SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                    FOR THE FISCAL YEAR ENDED JANUARY 2, 1998

                                       OR

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

                          COMMISSION FILE NO. 33-95060


                            HOST INTERNATIONAL, INC.



              DELAWARE                             52-1242334
----------------------------------    ---------------------------------------
   (State or Other Jurisdiction       (I.R.S. Employer Identification Number)
 of Incorporation or Organization)



                              6600 ROCKLEDGE DRIVE
                            BETHESDA, MARYLAND 20817
                                 (301) 380-7000



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


                       DOCUMENT INCORPORATED BY REFERENCE
                Notice of 1998 Annual Meeting and Proxy Statement
                      of Host Marriott Services Corporation



<PAGE>





                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Host International, Inc. (the "Company"), a wholly-owned subsidiary of Host
Marriott  Services  Corporation  ("Host  Marriott  Services"),  is  the  leading
provider  of  food,  beverage  and  merchandise   concessions  at  airports,  on
tollroads,  and at other travel and  entertainment  venues,  with  facilities at
nearly every major commercial airport and tollroad in the United States.

       The  Company  operates   primarily  in  the  United  States  through  its
subsidiaries.  The Company  manages six  tollroad  contracts  for Host  Marriott
Tollroads,  Inc. ("Host Marriott Tollroads"),  a wholly-owned subsidiary of Host
Marriott  Services.  The  Company  also has  international  airport  concessions
operations in The Netherlands,  New Zealand,  Australia and Canada and will soon
commence operations in Malaysia.

     The  Company's   operations  are  grouped  into  three  business  segments,
Airports, Travel Plazas and Shopping Malls and Entertainment,  which represented
79.7%, 15.2% and 5.1%, respectively,  of total sales in 1997. See Note 14 to the
Consolidated  Financial Statements for financial information about the Company's
business segments.

       Six airport  concessions  contracts were  transferred to the Company from
Host Marriott  Corporation  ("Host Marriott") on September 9, 1995. The revenues
and operating costs and expenses of these six airport concessions  contracts are
included in the  operating  results  for 1996 and 1997,  but are  excluded  from
operating results for the period of 1995 prior to the transfer date on September
9, 1995. Prior to the transfer of these contracts, the Company managed these six
airport  concessions  contracts for Host Marriott and received a management  fee
for such  management  services.  The Company also receives fees for managing six
tollroad contracts for Host Marriott Tollroads.

BUSINESS STRATEGY

      The Company's  strategic objective is to generate higher revenues and cash
flows by increasing  revenues per enplaning  passenger  ("RPE") and revenues per
vehicle ("RPV"),  as well as maximizing real estate at its existing  concessions
facilities,  retaining existing contracts,  gaining incremental business through
securing new contracts in core markets and continuing to expand  profitably into
the  international  airport and domestic  shopping  mall food court  concessions
markets.  Specifically,  key elements of the Company's business strategy include
the following:

REVENUE GROWTH AT EXISTING LOCATIONS

     The Company continues to increase the average amount spent by each customer
by  upgrading  generic  services to a blend of local and  internationally  known
branded concepts,  improving customer service and offering  innovative  facility
designs.  The Company has the largest  portfolio of brands in the industry  with
more than 80  franchised,  licensed  or  internally  developed  brands  that are
familiar  to  frequent  travelers.  The Company  leads in brand  development  by
researching customer preferences,  targeting the latest trends in retail as well
as food and  beverage,  identifying  the best brands and then working to adopt a
wide range of them into the operating  environment.  In 1997,  the Company added
several new unique and premium niche brands to its  portfolio,  including  Jamba
Juice, Cold Stone Creamery,  Cheesecake Factory,  Ruby's Diner, California Pizza
Kitchen,  La Salsa,  Victoria's  Secret,  Lands  End and  Johnston  and  Murphy.
Revenues from branded concepts  increased by 13.5% during 1997 and accounted for
approximately  $400 million of the Company's  total annual  revenues,  excluding
management fees.

RETAINING EXISTING CONTRACTS

     The Company has  maintained its market  leadership  position by striving to
provide  outstanding  service to its customers and maintaining high standards in
maintenance and innovation at each of its concession  facilities.  The

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<PAGE>

Company's  strong  relationships  with airport and highway  authorities  and its
successful  concession  operations  have  enabled the Company to retain the vast
majority of its concession  contracts.  Since the beginning of 1995, the Company
has retained  74.8% of contracts  managed or operated  that were up for renewal,
weighted by contract size.

     During 1997, the Company renewed 10 key concessions contracts in 8 domestic
airports,  including Chicago O'Hare International Airport,  Detroit Metropolitan
Wayne  County  Airport,  Charlotte  Douglas  International  Airport,  San  Diego
International   Airport,   Sacramento   International   Airport,   Little   Rock
International  Airport,  Ontario  International  Airport  and  Maine's  Portland
International Airport.  These 10 contracts represent  approximately $150 million
in annual revenues and have a  weighted-average  remaining  contract life of ten
years.  The Company,  through a joint  venture,  is  negotiating to enter into a
long-term  lease  agreement for 70% of the food and beverage  concessions at the
Miami  International   Airport,  which  would  replace  the  current  management
agreement between the Company and Dade County.

     The Company's success in retaining contracts is affected by industry trends
to fracture  concessions  contracts and award them to multiple  operators and to
increase  participation  by woman-  and  minority-owned  businesses  in  airport
concessions  operations.  While several large  concessions  contracts  have been
fractured,  the  Company  has renewed  the  majority  of its  contracts  without
significant  fracturing.  The Company is committed to creating opportunities for
woman-  and  minority-owned  businesses  and  currently  participates  with such
businesses in the  substantial  majority of its airport  concessions  contracts.
While contract fracturing by airport authorities and increased  participation by
woman- and  minority-owned  businesses are expected in the future, the impact of
these industry  trends on future revenue growth in the airport  business line is
expected to be more than offset by new contract wins and operating initiatives.

SECURING NEW CONTRACTS IN CORE MARKETS

     The Company's core operating markets consist of domestic airport and travel
plaza concessions. The Company's dedicated contract development teams are widely
recognized as among the most  experienced  and innovative in the industry with a
demonstrated  track record of securing  new  contracts  at  attractive  economic
returns.  Securing  new  contracts  requires  considerable  management  time and
financial  resources.  These dedicated  business  development  teams provide the
Company with the expertise and depth to pursue multiple projects simultaneously.
Since 1995, 16 new contracts in the  Company's  core markets were secured,  with
estimated annual revenues of $135.9 million.

EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES

     The Company has identified the international  airport concessions  industry
and  domestic  shopping  mall food courts as its  primary  growth  markets.  The
Company's  goal is to approach  $2.0 billion in total  annual  revenues by 2001,
with 25% of the  revenues  coming  from  these two  growth  markets,  as well as
others.

     During 1997,  the Company  established  a  development  office in Europe to
evaluate and pursue airport concessions opportunities,  successfully opened new,
exciting facilities at the Montreal International Airport - Dorval, expanded its
presence  in  Vancouver  International  Airport,  renewed  its  contract  at the
Auckland  International  Airport in New Zealand and secured a 49%  interest in a
joint  venture for several food and beverage  concessions  facilities at the new
Kuala Lumpur International Airport in Malaysia.

     The shopping mall industry is in the process of consolidating, reconcepting
and renovating,  which creates a significant  opportunity  for the Company.  The
Company  believes that food court  opportunities  in large malls align well with
the operating  skills and experience of the  management  team. By providing mall
developers  with turnkey food courts with branded  concepts  operated by trained
and highly motivated employees, their leasing and property management activities
are simplified.  In addition,  the Company  believes that its operating  skills,
brand  portfolio  and brand  expertise,  compared  to the  skills of  individual
operators,  will  provide  developers  with  better  returns  and more  reliable
service.

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<PAGE>

     During 1997, the Company opened its second food court concessions  location
at the new Grapevine Mills Mall near  Dallas/Fort  Worth,  Texas,  and its third
food court  concessions  location at the Vista Ridge Mall in  Lewisville,  Texas
(just outside of the  Dallas/Fort  Worth area).  These shopping mall food courts
are expected to generate  approximately  $15 million in  annualized  revenues by
2001.

     The Company  also  announced  in 1997 a ten-year  agreement  with the Simon
Debartolo Group,  the nation's  largest shopping mall developer,  to operate and
manage the 6,100  square foot food court and one food kiosk at the  Independence
Center Mall near Kansas City,  Missouri,  beginning  in late 1998.  Independence
Center  is  the  Company's  second  contract  at  an  existing  mall  undergoing
renovation,  a key component of the Company's  expansion  strategy.  The Company
also announced during 1997 a third mega-mall food court agreement with The Mills
Corporation. This ten-year agreement is for the development and operation of the
food court at the new 1.4 million square foot Concord Mills Mall near Charlotte,
North Carolina.  These two contracts are expected to generate  approximately $18
million in annualized revenues by 2001.

AIRPORT CONCESSIONS

     The  Company  is the  leading  provider  of  airport  food,  beverage,  and
merchandise  concessions in the United States. The Company operates  concessions
at 63 airports in the U.S. and 7  internationally.  The  Company's  portfolio of
airport  contracts  is highly  diversified  in the U.S.  in terms of  geographic
location  and  airport  terminal  type and  size.  No  single  airport  contract
constitutes a material portion of the Company's total revenues.

     Revenues in the airport  business  segment  were $913.5  million and $911.5
million in 1997 and 1996, respectively. Excluding the 53rd week of operations in
1996,  revenues in the airport business segment increased by 2.0%. The Company's
airport concession  revenues in 1997 and 1996 were approximately 79.7% and 80.0%
of  the  Company's  total  revenues,  respectively.  Comparison  of  results  of
operations for 1995 are impacted by the transfer of the six airport  concessions
contracts  from Host Marriott to the company  during the fourth quarter of 1995.
Airport  concessions  revenues,  including  management  fees,  were 76.8% of the
Company's  total  revenues  in 1995.  The  concentration  of  revenues  from the
Company's  ten largest  airport  contracts  decreased to 29.4% of the  Company's
total revenues from 37.8% of the Company's  total revenues in 1996.  Since 1995,
airport revenues have grown at a compound annual growth rate of 9.5%,  including
management fees in 1995.

     All of the Company's airport  concessions are operated under contracts with
original  terms  typically  ranging from 5 to 15 years.  Contracts are generally
awarded  by  airport  authorities  through  a  competitive  process,  but  lease
extensions are often negotiated  before contracts expire.  The  weighted-average
life  remaining  on  the  Company's  airport  contracts  increased  in  1997  to
approximately  7.2 years from 6.7 years in 1996.  Rents paid under the contracts
averaged 16% of the Company's total airport revenues in both 1997 and 1996. Rent
payments are typically  determined as a percentage of sales subject to a minimum
annual guarantee which may be stated as either a fixed dollar amount per year, a
percentage  of the  prior  year's  rental  obligation,  or  calculated  on a per
enplaning  passenger basis. During 1997, rent payments for most of the Company's
airport contracts exceeded the minimum annual guarantee on those contracts.

OPERATING LOCATIONS

     The Company  operates or manages  concessions  facilities  at the following
airports:

     UNITED STATES:  Anchorage,  AK; Atlanta,  GA; Austin,  TX;  Baltimore,  MD;
Billings,  MT;  Birmingham,  AL; Boston,  MA;  Charleston,  SC;  Charlotte,  NC;
Chicago,  IL (O'Hare);  Cincinnati,  OH;  Cleveland,  OH;  Columbia,  SC; Corpus
Christi,  TX; Dallas,  TX (DFW);  Dayton,  OH;  Detroit,  MI; Grand Rapids,  MI;
Harlingen,  TX;  Hartford,  CT; Honolulu,  HI; Houston,  TX;  Indianapolis,  IN;
Jackson, MS; Jacksonville, FL; Kansas City, MO; Kauai, HI; Las Vegas, NV; Little
Rock, AR; Los Angeles, CA (LAX); Louisville, KY; Lubbock, TX; Maui, HI; Memphis,
TN; Miami, FL; Midland, TX; Milwaukee, WI; Minneapolis,  MN; New York, NY (JFK);
New York, NY (La Guardia);  Newark,  NJ; Omaha, NE; Ontario,  CA; Orange County,
CA; Orlando, FL; Phoenix,  AZ; Portland,  ME; Raleigh, NC; Reno, NV; Sacramento,
CA; Salt Lake City, UT; San Diego,  CA; San Francisco,  CA

                                       3


(SFO); San Jose, CA; Sarasota,  FL;  Savannah,  GA; Seattle,  WA; St. Louis, MO;
Tampa, FL; Toledo,  OH;  Washington,  D.C.  (Dulles);  Washington,  D.C. (Ronald
Reagan Washington National); and Wichita, KS.

     INTERNATIONAL:  Auckland, New Zealand; Cairns, Australia;  Christchurch,
New Zealand;  Melbourne,  Australia; Vancouver, Canada; Montreal, Canada; and
Schiphol, The Netherlands.

     The airport  facilities  operated by the Company  offer five major  product
lines which are described below.

BRANDED FOOD AND BEVERAGE CONCESSIONS

     The  Company  has  been a  pioneer  in  providing  airport  travelers  with
well-known food and beverage branded concessions such as Burger King,  Starbucks
Coffee, Pizza Hut, Sbarro,  Cinnabon,  Nathan's Famous,  Chili's, TCBY "Treats,"
Taco Bell, Dunkin Donuts and Popeyes.  These branded concepts  typically perform
better and  produce  higher  RPE as  compared  to  non-branded  concepts.  Brand
awareness,  customer  familiarity with product offerings,  and the perception of
superior value and  consistency  are all factors  contributing  to higher RPE in
branded  facilities.  As a licensee or franchisee  of these brands,  the Company
pays royalty fees ranging from 2% to 10% of total sales.  Royalties expense as a
percent of branded revenues averaged 6.3% in 1997.

     Branded food and beverage  concepts revenues in all of the Company's venues
have grown at a compound  annual growth rate of 18.2% over the last three years.
The Company's exposure to any one brand is limited given the diversity of brands
that are offered and given that no single branded concept accounts for more than
10% of total  revenues.  Total branded  revenues  increased  13.6% in 1997, when
compared with 1996, the majority of which related to the continued  expansion of
branded sales at airports and revenues from new shopping mall food courts, which
consist primarily of branded food and beverage.

     Branded food and beverage  revenues in airports have  increased  15.4% when
comparing 1997 and 1996.  This increase can be attributed to large,  new branded
concept developments at Cleveland, Los Angeles and Minneapolis airports. Airport
branded  product sales  increased to $249.9  million,  or 27.4% of total airport
revenues,  for 1997,  compared  with $216.5  million,  or 23.8% of total airport
revenues, for fiscal year 1996.

NON-BRANDED FOOD AND BEVERAGE CONCESSIONS

     These  concessions  are operated  under a generic name and serve  primarily
non-branded food and beverages in a restaurant or cafeteria-style  setting.  The
majority of the food sold in these  facilities  is prepared on the  premises and
includes fresh salads,  hot dogs,  hamburgers,  sandwiches  and desserts.  While
branded  items such as Pizza Hut Personal  Pan Pizza are sold  through  separate
vending  stands  within  these  facilities,   the  majority  of  the  sales  are
non-branded food and beverage  revenues.  Non-branded food and beverage revenues
generated  approximately  37.4% and 40.4% of total  Company  airport  concession
revenues  in 1997 and  1996,  respectively.  Revenues  of  non-branded  food and
beverage  products  were down $26.7  million,  or 7.3%,  to $341.3  million when
comparing  1997 and 1996,  reflecting  the  Company's  efforts  to  aggressively
transform  its  core  airport  markets  from  generic  offerings  to a blend  of
international and unique local branded concepts.

ADULT BEVERAGES

     The  Company  serves  alcoholic  and  nonalcoholic  drinks,  together  with
selected food items, through lounges (generally operated under the Premium Stock
Airpub name),  restaurants,  cafeterias,  and specialty microbrewery pubs. These
facilities are designed to provide a comfortable and convenient  environment for
passengers  waiting for their  flights.  During 1997,  the Company  continued to
introduce  its  increasingly  popular  microbrewery  pubs which  include,  among
others,  Samuel  Adams Brew House and  Shipyard  Brew Port.  These bar and grill
concepts bring local flavors to the Company's  airport  contracts and complement
the  Company's  proprietary  Premium  Stock  Airpub  lounges.   Adult  beverages
generated  approximately  17.2% and 17.7% of total Company  airport  concessions
sales in 1997 and 1996, respectively.  Adult beverage sales at airports in which
the Company  operates  were down  slightly by $3.8 million in 1997 when compared
with 1996.

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<PAGE>

MERCHANDISE OUTLETS

     The Company  operates  merchandise  outlets at 27 airports.  The  Company's
merchandise shops sell souvenirs, gifts, snack items, newspapers,  magazines and
other convenience items. The Company utilizes a team of merchandise  specialists
who, based on extensive  research,  create  exciting visual  displays,  bring in
custom-designed  merchandise  that  reflects  the  regional  flavor and  develop
marketing  programs which capture  customer  interest.  In an effort to maximize
RPE, the Company  continues to introduce  specialty  retail concepts such as Tie
Rack,  Victoria's  Secret,  Lands End,  The Body Shop and  Johnston  and Murphy.
Merchandise  outlets  generated  approximately  13.7% of total  Company  airport
concession  sales in both 1997 and 1996.  Merchandise  sales  increased  by $0.8
million in 1997 to $125.3 million when compared with 1996.

DUTY-FREE SHOPS

     Duty-free shops sell items such as liquor, tobacco, perfume, leather goods,
cosmetics and gifts on a tax- and duty-free  basis to  international  travelers.
The Company's largest airport duty-free  operations are located at Detroit Metro
International  Airport,   Sea-Tac  International  Airport,   Hartsfield  Atlanta
International Airport and Minneapolis/St.  Paul International Airport. Duty-free
shops generated  approximately 4.4% and 4.5% of total Company airport concession
revenues in 1997 and 1996,  respectively.  Duty free  merchandise  sales totaled
$39.9 million during 1997, a decrease of 3.9% compared to 1996, primarily due to
the elimination of a weekly flight to Japan at an airport location.

OUTLOOK

     In March of 1998, the Federal Aviation  Administration  ("FAA")  forecasted
annual passenger  enplanement  growth of U.S.  carriers of 3.7% through the year
2009. The U.S.  airport  concession  industry is expected to continue to benefit
from strong industry  fundamentals  and the expansion of  "no-frills,"  low-fare
airlines.  In addition,  to sustain low-fare  positioning and improve  financial
performance,  most airlines have lowered their costs by reducing or  eliminating
inflight  catering  services.  The Company  continues to benefit from this trend
with an increased opportunity to serve passengers whose needs are not met in the
air as a result of the reduction in airline catering services.

