------     ---------- 
INCOME BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . . . . . .            20              15             28
Extraordinary item - loss on extinguishment of debt
    (net of income taxes of $8 million) . . . . . . . . . . . . . . . . . . .            --             (14)            --
                                                                                -----------      ----------     ----------

NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   $        20      $        1     $       28
                                                                                ===========      ==========     ==========

</TABLE>














                 See Notes to Consolidated Financial Statements.

<PAGE>

                     HMH PROPERTIES, INC. AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
              FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
                             AND DECEMBER 30, 1994
                                 (in millions)

<TABLE>
<CAPTION>
                                                                                    Additional      Accumulated
                                                       Common        Paid-In         Earnings      Distributions to
                                                       Stock         Capital          (Loss)       Hospitality, net
                                                       -------      ----------      -----------    ----------------
<S>                                                    <C>          <C>             <C>            <C>    

Balance, January 1, 1994. . . . . . . . . . . . . . .  $    --      $    929        $    (6)       $    (7)
    Net income. . . . . . . . . . . . . . . . . . . .       --            --             28             --
    Purchase of partnership investment (Note 4) . . .       --            (6)            --             --
    Net advances and distributions to Hospitality . .       --            --             --           (297)
                                                       -------      --------        -------        ------- 
Balance, December 30, 1994. . . . . . . . . . . . . .       --           923             22           (304)
    Net income. . . . . . . . . . . . . . . . . . . .       --            --              1             --
    Cash transfers to Hospitality . . . . . . . . . .       --            --             --           (151)
    Non-cash transfers to Hospitality . . . . . . . .       --            --             --            (71)
    Capitalized distributions pursuant
      to the Offering . . . . . . . . . . . . . . . .       --          (526)            --            526
    Dividends . . . . . . . . . . . . . . . . . . . .       --            --            (36)            --
                                                       -------      --------        -------        -------
Balance, December 29, 1995. . . . . . . . . . . . . .       --           397            (13)            --
    Net income. . . . . . . . . . . . . . . . . . . .       --            --             20         
    Dividends . . . . . . . . . . . . . . . . . . . .       --            --             (9)            --
    Sale of residual lease interest in
      16 Courtyard properties . . . . . . . . . . . .       --            24             --             --
    Purchase of general partner interest in
      a full-service property (Note 8). . . . . . . .       --            (9)            --             --
                                                       -------      --------        -------        -------
Balance, January 3, 1997. . . . . . . . . . . . . . .  $    --      $    412        $    (2)       $    --
                                                       =======      ========        =======        =======
</TABLE>






















                 See Notes to Consolidated Financial Statements.

<PAGE>

                     HMH PROPERTIES, INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995
                              AND DECEMBER 30, 1994
                                 (in millions)

<TABLE>
<CAPTION>


                                                                                     1996             1995            1994
                                                                                     ----             ----            ----
<S>                                                                              <C>              <C>             <C>

OPERATING ACTIVITIES
    Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    $         20     $          1    $         28
    Extraordinary loss on extinguishment of debt, net of taxes. . . . . . . .              --               14              --
    Adjustments to reconcile to cash from operations:
        Depreciation and amortization . . . . . . . . . . . . . . . . . . . .              42               48              60
        Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . .              13                8              13
        Net realizable value writedown. . . . . . . . . . . . . . . . . . . .              --               10              --
        Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               6                3               1 
        Changes in operating accounts:
            Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . .              --               (5)              5
            Other liabilities . . . . . . . . . . . . . . . . . . . . . . . .               9               (4)              2
                                                                                 ------------     ------------    ------------
            Cash provided by operations . . . . . . . . . . . . . . . . . . .              90               75             109
                                                                                 ------------     ------------    ------------

INVESTING ACTIVITIES
    Proceeds from sales of assets . . . . . . . . . . . . . . . . . . . . . .             349              337             473
        Less non-cash proceeds. . . . . . . . . . . . . . . . . . . . . . . .             (34)             (33)            (54)
                                                                                 ------------     ------------    ------------ 
    Cash received from sales of assets. . . . . . . . . . . . . . . . . . . .             315              304             419
    Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . .             (45)             (41)            (27)
    Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            (246)            (242)           (145)
    Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             (10)              20              12
                                                                                 ------------     ------------    ------------
            Cash provided by investing activities . . . . . . . . . . . . . .              14               41             259
                                                                                 ------------     ------------    ------------

FINANCING ACTIVITIES
    Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .              (3)            (589)            (23)
    Issuances of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .              --              676              --
    Transfers to Hospitality, net . . . . . . . . . . . . . . . . . . . . . .              --             (151)           (345)
    Dividends to Hospitality. . . . . . . . . . . . . . . . . . . . . . . . .              (9)             (36)             --
                                                                                 ------------     ------------    ------------
            Cash used in financing activities . . . . . . . . . . . . . . . .             (12)            (100)           (368)
                                                                                 ------------     ------------    ------------ 
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . .              92               16              --
CASH AND CASH EQUIVALENTS, beginning of year. . . . . . . . . . . . . . . . .              16               --              --
                                                                                 ------------     ------------    ------------
CASH AND CASH EQUIVALENTS, end of year. . . . . . . . . . . . . . . . . . . .    $        108     $         16    $         --
                                                                                 ============     ============    ============
</TABLE>










                 See Notes to Consolidated Financial Statements.

<PAGE>

                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements


1.   Summary of Significant Accounting Policies 

Basis of Presentation 

HMH  Properties,  Inc.  (the  "Company")  was formed in 1993 to own many of Host
Marriott  Corporation's ("Host Marriott") lodging real estate properties.  As of
January 3,  1997,  the  Company  owned,  or  controlled,  31 lodging  properties
generally located  throughout the United States and operated primarily under the
Marriott or  Ritz-Carlton  brands and managed by  Marriott  International,  Inc.
("Marriott  International").  The Company's hotel properties  represent  quality
assets in the luxury and upscale full-service lodging segments.

On October 8, 1993 (the "Distribution Date"), Marriott Corporation  distributed,
through a special tax-free dividend (the "Distribution"), to holders of Marriott
Corporation's  common stock (on a  share-for-share  basis)  approximately  116.4
million shares of common stock of an existing wholly owned subsidiary,  Marriott
International,  resulting in the division of Marriott  Corporation's  operations
into two separate  companies.  The  distributed  operations  included the former
Marriott Corporation's lodging management, franchising and senior living service
operations. Host Marriott retained the former Marriott Corporation's airport and
tollroad food, beverage and merchandise concession  operations,  as well as most
of its real estate  properties.  Effective at the  Distribution  Date,  Marriott
Corporation changed its name to Host Marriott  Corporation.  Concurrent with the
Distribution,  Host  Marriott  completed an exchange  offer  ("Exchange  Offer")
pursuant  to which  holders  of  notes  in the  aggregate  principal  amount  of
approximately  $1.2  billion  ("Old  Notes")  exchanged  such  Old  Notes  for a
combination  of (i) cash,  (ii) common  stock of Host  Marriott and (iii) senior
notes  ("Hospitality   Notes")  issued  by  Host  Marriott   Hospitality,   Inc.
("Hospitality").

The Company is a direct wholly-owned subsidiary of Hospitality which is a direct
wholly-owned  subsidiary of Host Marriott.  In connection with the Distribution,
the majority of Host Marriott's real estate  properties were  transferred to the
Company and its  subsidiaries,  while most of the assets relating to the airport
and tollroad  operations remained in Host Marriott Travel Plazas, Inc. ("HMTP"),
a wholly-owned subsidiary of Hospitality, and its subsidiaries. In May 1995, the
Company and HMTP consummated  concurrent debt offerings  totalling $1 billion of
senior notes (the "Offering"),  the net proceeds of which were used to repay the
Hospitality  Notes and a portion of Host Marriott's $630 million  revolving line
of credit with Marriott International ("Line of Credit"). Prior to the Offering,
the  accompanying  consolidated  financial  statements  present the  pushed-down
effects  of the debt  that was  repaid  with the  proceeds  of the  Offering  as
discussed in Note 7.

The consolidated financial statements present the financial position, results of
operations, and cash flows of the Company as if it were a separate subsidiary of
Hospitality for all periods presented.  Host Marriott's  historical basis in the
assets and  liabilities  of the Company  have been  carried  over.  All material
intercompany  transactions and balances between the Company and its subsidiaries
have been eliminated.  Net transfers subsequent to the Distribution Date between
the Company and  Hospitality,  including the transfer of asset sales proceeds to
Hospitality  for bond  redemptions  of $292 million in 1994, are included in the
statement of shareholder's  equity. Such amounts are reflected as a component of
equity because the balance  accumulated  through the date of consummation of the
Offering was not required to be paid,  but rather was a permanent  adjustment to
capital on May 25, 1995.


<PAGE>

                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

An analysis of the activity in the  "Distributions to Hospitality,  net" for the
fiscal year ended December 29, 1995 is as follows (in millions):
<TABLE>
<CAPTION>
<S>                                                                              <C>

         Balance, Distributions to Hospitality, net, January 1, 1994. . . . .    $         (7)
             Increase in taxes payable. . . . . . . . . . . . . . . . . . . .              48
             Cash transfers to Hospitality. . . . . . . . . . . . . . . . . .            (345)
                                                                                 ------------ 
         Balance, Distributions to Hospitality, net, December 30, 1994. . . .            (304)
             Increase in taxes payable. . . . . . . . . . . . . . . . . . . .               8
             Non-cash transfers to Hospitality. . . . . . . . . . . . . . . .             (79)
             Cash transfers to Hospitality. . . . . . . . . . . . . . . . . .            (151)
             Amount reclassified as additional paid-in capital. . . . . . . .             526
                                                                                 ------------
         Balance, Distributions to Hospitality, net, May 25, 1995 . . . . . .    $         --
                                                                                 ============
</TABLE>

The average balance of  Distributions  to Hospitality,  net for fiscal year 1994
and the period from December 31, 1994 through May 25, 1995 were $132 million and
$461 million, respectively.

The Company operates as a unit of Host Marriott and Hospitality,  utilizing Host
Marriott's  employees,  insurance and administrative  services.  Through May 25,
1995,  the Company also utilized Host  Marriott's  centralized  systems for cash
management and  substantially  all cash received by the Company was deposited in
and commingled with Host Marriott's and  Hospitality's  general corporate funds.
Subsequent to May 25, 1995, the Company has  maintained  separate cash accounts.
The Company has no employees.  Certain operating expenses,  capital expenditures
and  other  cash  requirements  of the  Company  are paid by Host  Marriott  and
Hospitality  and charged  directly or allocated to the Company.  Certain general
and  administrative  costs of Host Marriott are allocated to Hospitality and, in
turn,  to  the  Company,   principally   based  on  Host   Marriott's   specific
identification  of  individual  cost items and  otherwise  based upon  estimated
levels of effort  devoted  by its  general  and  administrative  departments  to
individual  entities  or  relative  measures  of size of the  entities  based on
assets.  In the opinion of  management,  the methods for  allocating  corporate,
general and administrative expenses and other direct costs are reasonable. It is
not  practicable  to  estimate  the costs that would have been  incurred  by the
Company if it had been  operated on a  stand-alone  basis,  however,  management
believes that these expenses are comparable to the expected  expense levels on a
forward-looking basis.

Principles of Consolidation                       
         
The consolidated  financial  statements  include the accounts of the Company and
its  subsidiaries  and controlled  affiliates.  Investments in 50% or less owned
affiliates  over  which the  Company  has the  ability to  exercise  significant
influence are accounted for using the equity method.

Fiscal Year 

The Company's  fiscal year ends on the Friday  nearest to December 31. Full year
results  for 1996  include 53 weeks  versus 52 weeks for  fiscal  years 1995 and
1994.

Revenues and Expenses 

Revenues  include house profit from the Company's hotel  properties  because the
Company has delegated  substantially  all of the operating  decisions related to
the  generation  of house profit from its hotels to the manager.  Revenues  also
include lease rentals from the Company's  senior living  communities  (in 1994),
net gains  (losses) on property  transactions  and equity in the  earnings of an
affiliate.  House profit  reflects  the net  revenues  flowing to the Company as
property owner and  represents  hotel  operating  results,  less  property-level
expenses,  excluding  depreciation,  management fees, real and personal property
taxes,  ground and equipment rent,  insurance and certain other costs, which are
classified as operating costs and expenses.

Property and Equipment

Property and equipment is recorded at cost. For newly developed properties, cost
includes  interest,  rent and real estate taxes incurred during  development and
construction. Replacements and improvements are capitalized.

Depreciation  is computed  using the  straight-line  method  over the  estimated
useful  lives of the assets,  generally 40 years for  buildings  and three to 10
years for furniture and equipment. Leasehold improvements are amortized over the
shorter of the lease term or the useful lives of the related improvements.

Gains on sales of properties  are  recognized at the time of sale or deferred to
the extent required by generally accepted accounting principles.  Deferred gains
are recognized as income in subsequent periods as conditions  requiring deferral
are satisfied or expire.

In cases where management is holding for sale particular lodging properties, the
Company assesses impairment based on whether the net realizable value (estimated
sales price less costs of  disposal) of each  individual  property to be sold is
less than its net book value.  A lodging  property is  considered to be held for
sale  when the  Company  has made  the  decision  to  dispose  of the  property.
Otherwise,  the Company assesses  impairment of its real estate properties based
on whether the estimated net undiscounted future cash flows from each individual
property  (excluding  debt service)  will be less than its net book value.  If a
property is  impaired,  its basis is adjusted to its fair market value less cost
to sell.

Deferred Charges

Deferred  financing  costs related to long-term  debt are deferred and amortized
over the remaining life of the debt.

Cash and Cash Equivalents 

The Company  considers  all highly liquid  investments  with a maturity of three
months or less at the date of purchase to be cash equivalents.

Use of Estimates in the Preparation of Financial Statements

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.

Reclassifications

Certain amounts have been reclassified for comparative purposes.

New Statements of Financial Accounting Standards 

The Company  adopted SFAS No. 114,  "Accounting by Creditors for Impairment of a
Loan" and SFAS No. 121,  "Accounting for the Impairment of Long-Lived Assets and
for  Long-Lived  Assets  to be  Disposed  Of" in  1995.  The  adoption  of these
statements  did  not  have  a  material  effect  on the  Company's  consolidated
financial statements.
 
<PAGE>
                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

2.   Property and Equipment 

Property and equipment consists of the following (in millions): 
<TABLE>
<CAPTION>

                                                                                         1996              1995
                                                                                    -------------      ------------
<S>                                                                                 <C>                <C> 
   Land and land improvements. . . . . . . . . . . . . . . . . . . . . . . . .      $          99      $        138
   Building and leasehold improvements . . . . . . . . . . . . . . . . . . . .                901               905
   Furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . .                125               143
   Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . .                 23                45
                                                                                    -------------      ------------
                                                                                            1,148             1,231
   Less accumulated depreciation and amortization. . . . . . . . . . . . . . .               (204)             (232)
                                                                                    -------------      ------------ 
                                                                                    $         944      $        999
                                                                                    =============      ============
</TABLE>

Interest cost  capitalized  in connection  with the  Company's  development  and
construction  activities  totalled $1 million in 1996, $2 million in 1995 and $1
million in 1994.

In the second quarter of 1995, the Company made a  determination  that its owned
Courtyard  and Residence  Inn  properties  were held for sale and recorded a $10
million charge to write down the carrying value of five individual Courtyard and
Residence Inn properties to their estimated net realizable value.

3.   Notes Receivable Due From Affiliate 

In  connection  with  the  sale  of  several  hotels  to an  affiliated  limited
partnership  in 1984,  a  subsidiary  of the Company  received as proceeds  $168
million in notes  receivable  that are secured by  nonrecourse  mortgages on the
underlying  properties.  The notes mature on December 31, 2003 and bear interest
at 9%.  These  notes  require  principal  paydown  of  approximately  44% of the
original  principal  amount  prior to  maturity.  The  principal  balances as of
January  3, 1997 and  December  29,  1995 were $140  million  and $145  million,
respectively.

4.   Equity Investment in Affiliate 

On February 26, 1994,  Host  Marriott  transferred  to the Company a 49% limited
partner  interest in an affiliate that owns a hotel in Santa Clara,  California,
in exchange for $30 million in cash. The difference between the cash transferred
to Host Marriott and the carried-over cost basis of the 49% interest, net of the
related tax effects, has been charged to additional paid-in capital.

The investment is accounted for using the equity  method.  The Company has a 49%
interest  in  the  operating  profits  (income  before  interest  costs)  in the
partnership  which is included in equity in the  earnings of an  affiliate.  The
Company's equity in income of the partnership was $5 million,  $4 million and $3
million for 1996, 1995 and 1994, respectively.