     The aggressive  transformation  of the Company's core airport  markets from
generic  offerings to a blend of international and unique local branded concepts
should attract more  customers.  Currently,  branded food and beverage  revenues
make up only 42.3% of the Company's total food and beverage  revenues in airport
concessions  (27.4% of total airport  concessions  revenues),  demonstrating the
considerable  potential  for growth.  Further,  the Company has  redesigned  and
substantially  improved its business  development  processes and is committed to
refining its core operating processes to improve efficiencies,  reduce costs and
increase revenues.

     Initiatives to improve customer  satisfaction and increase revenues include
the rollout of the Store Manager concept  intended to move management  closer to
the customer;  the creation of the StoreCard reporting system, where emphasis is
placed on tracking and measuring store level performance; and the implementation
of Labor Pro  software,  which  provides  managers  with a new  automated  labor
scheduling  report to manage service  standards and control  labor.  The Company
also renegotiated its distributor  agreements for books and magazines in 1996 in
the Company's  airports and travel plazas to improve  in-stock  availability and
cost  margins.  The Company also  expanded a program  under which brand  experts
("Brand  Champions")  are assigned to certain of the Company's  largest  selling
branded  concepts  to  promote  operational   excellence  and  create  operating
efficiencies  across all of the Company's  locations of a particular  brand.  To
date, the Company has assigned Brand Champions to the Burger King,  Sbarro,  Roy
Rogers  and  Starbucks  brands and the  Company's  internally  developed  brand,
Premium  Stock  Airpub.  Revenues  from these  branded  and  specialty  concepts
accounted for over 30% of total Company revenues in 1997.  Further,  the Company
expects  continued  success  in 1998 and  beyond  in  making  its  core  airport
concessions  contracts  more  profitable  through  new  concepts  and  operating
excellence initiatives.

     Over the next three years, 26 airport  concessions  contracts  representing
approximately $163.7 million, or 13.7% of annualized total Company revenues will
come up for renewal.  The Company  expects  continued  success

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<PAGE>

in retaining  such contracts and is committed to striving for the highest levels
of product quality and improved customer satisfaction.

TRAVEL PLAZA CONCESSIONS

     The Travel Plazas segment consists of 92 travel plazas spread throughout 13
tollroads,  which is the  largest  network  of  travel  plazas  in the U.S.  The
Company's  travel  plazas  are  located  in  the  mid-Atlantic,  midwestern  and
northeastern  states,  as well as in Florida.  The  Company  operates or manages
these travel plazas and it currently  holds the leading market  position on each
of the top ten tollroads on which it operates or manages.  The  relatively  high
level of traffic on tollroads in the mid-Atlantic  and northeastern  states make
those  roads  the  highest  revenue-producing   tollroads.  The  travel  plazas,
including  management fees,  consistently  produce a significant  portion of the
Company's overall cash flow,  contributing  approximately 20% of total operating
cash flow during 1997.

     Revenues in the travel plaza business segment,  including  management fees,
were  $174.2  million  and $174.3  million in 1997 and 1996,  respectively.  The
Company's  travel  plaza  concession  revenues  in  1997,  1996  and  1995  were
approximately 15.2%, 15.3% and 17.8%, of the Company's total revenues (including
management fees), respectively.  Excluding the extra week of operations in 1996,
travel plaza  revenues  increased  approximately  1.7%.  The five largest travel
plaza  contracts  accounted for  approximately  12.9% and 13.1% of the Company's
total revenues (including  management fees) in 1997 and 1996,  respectively.  No
single travel plaza  contract  constitutes  a material  portion of the Company's
total revenues.

     Travel  plazas  are  operated  or  managed  under  contracts  with  highway
authorities that are typically 10 to 15 years in duration. Contracts are awarded
through a  competitive  process,  but lease  extensions  often can be negotiated
before contracts expire.  The  weighted-average  remaining life of the Company's
managed and operated travel plaza contracts is approximately 7.0 years.

     The Company offers branded concepts in a clean,  safe environment which are
designed to appeal to travelers who desire  high-quality  meals without  exiting
the tollroad.  Travel plaza concessions are dominated by branded concepts, which
comprised  78.1% of travel plaza  concessions  revenues in 1997 (85.0% of travel
plaza food and beverage revenues).  The core business of most travel plazas is a
mall-style food court offering branded  restaurants,  including Burger King, Roy
Rogers,  Bob's Big Boy, Sbarro,  TCBY "Treats",  Miami Subs Grill, Dunkin Donuts
and Popeye's.  Merchandise  gift shops  selling  souvenirs,  postcards,  snacks,
newspapers and magazines  frequently  are located  adjacent to these food courts
and accounted for  approximately  $13.0 million in sales in 1997.  Travel plazas
generally  include  automated  teller  machines,  vending  machines and business
centers and all of the facilities are accessible to the disabled.

OPERATING LOCATIONS

     The Company operates or manages travel plazas on the following tollroads:

     Atlantic City Expressway;  Delaware Turnpike;  Florida's  Turnpike;  Garden
State  Parkway;   Illinois   Tollway;   Maine   Turnpike;   Maryland   Turnpike;
Massachusetts  Turnpike;  New Jersey Turnpike;  New York Thruway; Ohio Turnpike;
Pennsylvania Turnpike; and West Virginia Parkways.

OUTLOOK

     The Company has projected, based on historical experience,  that the impact
on  travel  plaza  revenue  growth   attributed  to  tollroad   traffic  in  the
Northeastern  corridor of the U.S. will be  approximately  1% to 2% on an annual
basis.  Moderate  pricing and the  introduction of new branded food and beverage
concepts, to replace mature brands, are expected to further increase revenues in
1998 and beyond.  Management's continued focus on operational excellence and the
addition of  development  resources  to evaluate  growth  strategies,  including
potential   acquisitions,   are  expected  to  further   enhance  the  operating
performance of the Travel Plaza business line.

                                       6


<PAGE>

     Over  the  next  three  years,  four  travel  plaza  concessions  contracts
representing  approximately  $38.8 million, or 3.3%, of annualized total Company
revenues, will come up for renewal (including management fees related to the six
managed  travel  plazas).  Over the next three years,  one managed  travel plaza
contract  will come up for  renewal.  Management  fee  income  relating  to this
managed  contract  totaled $1.4 million in 1997. The Company  expects  continued
success in retaining such contracts.

SHOPPING MALLS AND ENTERTAINMENT CONCESSIONS

     The Shopping Malls and  Entertainment  segment is comprised of 21 locations
in shopping malls, tourist attractions, stadiums and arenas in which the Company
operates food courts,  restaurants,  concession  stands,  gift shops and related
facilities.  The  facilities  are typically a part of a larger  structure at the
venue  site.  The  Company's   portfolio  of  shopping  mall  and  entertainment
concession contracts is diversified in the U.S. in terms of geographic location.

     Shopping  mall and  entertainment  concessions  generated  $58.6 million in
revenues in 1997,  approximately  5.1% of total  Company  revenues and generated
$53.9 million in revenues in 1996, approximately 4.7% of total Company revenues.
Merchandise  sales,  including  souvenirs  sold at  sporting  events and tourist
attractions,  comprise  50.2% of the Company's  shopping mall and  entertainment
concession  revenues  compared  with  56.2% in  1996.  Total  food and  beverage
revenues  accounted for 49.8% of the business line's revenues in 1997,  compared
with 43.6% in 1996. No single  contract  constitutes  a material  portion of the
Company's total revenues.

     Shopping mall food court  concessions  contracts usually have initial terms
of ten or more years and entertainment concession contracts usually have initial
terms of five or more years.  The Company  leases its premises at a fee which is
negotiated at the time the concession contract is awarded.  The weighted average
length of time  remaining on the Company's 21 shopping  malls and  entertainment
concession contracts was approximately 7.4 years, up from 4.1 years in 1996, due
to the addition of new mall locations with longer average contract lives.

OPERATING LOCATIONS

     The Company operates or manages  concessions at the following shopping mall
and entertainment locations:

     Grapevine Mills Mall,  Ontario Mills Mall, Vista Ridge Mall, Dallas Reunion
Arena,  Houston Space Center,  Empire State  Building  Observatory,  New Orleans
Aquarium,  Atlantic City (5 sites),  Las Vegas (4 sites),  Memphis Peabody Hotel
Gift Shop, Orlando Peabody Hotel Gift Shop, Polynesian Cultural Center,  Raleigh
Crabtree Hotel Gift Shop, Reno-Souvenir & Gift Emporium,  Orlando Arena, and Bob
Carr Performing Arts Center.

OUTLOOK

     The Company is actively pursuing new food court contracts both in new malls
and malls  undergoing  renovation.  The Company's food court  concessions at the
Ontario  Mills Mall in  California,  the  Grapevine  Mills Mall in Texas and the
Vista Ridge Mall in Texas have  provided a solid  foundation  for the Company to
build on in the  future.  The Company is  expected  to begin  operations  at the
Independence  Center  Mall in  Kansas  City,  Missouri,  in late 1998 and at the
Concord Mills Mall near Charlotte, North Carolina, in mid-1999.

     The  Company  will be  accelerating  its  shopping  mall food court  market
efforts in 1998 and in future years. The Company is currently working on over 20
potential  shopping mall food court projects with eight leading mall  developers
and has reallocated development resources to better focus on this new venue.

     Over the next three years, no mall contracts  expire,  and 13 entertainment
concessions  contracts  representing  approximately  $27.8  million,  or 2.3% of
annualized total Company revenues, will come up for renewal.

                                       7

<PAGE>

THE DISTRIBUTION

     On December 29, 1995 (the "Distribution  Date"), Host Marriott distributed,
through a special  dividend to holders of Host  Marriott's  common  stock,  31.9
million shares of common stock of Host Marriott Services (the Company's parent),
resulting  in the  division  of Host  Marriott's  operations  into two  separate
companies.  The  shares  were  distributed  on the  basis  of one  share of Host
Marriott  Services'  common stock for every five shares of Host Marriott  stock.
Subsequent to the Distribution Date, Host Marriott continues to conduct its real
estate related businesses and Host Marriott Services operates the food, beverage
and merchandise concession businesses in travel, entertainment and other venues.

RELATIONSHIP WITH HOST MARRIOTT

     For purposes of governing certain of the ongoing relationships between Host
Marriott Services and Host Marriott after the Distribution and to provide for an
orderly  transition,  Host  Marriott  Services  and Host  Marriott  entered into
various  agreements  including a Distribution  Agreement,  an Employee  Benefits
Allocation  Agreement,  a Tax  Sharing  Agreement  and a  Transitional  Services
Agreement.  The  agreements  establish  certain  obligations  for Host  Marriott
Services to issue shares upon  exercise of Host  Marriott  warrants and to issue
shares or pay cash to Host  Marriott  upon  exercise  of stock  options and upon
release of  deferred  stock  awards  held by certain  former  employees  of Host
Marriott.

RELATIONSHIP WITH MARRIOTT INTERNATIONAL

     On October 8, 1993 (the "MI Distribution  Date"), Host Marriott distributed
through a special  dividend to holders of Host Marriott common stock, all of the
outstanding shares of its wholly owned subsidiary Marriott  International,  Inc.
("Marriott  International").  In  connection  with  the  Marriott  International
distribution,  Host  Marriott  and Marriott  International  entered into various
management and transitional service agreements.  In 1995, Host Marriott Services
(then  operating as a division of Host Marriott)  purchased food and supplies of
$63.8  million  from  affiliates  of  Marriott   International  under  one  such
agreement. In addition, under various service agreements,  Host Marriott paid to
Marriott  International  $11.9 million in 1995, which  represented the Company's
allocated portion of these expenses.

     In  connection  with the  spin-off  of Host  Marriott  Services  from  Host
Marriott, Host Marriott Services and Marriott International entered into several
transitional agreements, each of which is described below:

     CONTINUING SERVICES  AGREEMENT.  This agreement provides that Host Marriott
Services will receive (i) various  corporate  services such as computer  systems
support and telecommunication  services; (ii) various procurement services, such
as developing  product  specifications,  selecting  vendors and distributors for
proprietary products and purchasing certain identified  products;  (iii) various
product supply and distribution  services;  (iv) casualty claims  administration
services  solely  for claims  which  arose on or before  October  8,  1993;  (v)
employee benefit  administration  services and (vi) a sublease for Host Marriott
Services'  headquarters  office  space.  The office  sublease was  terminated in
February  1997  when  Host  Marriott  Services  relocated  to its new  corporate
headquarters.

     As a part of the Continuing Services  Agreement,  the Company paid Marriott
International $77.3 million and $76.9 million for purchases of food and supplies
and paid $9.8 million and $10.7 million for corporate  support  services  during
1997 and 1996, respectively.

     NONCOMPETITION  AGREEMENT.  In connection  with the MI  Distribution,  Host
Marriott and Marriott  International  entered  into a  Noncompetition  Agreement
dated October 8, 1993 (the  "Noncompetition  Agreement")  pursuant to which Host
Marriott and its subsidiaries, including those comprising its food, beverage and
merchandise  concession  businesses (the "Operating Group"), are prohibited from
entering  into, or acquiring an ownership  interest in any entity that operates,
any business that (i) competes with the food and facilities  management business
as currently  conducted  by Marriott  International's  wholly-owned  subsidiary,
Marriott Management Services,  Inc. ("MMS," with such business being referred to
as the  "MMS  Business"),  provided  that  such  restrictions  do not  apply  to
businesses  that  constitute  part of the  business  comprising  the  then  Host
Marriott's

                                       8

<PAGE>

Operating Group or (ii) competes with the hotel management  business
as conducted by Marriott International,  subject to certain exceptions. Marriott
International  is  prohibited  from  entering  into,  or  acquiring an ownership
interest  in any entity that  operates,  any  business  that  competes  with the
businesses  comprising the then Host Marriott's Operating Group,  providing that
such  restrictions  do not apply to businesses that constitute a part of the MMS
Business. The Noncompetition Agreement provides that the parties (including Host
Marriott  Services) and any  successor  thereto will continue to be bound by the
terms of the agreement until October 8, 2000.

     At the time of the  preparation of this Form 10-K,  Marriott  International
has announced its intention to engage in a transaction  which would separate its
institutional food service and lodging and related businesses.  This transaction
does not involve the Company and will not negatively impact the Company.

     LICENSE  AGREEMENT.  Pursuant to the terms of a License  Agreement  between
Host  Marriott and Marriott  International  dated  October 8, 1993 (the "License
Agreement"),  the right,  title and  interest in certain  trademarks,  including
"Marriott,"  were conveyed to Marriott  International  and Host Marriott and its
subsidiaries,  including those comprising the Operating Group. As a result, Host
Marriott  Services was granted a license to use such trademarks in its corporate
name and in connection  with the  Operating  Group  business  subject to certain
restrictions  set  forth  in the  License  Agreement.  In  connection  with  the
Distribution,  Host Marriott Services and Marriott  International entered into a
new  License  Agreement  pursuant  to  which  Host  Marriott  Services  and  its
subsidiaries, retained the license to use such trademarks subject to the License
Agreement.

COMPETITION

     The Company  competes with certain  national and several regional and local
companies to obtain the rights from airport,  highway and municipal authorities,
and  shopping  mall  developers  to  operate  food,   beverage  and  merchandise
concessions. The U.S. airport food and beverage concession market is principally
serviced  by  several  companies,   including  the  Company,  CA  One  Services,
Concessions   International  and  McDonald's.   The  U.S.  airport   merchandise
concession industry is more fragmented.  The major competitors include: Paradies
Shops, W.H. Smith, Duty Free  International,  DFS Group Limited and Hudson News.
The U.S.  tollroad  market  principally is served by the Company and McDonald's,
with  Hardee's  holding a minor  share of the  segment.  The  shopping  mall and
entertainment  concessions segments are fragmented and principally  dominated by
individual operators. However, there are a number of large potential competitors
including:  ARAMARK Corporation,  Ogden Food Services,  Service America,  Volume
Services, McDonald's, Delaware North and CA One Services.

     To compete  effectively,  the  Company  regularly  updates  and refines its
product  offerings  (including the addition of branded products) and facilities.
Through these efforts,  the Company  strives to generate higher sales per square
foot of concession space and thereby  increase returns to the Company's  clients
(airport and highway  authorities),  as well as to the Company.  Attaining these
financial  results,  as well as striving to achieve  higher  customer and client
satisfaction levels, enhances the Company's ability to renew contracts or obtain
new contracts.

GOVERNMENT REGULATION

     The Company is subject to various  governmental  regulations  incidental to
its  business,   such  as  environmental,   employment  and  health  and  safety
regulations.  The Company maintains  internal controls and procedures to monitor
and comply with such regulations.  The cost of the Company's compliance programs
is not material.

EMPLOYEES

     At January 2, 1998,  the Company  directly  employed  approximately  24,000
employees.  Approximately  6,115 of these  employees  are covered by  collective
bargaining  agreements  which are  subject  to review  and  renewal on a regular
basis.  The Company has good relations  with its unions and has not  experienced
any material business interruption as a result of labor disputes.

                                       9

<PAGE>

ITEM 2.  PROPERTIES

     In addition  to the  operating  properties  discussed  in Item 1.  Business
above,  Host  Marriott  Services  leased  45,288  square feet of office space in
Bethesda,   Maryland,   which  served  as  Host  Marriott  Services'   corporate
headquarters  as of the end of fiscal year 1996. In February  1997,  the Company
relocated its corporate headquarters to 6600 Rockledge Drive, Bethesda, Maryland
20817. The new office space lease is for 75,780 square feet of space and expires
on  December  31,  2003.  The  Company  has the right to renew the lease for one
five-year term.

     The  Company's  telephone  number  is  (301)  380-7000.  Business  results,
financial  reports and press  releases  can be obtained  via fax,  mail or audio
playback by dialing  1-888-380-HOST.  Such  information  can also be accessed on
Host Marriott Services' Web Site at www.hmscorp.com on the Internet's World Wide
Web.

ITEM 3. LEGAL PROCEEDINGS

LITIGATION

     The  Company  and its  subsidiaries  are  from  time to  time  involved  in
litigation  matters  incidental  to their  businesses.  Such  litigation  is not
considered by management to be significant  and its resolution  would not have a
material  adverse effect on the financial  condition or results of operations of
the Company or its subsidiaries.

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

     None.


                                       10


<PAGE>
                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'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 summary selected  historical  financial data
derived from the Company's audited  consolidated  financial statements as of and
for the five most recent fiscal years ended January 2, 1998. The  information in
the table  should  be read in  conjunction  with  "Management's  Discussion  and
Analysis of Financial  Condition and Results of Operations" and the consolidated
financial  statements of the Company included  elsewhere  herein.  The Company's
fiscal year ends on the Friday closest to December 31.

<TABLE>
<CAPTION>
------------------------------------------------------------ --------- ----------- ---------- --------- -----------
                                                             1997(1)    1996(2)     1995(3)   1994(4)    1993(5)
------------------------------------------------------------ --------- ----------- ---------- --------- -----------
                                                                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S>                                                            <C>        <C>         <C>        <C>        <C>

STATEMENT OF OPERATIONS DATA:
    Total revenues                                            $1,146      $1,140       $993      $944        $871

    Operating profit                                              66          60          2        22          28
    Income (loss) before extraordinary item
       and cumulative effect of change in
       accounting principle                                       20          13        (42)      (14)         (7)
    Net income (loss)                                             20          13        (51)      (14)        (11)

BALANCE SHEET DATA:
    Total assets                                                 500         538        473       523         546
    Total long-term debt                                         407         408        409       393         394
    Shareholder's deficit                                       (111)       (130)      (150)      (47)         (5)

OTHER OPERATING DATA:
    Cash flows provided by operations                             46          99         46        57          61
    Cash flows used in investing activities                      (75)        (50)       (43)      (32)        (43)
    Cash flows (used in) provided by financing activities         (4)         (1)        18       (29)         (5)
    EBITDA (6)                                                   123         112         95        85          94
    Cash interest expense                                         39          39         40        41          40
------------------------------------------------------------ --------- ----------- ---------- --------- -----------
<FN>
(1)    The  results  for 1997  included  $4.2  million of  write-downs  of
       long-lived  assets and $3.9  million of restructuring charge reversals
       related to the 1995 restructuring plan.
(2)    Fiscal year 1996 includes 53 weeks.  All other years include 52 weeks.
(3)    The results for 1995 included  $22.0 million of write-downs of long-lived
       assets  (reflecting the adoption of a new accounting  standard) and $14.5
       million of restructuring charges related to initiatives to improve future
       operating results.
(4)    The results for 1994 included a $12.0 million  charge for the transfer of
       an unprofitable  stadium concessions contract to a third party, which was
       partially offset by a $4.4 million  reduction in self insurance  reserves
       for general liability and workers' compensation claims.
(5)    Statement of Financial  Accounting  Standards (SFAS) No. 109, "Accounting
       for Income  Taxes,"  was  adopted  in 1993  resulting  in a $4.8  million
       noncash charge to reflect its adoption. The Company also recorded in 1993
       a restructuring charge of $7.4 million.
(6)    EBITDA  consists of the sum of consolidated  net income (loss),  interest
       expense,  income taxes,  depreciation  and amortization and certain other
       noncash items (principally  restructuring reserves and asset write-downs,
       including   subsequent  payments  against  such  previously   established
       reserves).  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 in certain debt covenant  calculations  required
       under the Senior Notes Indenture.  The Company  considers EBITDA to be an
       indicative measure of the Company's operating performance.  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 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.  The calculation of EBITDA for the Company may not
       be  comparable to the same  calculation  by other  companies  because the
       definition of EBITDA varies throughout the industry.
</FN>
</TABLE>

                                       11

<PAGE>

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

GENERAL

     On December 29, 1995, Host Marriott  Services  Corporation  ("Host Marriott
Services")  became a publicly  traded company and the successor to Host Marriott
Corporation's  ("Host  Marriott")  food,  beverage  and  merchandise  concession
businesses in travel and entertainment venues. On that date, 31.9 million shares
of common stock of Host  Marriott  Services were  distributed  to the holders of
Host Marriott's  common stock in a special  dividend (the  "Distribution"  - see
Note 2). Host International,  Inc. (the "Company") is the principal wholly-owned
subsidiary of Host Marriott Services.  The 1995 financial  information discussed
on the following pages and included in the accompanying  consolidated  financial
statements  is  presented  as if the Company was formed as a separate  entity of
Host Marriott. Host Marriott's historical basis in the assets and liabilities of
the Company has been carried over.

     Comparisons of results of operations  for 1997,  1996 and 1995 are impacted
by the  transfer of six airport  concessions  contracts to the Company from Host
Marriott during the fourth quarter of 1995. The revenues and operating costs and
expenses  of  these  six  airport  concessions  contracts  are  included  in the
operating results for 1997 and 1996, but are excluded from operating results for
the period of 1995 prior to the transfer on  September  9, 1995.  The amounts of
revenues,  operating  costs  and  expenses,  and  operating  profit of these six
airport  concessions  contracts that were excluded from the operating results in
1995 were $40.3 million, $34.2 million, and $6.1 million, respectively. Prior to
the  transfer  of  these  contracts,  the  Company  managed  these  six  airport
concessions  contracts for Host  Marriott and received a management  fee of $4.3
million for such management services, which is included in 1995 revenues.

     The Company also receives fees for managing six tollroad contracts for Host
Marriott Tollroads,  Inc. ("Host Marriott  Tollroads"),  which is a wholly-owned
subsidiary  of Host Marriott  Services.  Base  management  fees related to these
travel plaza contracts are based on a percentage of total revenues  generated by
each of the travel plazas, with additional  incentive management fees determined
as a percentage of available  cash flow.  Management  fees  received  related to
these travel plaza concession  facilities  totaled $13.9 million,  $13.9 million
and $10.9 million in 1997, 1996 and 1995, respectively.

     Over 80% of the Company's annual revenues,  excluding  management fees, are
generated from operating food and beverage  concessions with the remaining being
generated from news, gift and specialty retail  concessions.  The Company's core
operations,  domestic airport and travel plaza  concessions,  accounted for over
90% of total 1997 revenues. The Company's diversified branded concept portfolio,
which  consists of over 80  internationally  known  brands,  regional  specialty
concepts and  proprietary  concepts,  is a unique  competitive  advantage in the
marketplace.

     The  Company's   revenues  and  operating   profit,   before   general  and
administrative  expenses  and  unusual  items,  have grown at a compound  annual
growth rate ("CAGR") of 7.4% and 20.1%, respectively,  over the past three years
(including  management  fees).  Revenue  growth  has been  driven  primarily  by
increased customer traffic in airports and on tollroads, improvements in product
offerings  through the introduction of branded concepts,  moderate  increases in
menu prices and success in winning new business and retaining  contracts in core
markets.  The growth in operating profit was primarily due to revenue growth and
improved  operating profit margins from the  implementation of several operating
initiatives.

     The Company's airport  concessions  contributed  approximately 79.7% of the
Company's total revenues in fiscal year 1997.  Since 1995,  airport revenues and
operating profit, before general and administrative  expenses and unusual items,
have grown at a CAGR of 9.5% and 21.3%, respectively, including management fees.

     The Company's travel plazas concessions contributed  approximately 15.2% of
the Company's  total revenues in fiscal year 1997 (including  management  fees).
Since 1995,  travel plazas  revenues  decreased by 1.5% annually

                                       12

<PAGE>

while operating profit,  before general and administrative  expenses and unusual
items, has grown at a CAGR of 7.4% (including management fees).

     The  remaining  5.1%  of the  Company's  fiscal  year  1997  revenues  were
generated from the operation of restaurants,  gift shops and related  facilities
at  shopping  mall food  courts and at  various  tourist  attractions,  casinos,
stadiums and arenas.  Shopping malls and entertainment  revenues have grown at a
CAGR of 4.1% and operating profit,  before general and  administrative  expenses
and unusual  items,  grew fivefold  since 1995.  The operating  profit  increase
resulted  primarily  from the Company's  continued  expansion into shopping mall
food  court  concessions  and the exit  from  several  unprofitable  off-airport
contracts during 1996.

     Certain minor  reclassifications  were made to the 1996 and 1995 financial
information to conform to the 1997 presentation.


1997 COMPARED TO 1996

REVENUES

     Revenues  for the year ended  January 2, 1998,  which  included 52 weeks of
operations, increased by $6.6 million to $1,146.3 million compared with revenues
of $1,139.7  million for the year ended January 3, 1997, which included 53 weeks
of operations.

AIRPORTS

     Airport  concession  revenues  were up $2.0  million to $913.5  million for
fiscal year 1997.  Domestic airport  concession  revenues  decreased by 0.6%, to
$849.9  million for 1997 and  international  airport  revenues  were up 13.0% to
$63.6 million in 1997.  The opening of the Company's  operations at the Montreal
International Airport - Dorval in Canada during 1997 contributed to the increase
in international  airport  revenues,  which was partially offset by the negative
impact of exchange rate fluctuations in 1997.

     Comparable  domestic  airport  contracts  exclude  the  negative  impact of
several  contracts  with  significant  changes in scope of operation,  contracts
undergoing significant construction of new facilities and the positive impact of
new contracts.  Revenue growth at comparable  domestic airport locations,  which
comprise over 90% of total airport  revenues,  grew a solid 5.9% and reflects an
estimated 3.7% growth in passenger  enplanements  and 2.2% growth in revenue per
enplaned passenger  ("RPE"),  excluding an additional week of operations in 1996
(see "Accounting Period").  The growth in RPE can be attributed to the continued
addition of branded  locations,  selective moderate increases in menu prices and
various real estate  maximization  efforts.  Airport revenue growth was achieved
despite construction  projects in several comparable domestic airport locations,
including  Cleveland,  Los  Angeles  and  Minneapolis,   where  the  Company  is
introducing  branded  concepts.  Revenues also increased  despite the benefit of
severe winter weather in 1996, which caused air traffic delays,  contributing to
the Company's airport sales in that year.

TRAVEL PLAZAS

     Travel plaza concession revenues for 1997 were $160.3 million, level with a
year ago. In  addition,  travel plaza  management  fee income for 1997 was $13.9
million compared with $13.9 million for 1996.  Traffic growth and moderate price
increases  were offset by one less week of operations  during 1997, as well as a
slight  decrease in revenues per vehicle.  Travel plazas,  including  management
fees  received,  consistently  produce a  significant  portion of the  Company's
overall cash flow,  contributing  approximately 20% of total operating cash flow
in 1997.

SHOPPING MALLS AND ENTERTAINMENT

     Shopping mall and entertainment  concession revenues,  primarily consisting
of  merchandise,  food and  beverage  sales at food  courts in  shopping  malls,
stadiums, arenas, and other tourist attractions, increased 8.7% to $58.6 million
in 1997.  This  increase in  revenues  was a result of the  Company's  continued
expansion into shopping mall food court concessions. The outstanding performance
of the shopping mall facilities was partially

                                       13

<PAGE>

offset  by the  expiration  of a food  and  beverage  stadium  contract  and the
Company's planned exit from several  off-airport  merchandise  contracts in late
1996.

     During 1997, the Company opened its second food court concessions  location
at the Grapevine  Mills Mall near  Dallas/Fort  Worth,  and its third food court
concessions location at the Vista Ridge Mall in Lewisville,  Texas (just outside
of the Dallas/Fort Worth area).

     The Company announced in 1997 a ten-year agreement with the Simon-Debartolo
Group, the nation's  largest shopping mall developer,  to operate and manage the
6,100 square foot food court and one food kiosk at the Independence  Center Mall
near Kansas City,  Missouri,  beginning in late 1998.  Independence Center is an
existing mall undergoing renovation,  a key component of the Company's expansion
strategy.  In  addition,  the  Company  announced a ten-year  agreement  for the
development  and operation of the food court at the new 1.4 million  square foot
Concord Mills Mall, opening in mid-1999, near Charlotte, North Carolina.

OPERATING COSTS AND EXPENSES

     The  Company's  total  operating  costs and expenses  decreased to 94.2% of
total  revenues  compared  with 94.7% of total  revenues in 1996.  The  improved
operating  profit margin of 5.8% in 1997 compared with 5.3% in 1996 reflects the
implementation of several operating  initiatives,  resulting in a 70 basis point
improvement in the cost of sales margin.

     Cost of sales  decreased  $6.3 million,  or 1.9%,  below last year.  During
1997, the Company  benefited from its customer service and operating  excellence
initiatives. These initiatives include the rollout of the Store Manager concept;
the creation of the StoreCard  reporting system and the  implementation of Labor
Pro software;  the  renegotiation  of all  distributor  agreements for books and
magazines in 1996 in the Company's  airports and travel  plazas;  as well as the
Brand Champion Program. To date, the Company has assigned Brand Champions to the
Burger  King,  Sbarro,  Roy  Rogers  and  Starbucks  brands  and  the  Company's
internally developed brand, Premium Stock Airpub.

     Payroll and benefits  totaled  $338.4  million during 1997, a 1.0% increase
over 1996.  Payroll and benefits as a  percentage  of total  revenues  increased
slightly to 29.5% as a result of initiatives  put in place to increase  revenues
and decrease other cost areas.

     Rent expense  totaled  $180.4  million for 1997, a decrease of $0.5 million
from 1996.  Rent expense as a percentage  of total  revenues  decreased 20 basis
points in 1997 to 15.7%.  Contract  rent expense  determined  as a percentage of
revenues decreased during 1997, offset by increased rent from equipment rentals.
The increase in equipment rent was due to the continued  rollout of new computer
technology to the Company's airport operating units.

     Royalties  expense  for  1997  increased  by 9.2% to  $22.6  million.  As a
percentage of total  revenues,  royalties  expense  increased 20 basis points to
2.0%.  The  increase in  royalties  expense  reflects  the  Company's  continued
introduction  of  branded  concepts  to  its  airport  concessions   operations.
Royalties  expense  as a  percentage  of  branded  sales  averaged  6.3% in 1997
compared with 6.8% in 1996. Branded facilities  generate higher sales per square
foot and contribute toward increased RPE, which offset royalty payments required
to operate the concepts.

     Depreciation and amortization expense,  excluding $1.7 million of corporate
depreciation  on property  and  equipment,  which is included as a component  of
general and  administrative  expenses,  was $49.1  million for 1997,  down 1.2%,
excluding $0.7 million of corporate  depreciation  on property and equipment for
1996.

     General  and  administrative  expenses  were  $54.3  million  for 1997,  an
increase of 4.8%. The level of corporate  expenses  incurred during 1997 reflect
increased  costs  related  to  additional  corporate  resources  in  operations,
finance,  business  development and strategic planning and marketing to focus on
growth  initiatives  in the  Company's  core  markets  and  new  venues.  Higher
corporate   depreciation  expense  associated  with  the  new

                                       14

<PAGE>

headquarters  and  financial  system  also  contributed   substantially  to  the
increases in general and administrative expenses.

     Other operating  expenses,  which include  utilities,  casualty  insurance,
equipment maintenance,  trash removal and other miscellaneous expenses, remained
relatively flat at $105.5 million total for 1997. Other operating  expenses as a
percentage of total revenues decreased 10 basis points.

UNUSUAL ITEMS

*    The 1997 results include a $3.9 million reversal of  substantially  all of
     the  remaining  restructuring  reserves  to reflect the  conclusion  of the
     restructuring plan created in 1995 (see "1995 Restructuring").

*    During 1997, an operating  cash flow analysis of one airport unit in which
     the Company was obligated to add new facilities revealed that the Company's
     investment was partially impaired,  resulting in a $4.2 million write-down.
     The  partial  impairment  was the  result of  construction  cost  overruns,
     airline traffic shifts and weak operating  performance (see "Impairments of
     Long-Lived Assets").

*    The Company  recognized  the  utilization  of $1.9  million of certain tax
     credits  previously  considered  unrealizable  during 1997,  resulting in a
     reduction in the deferred tax asset  valuation  allowance.  Included in the
     1996  results  was a $5.2  million  decrease  in  the  deferred  tax  asset
     valuation allowance.


OPERATING PROFIT

     Operating  profit increased 10.0% to $66.1 million.  The overall  operating
profit margin,  excluding general and administrative expenses and unusual items,
increased to 10.5% in 1997 compared with 9.8% in 1996,  primarily reflecting the
70 basis point  improvement in the cost of sales margin.  Operating  profits for
airports,  prior to the  allocation  of  corporate  general  and  administrative
expenses and excluding  unusual items,  were $94.3 million and $87.7 million for
1997 and 1996,  respectively.  Operating  profits for travel  plazas,  excluding
general and  administrative  expenses and unusual items,  were $21.3 million and
$20.0 million for 1997 and 1996,  respectively.  Operating  profits for shopping
malls and  entertainment,  excluding  general and  administrative  expenses  and
unusual  items,  totaled  $5.1  million  and $4.2  million  for  1997 and  1996,
respectively.

     Airport  operating  profit margins,  excluding  general and  administrative
expenses and unusual  items,  showed a 70 basis point  improvement  for 1997 and
totaled 10.3%. The travel plazas operating profit margins, excluding general and
administrative expenses and unusual items, increased 70 basis points to 12.2% in
1997. The shopping mall and  entertainment  operating  profit margin,  excluding
general and administrative expenses and unusual items, increased 90 basis points
to 8.7%  for 1997 due  primarily  to the  strong  performance  of the  Company's
operations at the Ontario Mills Mall.

INTEREST EXPENSE

     Interest expense was $39.8 million for 1997 compared with $40.3 million for
1996. The slight decrease in interest expense reflects the continuing  principal
reduction in the Company's other long-term debt.

INTEREST INCOME

     Interest  income  increased  $0.6  million to $3.0  million for 1997.  Cash
balances  during  the first  quarter  of 1997 were  temporarily  higher due to a
transition to a new financial system at year-end 1996. This transition  resulted
in beginning  cash  balances  being higher than the  Company's  normal  seasonal
level. The 1997 results  included $0.4 million of non-recurring  interest income
relating to a recently  negotiated  agreement  with an Airport  Authority  which
reimburses  the Company for the cost of funding  certain  capital  improvements.
Also  contributing  to the  increase in interest  income  were  slightly  higher
short-term   interest  rates  and  the  Company's  increased  cash  balances  in
interest-bearing accounts during 1997.

                                       15

<PAGE>

INCOME TAXES

     The  provision for income taxes for 1997 and 1996 was $9.7 million and $9.3
million,  respectively.  Overall,  the  effective  tax rate declined for 1997 to
33.0% from 41.9% in 1996.  The lower  effective tax rate reflects a $1.9 million
benefit  to  recognize  certain  tax  credits  that were  previously  considered
unrealizable and a reduced state tax provision.  The 1996 results include a $5.2
million  decrease in the  valuation  allowance  due to the decrease in the state
effective  tax rate and the  expiration  of purchase  business  combination  tax
credits.

NET INCOME

     The Company's net income  increased  51.9% to $19.6 million.  This increase
reflects  strong  EBITDA  growth,  an increase  in  interest  income and a lower
effective tax rate (see "Liquidity and Capital Resources").


1996 COMPARED TO 1995

REVENUES

      Revenues  for the year ended  January 3, 1997,  increased by 14.7% to $1.1
billion for 1996. Had the Company included the $40.3 million of revenues related
to the  six  airport  concessions  contracts,  offset  by the  $4.3  million  in
management  fees  recorded  as revenues  in 1995,  revenues  for 1996 would have
increased by 10.7% over 1995. This increase was driven by strong  performance in
the airport concessions business line.