<PAGE>
                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

The  partnership's  summarized  balance sheet information at January 3, 1997 and
December 29, 1995 is as follows (in millions):
<TABLE>
<CAPTION>

                                                                                     1996                  1995
                                                                                 ------------         ------------
<S>                                                                              <C>                  <C>

        Property and equipment. . . . . . . . . . . . . . . . . . . . . . . . .  $         30         $         29
        Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .             5                    5
                                                                                 ------------         ------------
              Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . .  $         35         $         34
                                                                                 ============         ============

        Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $         44         $         44
        Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .             1                    1
        Partners' deficit . . . . . . . . . . . . . . . . . . . . . . . . . . .           (10)                 (11)
                                                                                 ------------         ------------ 
              Total liabilities and partners' deficit . . . . . . . . . . . . .  $         35         $         34
                                                                                 ============         ============
</TABLE>

The partnership's  summarized  operating results for the fiscal years 1996, 1995
and for the  period  from  February  26,  1994  through  December  30,  1994 (in
millions):

                                     1996        1995      1994
                                    -------    -------    ------
        Revenues. . . . . . . . .   $   17     $   15     $   11
        Operating costs . . . . .       (8)        (7)        (5)
        Interest expense. . . . .       (3)        (3)        (2)
                                    ------     ------     ------ 
        Net income. . . . . . . .   $    6     $    5     $    4
                                    ======     ======     ======

                     
5.   Income Taxes 

The Company,  Hospitality  and Host  Marriott  record income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 requires
the  recognition  of deferred tax assets and  liabilities  equal to the expected
future tax consequences of temporary differences.

Total  deferred tax assets and  liabilities  at January 3, 1997 and December 29,
1995 were as follows:

                                                     1996           1995
                                                  ---------       --------   
                                                        (in millions)
        Gross deferred tax assets . . . . . . . . $    18         $    17
        Gross deferred tax liabilities. . . . . .     (89)            (95)
                                                  -------         ------- 
        Net deferred income tax liability . . . . $   (71)        $   (78)
                                                  =======         ======= 

The tax effect of each type of temporary  difference and carryforward that gives
rise to a  significant  portion of  deferred  tax assets and  liabilities  as of
January 3, 1997 and December 29, 1995:


                                                    1996             1995
                                                  --------        ---------
                                                       (in millions)
        Tax credit carryforwards. . . . . .       $    9          $     9
        Reserves. . . . . . . . . . . . . .            6                2
        Affiliate notes receivable. . . . .          (43)             (44)
        Property and equipment. . . . . . .          (46)             (51)
        Investment in affiliate . . . . . .            3                6
                                                  ------          -------
                                                  $  (71)         $   (78)
                                                  ======          ======= 

Deferred tax  liabilities  have been adjusted by $20 million in 1995 as a result
of the transfer of certain assets and liabilities  pursuant to the Offering.  At
January 3, 1997, the Company had approximately $9 million of alternative minimum
tax credit carryforwards which do not expire.

The provision (benefit) for income taxes consists of (in millions):

                                         1996     1995      1994
                                        -----    ------    ------
        Current-Federal . . . . . . .   $  17    $   15    $  39
               -State . . . . . . . .       4         3        9
                                        -----    ------    -----
                                           21        18       48
                                        -----    ------    -----
                                        
        Deferred-Federal. . . . . . .      (6)       (7)      24)
                -State . . . . . . ..      (1)       (2)      (7)
                                        -----    ------    ----- 
                                           (7)       (9)     (31)
                                        -----    ------    ----- 
                                        $  14    $    9    $  17
                                        =====    ======    =====

A reconciliation  of the statutory  Federal tax rate to the Company's  effective
income tax rate follows:

<TABLE>
<CAPTION>
                                                                                 1996      1995      1994
                                                                                 ----      ----      ----
<S>                                                                              <C>       <C>       <C>
                  
        Statutory Federal tax rate. . . . . . . . . . . . . . . . . . . . . . .  35.0%     35.0%     35.0%   
        State income tax, net of Federal tax benefit. . . . . . . . . . . . . .   5.1       2.5       2.8 
        Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1.0        --        --
                                                                                 ----      ----      ----
                                                                                 41.1%     37.5%     37.8%
                                                                                 ====      ====      ==== 
</TABLE>

The Company is included in the  consolidated  Federal  income tax return of Host
Marriott and its affiliates (the "Group"). Tax expense allocated to the Company,
as a member of the Group, is based upon the Company's  relative  contribution to
the  Group's   consolidated   taxable   income/loss  and  changes  in  temporary
differences.  This allocation method results in Federal tax expense allocated to
the Company for all periods  presented  substantially  equal to the expense that
would be recognized if the Company and its subsidiaries filed a separate return.
On a  separate  return  basis,  net state  income  tax  expense  would have been
substantially equal to the expense reported for the fiscal year ended January 3,
1997 and would have been  approximately $1 million higher for each of the fiscal
years ended December 29, 1995 and December 30, 1994.

Prior to the Offering and consistent with the existing Host Marriott tax sharing
policy, all current tax provision or benefit amounts were treated as paid to, or
received from,  Host Marriott,  and as such,  there was no current tax provision
related  balances due to Host  Marriott at December 30, 1994.  Subsequent to the
Offering,  the Company  reimburses  Host  Marriott  for its  allocable  share of
current  taxes  payable.  At January 3, 1997,  $29  million  was payable to Host
Marriott.  For  Federal  income  tax  purposes,  the  Company is a member of the
affiliated group of Host Marriott and its  subsidiaries.  The Company's share of
the  affiliated  group's tax liability is limited to the lesser of the liability
computed as if the Company was in a separate  affiliated group, or its allocable
portion of the affiliated group's tax liability.  Cash paid to Host Marriott for
income taxes was $1 million,  $1 million and $4 million in 1996,  1995 and 1994,
respectively.

<PAGE>
                     HMH Properties, Inc. and Subsidiaries
                         Notes to Financial Statements

6.   Leases 

The Company sold and leased back 18 Residence Inn properties  from a real estate
investment  trust (the "REIT") in 1996. The initial term of the lease expires in
2010 and can be renewed  for a total of 40 years at the  Company's  option.  The
minimum rent payments are $17 million  annually with additional  contingent rent
equal to 7.5% of the excess of total hotels sales on the leased  properties over
1996 total hotel sales on the leased  properties.  The Residence Inn leases also
require  the Company to escrow an amount  equal to 5% of the annual  hotel sales
into a furniture,  fixture and equipment reserve which is available for renewals
and replacements.

The Company  leases certain other  property and equipment  under  non-cancelable
leases.  Leases include  long-term  ground leases for certain hotels,  generally
with multiple renewal options. Certain leases contain provisions for the payment
of  contingent  rentals  based on a percentage  of sales in excess of stipulated
amounts.

Future minimum annual rental commitments for all non-cancelable operating leases
are as follows (in millions):

       Fiscal Year
         1997. . . . . . . . . . . . . . . . . . .   $  24
         1998. . . . . . . . . . . . . . . . . . .      23
         1999. . . . . . . . . . . . . . . . . . .      23
         2000. . . . . . . . . . . . . . . . . . .      23
         2001. . . . . . . . . . . . . . . . . . .      23
         Thereafter. . . . . . . . . . . . . . . .     264
                                                     -----
             Total minimum lease payments. . . . .   $ 380
                                                     =====

Rent expense consists of (in millions): 


       Minimum rentals on operating leases . . . . .   $  19    $   7   $   8
       Additional rentals based on sales . . . . . .       6        4       4
                                                       -----    -----   -----
                                                       $  25    $  11   $  12
                                                       =====    =====   =====

7.   Debt 

Debt  consists of the  following  at January 3, 1997 and  December  29, 1995 (in
millions):

                                                                 1996     1995
                                                                 ----     ----
       Senior Notes, 9.5%, maturing May 15, 2005 . . . . . . . . $600     $600
       Notes secured by $276 million of real estate assets,
         with an average rate of 7.5% at January 3, 1997,
         maturing through 2002 . . . . . . . . . . . . . . . . .   98      100
       Other notes with an average rate of 7.1%
         at January 3, 1997, maturing through 2014 . . . . . . .   34       34
                                                                 ----     ----
                                                                 $732     $734
                                                                 ====     ====

On May 25, 1995,  the Company  issued $600 million of 9.5% senior  secured notes
(the "Senior  Notes").  Concurrently,  HMTP issued $400 million of senior notes.
The net proceeds of the offerings were used to defease, and subsequently redeem,
all of the remaining Hospitality Notes,  remaining bonds and to repay borrowings
under the Line of Credit.  In connection  with the redemptions and defeasance of
the Hospitality  Notes, the Company  recognized an extraordinary loss in 1995 of
approximately  $22 million ($14 million  after  taxes),  primarily  representing
premiums of $11 million paid on the  redemptions  and the  write-off of deferred
fees on the Hospitality Notes.