AIRPORTS

       Airport concession revenues,  excluding the impact of the transfer of six
airport  concessions  contracts,  were up  20.2% to  $911.5  million  for  1996.
Domestic airport  concessions  revenues increased by 17.8% to $855.1 million for
1996. Had the Company included the $40.3 million of revenues, offset by the $4.3
million in management fees, related to the six transferred  airport  concessions
contracts in 1995, total airport revenues and domestic airport revenues for 1996
would have  increased by 14.8% and 12.2%,  respectively.  International  airport
revenues  were $56.4  million in 1996,  up  substantially  from $32.2 million in
1995.  Revenue  growth  in  airport  concessions  can be  attributed  to  strong
fundamentals in the airport business,  with passenger enplanements at comparable
airports up an estimated 7% over 1995 and the benefit of an  additional  week of
operations  (see  "Accounting  Period").  Revenue  growth at comparable  airport
locations,  including  the  impact of the six  transferred  airport  concessions
contracts,  grew an impressive  14.2% during 1996.  The positive  effects of new
noncomparable contracts,  primarily Hartsfield Atlanta International Airport and
Amsterdam  Airport  Schiphol in the  Netherlands,  were  offset by the  negative
impact of contracts with significant changes in scope of operation and contracts
undergoing  significant  construction  of new  facilities.  RPE  grew  6% at the
Company's  comparable  airport  location in 1996. The Company has benefited from
annual passenger enplanement growth in excess of the FAA forecast. The growth in
RPE  can be  attributed  to the  addition  of new  branded  locations,  moderate
increases  in menu prices and benefits  from other  strategic  initiatives.  The
severe winter  weather  throughout the United States during the first quarter of
1996 caused flight  delays which  resulted in longer visit times in airports for
air travelers and translated into increased  revenues from the Company's airport
food, beverage and retail concessions.

TRAVEL PLAZAS

       Travel plaza concession revenues for 1996 were $160.3 million, a decrease
of 3.4% compared to 1995.  Excluding  revenues relating to a low margin gasoline
service  contract  on one  tollroad  and a minor food and  beverage  contract on
another tollroad, both of which the Company exited from in the fourth quarter of
1995, revenue growth for travel plaza concessions on a comparable contract basis
was 3.3% in 1996. Growth in travel plaza  concessions  revenues was attributable
to minor  increases in customer  traffic on tollroads,  moderate price increases
and the  benefit  of an  extra  week of  operations  in  1996  (see  "Accounting
Period").   The  harsh  winter  weather  that  benefited   airport   concessions
constrained travel plaza revenues in the first quarter of 1996.

                                       16


<PAGE>

SHOPPING MALLS AND ENTERTAINMENT

       Shopping mall and  entertainment  concession  revenues were $53.9 million
for 1996,  down slightly  from $54.1 million for 1995.  The decrease in revenues
was a result of the Company's  planned exit from seven retail  operations in the
business  line  that were  deemed to be  inconsistent  with the  Company's  core
strategies.  Revenues  from the  Company's  entrance into the shopping mall food
court  concessions  business at the Ontario Mills Mall in California during 1996
largely offset decreased revenues from the seven exited retail operations.

MANAGEMENT FEE INCOME

       Management  fee income for 1996 was $13.9  million,  compared  with $15.2
million for 1995.  Travel plaza management fee income increased to $13.9 million
for 1996, compared with $10.9 million 1995, reflecting  significant increases in
management fee percentages on all managed travel plaza  concessions.  There were
no fees received  from managing  airport  concessions  contracts  during 1996 as
compared to $4.3 million for 1995. The airport  management  fees received during
1995 were related to six airport  concessions  contracts  that were  transferred
from Host Marriott to the Company on September 9, 1995.

OPERATING COSTS AND EXPENSES

       The  Company's  total  operating  costs and expenses  (excluding  unusual
items)  increased  by 13.0% to $1.1 billion for 1996,  or 94.7% total  revenues,
compared with $1.0 billion for 1995 (excluding unusual items), or 96.2% of total
revenues.  The improved  operating  profit  margin of 5.3% in 1996 compared with
3.8% in 1995 (excluding  unusual items),  reflects  operating  leverage benefits
derived from revenue growth and reduced costs resulting from the  implementation
of several operating initiatives.  Had the Company included the $34.2 million of
operating costs related to the six airport concessions  contracts in 1995, total
operating costs and expenses for 1996 would have increased by $90.3 million,  or
9.1%, over 1995 (excluding unusual items).

       Cost of sales for 1996 was  $335.9  million,  an  increase  of 10.2% over
1995. Cost of sales as a percentage of total revenues decreased 120 basis points
during  1996,  most  notably  due  to  various  cost   controlling   initiatives
implemented  during the year.  Also  contributing  to the improved cost of sales
margin was the closure of a low margin gasoline service contract on one tollroad
during the fourth quarter of 1995.

       Payroll and benefits totaled $335.0 million during 1996, a 15.4% increase
over 1995.  Payroll and benefits as a  percentage  of total  revenues  increased
slightly from 29.2% in 1995 to 29.4% in 1996.

       Rent expense  totaled  $180.9 million for 1996, an increase of 15.5% over
1995.  The  majority of  increased  rent  expense is  attributable  to increased
revenues on contracts with rentals determined as a percentage of revenues.  Rent
expense as a percentage of total revenues increased to 15.9% for 1996 from 15.8%
in 1995.  The margin  increase is primarily  attributable  to equipment  rentals
related to a new point of sale and back  office  computer  system  rolled out to
operating units in late 1995 and 1996.

       Royalties  expense for 1996  increased by 29.4% to $20.7 million in 1996.
As a percentage of total revenues,  royalties expense increased to 1.8% for 1996
compared  with 1.6% for 1995.  The  increase in royalties  expense  reflects the
Company's continued  introduction of branded concepts to its airport concessions
operations. Branded concepts in all of the Company's venues have grown at a CAGR
of 12.2% between 1992 and 1996.  No single  branded  concept  accounted for more
than 10% of total  revenues.  Branded  revenues  increased  24.1% in 1996,  when
compared with 1995, the majority of which related to branded sales at airports.

       Branded revenues in airports increased 42.8% when comparing 1996 and 1995
through the  introduction of branded  concepts in the Company's  airports.  This
increase can be attributed to large new branded  concept  developments at Dulles
International   Airport  (just   outside  of   Washington,   D.C.),   San  Diego
International  Airport, Los Angeles International Airport and Hartsfield Atlanta
International  Airport.  Airport  branded  product  sales for 1996  increased to
$216.5  million,  or 23.8% of  total  airport  revenues,  compared  with  $151.6
million, or 20.0% of total airport revenues in 1995.

                                       17

<PAGE>

       Depreciation  and  amortization  expense  included in operating costs and
expenses was $49.7  million for 1996,  down 3.3% compared with $51.4 million for
1995,  primarily reflecting the impact of the Company's adoption of SFAS No. 121
during  the  fourth  quarter  of 1995.  The  adoption  of SFAS No.  121  reduced
depreciation expense by $3.4 million in 1996.

       General and  administrative  expenses  were $51.8  million  for 1996,  an
increase of 13.8% over 1995.  The level of corporate  expenses  incurred  during
1996 reflect increased general and administrative  costs incurred to operate the
Company on a stand-alone basis,  including additional payroll and benefits for a
newly established in-house architectural and construction management department.
Prior to 1996, the Company had purchased and capitalized construction management
services from a third-party provider.

       Other operating  expenses,  which include utilities,  casualty insurance,
equipment  maintenance,  trash removal and other  miscellaneous  expenses,  were
$105.6  million for 1996, a 16.6%  increase  over 1995. As a percentage of total
revenues,  other  operating  expenses  increased  20 basis  points for 1996 when
compared with 1995.

UNUSUAL ITEMS

The 1995 results reflect the following significant unusual items:

*    The  Company  adopted a new  accounting  standard  for the  impairment  of
     long-lived  assets that  resulted in the  recognition  of $22.0  million of
     asset write-downs in 1995. (See "Impairments of Long-Lived Assets").

*    The Company  recognized  $14.5 million of  restructuring  charges in 1995,
     primarily  representing  employee  severance and lease buy-out  costs.  The
     charges were taken to restructure the Company's business processes, thereby
     reducing  long-term  operating and general and  administrative  costs. (See
     "1995 Restructuring").

OPERATING PROFIT

       As a result of the changes in revenues and  operating  costs and expenses
discussed  above,  operating  profit  increased  to  $60.1  million,  or 5.3% of
revenues  for 1996.  Excluding  the effects of unusual  items  recorded in 1995,
operating  profit  was  $38.2  million,  or 3.8% of  revenues.  The  substantial
improvement  in the cost of sales  margin and the lower  depreciation  resulting
from the  adoption of SFAS No. 121 in 1995 were the primary  factors that caused
the  increase in the overall  operating  profit  margin.  Operating  profits for
airports and travel  plazas,  prior to the  allocation of corporate  general and
administrative  expenses and  excluding  unusual  items,  were $87.7 million and
$20.0 million,  respectively,  for 1996 as compared with $64.1 million and $18.5
million,  respectively,  for  1995.  Operating  profits  for  shopping  mall and
entertainment,  excluding general and administrative expenses and unusual items,
totaled $4.2 million and $1.1 million for 1996 and 1995, respectively.

       Operating profit margins increased,  excluding general and administrative
expenses and unusual items,  in all three  business  lines during 1996.  Airport
operating  profit margins,  excluding  general and  administrative  expenses and
unusual  items,  equaled 9.6% for 1996 compared  with 8.5% for 1995.  The travel
plazas operating profit margins,  excluding general and administrative  expenses
and unusual items, equaled 11.5% and 10.5% for 1996 and 1995, respectively.  The
shopping mall and entertainment  operating profit margin,  excluding general and
administrative  expenses and unusual items, increased to 7.8% for 1996 from 2.0%
for 1995.


INTEREST EXPENSE

       Interest  expense  was  $40.3  million  for both 1996 and 1995 and can be
attributed to lower  interest rates on the Company's debt as a result of the May
1995 issuance of $400.0  million in Senior Notes at a fixed rate of 9.5%,  which
is nearly 100 basis points lower than the debt that it replaced.  The  favorable
effect  of these  lower  interest  rates  was  partially  offset  by the cost of
incremental  debt that was incurred as a part of the Senior Notes issuance,  the
cost of debt assumed in the acquisition of the Schiphol contract,  as well as an
increased level of amortization of deferred financing costs.

                                       18

<PAGE>

INTEREST INCOME

       Interest  income totaled $2.4 million for 1996 compared with $0.7 million
for 1995.  This increase in interest income during 1996 was primarily due to the
Company  accelerating  the  transfer  of cash  balances  from  local  depository
accounts to corporate interest bearing consolidation  accounts as well as having
increased cash available from operations.

INCOME TAXES

       The  provision  for income  taxes for 1996 and 1995 was $9.3  million and
$3.9 million,  respectively.  The  effective  income tax rate for 1996 was 41.9%
compared with 10.8% for 1995.  The provision in 1995 was affected by an increase
in the deferred tax asset valuation allowance of $17.0 million to reduce the net
deferred  tax asset to the amount  that is more  likely  than not to be realized
(see "Deferred Tax Assets").  The provision for this valuation  allowance offset
the tax benefit of the 1995 loss  included  in 1995  results.  The 1996  results
include a $5.2 million  decrease in the valuation  allowance due to the decrease
in the  state  effective  tax  rate  and the  expiration  of  purchase  business
combination tax credits.

EXTRAORDINARY ITEM

       During  the  second   quarter  of  1995,   the  Company   recognized   an
extraordinary  loss of $14.8 million ($9.6 million after the related  income tax
benefit of $5.2 million) in connection with the redemption and defeasance of the
Host Marriott  Hospitality,  Inc. Senior Notes. This loss primarily  represented
premiums of $7.0  million  paid on the  redemptions  and the  write-off  of $7.8
million of deferred financing costs.

NET INCOME (LOSS)

       The Company's net income for 1996 was $12.9 million,  compared with a net
loss of $51.4  million  for 1995.  The  increase  in the  Company's  net  income
primarily was due to certain unusual and extraordinary  items occurring in 1995,
including  $22.0 million of write-downs of long-lived  assets,  $14.5 million of
restructuring  charges and $9.6 million of losses on the  extinguishment of debt
(see "Unusual Items" and "Extraordinary Item").


                                       19


<PAGE>

PRO FORMA FISCAL YEAR FINANCIAL DATA

     The following  table  presents a summary  unaudited pro forma  statement of
operations for the fiscal year ended  December 29, 1995, as if the  Distribution
and related transactions  occurred at the beginning of the fiscal year. The data
is presented for  informational  purposes only and may not reflect the Company's
future  results of operations or what the results of operations  would have been
had the Distribution and related  transactions  occurred at the beginning of the
fiscal year.

     The  principal  assumptions  used  in  the  preparation  of the  pro  forma
consolidated  financial statements include the consummation of the Distribution,
the  issuance  of the $400.0  million of Senior  Notes,  the  transfer  of three
full-service  hotels to Host  Marriott,  the transfer of assets and  liabilities
related  to  certain  former  restaurant   operations  to  Host  Marriott,   the
establishment  of management  agreements  for the Company to manage certain Host
Marriott  restaurant  operations,  and the  recognition  of  certain  costs  for
operating the Company on a stand-alone basis.

PRO FORMA FISCAL YEAR FINANCIAL DATA

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------- --- -----------------
                                                                                                    1995
----------------------------------------------------------------------------------------- --- -----------------
                                                                                             (IN MILLIONS)
<S>                                                                                                    <C>

REVENUES                                                                                             $1,027.8
----------------------------------------------------------------------------------------- --- -----------------
OPERATING COSTS AND EXPENSES                                                                          1,023.0
----------------------------------------------------------------------------------------- --- -----------------
OPERATING PROFIT                                                                                          4.8

   Interest expense                                                                                     (39.1)
   Interest income                                                                                        0.8
----------------------------------------------------------------------------------------- --- -----------------
LOSS BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM (1)                                                                               (33.5)

Provision for income taxes                                                                                4.0
----------------------------------------------------------------------------------------- --- -----------------
NET LOSS BEFORE EXTRAORDINARY ITEM (1)                                                               $  (37.5)
----------------------------------------------------------------------------------------- --- -----------------
<FN>
(1)  The pro forma  statement of operations  for 1995 excludes an  extraordinary
     loss of  $9.6  million,  net of the  related  income  tax  benefit  of $5.2
     million,   recorded  in  the  1995  historical  consolidated  statement  of
     operations for the extinguishment of certain long-term debt.
</FN>
</TABLE>



LIQUIDITY AND CAPITAL RESOURCES

     The Company funds its capital  requirements  with a combination of existing
cash  balances and  operating  cash flow.  The Company  believes  that cash flow
generated  from  ongoing  operations  and current  cash  balances  are more than
adequate to finance ongoing capital  expenditures,  as well as meet debt service
requirements.  The  Company  also has the  ability  to fund its  planned  growth
initiatives  from existing  credit  facilities  and from the sources  identified
above; however,  should significant growth opportunities arise, such as business
combinations or contract  acquisitions,  alternative financing arrangements will
be evaluated and considered.

     In May 1995,  the  predecessor  corporation  to the Company  issued  $400.0
million of Senior Notes,  which are now  obligations of the Company.  The Senior
Notes, which will mature in May 2005, were issued at par and have a fixed coupon
rate of 9.5%. The Senior Notes can be called beginning in May 2000 at a price of
103.56%, declining to par in March 2003. The net proceeds from the issuance were
used to defease,  and subsequently redeem, bonds issued by another subsidiary of
Host  Marriott  and to pay down a  portion  of a line of  credit  with  Marriott
International.  In issuing  these  notes,  the  Company  reduced the cost of its
long-term  financing by nearly

                                       20


<PAGE>

100 basis points.  Since 1995,  the Company's  cash interest  coverage ratio has
improved from 2.4 to 1.0 to 3.2 to 1.0 in 1997.

     The Company is required to make semi-annual  cash interest  payments on the
Senior Notes at a fixed  interest  rate of 9.5%.  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 invested in other properties within a specified period of time.
Management does not expect either of these events to occur.

     The  Senior  Notes  are  secured  by a pledge  of stock  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  subsidiaries  (the  "Guarantors")  of the
Company. The Senior Notes Indenture contains covenants that, among other things,
limit the  ability  of the  Company  and  certain of 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 capital stock of the  Guarantors,  and enter into certain
mergers and consolidations.

     The First National Bank of Chicago,  as agent for a group of  participating
lenders, has provided credit facilities ("Facilities") to the Company consisting
of a $75.0 million  revolving  credit  facility (the "Revolver  Facility") and a
$25.0 million letter of credit  facility.  During 1997,  the Company  negotiated
several  enhancements  to  the  Facilities.  These  enhancements  increased  the
aggregate  availability  and extended the maturity of the Facilities  from $75.0
million  through  December 2000 to $100.0 million  through April 2002. The $75.0
million  revolving  credit  facility  provides  for working  capital and general
corporate purposes other than hostile acquisitions.  The $25.0 million letter of
credit facility provides for the issuance of financial and nonfinancial  letters
of credit.  All borrowings  under the  Facilities are senior  obligations of the
Company  and are  secured  by Host  Marriott  Services'  pledge  of, and a first
perfected  security  interest  in, all of the  capital  stock of the Company and
certain of its subsidiaries.

     The loan agreements  relating to the Facilities  contain dividend and stock
retirement  covenants that are  substantially  similar to those set forth in the
Senior  Notes  Indenture,  provided  that  dividends  payable  to Host  Marriott
Services are limited to 25% of the Company's consolidated net income, as defined
in  the  loan  agreements.  The  enhancements  to  the  Facilities  during  1997
eliminated the revolver facility's annual 30-day repayment  provision.  The loan
agreements  also  contain  certain  financial  ratio  and  capital   expenditure
covenants. Any indebtedness outstanding under the Facilities may be declared due
and payable upon the  occurrence  of certain  events of default,  including  the
Company's  failure to comply  with the several  covenants  noted  above,  or the
occurrence of certain events of default under the Senior Notes Indenture.  As of
January 2, 1998,  and  throughout the years ended January 2, 1998 and January 3,
1997, there was no outstanding  indebtedness under the Revolver Facility and the
Company was in compliance with the covenants described above.

     The  Company's  cash  flows  from  operating  activities  are  affected  by
seasonality.  Cash from  operations  generally  is the  strongest  in the summer
months between  Memorial Day and Labor Day. Cash provided by operations,  before
changes in working  capital and income  taxes,  totaled  $78.1 million for 1997,
$68.4 million for 1996 and $51.1 million for 1995, respectively.

     The  primary  uses of cash  in  investing  activities  consist  of  capital
expenditures and acquisitions.  The Company incurs capital expenditures to build
out new  facilities,  including  growth  initiatives,  to expand  or  reposition
existing  facilities  and to maintain  the quality  and  operations  of existing
facilities. The Company's capital expenditures, including acquisitions, in 1997,
1996  and  1995  totaled  $66.0  million,   $54.9  million  and  $51.3  million,
respectively.  During  1998,  the Company  expects to make  capital  expenditure
investments of approximately $58.0 million in its core markets (domestic airport
and  travel  plaza   business   lines)  and  $15.0  million  in  growth  markets
(international  airports and food courts in U.S. shopping malls).  The timing of
actual  capital  expenditures  can vary  from  expected  timing  due to  project
scheduling and delays inherent in the construction and approval process.

                                       21

<PAGE>

     The Company's  cash used in financing  activities in 1997 and 1996 was $4.0
million and $0.8 million, respectively, compared with cash provided by financing
activities in 1995 of $17.9 million.  Cash used in financing  activities  during
1997  consisted  of a $2.2  million  payment  in  settlement  of  the  Company's
obligation  to pay for the 1996 exercise of  nonqualified  stock options and the
1996 release of deferred stock incentive shares held by certain former employees
of Host Marriott Corporation and $1.7 million of debt repayments.  The Company's
cash used in  financing  activities  during 1996 was due to $0.8 million of debt
repayments. The 1995 cash provided by financing activities consisted of net cash
transfers from Host Marriott.

     The Company manages its working capital  throughout the year to effectively
maximize the financial returns to the Company. If needed, the Company's Revolver
Facility  provides  funds  for  liquidity,  seasonal  borrowing  needs and other
general  corporate  purposes.  In  the  fourth  quarter  of  1996,  the  Company
transitioned  to a new  financial  system.  As a result of the  transition,  the
Company  experienced  temporarily high balances in cash and cash equivalents and
current  liabilities at year-end 1996 and  encountered  systems-related  issues.
During  1997,  the  Company  reduced its cash and cash  equivalents  and current
liabilities  balances to  seasonal  levels and worked to resolve  other  systems
issues.

     The  Company's  consolidated  earnings  before  interest  expense,   taxes,
depreciation, amortization and other non-cash items ("EBITDA") increased 9.3% to
$122.9  million in 1997 compared  with $112.4  million and $94.7 million in 1996
and 1995,  respectively.  The EBITDA margin improved 80 basis points to 10.7% of
revenues,  up from 9.9% in 1996 and 9.5% in 1995.  The  Company's  cash interest
coverage  ratio  (defined as EBITDA to interest  expense  less  amortization  of
deferred  financing  costs) was 3.2 to 1.0 in 1997  compared with 2.9 to 1.0 for
1996 and 2.4 to 1.0 for 1995. EBITDA during 1997 significantly  exceeded capital
expenditures of $66.0 million and scheduled  interest payments of $38.0 million.
The Company considers EBITDA to be a meaningful measure for assessing  operating
performance.  EBITDA can be used to  measure  the  Company's  ability to service
debt,  fund capital  investments  and expand its  business.  EBITDA  information
should not be considered an alternative to net income,  operating  profit,  cash
flows from operations,  or any other operating or liquidity  performance measure
recognized by Generally Accepted Accounting Principles ("GAAP"). The calculation
of EBITDA for the Company may not be comparable to the same calculation by other
companies because the definition of EBITDA varies throughout the industry.

The following is a reconciliation of net income (loss) to EBITDA:

<TABLE>
<CAPTION>
-------------------------------------------------- -------------- -------------- ---------------
                                                       1997           1996            1995
-------------------------------------------------- -------------- -------------- ---------------
                                                                  (IN MILLIONS)
<S>                                                        <C>           <C>            <C>

NET INCOME (LOSS)                                       $   19.6      $   12.9        $  (51.4)
Interest expense                                            39.8          40.3            40.3
Provision for income taxes                                   9.7           9.3             3.9
Extraordinary item, net of taxes                             ---           ---             9.6
Depreciation and amortization                               50.8          50.4            52.3
Unusual items                                                0.3           ---            36.5
Other non-cash items                                         2.7          (0.5)            3.5
-------------------------------------------------- -------------- -------------- ---------------
EBITDA                                                  $  122.9      $  112.4         $  94.7
-------------------------------------------------- -------------- -------------- ---------------
</TABLE>



IMPAIRMENTS OF LONG-LIVED ASSETS

     Effective  September 9, 1995,  the Company  adopted  Statement of Financial
Accounting  Standards  No. 121,  "Accounting  for the  Impairment  of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"). Under SFAS
No.  121,  the Company  reviews  its  long-lived  assets  (such as property  and
equipment) and certain  identifiable  intangible assets for impairment  whenever
events or circumstances  indicate that the carrying value of an asset may not be
recoverable.  If the sum of the  undiscounted  estimated future cash flows of an
asset is less than the carrying value of the asset,  an impairment loss equal to
the  difference  between the  carrying  value and

                                       22

<PAGE>

the fair value of the asset is  recognized.  Fair value is  estimated  to be the
present value of expected future cash flows, as determined by management,  after
considering  such factors as future air travel and toll-paying  vehicle data and
inflation.

     Historically,  the Company  reviewed such assets for impairment by grouping
along its three  general  business  lines  (i.e.,  airports,  travel  plazas and
shopping  mall and  entertainment  concessions).  Although  the Company has been
aware that certain operating units were generating losses and cash flow deficits
since the late 1980s,  because the estimated future undiscounted cash flows on a
business-line  basis  exceeded the carrying  amount of the Company's  long-lived
assets on a  business-line  basis,  the Company  offset such negative cash flows
with  positive cash flows from other  operating  units and did not recognize any
impairment charges in 1995 or 1994, prior to the adoption of SFAS No. 121. Under
SFAS No. 121,  the Company is required to assess  impairment  of its  long-lived
assets at the  operating  unit level  (representing  the lowest  level for which
there are identifiable cash flows that are largely independent of the cash flows
of other  groups of  assets).  Generally,  each  airport and  shopping  mall and
entertainment  facility at which the Company operates and each tollroad on which
the Company  operates (as opposed to each travel plaza on a tollroad)  comprises
an  operating  unit.  As a result of its  adoption of SFAS No. 121,  the Company
recognized a non-cash,  pretax charge against earnings during the fourth quarter
of 1995 of $22.0  million.  During 1997, an operating  cash flow analysis of one
airport unit in which the Company was obligated to add new  facilities  revealed
that the  Company's  investment  was  partially  impaired,  resulting  in a $4.2
million  write-down.  The partial impairment was the result of construction cost
overruns, airline traffic shifts and weak operating performance.

     In adopting  SFAS No. 121 (and  thereby  changing  its method of  measuring
long-lived  asset  impairments  from  a  business-line  basis  to an  individual
operating unit basis),  the Company wrote down the assets of 14 operating  units
to the extent the  carrying  value of the assets  exceeded the fair value of the
assets in 1995.  Eleven of the fourteen  units had projected cash flow deficits,
and,  accordingly  the assets of these units were written off in their entirety.
The remaining three units had projected  positive cash flows and the assets were
partially written down to their estimated fair values.  Approximately 43% of the
total 1995 write-down related to one airport unit.

     Historically, the Company has incurred net negative cash flows at 10 of the
original 14 individual impaired operating units.  Negative cash flows from these
units,  which  were  included  in the  Company's  cash  flows  from  operations,
aggregated  approximately  $0.3 million,  $4.0 million and $2.0 million in 1997,
1996 and 1995,  respectively.  During  1996 and  1997,  six of the  original  14
impaired units were either disposed of or the lease term expired.  As of the end
of 1997 and as a result of improved operating  performance,  the remaining eight
operating units had projected  positive cash flows of approximately $1.1 million
(including  operations cash flows and necessary capital  expenditures)  over the
remaining weighted-average life of the contracts of 3.4 years.

1995 RESTRUCTURING

     During 1995, the Company performed a review of its operating  structure and
core  business   processes  to  identify   opportunities  to  improve  operating
effectiveness.  As a  result  of  this  review,  management  approved  a  formal
restructuring  plan and the Company  recorded a pretax  restructuring  charge to
earnings  of $14.5  million in the fourth  quarter  of 1995.  The  restructuring
charge was primarily  comprised of  involuntary  employee  termination  benefits
(related  to  its  realignment  of  operational   responsibilities)   and  lease
cancellation penalty fees and related costs resulting from the Company's plan to
exit certain  activities in its  entertainment  venues. In the fourth quarter of
1997, the Company  concluded the restructuring  plan and reversed  substantially
all of the remaining  restructuring  reserve,  which  resulted in a $3.9 million
pretax reduction of other operating expenses.  The Company terminated a total of
221 positions in connection with the  restructuring  plan. The remaining portion
of the restructuring reserve relates to extended severance payments payable to a
limited number of individuals.

DEFERRED TAX ASSETS

     The Company has recognized net assets of $68.2 million and $78.7 million at
January 2, 1998 and January 3, 1997,  respectively,  related to deferred  taxes,
which  generally  represent tax credit  carryforwards  and tax effects of future
available  deductions from taxable income.  During 1997, the Company  recognized
the  utilization of $1.9

                                       23

<PAGE>

million of certain purchase business combination tax credits previously believed
unrealizable,  reducing  the  valuation  allowance.  During  1996,  the  Company
decreased the deferred tax asset valuation  allowance by $5.2 million due to the
decrease in the state effective tax rate and the expiration of purchase business
combination tax credits.

     Prior to the  Distribution,  the Company was included in the Host  Marriott
Corporation  affiliated  group (the "Host  Marriott  Group") for purposes of its
Federal income tax filings.  Management believes that the realization of the net
deferred tax assets recorded through the  Distribution  Date is more likely than
not to occur because the Host Marriott Group has deferred tax  liabilities  that
must be paid in the future  that are  substantially  in excess of the  Company's
recognized net deferred tax assets.

     Upon  consummation  of the  Distribution,  the  Company  became a  separate
affiliated group for purposes of its Federal income tax filings.  Management has
considered  various  factors as described  below and believes that the Company's
recognized net deferred tax assets are more likely than not to be realized.

     Realization  of the net deferred tax assets are  dependent on the Company's
ability to generate future taxable  income.  During the period 1995 to 1997, the
Company  would have  generated  taxable  and pretax book income in each year and
cumulative  taxable and pretax book income for this period of $108.1 million and
$55.3  million,  respectively,  after  adjusting  for the pro forma  effects  of
certain  transfers  related  to the  Distribution  and for  unusual  income  and
charges.  The  relationship of pretax book income and taxable income is expected
to  continue   indefinitely,   with  future  originating  temporary  differences
offsetting  the  reversal  of  existing  temporary  differences.  The  Company's
deferred tax assets primarily  relate to temporary  differences for property and
equipment,  accrued rent and reserves and to alternative minimum tax and general
business  tax  credit  carryforwards.   All  of  these  items  represent  future
reductions in the Company's regular tax liabilities.

     Management  believes  that it is more likely  than not that future  taxable
income will be  sufficient  to realize the net deferred  tax assets  recorded at
January 2, 1998 and January 3, 1997.  Management  anticipates  that increases in
taxable  income  will  arise in  future  periods  primarily  as a result  of the
business  strategies   discussed  herein  (see  "Item  1.  Business  -  Business
Strategy") and reduced operating costs resulting from the ongoing  restructuring
of the Company's business  processes.  The anticipated  improvement in operating
results is expected to increase  the taxable  income base to a level which would
allow realization of the existing net deferred tax assets within eight to twelve
years.

     Future  levels of operating  income and other  taxable  gains are dependent
upon general economic and industry  conditions,  including  airport and tollroad
traffic,  inflation,  competition  and demand for  development of concepts,  and
other factors beyond the Company's  control,  and no assurance can be given that
sufficient  taxable  income will be generated for full  utilization of these tax
credits and  deductible  temporary  differences.  Management  has considered the
above  factors in reaching its  conclusion  that it is more likely than not that
operating income will be sufficient to utilize these deferred  deductions fully.
The amount of the net deferred tax assets considered realizable,  however, could
be reduced if estimates of future taxable income are not achieved.

SHAREHOLDER'S DEFICIT

     The level of long-term debt  distributed to the Company in connection  with
its spin-off from Host  Marriott was based on the Company's  ability to generate
sufficient  operating  cash  flow to  service  the  Senior  Notes.  The level of
distributed  long-term debt resulted in the Company  reflecting a  shareholder's
deficit of $111.3  million and $130.0  million as of January 2, 1998 and January
3, 1997, respectively.

INFLATION

     The  Company's  expenses are impacted by inflation.  While price  increases
generally can be instituted as inflation occurs, many contracts require landlord
approval before prices can be increased,  which may temporarily  have an adverse
impact on profit  margins.  Management  believes  that over time,  however,  the
Company will be able to raise prices and sustain profit margins.

                                       24


<PAGE>

ACCOUNTING PERIOD

     The Company's 1997 and 1995 fiscal years contained 52 weeks, while the 1996
fiscal year  contained 53 weeks.  The  Company's  fiscal year ends on the Friday
nearest to December 31.

RISK FACTORS AND FORWARD-LOOKING STATEMENTS

     This report,  the Company's  other reports  filed with the  Securities  and
Exchange  Commission or furnished to shareholders and its public  statements and
press releases may contain  "forward-looking  statements"  within the meaning of
the federal  securities  laws,  including  statements  concerning  the Company's
outlook for 1998 and beyond;  the growth in total revenue in 1998 and subsequent
years; the amount of additional revenues expected from new international airport
and domestic  shopping mall food court contracts that were added in 1997 or that
are expected to be added or renewed in 1998 and  subsequent  years;  anticipated
retention rates of existing  contracts in core business lines;  capital spending
plans; business strategies and their anticipated results; and similar statements
concerning future events and expectations  that are not historical facts.  These
forward-looking  statements  are  subject to numerous  risks and  uncertainties,
including the effects of seasonality, airline and tollroad industry fundamentals
and general  economic  conditions  (including the current  economic  downturn in
Asia),  competitive  forces  within the food,  beverage  and retail  concessions
industries,  the availability of cash flow to fund future capital  expenditures,
government regulation and the potential adverse impact of the Year 2000 issue on
operations.  Forward-looking  statements are inherently uncertain, and investors
must recognize that actual results could differ  materially from those expressed
or implied by the statements.

SEASONALITY.  The Company's  revenues and operating  profit margins have varied,
and are expected to continue to vary, significantly from quarter to quarter as a
result of  seasonal  traffic  patterns.  The  Company's  business is seasonal in
nature,  with the highest  vacation  traffic taking place during the peak summer
travel  months,  particularly  between  Memorial  Day and Labor Day.  Results of
operations  for any  particular  quarter  may not be  indicative  of  results of
operations for future periods.

INDUSTRY  FUNDAMENTALS  AND GENERAL  ECONOMIC  CONDITIONS.  The Company could be
adversely impacted during  inflationary  periods. If operating expenses increase
in the future due to  inflation,  the Company can recover some of the  increased
costs by  increasing  menu prices.  However,  many  contracts  require  landlord
approval before prices can be increased,  which could reduce profit margins.  In
addition, a significant  recession could reduce air travel or cause users of the
Company's  facilities to cancel,  reduce or postpone their use of the facilities
or cause  patrons to reduce their  spending on food,  beverage  and  merchandise
while at such facilities.

COMPETITIVE  FORCES.  The food and beverage and retail  concessions  business in
airports, on tollroads and in shopping malls is highly competitive.  The Company
competes to retain existing  contracts and to obtain new contracts from airport,
highway and municipal  authorities and shopping mall  developers.  The Company's
contracts  generally  have a fixed term and in any fiscal year a number of these
contracts  either expire or come up for renewal.  There can be no assurance that
the Company  will be able to retain and renew  existing  contracts or obtain new
contracts. Competition within the industry is likely to intensify as the Company
and its competitors attempt to expand operations.  Such intensified  competition
could  have a  material  adverse  impact on the  Company's  business,  financial
condition and results of operations. (see "Item 1. Business - Competition").

CAPITAL  EXPENDITURES.  The Company incurs capital expenditures to build out new
facilities, expand or re-concept existing facilities and to maintain the quality
and improve  operations  of existing  facilities.  The Company funds its capital
expenditures with cash flow generated from ongoing  operations.  There can be no
assurance  that cash flow from  operations in future periods will be adequate to
sustain the level of capital expenditures made in prior periods.

GOVERNMENT  REGULATION.  The food,  beverage and retail concessions  business is
subject to numerous federal, state and local government  regulations,  including
regulations relating to the sale of alcoholic beverages, preparation and sale of
food and  employer/employee  relations.  The application of these regulations to
the Company, such as the loss of a liquor license at an operating location,  and
changes in these regulations,  such as any substantial

                                       25

<PAGE>

increases in the minimum wage or mandatory health care coverage, could adversely
affect the Company's business, financial condition and results of operations.

YEAR 2000. The Company is currently  working to resolve the potential  impact of
the Year 2000 on the Company's operations.  If the Company, its customers or its
vendors are unable to resolve these issues in a timely  manner,  it could result
in material financial risk to the Company. (See "Other Matters").

ASIAN MARKETS.  The Company does not expect any material  adverse effects on its
financial results from the present downturn in the Asian markets; however, it is
possible that a prolonged  Asian economic  downturn could slow growth at a small
number of the  Company's  concessions  operations,  particularly  its  duty-free
merchandise concession catering to Asian travelers.


OTHER MATTERS

     The Company is  currently  working to resolve the  potential  impact of the
Year 2000 on the Company's operations. An action plan consisting of three phases
was  formulated  in 1997.  Phase one will be completed in the first half of 1998
and full  completion  of the action  plan  should  occur in 1999.  The Year 2000
problem  is the  result of  computer  programs  being  written  using two digits
(rather than four) to define the applicable year. Any of the Company's  programs
or computer hardware and electronic equipment that have time-sensitive  software
or computer  chips may recognize a date using "00" as a date other than the Year
2000, which could result in miscalculations or system failures.  If the Company,
its customers or its vendors are unable to resolve such  processing  issues in a
timely manner, it could result in a material  financial risk.  Accordingly,  the
Company plans to devote the necessary  resources to resolve all significant Year
2000 issues in a timely manner.  The Company  currently  anticipates the cost of
funding its Year 2000 systems compliance  program will total  approximately $1.5
million in 1998, $1.5 million in 1999 and $0.5 million in 2000. The Company will
confirm  its  estimate  of funding  costs after the first phase of the Year 2000
project.   Additionally,   final   remediation   may  require   further  capital
investments.

     In addition to the risks noted above, the Company's  operations may also be
affected by Year 2000 issues related to air traffic control and security systems
used in airports. These issues could potentially lead to degraded flight safety,
grounded or delayed flights, increased airline costs and customer inconvenience.
Since the Company is not  responsible  for  addressing  these issues,  it cannot
control  or  predict  the  impact  on future  operations  of the Year 2000 as it
pertains to air traffic control and airport security systems.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Not applicable.


                                       26


<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial information is included on the pages indicated.

                                                                         PAGE(S)

  Report of Independent Public Accountants                                   28

  Consolidated Balance Sheets as of January 2, 1998
        and January 3, 1997                                                  29

  Consolidated Statements of Operations for the Fiscal Years Ended
        January 2, 1998, January 3, 1997 and December 29, 1995               30

  Consolidated Statements of Cash Flows for the Fiscal Years Ended
        January 2, 1998, January 3, 1997 and December 29, 1995               31

  Consolidated Statements of Shareholder's Deficit for the Fiscal
        Years Ended January 2, 1998, January 3, 1997 and
        December 29, 1995                                                    32

  Notes to Consolidated Financial Statements                            33 - 48



                                       27


<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholder of Host International, Inc.:


        We have audited the  accompanying  consolidated  balance  sheets of Host
International,  Inc.  and  subsidiaries,  as defined in Note 1, as of January 2,
1998 and January 3, 1997, and the related consolidated statements of operations,
cash flows and  shareholders'  deficit for each of the three fiscal years in the
period ended January 2, 1998. These financial  statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements 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 in the
first paragraph present fairly, in all material respects, the financial position
of Host  International,  Inc. and subsidiaries as of January 2, 1998 and January
3, 1997,  and the results of their  operations  and their cash flows for each of
the three fiscal years in the period ended January 2, 1998,  in conformity  with
generally accepted accounting principles.