The Senior Notes were issued at par and have a final  maturity of May 2005.  The
Senior Notes are senior  obligations  of the Company  secured by a pledge of the
capital  stock of  certain of the  Company's  subsidiaries  and are  guaranteed,
jointly and  severally,  by certain  subsidiaries.  The indenture  governing the
Senior Notes contains  covenants that, among other things,  limit the ability of
the Company and its  subsidiaries  to incur  additional  indebtedness  and issue
preferred stock, pay dividends or make other  distributions,  repurchase capital
stock or  subordinated  indebtedness,  create certain liens,  enter into certain
transactions  with affiliates,  sell certain assets,  issue or sell stock of the
Company's  subsidiaries,  and enter into  certain  mergers  and  consolidations.
Distributions  of the Company's  equity is restricted  but will be available for
the  payment of  dividends  to the  extent  that the  cumulative  amount of such
dividends  from May 25, 1995 does not exceed $25 million plus an amount equal to
the excess of the Company's EBITDA over 200% of the Company's  interest expense,
as defined in the indenture,  plus the amount of capital contributions,  if any,
to the Company  subsequent to May 25, 1995.  The Company paid $9 million and $36
million  in  dividends  for 1996 and 1995,  respectively,  to Host  Marriott  as
permitted under the Senior Notes indenture.

Under the indenture  for the Senior Notes,  proceeds from the sale of assets may
be used for the acquisition of new properties subject to certain limitations.

Aggregate debt maturities at January 3, 1997 are as follows (in millions):

     1997. . . . . . . . . . . . . .  $  2
     1998. . . . . . . . . . . . . .     2
     1999. . . . . . . . . . . . . .     2
     2000. . . . . . . . . . . . . .     1
     2001. . . . . . . . . . . . . .     1
     Thereafter. . . . . . . . . . .   724
                                       ---
                                      $732
                                      ====

Cash paid for interest, net of amounts capitalized, was $68 million in 1996, $61
million in 1995 and $62 million in 1994.  Deferred  financing  costs,  which are
included in other assets,  amounted to $17 million and $18 million at January 3,
1997 and December 29, 1995, respectively.
<PAGE>
                      HMH Propeties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

8.   Acquisitions and Dispositions 

During 1996, the Company acquired seven full-service  properties totalling 2,350
rooms for  approximately  $249 million.  The  acquisition  of the Salt Lake City
Marriott for $67 million included the purchase of a 20% general partner interest
from Host Marriott for $10 million.  The difference between the cash transferred
to Host Marriott and the carried-over cost basis of the 20% interest, net of the
related tax effect,  has been charged to additional  paid- in capital.  The 1996
acquisitions  included the acquisition,  through  foreclosure,  of a controlling
interest  in the 250- room  Newport  Beach  Marriott  Suites.  The  Company  had
purchased  an 83% interest in the  mortgage  loans  secured by the hotel for $18
million in the first quarter of 1996.  The Company also  completed  construction
and opened the Pentagon  City  Residence  Inn in April 1996.  Subsequent to year
end,  the  Company  acquired  the  306-room  Ritz-  Carlton,  Marina del Rey for
approximately $57 million.

The Company acquired four  full-service  hotels in 1995 totalling 1,944 rooms in
separate  transactions for approximately $240 million.  During 1994, the Company
acquired two  full-service  hotels  totaling 959 rooms in separate  transactions
aggregating   approximately   $80  million.   The  Company  also  provided  100%
non-recourse  financing  totaling  approximately  $35  million to an  affiliated
partnership,  in which Host Marriott owns the sole general partner interest, for
the acquisition of two  full-service  hotels (totaling  another 684 rooms).  The
Company consolidates these properties for accounting purposes.

During the first and second  quarters of 1996,  the Company sold and leased back
to the  REIT  16 of  its  Courtyard  properties  and  18 of  its  Residence  Inn
properties for $349 million (10% of which was deferred). Host Marriott purchased
the Company's  rights to the deferred  proceeds and obligations  under the lease
for the 16 Courtyard properties at their fair market value. The Company's rights
to the deferred  proceeds and  obligations  under the lease for the 18 Residence
Inns remain with the Company.  The Company  recorded a $14 million deferred gain
in 1996 and is amortizing the gain over the initial term of the lease.

During the first and third quarters of 1995, the Company sold and leased back to
the REIT 37 of its Courtyard  properties  for $330  million.  Ten percent of the
sales amount of these  transactions  was deferred.  The Company  transferred its
rights to the deferred  proceeds and obligations under the lease to a designated
subsidiary of Hospitality in connection with the Offering.

During 1994,  the Company sold its 14 senior living  communities to an unrelated
party for $320 million, which approximated the communities' carrying value.

In the third quarter of 1994,  the Company sold 26 of its  Fairfield  Inns to an
unrelated  third  party.  The net  proceeds  from the sale of such  hotels  were
approximately  $114 million,  which exceeded the carrying value of the hotels by
approximately $12 million. Approximately $27 million of the proceeds was payable
in the form of a note from the  purchaser  due in 2001.  The gain on the sale of
these hotels has been  deferred.  The note  receivable  and  deferred  gain were
transferred to Hospitality in connection with the Offering.

In connection with the Offering,  HMTP  transferred  certain hotel assets to the
Company and the Company  transferred  certain  undeveloped land parcels,  a note
receivable and the leases and related  assets of the 37 Courtyard  properties to
Hospitality or a designated subsidiary of Hospitality.

Summarized  unaudited  pro  forma  results  of  operations,  assuming  the above
transactions  (excluding  the New York Vista Hotel  acquisition in 1995) and the
Offering  and debt  activity  discussed in Note 7 occurred on December 31, 1994,
are as follows (in millions):
                                                          1996     1995
                                                         -----    -----
       Revenue . . . . . . . . . . . . . . . . . . . .   $ 250    $ 189
       Operating profit before corporate expenses
          and interest . . . . . . . . . . . . . . . .     107       71
       Net income before extraordinary item. . . . . .      30        8


<PAGE>
                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

9.   Fair Value of Financial Instruments 

The fair values of certain financial instruments are shown below (in millions):


<TABLE>
<CAPTION>

                                                                                January 3, 1997       December 29, 1995
                                                                                ----------------      ------------------
                                                                                Carrying   Fair       Carrying     Fair
                                                                                 Amount    Value       Amount      Value
                                                                                --------   -----      --------    ------
<S>                                                                             <C>        <C>        <C>          <C>
                Financial assets
                   Note receivable from affiliate . . . . . . . . . . . . . .   $ 140      $ 150      $  145       $ 145
                Financial liabilities
                   Senior notes . . . . . . . . . . . . . . . . . . . . . . .     600        627         600         612
                   Notes secured by real estate assets. . . . . . . . . . . .      98         95         100         100
                   Other notes. . . . . . . . . . . . . . . . . . . . . . . .      34         34          34          34

</TABLE>

Receivables from affiliates,  and other financial assets are valued based on the
expected future cash flows discounted at  risk-adjusted  rates. The Senior Notes
are valued  based on quoted  market  prices.  Valuations  for  secured and other
unsecured debt are determined  based on the expected future payments  discounted
at risk-adjusted  rates.  The fair values of other assets and other  liabilities
are estimated to be equal to their carrying value.

10.   Relationship Between the Company and Marriott International 

In connection with the  Distribution,  Host Marriott and Marriott  International
entered into agreements  which provide,  among other things,  that (i) 26 of the
Company's  lodging  properties  are  managed  by  Marriott  International  under
agreements with initial terms of 15 to 20 years and which are subject to renewal
at the option of Marriott  International for up to 16 to 30 years (see Note 11),
(ii) the Company and its  subsidiaries  will lease senior living  communities to
Marriott  International  prior to their  disposal  (see Note 8), (iii)  Marriott
International  will guarantee  Host  Marriott's  performance in connection  with
certain loans and other obligations and (iv) three of the Company's full-service
properties are operated under a franchise agreement with Marriott International.

For fiscal years 1996, 1995 and 1994, the Company paid to Marriott International
$32 million,  $28 million and $23 million,  respectively,  in lodging management
fees and the  Company  earned  $14  million  in 1994  under  the  senior  living
community leases.

In connection with the purchase of the Marriott World Trade Center,  the Company
received a mortgage  loan of $10 million from Marriott  International.  Marriott
International also provided an additional $10 million to the Company.  Repayment
of this amount is  contingent  on the future  earnings of the hotel and has been
included in other liabilities in the accompanying financial statements.

In addition,  Marriott  International has the right to purchase up to 20% of the
voting stock of Host Marriott if certain events involving a change in control of
Host Marriott occur.