        As explained in Note 3 to the  consolidated  financial  statements,  the
Company changed its method of accounting for impairments of long-lived assets in
1995.





ARTHUR ANDERSEN LLP
February 3, 1998
Washington, D.C.

                                       28


<PAGE>

HOST INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997

<TABLE>
<CAPTION>
-------------------------------------------------------------------------- ---------------- -----------------
                                                                                1997              1996
-------------------------------------------------------------------------- ---------------- -----------------
                                                                                    (IN MILLIONS)
<S>                                                                               <C>               <C>

                                 ASSETS
Current assets:
   Cash and cash equivalents                                                      $  60.3           $  93.1
   Accounts receivable, net                                                          23.3              28.1
   Inventories                                                                       38.5              40.8
   Deferred income taxes                                                             12.9              27.0
   Prepaid rent                                                                       7.0               5.9
   Other current assets                                                               6.2               3.4
-------------------------------------------------------------------------- ---------------- -----------------
   Total current assets                                                             148.2             198.3

Property and equipment, net                                                         252.5             245.1
Intangible assets                                                                    21.9              23.1
Deferred income taxes                                                                55.3              51.7
Other assets                                                                         22.1              19.6
-------------------------------------------------------------------------- ---------------- -----------------
Total assets                                                                      $ 500.0           $ 537.8
-------------------------------------------------------------------------- ---------------- -----------------

                  LIABILITIES AND SHAREHOLDER'S DEFICIT

Current liabilities:
   Accounts payable                                                               $  67.7           $  93.1
   Accrued payroll and benefits                                                      46.1              45.7
   Accrued interest payable                                                           4.7               4.8
   Current portion of long-term debt                                                  1.0               0.8
   Other current liabilities                                                         36.4              59.4
-------------------------------------------------------------------------- ---------------- -----------------
   Total current liabilities                                                        155.9             203.8

Long-term debt                                                                      405.8             407.4
Other liabilities                                                                    49.6              56.6
-------------------------------------------------------------------------- ---------------- -----------------
Total liabilities                                                                   611.3             667.8

Common stock, no par value, 100 shares authorized,
   issued and outstanding                                                             ---               ---
Retained deficit                                                                   (111.3)           (130.0)
-------------------------------------------------------------------------- ---------------- -----------------
   Total shareholder's deficit                                                     (111.3)           (130.0)
-------------------------------------------------------------------------- ---------------- -----------------
Total liabilities and shareholder's deficit                                       $ 500.0           $ 537.8
-------------------------------------------------------------------------- ---------------- -----------------

</TABLE>



              See notes to the consolidated financial statements.

                                       29


<PAGE>

HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995

<TABLE>
<CAPTION>
------------------------------------------------------------------ ----------------- ---------------- -----------------
                                                                         1997             1996              1995
------------------------------------------------------------------ ----------------- ---------------- -----------------
                                                                                      (IN MILLIONS)
<S>                                                                        <C>              <C>              <C>

REVENUES                                                                  $1,146.3         $1,139.7          $  993.3
------------------------------------------------------------------ ----------------- ---------------- -----------------

OPERATING COSTS AND EXPENSES
   Cost of sales                                                             329.6            335.9             304.8
   Payroll and benefits                                                      338.4            335.0             290.0
   Rent                                                                      180.4            180.9             156.8
   Royalties                                                                  22.6             20.7              16.0
   Depreciation and amortization                                              49.1             49.7              51.4
   Write-downs of long-lived assets                                            4.2              ---              22.0
   Restructuring and other special charges, net                               (3.9)             ---              14.5
   General and administrative                                                 54.3             51.8              45.5
   Other                                                                     105.5            105.6              90.6
------------------------------------------------------------------ ----------------- ---------------- -----------------
Total operating costs and expenses                                         1,080.2          1,079.6             991.6

OPERATING PROFIT                                                              66.1             60.1               1.7

   Interest expense                                                          (39.8)           (40.3)            (40.3)
   Interest income                                                             3.0              2.4               0.7
------------------------------------------------------------------ ----------------- ---------------- -----------------
INCOME (LOSS) BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM                                                         29.3             22.2             (37.9)

Provision for income taxes                                                     9.7              9.3               3.9
------------------------------------------------------------------ ----------------- ---------------- -----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                       19.6             12.9             (41.8)
   Extraordinary item - loss on extinguishment of debt
        (net of related income tax benefit of $5.2 million)                    ---              ---              (9.6)
------------------------------------------------------------------ ----------------- ---------------- -----------------
NET INCOME (LOSS)                                                         $   19.6         $   12.9          $  (51.4)
------------------------------------------------------------------ ----------------- ---------------- -----------------
</TABLE>




              See notes to the consolidated financial statements.

                                       30


<PAGE>

HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995

<TABLE>
<CAPTION>
------------------------------------------------------------------ ----------------- ---------------- -----------------
                                                                         1997             1996              1995
------------------------------------------------------------------ ----------------- ---------------- -----------------
                                                                                      (IN MILLIONS)
<S>                                                                         <C>             <C>               <C>

OPERATING ACTIVITIES
Net income (loss)                                                           $ 19.6           $ 12.9            $(51.4)
Extraordinary item                                                             ---              ---               9.6
------------------------------------------------------------------ ----------------- ---------------- -----------------
Income (loss) before extraordinary item                                       19.6             12.9             (41.8)

Adjustments to reconcile cash from operations:
   Depreciation and amortization                                              50.8             50.4              52.3
   Deferred financing                                                          1.3              1.3               0.7
   Income taxes                                                               10.5             (5.5)             (8.6)
   Write-downs of long-lived assets                                            4.2              ---              22.0
   Restructuring and other special charges                                    (3.9)             ---              14.5
   Other                                                                       6.1              3.8               3.4

   Working capital changes:
        Decrease in accounts receivable                                        5.4              2.1               1.1
        Decrease (increase) in inventories                                     1.5             (6.8)             (3.2)
        (Increase) decrease in other current assets                           (5.7)            (1.6)              2.5
        (Decrease) increase in accounts payable and accruals                 (43.9)            41.9               3.4
------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash provided by operations                                                   45.9             98.5              46.3
------------------------------------------------------------------ ----------------- ---------------- -----------------

INVESTING ACTIVITIES
Capital expenditures                                                         (66.0)           (54.9)            (49.7)
Acquisitions                                                                   ---              ---              (1.6)
Net proceeds from the sale of assets                                           ---              2.4               2.3
Other, net                                                                    (8.7)             2.6               5.5
------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash used in investing activities                                            (74.7)           (49.9)            (43.5)
------------------------------------------------------------------ ----------------- ---------------- -----------------

FINANCING ACTIVITIES
Payment to Host Marriott Corporation for Marriott  International
   options and deferred shares                                                (2.2)             ---               ---
Repayments of long-term debt                                                  (1.7)            (0.8)           (392.8)
Issuance of long-term debt                                                     ---              ---             388.3
Transfers (to) from Host Marriott Corporation and other, net                  (0.1)             ---              22.4
------------------------------------------------------------------ ----------------- ---------------- -----------------
Cash (used in) provided by financing activities                               (4.0)            (0.8)             17.9
------------------------------------------------------------------ ----------------- ---------------- -----------------

(DECREASE) INCREASE IN CASH AND
   CASH EQUIVALENTS                                                          (32.8)            47.8              20.7

CASH AND CASH EQUIVALENTS, beginning of year                                  93.1             45.3              24.6
------------------------------------------------------------------ ----------------- ---------------- -----------------
CASH AND CASH EQUIVALENTS, end of year                                      $ 60.3           $ 93.1            $ 45.3
------------------------------------------------------------------ ----------------- ---------------- -----------------
</TABLE>



              See notes to the consolidated financial statements.

                                       31


<PAGE>

HOST INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S DEFICIT
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
(IN MILLIONS)

<TABLE>
<CAPTION>
------------------------------------------------------- -------------- ------------- --------------- ---------------
                                                                        ADDITIONAL
                                                           COMMON        PAID-IN        RETAINED
                                                            STOCK        CAPITAL        DEFICIT          TOTAL
------------------------------------------------------- -------------- ------------- --------------- ---------------
<S>                                                          <C>           <C>             <C>            <C>

Balance, December 30, 1994                                    $  ---        $  9.6         $ (56.1)        $ (46.5)
------------------------------------------------------- -------------- ------------- --------------- ---------------

Net loss                                                         ---           ---           (51.4)          (51.4)
Net distributions to parent                                      ---          (9.6)          (42.7)          (52.3)
------------------------------------------------------- -------------- ------------- --------------- ---------------
Balance, December 29, 1995                                       ---           ---          (150.2)         (150.2)

Net income                                                       ---           ---            12.9            12.9
Adjustments to distribution of
   capitalization of Company                                     ---           ---             4.6             4.6
Deferred compensation and other                                  ---           ---             2.7             2.7
------------------------------------------------------- -------------- ------------- --------------- ---------------
Balance, January 3, 1997                                         ---           ---          (130.0)         (130.0)

Net income                                                       ---           ---            19.6            19.6
Deferred compensation and other                                  ---           ---             1.3             1.3
Payment to Host Marriott Corporation for
   Marriott International options and deferred shares                                         (2.2)           (2.2)
------------------------------------------------------- -------------- ------------- --------------- ---------------
BALANCE, JANUARY 2, 1998                                      $  ---        $  ---         $(111.3)        $(111.3)
------------------------------------------------------- -------------- ------------- --------------- ---------------
</TABLE>




              See notes to the consolidated financial statements.

                                       32


<PAGE>

                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
         (IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS WHERE INDICATED)



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Prior to December 21, 1995, Host International,  Inc. (a Delaware  corporation -
the  "Company")  operated as a wholly-owned  subsidiary of Host Marriott  Travel
Plazas,  Inc. ("HMTP"),  which was formed in 1993 to own and operate most of the
airport,  travel plaza and sports and  entertainment  concessions  facilities of
Host Marriott Corporation ("Host Marriott").  HMTP was an indirect  wholly-owned
subsidiary  of Host  Marriott.  On December 21,  1995,  HMTP was merged into the
Company  with the Company  emerging  as the  surviving  entity.  Pursuant to the
merger, the Company became the operator or manager of all of the food,  beverage
and merchandise  concessions  businesses in travel and  entertainment  venues of
Host Marriott (formerly known as Host Marriott's "Operating Group"). The Company
also became the obligor on the $400.0 million of senior notes,  due in 2005 (the
"Senior Notes") which were issued by HMTP in May 1995 (see Note 6).
        On  December  29,  1995  (the   "Distribution   Date"),   Host  Marriott
distributed,  through a special  dividend to holders of Host  Marriott's  common
stock, 31.9 million shares of common stock of Host Marriott Services Corporation
("Host  Marriott  Services"),  resulting  in the  division  of  Host  Marriott's
operations into two separate  companies.  Through a series of transactions  that
were  consummated  prior  to  the  Distribution   Date,  the  Company  became  a
wholly-owned subsidiary of Host Marriott Services.
     Prior to the Distribution,  the Company operated as a unit of Host Marriott
Corporation,  utilizing Host Marriott's centralized systems for cash management,
payroll,  purchasing and  distribution,  employee  benefit plans,  insurance and
administrative services. Except for unit operating cash accounts,  substantially
all cash  received by the  Company was  deposited  in and  commingled  with Host
Marriott's general corporate funds. Operating expenses, capital expenditures and
other cash  requirements  of the Company were paid by Host  Marriott and charged
directly or allocated to the Company.  Certain general and administrative  costs
of Host  Marriott  were  allocated  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 or  operating  profit.  Such  allocated  amounts are included in
corporate  expenses and were $8.0 million in fiscal year 1995. In the opinion of
management,  the methods for  allocating  corporate  general and  administrative
expenses and other direct costs are reasonable in their respective  years. 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.
     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.  All material  intercompany
transactions  and balances  between the Company and its  subsidiaries  have been
eliminated.
     The Company's 1995 statement of financial  position,  results of operations
and  cash  flows  are  presented  in  the  accompanying  consolidated  financial
statements as if the Company were formed as a separate entity of Host Marriott.

DESCRIPTION OF THE BUSINESS

The Company operates or manages  restaurants,  gift shops and related facilities
at 70 airports,  on 13 tollroads  (including  92 travel  plazas) and in 21 other
venues (including shopping malls, tourist attractions, stadiums and arenas). The
Company  conducts its operations  primarily in the United States and manages the
travel plaza  concessions  business of its affiliate,  Host Marriott  Tollroads,
Inc.  ("Tollroads"),  a wholly-owned  subsidiary of Host Marriott Services.  The
Company  also has  international  operations  in The  Netherlands,  New Zealand,
Australia and Canada.

FISCAL YEAR

The Company's fiscal year ends on the Friday nearest to December 31, with fiscal
quarters  of 12 weeks in each of the first  three  quarters  and 16 weeks in the
fourth quarter (except in a 53-week year,  which has a 17 week fourth  quarter).
Fiscal year 1996  includes 53 weeks while  fiscal years 1997 and 1995 include 52
weeks.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents generally include all highly liquid investments with a
maturity of three months or less at the date of purchase.


                                       33

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


INVENTORIES

Inventories consist of merchandise, food items and supplies, which are stated at
the lower of average  cost or market.  The cost of food  items and  supplies  is
determined using the first-in,  first-out method. Merchandise cost is determined
using the retail method.

PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost.  Replacements  and improvements are
capitalized.  Leasehold  improvements,  net of  estimated  residual  value,  are
amortized  over the shorter of the useful  life of the asset,  generally 5 to 15
years,  or the lease  term.  Depreciation  is computed  using the  straight-line
method over the  estimated  useful lives of the assets,  generally 3 to 10 years
for furniture and equipment.

INTANGIBLE ASSETS

Intangible  assets  consist of goodwill of $5.2 million in 1997 and $5.4 million
in 1996, and contract rights of $16.7 million in 1997 and $17.7 million in 1996.
These  intangibles are being amortized on a straight-line  basis over periods of
40 years for goodwill and the life of the contract, generally 5 to 15 years, for
contract rights. Amortization expense totaled $2.9 million in 1997, $2.8 million
in 1996 and $2.7 million in 1995. Accumulated amortization totaled $13.9 million
and $11.1 million as of January 2, 1998, and January 3, 1997, respectively.

IMPAIRMENTS OF LONG-LIVED ASSETS

Property  and  equipment  and  intangible  assets are  reviewed  for  impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If the sum of undiscounted expected future cash
flows is less than the carrying amount of an individual operating unit's assets,
the  Company  recognizes  an  impairment  loss  based on the amount by which the
carrying amount of the asset exceeds the fair value of the asset.  Fair value is
calculated as the present  value of expected  future cash flows on an individual
operating unit basis.

SELF-INSURANCE PROGRAM

Prior to October 1993,  Host  Marriott was  self-insured  for certain  levels of
general   liability  and  workers'   compensation.   Estimated  costs  of  these
self-insurance  programs were accrued at present values of projected settlements
for  known  and  anticipated   claims.   Host  Marriott's   costs  for  workers'
compensation and general liability insurance were allocated to the Company based
on specific  identification  of claims.  Host  Marriott,  including the Company,
discontinued its self-insurance program for claims arising subsequent to October
1993.  Self-insurance  liabilities  of the Company  amounted to $9.9 million and
$10.1 million at January 2, 1998 and January 3, 1997, respectively.

FOREIGN CURRENCY TRANSLATION

Results of operations for foreign  entities are translated to U.S. dollars using
the  average  exchange  rates  during the  period.  Assets and  liabilities  are
translated  using  the  exchange  rate in  effect  at the  balance  sheet  date.
Resulting  translation  adjustments  are reflected in  shareholders'  deficit as
cumulative translation adjustments.

INCOME TAXES

The  Company  recognizes  deferred  tax  assets and  liabilities  based upon the
expected future tax consequences of existing  differences  between the financial
reporting and tax reporting  bases of assets and  liabilities and operating loss
and tax credit carryforwards.

NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

The Company adopted  Statements of Financial  Accounting  Standards ("SFAS") No.
129,  "Disclosure of  Information  about Capital  Structure,"  and SFAS No. 131,
"Disclosures  about Segments of an Enterprise and Related  Information,"  during
1997.  The  adoption of these  standards  did not have a material  effect on the
Company's  consolidated  financial statements (see Note 14). The Company adopted
the disclosure  only  provisions of SFAS No. 123,  "Accounting  for  Stock-Based
Compensation,"  during  1996 (see Note 8). The  Company  adopted  SFAS No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed  Of" during 1995.  The initial  adoption of SFAS No. 121 resulted in
the  recognition  of a non-cash,  pretax charge  against  earnings in the fourth
quarter  of 1995 of $22.0  million  (see  Note  3).  SFAS  No.  130,  "Reporting
Comprehensive  Income," is  required  to be adopted no later than the  Company's
fiscal year ending  January 1, 1999.  The Company is  currently  evaluating  the
financial statement impact of adopting SFAS No. 130.

USE OF ESTIMATES

The preparation of the consolidated  financial statements 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

                                       34

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


reported  amounts of revenues and  expenses  during the period.  Actual  results
could differ from those estimates.

RECLASSIFICATIONS

Certain  reclassifications were made to the prior years' financial statements to
conform to the 1997 presentation.

2.  THE DISTRIBUTION

On December 29, 1995 (the  "Distribution  Date"),  Host Marriott  distributed to
holders  of its  common  stock,  31.9  million  shares of  common  stock of Host
Marriott Services through a special dividend. The shares were distributed on the
basis of one share of Host Marriott Services' common stock for every five shares
of Host Marriott stock.
     In connection with the  Distribution,  Host Marriott  retained all cash and
cash  equivalent  balances  of the Company  and its  subsidiaries,  except for a
defined  level of initial  cash  equaling  $25.0  million,  adjusted  to include
certain   estimated   future   restructuring   expenditures,   certain   capital
expenditures  and  cash  maintained  at a  foreign  airport  operation.  At  the
Distribution  Date,  the  Company  held cash in excess of the  defined  level of
initial cash of $7.9 million that was payable to Host Marriott.
     In connection  with the  Distribution,  the Company entered into management
agreements related to certain restaurant  operations  retained by Host Marriott.
Management fees related to these  contracts were $0.1 million,  $0.2 million and
$1.2  million  in  1997,  1996  and  1995,  respectively.   Host  Marriott  also
transferred  six  airport  concessions  contracts  and the  related  assets  and
liabilities  to the Company such that the  operations of these  facilities  were
included in the  Company's  results of operations  for the period  subsequent to
September 9, 1995 through  December  29, 1995.  Prior to September 9, 1995,  the
Company managed the six airport concessions  contracts referred to above, and in
connection therewith, received management fees of $4.3 million in 1995.
     Net  distributions to parent  reflected in the  consolidated  statements of
shareholder's  deficit  include,  among  other  things,  asset,  cash and  other
transfers between the Company and its parent. In 1995 and in connection with the
Distribution,  $84.0 million of assets were  transferred  to the parent and $7.0
million  of assets  were  received  from the  parent  through  the  transactions
described above.
     For purposes of governing certain of the ongoing  relationships between the
Company  and Host  Marriott  after the  Distribution  and to provide for an
orderly  transition,   the  Company  and  Host  Marriott  entered  into  various
agreements including a Distribution  Agreement,  an Employee Benefits Allocation
Agreement,  a Tax Sharing  Agreement  (see Note 4) and a  Transitional  Services
Agreement.  Payments made to Host Marriott relating to these agreements  totaled
$0.1 million in 1996. No payments were made during 1997.

3.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
---------------------------------- ----------- ----------
                                      1997       1996
---------------------------------- ----------- ----------
                                       (IN MILLIONS)
<S>                                  <C>        <C>

Leasehold improvements               $ 367.7    $ 362.0
Furniture and equipment                208.6      201.0
Construction in progress                32.9       28.7
---------------------------------- ----------- ----------
Subtotal                               609.2      591.7
Less:  accumulated
       depreciation and
       amortization                   (356.7)    (346.6)
---------------------------------- ----------- ----------
Total property and equipment, net    $ 252.5    $ 245.1
---------------------------------- ----------- ----------
</TABLE>

     During 1997,  the operating cash flow analysis of one airport unit in which
the Company was  obligated to add new  facilities,  revealed  that the Company's
investment  was  partially  impaired and  recognized a non-cash,  pretax  charge
against  earnings  of  $4.2  million.   The  partial   impairment  stemmed  from
construction cost overruns and weak operating performance.
     Effective  September  9, 1995,  the Company  adopted SFAS No. 121 and wrote
down the assets of 14  individual  operating  units by  recognizing  a non-cash,
pretax charge against  earnings of $22.0  million.  Eleven of the fourteen units
had projected  cash flow deficits  and,  accordingly,  the assets of these units
were written off in their  entirety.  The  remaining  three units had  projected
positive  cash  flows,  and the  assets  were  partially  written  down to their
respective fair values.  Approximately 43% of the total 1995 write-down  related
to the Orlando  airport unit.  Historically,  the Company has incurred  negative
cash  flows  at 10 of  the  14  individual  operating  units,  which  aggregated
approximately  $0.3  million,  $4.0 million and $2.0  million in 1997,  1996 and
1995, respectively.  The Company incurred positive cash flows of $0.5 million in
1996  relating to these units.  These cash flows were  included in the Company's
reported  cash flow from  operations  for each  year.  During  1996,  six of the
original 14 impaired units either were disposed of or the lease term expired. As
of the end of 1997  and as a  result  of  improved  operating  performance,  the
remaining

                                       35

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


eight operating units had projected  positive cash flows of  approximately  $1.1
million over the remaining weighted-average life of 3.4 years.
     Prior to  September  9, 1995,  the Company  determined  the  impairment  of
operating unit assets on a business-line  basis. Using the business-line  basis,
if the net carrying costs exceeded the estimated future  undiscounted cash flows
from a  business-line  basis,  such  excess  costs  would be charged to expense.
Although the Company has been aware that certain operating units were generating
losses and cash flow deficits since the late 1980s, because the estimated future
undiscounted cash flow on a business-line  basis exceeded the carrying amount of
the Company's  long-lived  assets on a business-line  basis,  the Company offset
such negative cash flows with positive cash flows from other  operating units in
the  applicable  business  lines and did not recognize any  impairment  charges,
prior to the adoption of SFAS No. 121.

4.  INCOME TAXES

The provision for income taxes consists of:

<TABLE>
<CAPTION>
-------------------------- -------- ---------- ---------
                            1997      1996       1995
-------------------------- -------- ---------- ---------
                                  (IN MILLIONS)
<S>                         <C>        <C>       <C>

Current:
   Federal                  $(3.2)     $11.1    $  0.2
   Foreign                    ---        0.2       ---
   State                      2.4        3.5       1.5
-------------------------- -------- ---------- ---------
Total current (benefit)
   provision                 (0.8)      14.8       1.7
-------------------------- -------- ---------- ---------

Deferred:
   Federal                   10.1       (2.3)    (11.7)
   Foreign                    ---       (0.2)      ---
   State                      2.3        2.2      (3.1)
   Increase (decrease)
      in valuation
      allowance              (1.9)      (5.2)     17.0
-------------------------- -------- ---------- ---------
Total deferred
   provision (benefit)       10.5       (5.5)      2.2
-------------------------- -------- ---------- ---------
Total provision             $ 9.7      $ 9.3     $ 3.9
-------------------------- -------- ---------- ---------
</TABLE>

     The tax effect of each type of temporary  difference and carryforward  that
gives rise to a significant portion of deferred tax assets and liabilities is as
follows:

<TABLE>
<CAPTION>
------------------------------------ --------- ---------
                                       1997      1996
------------------------------------ --------- ---------
                                       (IN MILLIONS)
<S>                                    <C>        <C>

Deferred tax assets:
   Tax credit carryforwards            $21.7     $21.7
   Property and equipment               52.9      49.3
   Casualty insurance                    8.8       7.8
   Reserves                              5.9      10.3
   Employee benefits                     2.6      16.7
   Accrued rent                         10.7      11.5
   Other                                 0.9       ---
------------------------------------ --------- ---------
Gross deferred tax assets              103.5     117.3

Less:  valuation allowance             (26.5)    (28.4)
------------------------------------ --------- ---------
Net deferred tax assets                 77.0      88.9
------------------------------------ --------- ---------

Deferred tax liabilities:
   Safe harbor lease investments        (3.8)     (5.0)
   Other deferred tax liabilities       (5.0)     (5.2)
------------------------------------ --------- ---------
Gross deferred tax liabilities          (8.8)    (10.2)
------------------------------------ --------- ---------
Net deferred income taxes              $68.2     $78.7
------------------------------------ --------- ---------
</TABLE>

     At the end of fiscal year 1997, the Company had approximately  $9.1 million
of alternative  minimum tax credit  carryforwards  that do not expire, and $12.6
million of other tax credits which expire through 2012.
     The Company  establishes  a valuation  allowance to reduce its net deferred
tax assets to the amount  that is more likely  than not to be  realized.  During
1997, the Company recognized the utilization of $1.9 million of certain purchase
business combination tax credits previously believed unrealizable. The valuation
allowance  was  reduced to reflect  the credit  utilization.  During  1996,  the
Company decreased the deferred tax asset and valuation allowance by $5.2 million
due to the decrease in the state  effective tax rate and expiration of purchased
business  combination  tax  credits.  During  1995,  the Company  increased  the
valuation   allowance  by  $17.0  million   based  on  its   assessment  of  the
realizability of the net deferred tax assets.
     Realization  of the net deferred  tax assets is dependent on the  Company's
ability to generate sufficient future taxable income during the periods in which
temporary  differences  reverse.  The  amount  of the net  deferred  tax  assets
considered realizable,  however, could be reduced if estimates of future taxable
income are not  achieved.  Although  realization  is not  assured,  the  Company
believes  it is more likely  than not that the net  deferred  tax assets will be
realized.

                                       36

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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

<TABLE>
<CAPTION>
----------------------- ----------- ----------- ---------
                           1997        1996       1995
----------------------- ----------- ----------- ---------

<S>                        <C>         <C>       <C>

Statutory Federal
   tax rate                 35.0 %      35.0 %   (35.0)%
State income tax,
   net of Federal
   tax benefit               4.9         4.9       2.7
Tax credits                 (3.2)        6.5      (2.7)
Change in valuation
   allowance                (6.5)      (23.4)     45.9
Effect of state tax
   rate changes on
   deferred taxes            ---        13.8       ---
Other, net                   2.8         5.1      (0.1)
----------------------- ----------- ----------- ---------
Effective income
   tax rate                 33.0 %      41.9 %    10.8 %
----------------------- ----------- ----------- ---------
</TABLE>

     Beginning  with  the  1996  fiscal  year,  the  Company  and  its  domestic
subsidiaries are included in the consolidated  Federal income tax return of Host
Marriott  Services.  Prior to fiscal year 1996,  the Company was included in the
consolidated Federal income tax return of Host Marriott and its affiliates.  The
income tax provision or benefit included in these financial  statements reflects
the income tax provision or benefit and temporary  differences  attributable  to
the operations of the Company on a separate income tax return basis.
     In connection with the Distribution,  the Company and Host Marriott entered
into a tax sharing  agreement (the "Tax Sharing  Agreement").  In general,  with
respect to periods  ending on or before  December  29,  1995,  Host  Marriott is
responsible  for filing  consolidated  Federal and certain state tax returns for
the Host Marriott affiliated group and paying the taxes relating to such returns
(including any subsequent adjustments resulting from the redetermination of such
tax liabilities by the applicable taxing  authorities).  The Company  reimburses
Host Marriott for a defined portion of such taxes.
     Prior to the  existence  of the Tax  Sharing  Agreement,  all  current  tax
provision  amounts were treated as paid to, or received  from,  Host Marriott in
accordance with Host Marriott's tax sharing policy.  The Company made net income
tax payments of $2.5 million and $15.9  million in 1997 and 1996,  respectively,
and paid $12.6 million to Host Marriott for income taxes in 1995.


5.  DETAIL OF OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>
-------------------------------- ----------- ---------
                                    1997       1996
-------------------------------- ----------- ---------
                                    (IN MILLIONS)
<S>                                  <C>        <C>

Accrued rent                          $ 7.9     $19.3
Operating insurance accruals            8.6       9.6
Accrued restructuring costs             0.5       7.1
International accruals                  3.5       3.6
Accrued franchise fees                  1.8       1.7
Other                                  14.1      18.1
-------------------------------- ----------- ---------
Total other current liabilities       $36.4     $59.4
-------------------------------- ----------- ---------
</TABLE>


6.  DEBT

Debt consists of the following:

<TABLE>
<CAPTION>
--------------------------------- ---------- ---------
                                    1997       1996
--------------------------------- ---------- ---------
                                     (IN MILLIONS)
<S>                                 <C>       <C>

Senior Notes with a fixed rate
   of 9.5%, due 2005                $400.0    $400.0
Capital lease obligations              0.6       0.7
Other                                  6.2       7.5
--------------------------------- ---------- ---------
Total debt                           406.8     408.2
Less:  current portion                (1.0)     (0.8)
--------------------------------- ---------- ---------
Total long-term debt                $405.8    $407.4
--------------------------------- ---------- ---------
</TABLE>


SENIOR NOTES

In May 1995,  the Company issued $400.0 million of senior notes due in 2005 (the
"Senior  Notes"),  the net proceeds of which were  distributed to Host Marriott,
and were used to repay portions of Host Marriott's debt obligations.  The Senior
Notes 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  subsidiaries of
the Company (the "Guarantors"). The Senior Notes are also secured by a pledge of
the capital stock of the  Guarantors.  The indenture  governing the Senior Notes
(the "Senior Notes  Indenture")  contains  covenants  that,  among other things,
limit the  ability  of the  Company  and  certain of its  subsidiaries  to incur
additional  indebtedness  and issue preferred stock, pay dividends or make other
distributions,  repurchase  capital  stock or repay  subordinated  indebtedness,
create certain liens,  enter into certain  transactions  with  affiliates,  sell
certain  assets,  issue or sell capital stock of the  Guarantors  and enter into
certain mergers and consolidations.
     As of January 2, 1998,  the Company  had  approximately  $103.2  million of
unrestricted  funds available for  distribution to Host Marriott  Services under

                                       37

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


the provisions of the Senior Notes Indenture.  However, certain covenants of the
loan  agreements  referred to below further  restrict the  Company's  ability to
dividend these funds to Host Marriott  Services.  The Senior Notes can be called
beginning in May 2000 at a price of 103.56%, declining to par in March 2003.

CREDIT FACILITIES

The  First  National  Bank of  Chicago,  as agent  for a group of  participating
lenders,  has provided credit facilities (the "Facilities") to the Company.  The
Company  negotiated  several  enhancements  to the  Facilities  during 1997. The
enhancements  increased the aggregate principal amount and extended the maturity
of the  Facilities  from $75.0  million of principle  through  December  2000 to
$100.0 million  through April 2002 ("Total  Commitment").  The Total  Commitment
consists of (i) a letter of credit  facility in the amount of $25.0  million for
the  issuance  of  financial  and  non-financial  letters  of credit  and (ii) a
revolving credit facility in the amount of $75.0 million  ("Revolver  Facility")
for  working  capital  and  general   corporate   purposes  other  than  hostile
acquisitions.  An annual  commitment fee ranging from 0.25% to 0.375% is charged
on the unused portion of the Facilities. All borrowings under the Facilities are
senior  obligations  of the Company and are secured by Host  Marriott  Services'
pledge of, and a first perfected  security interest in, the capital stock of the
Company and certain of its subsidiaries.
     The loan agreements  relating to the Facilities  contain dividend and stock
retirement  covenants that are  substantially  similar to those set forth in the
Senior  Notes  Indenture,  provided  that  dividends  payable to the Company are
limited to 25% of the Company's consolidated net income. The enhancements to the
Facility during 1997 eliminated the revolver  facility's annual 30-day repayment
provision.  As of the end of fiscal year 1997,  and  throughout  the fiscal year
1997, there was no outstanding indebtedness under the Revolver Facility.
     Aggregate debt maturities,  excluding capital lease obligations, at the end
of fiscal year 1997 are as follows:

<TABLE>
<CAPTION>
---------------------------------- -------------------
Fiscal Years
---------------------------------- -------------------
                                     (IN MILLIONS)
<S>                                             <C>

1998                                           $  0.8
1999                                              0.9
2000                                              0.9
2001                                              1.0
2002                                              1.0
Thereafter                                      401.6
---------------------------------- -------------------
Total debt                                     $406.2
---------------------------------- -------------------
</TABLE>

     Other debt totaling $6.2 million  includes  various debt agreements with an
average rate of 7.8%. Approximately $1.7 million of other debt is denominated in
Dutch Guilders.
     Deferred financing costs,  which are included in other assets,  amounted to
$9.1  million  and  $10.2  million  at the end of  fiscal  year  1997 and  1996,
respectively.  Cash paid for interest was $38.5 million, $38.8 million and $39.8
million in 1997, 1996 and 1995, respectively.

7.  SHAREHOLDER'S DEFICIT

One  hundred  shares  of  common  stock,  without  par  value,  are  issued  and
outstanding as of the end of fiscal years 1997, 1996 and 1995. All of the shares
are owned by the Company's parent, Host Marriott Services.

HOST MARRIOTT STOCK OPTIONS AND DEFERRED STOCK AWARDS HELD BY
MARRIOTT INTERNATIONAL EMPLOYEES

On the Distribution  Date,  certain  employees of Marriott  International,  Inc.
("Marriott  International" - see Note 13) held Host Marriott  nonqualified stock
options (the "MI Host Marriott  Options") and deferred  stock  incentive  shares
(the "MI Host Marriott Deferred Stock"). As a result of the Distribution, the MI
Host Marriott  Options  remained options to acquire only shares of Host Marriott
common  stock,  except  that the  exercise  price of,  and the  number of shares
underlying,  such options were adjusted to preserve the  intrinsic  value of the
options to their  holders.  Likewise,  each award for MI Host Marriott  Deferred
Stock remained awards to be paid using Host Marriott common stock and the number
of shares was adjusted to preserve the  intrinsic  value.  Host Marriott and the
Company have agreed to share the cost to Host Marriott of the adjustments to the
MI Host Marriott Options and the MI Host Marriott Deferred Stock.
     Host Marriott  Services may issue to Host Marriott up to 1.4 million shares
of  common  stock  upon  the  exercise  of  the MI  Host  Marriott  Options  and
approximately  204,000 shares upon the release of the MI Host Marriott  Deferred
Stock.  Host Marriott  Services has the option to satisfy these  obligations  by
paying to Host  Marriott cash equal to the value of such shares of Host Marriott
Services'  common  stock on the last day of the fiscal year in which the options
are exercised or the deferred shares are released.  Host Marriott  Services will
receive  approximately 11% of the exercise price of each MI Host Marriott Option
exercised.  During 1997,  the Company paid Host Marriott $2.2 million in partial
settlement  of its  obligation  to pay  for  the  1996  exercise  of the MI Host
Marriott Options and the release of the MI Host Marriott Deferred Stock.
     These  obligations,  which were  recorded at an average  price of $5.29 per
share,  are shown as a

                                       38

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


component of shareholder's  deficit and totaled $7.0 million and $8.6 million as
of year end 1997 and 1996, respectively.

ADJUSTMENTS TO DISTRIBUTION OF CAPITALIZATION OF THE COMPANY

The  carrying  amounts of  certain  assets and  liabilities  distributed  to the
Company in connection  with the  Distribution  were based on  estimates.  During
1996, the Company  revised  certain of these estimates and recorded $4.6 million
of adjustments to the original capitalization of the Company.

8.  STOCK-BASED COMPENSATION PLANS

The employees of the Company participate in certain employee stock plans of Host
Marriott  Services,  including the  Comprehensive  Stock Plan and Employee Stock
Purchase Plan. Under the Comprehensive Stock Plan,  employees of the Company may
receive (i) awards of restricted shares of Host Marriott Services' common stock,
(ii) deferred  awards of shares of Host  Marriott  Services'  common stock,  and
(iii) awards of options to purchase Host  Marriott  Services'  common stock.  In
addition,  employees  of the  Company  participate  in Host  Marriott  Services'
Employee Stock Purchase  Plan.  Host Marriott  Services has reserved 6.5 million
and  750,000  shares  of  common  stock  for  issuance  in  connection  with the
Comprehensive Stock Plan and the Employee Stock Purchase Plan, respectively. The
compensation  costs related to restricted  stock and deferred stock awards under
these  plans  have  been  reflected  in the  operations  of the  Company  as all
employees of Host Marriott Services are employees of the Company.  The principal
terms and conditions of each of the plans are summarized below.

RESTRICTED STOCK AWARDS

Restricted  shares are  awarded  to certain  officers  and key  executives.  All
current  restricted  share awards  expire at the end of fiscal year 1998.  As of
January 2,  1998,  there  were  631,185  restricted  share  awards  outstanding.
Compensation  expense is  recognized  over the award period and consists of time
and performance based components. The time-based expense is calculated using the
fair value of the shares on the date of issuance and is  contingent on continued
employment.  The performance-based expense is calculated using the fair value of
Host Marriott Services common stock during the award period and is contingent on
attainment of certain performance criteria.
     Host Marriott  Services  awarded 445,362 shares of new restricted  stock to
key  executives  of the  Company in 1996.
     In 1993,  Host  Marriott  issued 781,500 shares of Host Marriott restricted
stock to certain  officers and key  executives  of the Company.  The  restricted
shares of Host Marriott stock  outstanding at the Distribution Date received the
stock dividend in accordance with the one-for-five  distribution  ratio.  During
the first 12 weeks of 1996,  all of the  Company's  executive  officers who held
restricted  shares of Host Marriott  stock  elected to convert those  restricted
shares into restricted shares of Host Marriott  Services' stock in a manner that
preserved the intrinsic value of the restricted shares to their holders,  except
that the intrinsic value was adjusted to provide a 15% conversion incentive.