11.   Management Agreements 

The Company is party to management  agreements (the "Agreements")  which provide
for Marriott International to manage the hotels generally for an initial term of
15 to 30 years with renewal  terms of up to an  additional  16 to 30 years.  The
Agreements generally provide for payment of base management fees equal to two to
four percent of sales and incentive  management  fees generally  equal to 40% to
50% of hotel operating  profits (as defined in the  Agreements)  over a priority
return (as defined) to the Company,  with total incentive management fees not to
exceed 20% of operating profits.  For certain full-service hotels acquired after
September 8, 1995,  the  incentive  management  fee is equal to 20% of operating
profits.  In  the  event  of  early  termination  of  the  Agreements,  Marriott
International  will  receive  additional  fees based on the  unexpired  term and
expected future base and incentive management fees. No agreement with respect to
a single lodging  facility is  cross-collateralized  or  cross-defaulted  to any
other  agreement  and  a  single   agreement  may  be  cancelled  under  certain
conditions,  although such cancellation will not trigger the cancellation of any
other Agreement.

Pursuant to the terms of the Agreements,  Marriott  International is required to
furnish the hotels with certain services ("Chain  Services") which are generally
provided  on a  central  or  regional  basis  to  all  hotels  in  the  Marriott
International hotel system. Chain Services include central training, advertising
and  promotion,   a  national  reservation  system,   computerized  payroll  and
accounting  services,  and such additional  services as needed which may be more
efficiently  performed on a centralized  basis.  Costs and expenses  incurred in
providing such services are allocated among all domestic  hotels managed,  owned
or leased by  Marriott  International  or its  subsidiaries.  In  addition,  the
full-service  hotels also participate in Marriott's Honored Guest Awards Program
and the Courtyard  hotels in the Courtyard Club. The costs of these programs are
charged to all hotels in the respective hotel system.

The Company is obligated to provide the manager with  sufficient  funds to cover
the cost of (a) certain non- routine repairs and maintenance to the hotels which
are  normally  capitalized;  and (b)  replacements  and  renewals to the hotels'
property and  improvements.  Under  certain  circumstances,  the Company will be
required to establish  escrow accounts for such purposes under terms outlined in
the Agreements.

Pursuant  to the terms of the  Agreements,  the  Company is  required to provide
Marriott  International  with funding for working  capital to meet the operating
needs of the  hotels.  Marriott  International  converts  cash  advanced  by the
Company into other forms of working  capital  consisting  primarily of operating
cash,  inventories  and trade  receivables.  Under the terms of the  Agreements,
Marriott  International  maintains  possession  of and  sole  control  over  the
components of working  capital and  accordingly,  the Company  reports the total
amounts so advanced to Marriott  International  as a component of other  assets.
Upon termination of the Agreements,  the working capital will be returned to the
Company.

At  January  3,  1997 and  December  29,  1995,  $25  million  and $22  million,
respectively,  have been advanced to the hotel managers for working  capital and
are included in due from hotel managers in the accompanying balance sheet.

Franchise Agreements

The Company has entered into franchise  agreements  with Marriott  International
for three hotels. Pursuant to these franchise agreements,  the Company generally
pays a franchise  fee based on a percentage  of room sales and food and beverage
sales as well as certain other fees for advertising and reservations.  Franchise
fees for room sales vary from four to six percent of room sales,  while fees for
food and  beverage  sales vary from two to three  percent of sales.  The initial
terms of the franchise  agreements are from 20 to 25 years.  Franchise fees paid
to  Marriott  International  for 1996 were $1 million.  Franchise  fees were not
material in prior periods.

12.   Litigation

The  Company  is from time to time the  subject  of, or  involved  in,  judicial
proceedings.  Management believes that any liability or loss resulting from such
matters will not have a material  adverse  effect on the  financial  position or
results of operations of the Company.

<PAGE>
                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

13.   Hotel Operations 

Hotel revenues reflect house profit from the Company's hotel  properties.  House
profit  reflects the net revenues  flowing to the Company as property  owner and
represents all gross hotel  operating  revenues,  less all gross property- level
expenses,  excluding  depreciation,  management fees, real and personal property
taxes,  ground and equipment rent,  insurance and certain other costs, which are
classified as operating  costs and expenses.  Accordingly,  the following  table
presents the Company's house profit for 1996, 1995 and 1994 (in millions).

                                           1996     1995    1994
                                           ----     ----    ---- 
Sales           
 Rooms. . . . . . . . . . . . . . . . .    $390     $351    $382
 Food and beverage. . . . . . . . . . .     135      106      95
 Other. . . . . . . . . . . . . . . . .      38       27      26
                                           ----     ----    ----
   Total hotel sales. . . . . . . . . .     563      484     503
                                           ----     ----    ----
Department costs
 Rooms. . . . . . . . . . . . . . . . .      93       81      91
 Food and beverage. . . . . . . . . . .     109       81      73
 Other. . . . . . . . . . . . . . . . .      18       14      12
                                           ----     ----    ----
   Total department costs . . . . . . .     220      176     176
                                           ----     ----    ----

Department profit . . . . . . . . . . .     343      308     327
Other deductions. . . . . . . . . . . .     133      119     128
                                           ----     ----    ----
   House profit . . . . . . . . . . . .    $210     $189    $199
                                           ====     ====    ====

14.      Supplemental Guarantor And Non-Guarantor Subsidiary Information

All but two of the  subsidiaries of the Company  guarantee the Senior Notes. The
separate  financial   statements  of  each  guaranteeing   subsidiary  (each,  a
"Guarantor  Subsidiary") are not presented because the Company's  management has
concluded  that such  financial  statements  are not material to investors.  The
guarantee of each Guarantor  Subsidiary is full and  unconditional and joint and
several and each  Guarantor  Subsidiary  is a wholly-  owned  subsidiary  of the
Company. The non-guarantor  subsidiaries (the "Non-Guarantor  Subsidiaries") are
the owners of the Marriott World Trade Center, which was acquired by the Company
in late  December  1995  and HMH HPT  Residence  Inn,  Inc.  the  lessee  of the
Residence Inn  properties.  At February 28, 1997,  there is no subsidiary of the
Company  the  capital  stock of which  comprises  a  substantial  portion of the
collateral  for the Senior Notes  within the meaning of Rule 3-10 of  Regulation
S-X.

The following  condensed,  consolidating  financial  information  sets forth the
combined  financial  position  as of January 3, 1997 and  December  29, 1995 and
results of operations  for the three fiscal years in the period ended January 3,
1997 of the parent,  Guarantor Subsidiaries and the Non-Guarantor  Subsidiaries,
along  with the cash  flows of the parent  and  Guarantor  Subsidiaries  and the
Non-Guarantor  Subsidiaries  for the year ended January  3,1997 and December 29,
1995:

<PAGE>
                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

               Supplemental Condensed Consolidating Balance Sheets
                                  (in millions)
                                 
<TABLE>
<CAPTION>

                                                                                Guarantor        Non-Guarantor       
                         January 3, 1997                          Parent        Subsidiaries       Subsidiary       Consolidated
                                                                ----------      ------------     -------------      ------------
<S>                                                             <C>             <C>              <C>                <C>
Property and equipment. . . . . . . . . . . . . . . . . . . . . $    488        $    316         $       140        $       944
Investment in affiliate . . . . . . . . . . . . . . . . . . . .       17              --                  --                 17
Notes receivable from affiliate . . . . . . . . . . . . . . . .       --             140                  --                140
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . .       31              21                  24                 76
Cash and cash equivalents . . . . . . . . . . . . . . . . . . .      108              --                  --                108
                                                                --------        --------         -----------        -----------
     Total assets . . . . . . . . . . . . . . . . . . . . . . . $    644        $    477         $       164        $     1,285
                                                                ========        ========         ===========        ===========

Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $    638        $     19         $        75        $       732
Deferred income taxes . . . . . . . . . . . . . . . . . . . . .       23              47                   1                 71
Other liabilities . . . . . . . . . . . . . . . . . . . . . . .       30              15                  24                 72
                                                                --------        --------         -----------        -----------
     Total liabilities. . . . . . . . . . . . . . . . . . . . .      691              81                 100                875
Owner's equity. . . . . . . . . . . . . . . . . . . . . . . . .      (47)            396                  64                410
                                                                --------        --------         -----------        -----------
     Total liabilities and owner's equity . . . . . . . . . . . $    644        $    477         $       164        $     1,285
                                                                ========        ========         ===========        ===========


                                December 29, 1995

Property and equipment. . . . . . . . . . . . . . . . . . . . . $    557        $    298         $       144        $       999
Investment in affiliate . . . . . . . . . . . . . . . . . . . .       16              --                  --                 16
Notes receivable from affiliate . . . . . . . . . . . . . . . .       --             145                  --                145
Other assets. . . . . . . . . . . . . . . . . . . . . . . . . .       24              18                   4                 46
Cash and cash equivalents . . . . . . . . . . . . . . . . . . .       16              --                  --                 16
                                                                --------        --------         -----------        -----------
     Total assets . . . . . . . . . . . . . . . . . . . . . . . $    613        $    461         $       148        $     1,222
                                                                ========        ========         ===========        ===========

Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $    640        $     19         $        75        $       734
Deferred income taxes . . . . . . . . . . . . . . . . . . . . .       21              57                  --                 78
Other liabilities . . . . . . . . . . . . . . . . . . . . . . .       15               1                  10                 26
                                                                --------        --------         -----------        -----------
     Total liabilities. . . . . . . . . . . . . . . . . . . . .      676              77                  85                838
Owner's equity. . . . . . . . . . . . . . . . . . . . . . . . .      (63)            384                  63                384
                                                                --------        --------         -----------        -----------
     Total liabilities and owner's equity . . . . . . . . . . . $    613        $    461         $       148        $     1,222
                                                                ========        ========         ===========        ===========

</TABLE>
<PAGE>
                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

          Supplemental Condensed Consolidating Statements of Operations
                                  (in millions)
                           

<TABLE>
<CAPTION>
                                                                                                          
                                                                                Guarantor        Non-Guarantor        
                           Year Ended January 3, 1997            Parent         Subsidiaries     Subsidiary         Consolidated
                                                               ---------        ------------     -------------      ------------
<S>                                                            <C>              <C>              <C>                <C>
REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . .    $    105         $      67        $        44        $       216
OPERATING COSTS AND EXPENSES. . . . . . . . . . . . . . . .          59                34                 34                127
                                                               --------         ---------        -----------        -----------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
    AND INTEREST. . . . . . . . . . . . . . . . . . . . . .          46                33                 10                 89
Corporate expenses. . . . . . . . . . . . . . . . . . . . .          (4)               (4)                (2)               (10) 
Interest expense. . . . . . . . . . . . . . . . . . . . . .         (63)               (1)                (5)               (69)
Interest income . . . . . . . . . . . . . . . . . . . . . .          21                 3                 --                 24
                                                               --------         ---------        -----------        -----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . .          --                31                  3                 35
Provision for income taxes. . . . . . . . . . . . . . . . .          --               (13)                (1)               (14)
                                                               --------         ---------        -----------        ----------- 
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . .    $     --         $      18        $         2        $        20
                                                               ========         =========        ===========        ===========


                          Year Ended December 29, 1995

REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . $       137         $      46        $        --        $       183
OPERATING COSTS AND EXPENSES. . . . . . . . . . . . . . . .          59                44                 --                103
                                                            -----------         ---------        -----------        -----------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
    AND INTEREST. . . . . . . . . . . . . . . . . . . . . .          78                 2                 --                 80
Corporate expenses. . . . . . . . . . . . . . . . . . . . .          (6)               (4)                --                (10) 
Interest expense. . . . . . . . . . . . . . . . . . . . . .         (60)               (1)                --                (61) 
Interest income . . . . . . . . . . . . . . . . . . . . . .           2                13                 --                 15
                                                            -----------         ---------        -----------        -----------
INCOME BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM. . . . . . . . . . . . . . . . . . .           14                10                 --                 24
Provision for income taxes. . . . . . . . . . . . . . . . .          (5)               (4)                --                 (9)
                                                            -----------         ---------        -----------        ----------- 
INCOME BEFORE EXTRAORDINARY ITEM. . . . . . . . . . . . . .           9                 6                 --                 15
Extraordinary item -- Loss on extinguishment of debt. . . .         (14)               --                 --                (14)
                                                            -----------         ---------        -----------        ----------- 
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . . . . $        (5)        $       6        $        --        $         1
                                                            ===========         =========        ===========        ===========


                          Year Ended December 30, 1994

REVENUES. . . . . . . . . . . . . . . . . . . . . . . . . . $       185         $      32        $        --        $       217
OPERATING COSTS AND EXPENSES. . . . . . . . . . . . . . . .          98                16                 --                114
                                                            -----------         ---------        -----------        -----------
OPERATING PROFIT BEFORE CORPORATE EXPENSES 
    AND INTEREST. . . . . . . . . . . . . . . . . . . . . .          87                16                 --                103
Corporate expenses. . . . . . . . . . . . . . . . . . . . .          (6)               (2)                --                 (8)
Interest expense. . . . . . . . . . . . . . . . . . . . . .         (62)               (2)                --                (64)
Interest income . . . . . . . . . . . . . . . . . . . . . .          --                14                 --                 14
                                                            -----------         ---------        -----------        -----------
INCOME BEFORE INCOME TAXES. . . . . . . . . . . . . . . . .          19                26                 --                 45
Provision for income taxes. . . . . . . . . . . . . . . . .          (7)              (10)                --                (17)
                                                            -----------         ---------        -----------        -----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . $        12         $      16        $        --        $        28
                                                            ===========         =========        ===========        ===========
</TABLE>
<PAGE>
                     HMH Properties, Inc. and Subsidiaries
                   Notes to Consolidated Financial Statements

          Supplemental Condensed Consolidating Statements of Cash Flows
                                  (in millions)
                           Year Ended January 3, 1997
<TABLE>
<CAPTION>

                                                                                                                                
                                                                                  Guarantor         Non-Guarantor         
                                                                Parent            Subsidiaries        Subsidiaries     Consolidated
                                                            ------------        ---------------    ----------------   --------------
<S>                                                         <C>                 <C>                <C>                <C>
CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . $        53         $        34        $         3        $         90
                                                            -----------         -----------        -----------        ------------
INVESTING ACTIVITIES
    Cash received from sales of assets. . . . . . . . . . .         315                  --                 --                 315
    Capital expenditures. . . . . . . . . . . . . . . . . .         (13)                (31)                (1)                (45)
    Acquisitions. . . . . . . . . . . . . . . . . . . . . .        (246)                 --                 --                (246)
    Other       . . . . . . . . . . . . . . . . . . . . . .         (14)                  4                 --                 (10)
                                                            -----------         -----------        -----------        ------------ 
    Cash provided by (used in) investing activities . . . .          42                 (27)                (1)                 14
                                                            -----------         -----------        -----------        ------------
FINANCING ACTIVITIES
    Repayment of debt . . . . . . . . . . . . . . . . . . .          (3)                 --                 --                  (3)
    Dividends to Hospitality. . . . . . . . . . . . . . . .          --                  (7)                (2)                 (9)
                                                            -----------         -----------        -----------         ----------- 
    Cash provided by (used in) financing activities . . . .          (3)                 (7)                (2)                (12)
                                                            -----------         -----------        -----------         ----------- 
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . .          92                  --                 --                  92
CASH AND CASH EQUIVALENTS, beginning of year. . . . . . . .          16                  --                 --                  16
                                                            -----------         -----------        -----------         -----------
CASH AND CASH EQUIVALENTS, end of year. . . . . . . . . . . $       108         $        --        $        --         $       108
                                                            ===========         ===========        ===========         ===========
</TABLE>

                          Year Ended December 29, 1995
                                                                               
<TABLE>
<CAPTION>
                                                                                                   Non-Guarantor         
                                                                                  Parent            Subsidiaries      Consolidated
                                                                                -----------        -------------      ------------
<S>                                                                             <C>                <C>                <C>
CASH PROVIDED BY OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . $       75         $        --        $         75
                                                                                ----------         -----------        ------------
INVESTING ACTIVITIES
    Cash received from sales of assets. . . . . . . . . . . . . . . . . . . . .        304                  --                 304
    Capital expenditures. . . . . . . . . . . . . . . . . . . . . . . . . . . .        (41)                 --                 (41)
    Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        (29)               (147)               (242)
    Other       . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         10                  10                  20
                                                                                ----------          ----------        ------------
    Cash provided by (used in) investing activities . . . . . . . . . . . . . .        178                (137)                 41
                                                                                ----------          ----------        ------------
FINANCING ACTIVITIES
    Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       (589)                 --                (589)
    Issuance of debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        601                  75                 676
    Transfers to Hospitality, net . . . . . . . . . . . . . . . . . . . . . . .       (151)                 --                (151)
    Transfer from Parent. . . . . . . . . . . . . . . . . . . . . . . . . . . .        (62)                 62                  --
    Dividends to Hospitality. . . . . . . . . . . . . . . . . . . . . . . . . .        (36)                 --                 (36)
                                                                                ----------        ------------        ------------ 
    Cash provided by (used in) financing activities . . . . . . . . . . . . . .       (237)                137                (100)
                                                                                ----------        ------------        ------------ 
INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . .         16                  --                  16
CASH AND CASH EQUIVALENTS, beginning of year. . . . . . . . . . . . . . . . . .         --                  --                  --
                                                                                ----------        ------------        ------------
CASH AND CASH EQUIVALENTS, end of year. . . . . . . . . . . . . . . . . . . . . $       16        $         --        $         16
                                                                                ==========        ============        ============
</TABLE>
<PAGE>

                                    PART III

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE

          None.

                                    PART III

The Company's directors, executive officers and management are employees of Host
Marriott.  Certain  information  required  by  Items  10-13 is  incorporated  by
reference  from the Host Marriott 1997 Annual  Meeting of  Shareholders - Notice
and Proxy Statement.

Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
                        
Set forth  below is certain  information  with  respect to the  persons  who are
executive officers of the Company.
<TABLE>
<CAPTION>

<S>                             <C>      <C>
                                               Other Positions and
                                         Business Experience Prior to Becoming
    Name and Title               Age     an Executive Officer of the Company 
-------------------             ----     ---------------------------------------
Robert E. Parsons, Jr.           41      Robert E. Parsons, Jr. joined Host Marriott's Corporate Financial Planning staff in
President and Director                   981 and was made Assistant Treasurer in 1988.  In 1993, Mr. Parsons was elected
                                         Senior Vice President and Treasurer of Host Marriott, and in 1995, he was elected
                                         Executive Vice President and Chief Financial Officer of Host Marriott.  Mr.
                                         Parsons was elected Vice President of the Company in 1993 and was elected Senior
                                         Vice President in 1995.  In 1996, Mr. Parsons was elected President and Director
                                         of the Company.

Christopher G. Townsend          49      Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a
Executive Vice President                 Senior Attorney.  In 1984, Mr. Townsend was made Assistant Secretary of Host
and Director                             Marriott, and in 1986, he was made Assistant General Counsel.  In 1993, Mr.
                                         Townsend was elected Senior Vice President, Corporate Secretary and Deputy
                                         General Counsel of Host Marriott.  In January 1997, he was elected General
                                         Counsel of Host Marriott.  Mr. Townsend was elected Vice President of the
                                         Company in 1993, Senior Vice President in 1995, and Executive Vice President and
                                         Director in 1996.

Christopher J. Nassetta          34      Christopher J. Nassetta joined Host Marriott in October 1995 as Executive Vice
Executive Vice President                 President.  Mr. Nassetta was elected Vice President of the Company in 1995.  Prior
                                         to joining Host Marriott, Mr. Nassetta served as President of Bailey Realty
                                         Corporation from 1991 until 1995.  He had previously served as Chief Development
                                         Officer and in various other positions with The Oliver Carr Company
                                         from 1984 through 1991. 

Bruce D. Wardinski               36      Bruce Wardinski joined Host Marriott in 1987 as Senior Financial Analyst of              
Vice President and                       Financial Planning & Analysis and was named Manager in June 1988.  He was 
Treasurer                                appointed Director of Financial Planning & Analysis in 1989, Director of Project
                                         Finance in June 1993, Vice President of Project Finance in June 1994, and Senior
                                         Vice President of International Development in October 1995.  In 1996, Mr.
                                         Wardinski was named Senior Vice President and Treasurer of Host Marriott.  Also
                                         in 1996, Mr. Wardinski was named Vice President and Treasurer of the Company. 
                                         Prior to joining Host Marriott, Mr. Wardinski was with the public accounting firm
                                         of Price Waterhouse.

Donald D. Olinger                38      Donald D. Olinger joined Host Marriott in 1993 as Director - Corporate Accounting. 
Vice President and                       Later in 1993, Mr. Olinger was promoted to Senior Director and Assistant Controller
Corporate Controller                     of Host Marriott.  He was promoted to Vice President - Corporate Accounting in 1995.
                                         In 1996, he was elected Senior Vice President and Corporate Controller.  Mr. Olinger was
                                         elected Vice President and Corporate Controller of the Company in 1996.  Prior to
                                         joining Host Marriott, Mr. Olinger was with the public accounting firm of Deloitte
                                         & Touche.


</TABLE>

Item 11.  EXECUTIVE COMPENSATION

The officers and directors of the Company are employees of Host Marriott and are
compensated by Host Marriott.  The officers and directors are required to devote
to the Company such time as may be necessary for the proper performance of their
duties,  but are not  required to devote their full time to the  performance  of
such duties.  No officer or director of the Company  receives  any  compensation
from the Company.

Certain general and  administrative  costs of Host Marriott are allocated to the
Company;   such  allocations   totaled  $10  million  in  both  1996  and  1995,
respectively, and $8 million in 1994.

Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  Company  has 100  shares  of common  stock  with no par  value  issued  and
outstanding,  all of which are held  beneficially and of record by Host Marriott
Hospitality,  Inc. No  executive  officer or  director  of the Company  owns any
shares of the Company's common stock.

Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Company  operates as a unit of Host Marriott and Host Marriott  Hospitality,
Inc.,  utilizing  Host  Marriott's   employees,   insurance  and  administrative
services.  Host Marriott  contracts with Marriott  International  for certain of
these services. In addition,  Host Marriott provides certain corporate,  general
and administrative services to the Company.

The Company  sold and leased back to a real  estate  investment  trust 16 of its
Courtyard properties in 1996 for $176 million (10% of which was deferred).  Host
Marriott purchased the Company's rights and obligations to the deferred proceeds
and  obligations  under the lease for the properties at their fair market value.
Also in 1996, the Company  acquired Host Marriott's 20% general partner interest
in the Salt Lake City Hotel  Partners,  which owned the Salt Lake City Marriott,
for $10 million.

Additional  information regarding certain relationships and related transactions
of the Company are  incorporated by reference from the Host Marriott 1997 Annual
Meeting of Shareholders - Notice and Proxy Statement.

                                     PART IV

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

          (a)  LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

               (1)  FINANCIAL STATEMENTS

                    All  financial  statements  of the  registrant  as set forth
                    under Item 8 of this Report on Form 10-K.
 
               (2)  FINANCIAL STATEMENT SCHEDULES

                    The following financial information is filed herewith on the
                    pages indicated.

                    Financial Schedule:

                    III. Real Estate and Accumulated Depreciation

                    All  other  schedules  are  omitted  because  they  are  not
                    applicable  or the required  information  is included in the
                    consolidated financial statements or notes thereto.

<PAGE>

               (3)  EXHIBITS

Exhibit # DESCRIPTION
--------- --------------------------------------------

     3.1  Certificate of Incorporation of the Company (incorporated by reference
          to Registration Statement No. 33-95088).

     3.2  Restated  Bylaws  of  the  Company   (incorporated   by  reference  to
          Registration Statement No. 33-95058).

     4.1  Indenture  dated as of May 25,  1995,  by and among the  Company,  HMH
          Courtyard Properties,  Inc., HMC Retirement Properties, Inc., Marriott
          Financial Services,  Inc., HMH Pentagon Corporation,  Marriott SBM Two
          Corporation  and Host Airport Hotels,  Inc. as Subsidiary  Guarantors,
          and Marine Midland Bank, as Trustee,  with respect to the 91/2% Senior
          Secured  Notes due 2005 of the Company  (incorporated  by reference to
          Registration Statement No. 33-95058).

     10.1 Purchase  Agreement,  dated  as of May  18,  1995,  by and  among  the
          Company, HMH Courtyard  Properties,  Inc., HMC Retirement  Properties,
          Inc.,  Marriott Financial  Services,  Inc., HMH Pentagon  Corporation,
          Marriott  SBM  Two  Corporation  and  Host  Airport  Hotels,  Inc.  as
          Subsidiary  Guarantors  and  Donaldson,  Lufkin & Jenrette  Securities
          Corporation, Goldman Sachs & Co., BT Securities Corporation,  Citicorp
          Securities,  Inc.,  Montgomery  Securities,  Salomon Brothers Inc, and
          Smith Barney Inc. as the Initial Purchasers (incorporated by reference
          to Registration Statement No. 33-95058).

     10.2 Registration  Rights  Agreement,  dated  as of May  25,  1995,  by and
          between the Company,  HMH Courtyard  Properties,  Inc., HMC Retirement
          Properties,  Inc.,  Marriott  Financial  Services,  Inc., HMH Pentagon
          Corporation,  Marriott SBM Two  Corporation  and Host Airport  Hotels,
          Inc.  as  Subsidiary  Guarantors  and  Donaldson,  Lufkin  &  Jenrette
          Securities   Corporation,   Goldman   Sachs  &  Co.,   BT   Securities
          Corporation, Citicorp Securities, Inc., Montgomery Securities, Salomon
          Brothers  Inc,  and  Smith  Barney  Inc.  as  the  Initial  Purchasers
          (incorporated by reference to Registration Statement No. 33-95058).

     10.3 Consolidation  Letter  Agreement  pertaining to Courtyard Hotels dated
          September  25, 1993  between a subsidiary  of Marriott  International,
          Inc.   and  a  subsidiary   of  Host   Marriott   Hospitality,   Inc.,
          (incorporated by reference from Registration Statement No. 33-62444).

     10.4 Consolidation  Letter  Agreement  pertaining  to Residence  Inns dated
          September  25, 1993  between a subsidiary  of Marriott  International,
          Inc. and a subsidiary of Host Marriott Hospitality, Inc. (incorporated
          by reference from Registration Statement No. 33-62444)

     10.5 Corporate  Services  Agreement  dated  as of  October  8,  1993 by and
          between  Marriott   Corporation  and  Marriott   International,   Inc.
          (incorporated by reference from Registration Statement No. 33-62444)

     10.6 Host Marriott Lodging  Management  Agreement -- Courtyard Hotels dated
          September 25, 1993 by and between  Marriott  Corporation  and Marriott
          International,  Inc.  (incorporated  by  reference  from  Registration
          Statement No. 33-62444)

     10.7 Host Marriott Lodging Management Agreement-Marriott  Hotels,  Resorts
          and  Hotels  dated   September  25,  1993  by  and  between   Marriott
          Corporation  and  Marriott   International,   Inc.   (incorporated  by
          reference from Registration Statement No. 33-62444)

     10.8 Host  Marriott  Lodging  Management Agreement-Residence  Inns  dated
          September 25, 1993 by and between  Marriott  Corporation  and Marriott
          International,  Inc.  (incorporated  by  reference  from  Registration
          Statement No. 33-62444)

    10.11 Tax  Administration  Agreement  dated  as of  October  8,  1993 by and
          between  Marriott   Corporation  and  Marriott   International,   Inc.
          (incorporated by reference from Registration Statement No. 33-62444)

    10.12 Tax  Sharing  Agreement  dated as of  October  5, 1993 by and  between
          Marriott Corporation and Marriott International, Inc. (incorporated by
          reference from Registration Statement No. 33-62444)

     12   Computation of ratio of earnings to fixed charges

     21   Subsidiaries of HMH Properties, Inc.

     27   Financial Data Schedule

         (b)   REPORTS ON FORM 8-K

               .    December  6,  1996 -  Report  of the  announcement  that the
                    Company  acquired  the Salt  Lake City  Marriott,  including
                    financial  statements of the acquired business and pro forma
                    financial statements for HMH Properties, Inc.





<PAGE>

                                   SIGNATURES


Pursuant to the  requirements  of Section 13 or 15(d) of the  Securities  Act of
1934,  the  Registrant has duly caused this Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, on this 27th day of March, 1997.

                                             HMH PROPERTIES, INC.

                                              By /s/ Robert E. Parsons, Jr.
                                                ---------------------------
                                                Robert E. Parsons, Jr.
                                                President and Director


Pursuant to the  requirements  of the Securities Act of 1934, this Form 10-K has
been signed below by the following  persons in the  capacities  and on the dates
indicated.
<TABLE>
<CAPTION> 
<S>                               <C>                                           <C>

          Signatures                       Title                                  Date
----------------------------      -----------------------------                 -----------

/s/ ROBERT E. PARSONS, JR.        President and Director                        March 27, 1997
----------------------------      (Principal Executive Officer)
    Robert E. Parsons, Jr.


/s/ CHRISTOPHER G. TOWNSEND
----------------------------      Executive Vice President and Director         March 27, 1997
    Christopher G. Townsend


/s/ CHRISTOPHER J. NASSETTA
----------------------------      Executive Vice President                      March 27, 1997
    Christopher J. Nassetta

/s/ BRUCE D. WARDINSKI
----------------------------      Vice President and Treasurer                  March 27, 1997
    Bruce D. Wardinski            (Principal Financial Officer)


/s/ DONALD D. OLINGER             Vice President and Corporate Controller       March 27, 1997
----------------------------      (Principle Accounting Officer
    Donald D. Olinger
</TABLE>










<PAGE>

                                                                   SCHEDULE III
                                                                   Page 1 of 2

                      HMH PROPERTIES, INC. AND SUBSIDIARIES
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
                                 January 3, 1997
                                  (in millions)


<TABLE>
<CAPTION>
                                                                                                                            
                                                                                          Gross Amount at
                                           Initial Costs                                  January 3, 1997
                                           -------------           Subsequent     ---------------------------
                                                    Building &       Costs              Building &          Accumulated      
       Description                  Debt   Land    Improvements   Capitalized   Land   Improvements   Total  Depreciation
       -----------                  ----   ----    ------------   -----------   ----   ------------   -----  ------------
<S>                                 <C>    <C>      <C>             <C>         <C>       <C>         <C>       <C>    

Full-service Hotels:
  Marriott World Trade Center
     New York, NY . . . . . . . .   $ 75   $ --     $ 135           $   1       $ --      $  136      $  136   $  (3) 
  Newport Beach Marriott Hotel
     Newport Beach, CA. . . . . .      4     11        13              39         11          52          63     (21) 
  Ritz-Carlton Atlanta Downtown
     Atlanta, GA. . . . . . . . .     --     13        41              --         13          41          54      (1) 
  Salt Lake City Marriott
     Salt Lake City, UT . . . . .     --     --        54              --         --          54          54      --  
  Other full-service properties,
     each less than 5% of total .     19     70       498             126         75         618         693    (120) 
                    -              -----   ----     -----           -----       ----      ------      ------   -----  
  TOTAL . . . . . . . . . . . . .  $  98   $ 94     $ 741           $ 166       $ 99      $  901      $1,000   $(145)
                                   =====   ====     =====           =====       ====      ======      ======   ===== 

<CAPTION>

                                       Date of
                                    Completion of       Date      Depreciation
        Description                 Construction      Acquired        Life
       -------------               --------------    ----------   ------------
<S>                                     <C>               <C>            <C>
Full-service Hotels:
  Marriott World Trade Center
     New York, NY. . . . . . . .        1981              1995           40
  Newport Beach Marriott Hotel
     Newport Beach, CA . . . . .        1975              N/A            40
Ritz-Carlton Atlanta Downtown
     Atlanta, GA . . . . . . . .        1984              1996           40
Salt Lake City Marriott
     Salt Lake City, UT. . . . .        1981              1996           40
Other full-service properties,
     each less than 5% of total.     Various           Various           40
</TABLE>

<PAGE>

                                                                    Schedule III
                                                                     Page 2 of 2
                     HMH PROPERTIES, INC. AND SUBSIDIARIES
                    REAL ESTATE AND ACCUMULATED DEPRECIATION

                                January 3, 1997
                                 (in millions)

Notes: 

(A)  The change in total cost of  properties  for the fiscal years ended January
     3, 1997, December 29, 1995 and December 30, 1994 is as follows:

<TABLE>
<CAPTION>
<S>                                                         <C>
         
         Balance at December 31, 1993 . . . . . . . . . . . $      1,466
             Additions:
                 Acquisitions . . . . . . . . . . . . . . .          104
                 Capital expenditures . . . . . . . . . . .           34
             Deductions:
                 Dispositions and other . . . . . . . . . .         (435)
                                                            ------------ 
         Balance at December 30, 1994 . . . . . . . . . . .        1,169
             Additions:
                 Acquisitions . . . . . . . . . . . . . . .          222
                 Capital expenditures . . . . . . . . . . .           13
             Deductions:
                 Dispositions and other . . . . . . . . . .         (361)
                                                            ------------ 
         Balance at December 29, 1995 . . . . . . . . . . .        1,043
             Additions:
                 Acquisitions . . . . . . . . . . . . . . .          220
                 Capital expenditures . . . . . . . . . . .           21
                 Transfers from construction in progress. .           28
             Deductions:
                 Dispositions and other . . . . . . . . . .         (312)
                                                            ------------ 
         Balance at January 3, 1997 . . . . . . . . . . . . $      1,000
                                                            ============
</TABLE>

(B)  The change in  accumulated  depreciation  and  amortization  for the fiscal
     years ended January 3, 1997,  December 29, 1995 and December 30, 1994 is as
     follows:
<TABLE>
<CAPTION>

<S>                                                        <C>          
         Balance at December 31, 1993 . . . . . . . . . .  $        146
             Depreciation and amortization. . . . . . . .            32
             Dispositions and other . . . . . . . . . . .           (27)
                                                           ------------ 
         Balance at December 30, 1994 . . . . . . . . . .           151
             Depreciation and amortization. . . . . . . .            27
             Dispositions and other . . . . . . . . . . .           (27)
                                                           ------------ 
         Balance at December 29, 1995 . . . . . . . . . .           151
             Depreciation and amortization. . . . . . . .            25
             Dispositions and other . . . . . . . . . . .           (31)
                                                           ------------ 
         Balance at January 3, 1997 . . . . . . . . . . .  $        145
                                                           ============
</TABLE>

(C)  The  aggregate  cost of  properties  for  Federal  income tax  purposes  is
     approximately $944 million at January 3, 1997.

(D)  The total cost of properties excludes construction-in-progress properties.