DEFERRED STOCK AWARDS

Deferred stock  incentive  shares  granted to key employees  generally vest over
five to ten years in annual  installments  commencing one year after the date of
grant.  Certain  employees  may elect to defer  payments  until  termination  or
retirement.  The Company accrues  compensation expense for the fair market value
of the shares on the date of grant, less estimated forfeitures.
     In connection with the  Distribution,  the deferred stock incentive  shares
granted to employees of the Company and employees of Host Marriott were split in
accordance  with  the  one-for-five  distribution  ratio.  Presented  below is a
summary of the Company's deferred stock award activity since the Distribution:

<TABLE>
<CAPTION>
                                               SHARES
-------------------------------- ---------- -------------
<S>                                             <C>

Balance, December 29, 1995                      146,809
Granted                                         163,813
Issued                                          (11,308)
Forfeited/expired                               (34,112)
-------------------------------- ---------- -------------

Balance, January 3, 1997                        265,202
Granted                                         210,180
Issued                                          (25,894)
Forfeited/expired                               (26,941)
-------------------------------- ---------- -------------

Balance, January 2, 1998                        422,547
-------------------------------- ---------- -------------
</TABLE>


STOCK OPTION AWARDS

Employee  stock  options may be granted to key  employees  at not less than fair
market  value on the date of the grant.  Options  granted  before May 11,  1990,
expire 10 years after the date of grant, and nonqualified  options granted on or
after May 11,  1990,  expire from 10 to 15 years  after the date of grant.  Most
options vest ratably over each of the first four years following the date of the
grant.  There was no  compensation  cost  recognized by the Company  relating to
stock options during the 1997,  1996 and 1995 fiscal years.

                                       39

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


     In  connection with the  Distribution,  the outstanding  Host Marriott
options held by current  employees of the Company and employees of Host Marriott
were  redenominated in both Host Marriott  Services and Host Marriott stock, and
the exercise  prices of the options were adjusted based on the relative  trading
prices of shares of the common stock of the two companies  immediately following
the  Distribution.  The 1995 stock option  issuances  were delayed until 1996 to
avoid further adjustments to the Distribution.
     Presented   below  is  a  summary  of  stock  option   activity  since  the
Distribution:

<TABLE>
<CAPTION>
-------------------------------- ------------ -------------
                                                WEIGHTED
                                                AVERAGE
                                   SHARES        PRICE
-------------------------------- ------------ -------------
<S>                                 <C>             <C>

Balance, December 29, 1995          435,240          $3.75
Granted                           1,660,800           7.21
Exercised                           (72,231)          3.57
Forfeited/expired                   (67,635)          5.55
-------------------------------- ------------ -------------

Balance, January 3, 1997          1,956,174          $6.63
Granted                             433,400          14.21
Exercised                          (161,718)          5.20
Forfeited/expired                  (120,360)          7.22
-------------------------------- ------------ -------------
Balance, January 2, 1998          2,107,496          $8.27
-------------------------------- ------------ -------------
</TABLE>

     The  weighted-average  fair value of Host Marriott Services' stock options,
calculated  using the  Black-Scholes  option-pricing  model,  granted during the
fiscal  years ended 1997,  1996 and 1995 is $2.5  million,  $5.3  million and $4
thousand, respectively.
     Presented below is a summary of the Company's exercisable and unexercisable
stock options as of the end of fiscal years 1997 and 1996:

<TABLE>
<CAPTION>
                             EXERCISABLE    UNEXERCISABLE
--------------------------- -------------- ----------------
<S>                            <C>             <C>

JANUARY 2, 1998
   Shares                         589,949        1,517,547
   Exercise price range       $0.86-$8.88     $5.07-$14.75
   Weighted-average
     exercise price                 $5.80            $9.23
   Weighted-average
     remaining contractual
     life in years                   10.9             10.9
--------------------------- -------------- ----------------

JANUARY 3, 1997
   Shares                         254,970        1,701,204
   Exercise price range       $0.86-$5.50      $4.03-$8.88
   Weighted-average
     exercise price                 $3.35            $7.12
   Weighted-average
     remaining contractual
     life in years                   11.0             12.3
--------------------------- -------------- ----------------
</TABLE>

EMPLOYEE STOCK PURCHASE PLAN

Under the terms of the Employee  Stock  Purchase  Plan,  eligible  employees may
purchase Host Marriott  Services' common stock through payroll deductions at the
lower of the market value of the stock at the beginning or end of the plan year.
During the first quarter of 1998,  approximately 195,000 Host Marriott Services'
common  shares  were sold to  employees  under the terms of the  Employee  Stock
Purchase Plan at an exercise price of $9.13 per share.  During the first quarter
of 1997,  274,021 Host Marriott  Services'  common shares were sold to employees
under the terms of the  Employee  Stock  Purchase  Plan at an exercise  price of
$6.06 per share.
     There was no compensation  cost recognized by the Company relating to the
Employee  Stock Purchase Plan during the 1997,  1996 and 1995 fiscal years.  The
fair value option feature of the Employee Stock Purchase Plan,  calculated using
the Black-Scholes  option-pricing model, was $274 thousand and $285 thousand for
fiscal years 1997 and 1996, respectively.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The  Company has adopted the  disclosure-only  provisions  of SFAS No. 123,  but
applies Accounting  Principles Board Opinion No. 25 and related  interpretations
in  accounting  for its  plans.  Compensation  cost  recognized  by the  Company
relating  to  restricted  stock and  deferred  stock  awards  granted  under the
Comprehensive  Stock Plan was $4.0  million,  $3.7  million and $0.8 million for
fiscal years 1997, 1996 and 1995, respectively.
     Had the  Company  elected  to  recognize  compensation  cost for all awards
granted under Host Marriott Services'  Comprehensive Stock Plan and the Employee
Stock  Purchase  Plan based on the fair value of the awards at the grant  dates,
consistent  with the method  prescribed by SFAS No. 123, net income (loss) would
have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
-----------------------------------------------------------
                                 1997      1996     1995
-----------------------------------------------------------
                                      (IN MILLIONS)
<S>                              <C>        <C>     <C>

Net income (loss)  As reported    $19.6     $12.9  $(51.4)
                   Pro forma       18.6      12.3   (51.4)
-----------------------------------------------------------
<FN>
Note:  Because the SFAS No. 123 method of accounting has not been applied to
       options granted prior to January 1, 1995, the resulting pro forma
       compensation cost may not be representative of the effects on net income
       expected in future years.
</FN>
</TABLE>

     Fair values of stock  options  used to compute pro forma net income  (loss)
disclosures were determined using the  Black-Scholes  option-pricing  model. The

                                       40


<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


significant  assumptions  used in the model for 1997 included the  following:  a
dividend yield of 0%; an expected volatility of 30.8%; a risk-free interest rate
of 6.3%;  and an  expected  holding  period  of  seven  years.  The  significant
assumptions  used in the  model  for 1996 and 1995  included  the  following:  a
dividend yield of 0%; an expected volatility of 34.7%; a risk-free interest rate
of 6.0%; and an expected holding period of seven years.

9.  PROFIT SHARING AND POSTRETIREMENT BENEFIT PLANS

Employees meeting certain  eligibility  requirements can elect to participate in
profit sharing and deferred  compensation plans. The amount to be matched by the
Company is determined annually by the Company's Board of Directors.  The cost of
these  plans is based on  salaries  and  wages of  participating  employees  and
totaled $2.8  million,  $2.5  million and $2.0  million in 1997,  1996 and 1995,
respectively.
     The Company has a  supplemental  retirement  plan for certain key officers.
The liability  relating to this plan recorded as of the end of 1997 and 1996 was
$5.6 million and $5.8 million,  respectively.  The compensation  cost recognized
for each of the fiscal years of 1997, 1996 and 1995 was $0.3 million.
     Prior to the  Distribution,  the Company  provided  postretirement  medical
benefits  to a very  limited  number of retired  employees  meeting  restrictive
eligibility  requirements.  For the 1995 fiscal year,  medical  expenses accrued
and/or  paid  under  these   arrangements   were  immaterial  to  the  financial
statements.  In  connection  with the  Distribution,  Host  Marriott  became the
obligor with respect to these postretirement benefits.


10.  RESTRUCTURING

Management approved a formal  restructuring plan in October 1995 and the Company
recorded  a pretax  restructuring  charge to  earnings  of $14.5  million in the
fourth  quarter of 1995.  The  restructuring  charge was primarily  comprised of
involuntary  employee  termination  benefits  (related  to  its  realignment  of
operational  responsibilities)  and lease cancellation  penalty fees and related
costs  resulting  from the  Company's  plan to exit  certain  activities  in its
entertainment venues.
    The  employee  termination  benefits  included in the  restructuring  charge
reflect the  immediate  elimination  of  approximately  100  corporate and field
operations  positions and the elimination of approximately  200 additional field
operations  positions,   all  of  which  were  specifically  identified  in  the
restructuring plan. Certain initiatives of the restructuring plan were scheduled
to be implemented  throughout the duration of the plan, resulting in an extended
period  over  which  the 200  additional  field  operations  positions  would be
eliminated.  Also as a part of the restructuring,  the Company committed to exit
certain  operating  units  in  entertainment  venues  which  were  deemed  to be
inconsistent with the Company's core operating strategies.
    In the fourth quarter of 1997, the Company concluded its restructuring  plan
and reversed  substantially all of the remaining  restructuring  reserve,  which
resulted in a $3.9 million pretax  reduction of other  operating  expenses.  The
Company terminated a total of 221 positions in connection with the restructuring
plan. The remaining  portion of the  restructuring  reserve  relates to extended
severance payments payable to a limited number of individuals.
    The  following  table  sets  forth the  restructuring  reserve  and  related
activity as of January 2, 1998:

<TABLE>
<CAPTION>
                            ACTIVITY TO DATE
                           --------------------
                                     CHANGES   RESERVE
                PROVISION    COSTS      IN      AS OF
                 RECORDED  INCURRED  ESTIMATE   1/2/98
---------------------------------------------------------
                             (IN MILLIONS)
<S>                 <C>        <C>      <C>        <C>

Employee
  termination
  benefits           $11.6     $ 7.4   $(3.7)       $0.5
Asset
  write-downs          0.5       0.8     0.3         ---
Lease
  cancellation
  penalty fees
  and related
  costs                2.4       1.9    (0.5)        ---
---------------------------------------------------------
Total                $14.5     $10.1   $(3.9)       $0.5
---------------------------------------------------------
</TABLE>


11.  COMMITMENTS AND CONTINGENCIES

Future minimum annual rental commitments for noncancellable  operating leases as
of January 2, 1998 are as follows:

<TABLE>
<CAPTION>
---------------------------------------- -------------
Fiscal Years
---------------------------------------- -------------
                                         (IN MILLIONS)
<S>                                            <C>

1998                                           $134.8
1999                                            121.9
2000                                            100.7
2001                                             87.3
2002                                             71.0
Thereafter                                      178.4
---------------------------------------- -------------
Total minimum lease payments                   $694.1
---------------------------------------- -------------
</TABLE>

     The Company  leases  property and equipment  under  noncancellable  leases.
Certain leases contain provisions

                                       41


<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


for the payment of  contingent  rentals  based on sales in excess of  stipulated
amounts and many also contain  contractual  rental payment increases  throughout
the term of the lease. The minimum rent increases are amortized over the term of
the  applicable  lease on a  straight-line  basis.  Future minimum annual rental
commitments of $694.1 million have not been reduced by minimum  sublease rentals
of $60.9  million  payable to the Company under  noncancellable  subleases as of
January 2, 1998.
     Certain  leases  require  a  minimum  level  of  capital  expenditures  for
renovations  and facility  expansions  during the lease terms.  As of the end of
fiscal year 1997,  the  Company  was  committed  to invest  approximately  $74.0
million for initial investment and mid-term refurbishments over various contract
dates ranging from 2 to 15 years.
     Rent expense consists of:

<TABLE>
<CAPTION>
---------------------- --------- ---------- ----------
                         1997      1996       1995
---------------------- --------- ---------- ----------
                               (IN MILLIONS)
<S>                      <C>        <C>         <C>

Minimum rental on
   operating leases      $118.7     $111.2      $93.0
Additional rental
   based on sales          61.7       69.7       63.8
---------------------- --------- ---------- ----------
Total rent expense       $180.4     $180.9     $156.8
---------------------- --------- ---------- ----------
</TABLE>

     Rent expense  related to the Company's  corporate  operations,  included in
general and administrative expenses, totaled $2.9 million, $2.4 million and $1.8
million in 1997, 1996 and 1995, respectively.
     The Company's  facilities are operated under numerous long-term  concession
agreements   with  various  airport  and  tollroad   authorities.   The  Company
historically has been successful at retaining such  arrangements and winning new
business,  enabling  it to replace  lost  concession  facilities.  However,  the
expiration of certain of these agreements could have a significant impact on the
Company's  financial  condition and results of  operations,  and there can be no
assurance that the Company will succeed in replacing lost concession  facilities
and retaining the remainder of its facilities in the future.
     The  Company  is from  time to time,  or  involved  in  litigation  matters
incidental  to its  business.  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.

12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of the  Company's  financial  instruments,  including  cash and cash
equivalents,   accounts   receivable,   accounts   payable  and  other   accrued
liabilities,  the  carrying  amounts  approximate  fair value due to their short
maturities.  The fair value of the Senior Notes is based on quoted market prices
and the fair  value  of other  long-  term  debt  instruments  is  estimated  by
discounting  the  expected  future cash flows  using the current  rates at which
similar debt  instruments  would be provided from lenders for the same remaining
maturities.
     The carrying  values and fair values of certain of the Company's  financial
instruments are shown in the table below:


<TABLE>
<CAPTION>
                     JANUARY 2, 1998      JANUARY 3, 1997
------------------ -------------------- --------------------
                   CARRYING     FAIR     CARRYING    FAIR
                    AMOUNT      VALUE     AMOUNT    VALUE
------------------ ---------- ---------- --------- ---------
                                (IN MILLIONS)
<S>                    <C>        <C>       <C>       <C>

Financial
liabilities:
   Senior Notes       $400.0     $426.8    $400.0    $402.6
   Other debt            6.2        6.6       7.5       7.9
------------------ ---------- ---------- --------- ---------
</TABLE>


13.  RELATIONSHIP WITH MARRIOTT INTERNATIONAL

On October  8, 1993 (the "MI  Distribution  Date"),  Host  Marriott  distributed
through a special  dividend to holders of Host Marriott  common stock all of the
outstanding shares of its wholly-owned subsidiary, Marriott International.
     In connection  with the MI  Distribution  on October 8, 1993, Host Marriott
and Marriott  International  entered into various  management  and  transitional
service  agreements.  In 1995, the Company  purchased food and supplies of $63.8
million, from affiliates of Marriott International under one such agreement.  In
addition,  under  various  service  agreements,  Host  Marriott paid to Marriott
International  $11.9 million in 1995, which represented the Company's  allocated
portion of these expenses.
     In connection with the  Distribution,  Host Marriott Services and Marriott
International  entered into a Continuing  Services  Agreement,  a Noncompetition
Agreement and a License Agreement. These agreements provide, among other things,
that Host Marriott Services will receive (i) certain corporate services, such as
accounting  and  computer  systems  support,  (ii)  various  product  supply and
distribution  services  and  (iii)  various  other  transitional   services.  In
accordance with the agreements,  Host Marriott Services will compensate Marriott
International  for services  rendered  thereunder.  As a part of the  Continuing
Services  Agreement,  the Company paid Marriott  International $77.3 million and
$76.9 million for purchases of food and supplies and paid $9.8 million and $10.7
million for corporate support services during 1997 and 1996, respectively.

                                       42

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


14.  BUSINESS SEGMENTS

The Company has three reportable operating segments: airports, travel plazas and
shopping malls and entertainment. The Company's management evaluates performance
of each segment  based on profit or loss from  operations  before  allocation of
general and administrative  expenses,  unusual and extraordinary items, interest
and income taxes. The accounting  policies of the segments are the same as those
described in the summary of significant accounting policies (see Note 1).

<TABLE>
<CAPTION>

(IN MILLIONS)             1997        1996        1995
---------------------------------------------------------
<S>                        <C>         <C>        <C>

REVENUES:
  Airports                $ 913.5     $ 911.5    $ 762.4
  Travel plazas             174.2       174.3      176.8
  Shopping malls
    and entertainment        58.6        53.9       54.1
---------------------------------------------------------
                         $1,146.3    $1,139.7   $  993.3
---------------------------------------------------------

OPERATING PROFIT:(1)
  Airports                $  94.3    $   87.7   $   64.1
  Travel plazas              21.3        20.0       18.5
  Shopping malls
    and entertainment         5.1         4.2        1.1
---------------------------------------------------------
                          $ 120.7    $  111.9   $   83.7
---------------------------------------------------------

CAPITAL
EXPENDITURES:(2)
  Airports                  $52.1       $42.4      $49.6
  Travel plazas               2.0         1.9        1.0
  Shopping malls
    and entertainment         7.4         4.5        0.5
---------------------------------------------------------
                            $61.5       $48.8      $51.1
---------------------------------------------------------

DEPRECIATION EXPENSE:
  Airports                  $38.3       $38.8      $41.0
  Travel plazas               8.1         8.9        6.2
  Shopping malls
    and entertainment         2.7         2.0        4.2
---------------------------------------------------------
                            $49.1       $49.7      $51.4
---------------------------------------------------------

ASSETS:
  Airports                 $273.1      $266.9
  Travel plazas              59.2        67.1
  Shopping malls
    and entertainment        32.9        19.4
----------------------------------------------
                           $365.2      $353.4
----------------------------------------------
<FN>
(1)  Before general and administrative expenses and unusual items.
(2)  Includes acquisitions.
</FN>
</TABLE>


    Reconciliations  of segment  results to the Company's  consolidated  results
follow:

<TABLE>
<CAPTION>

(IN MILLIONS)                1997       1996      1995
---------------------------------------------------------
<S>                         <C>         <C>       <C>

OPERATING PROFIT:
Segments                    $120.7    $ 111.9    $ 83.7
General and
    administrative           (54.3)     (51.8)    (45.5)
expenses
Write-downs of
    long-lived assets         (4.2)       ---     (22.0)
Restructuring and other
    special charges, net       3.9        ---     (14.5)
---------------------------------------------------------
                            $ 66.1     $ 60.1    $  1.7
---------------------------------------------------------

CAPITAL EXPENDITURES:
Segments                    $ 61.5     $ 48.8    $ 51.1
Corporate and other            4.5        6.1       0.2
---------------------------------------------------------
                            $ 66.0     $ 54.9    $ 51.3
---------------------------------------------------------

ASSETS:
Segments                    $365.2      $353.4
Corporate and other          134.8       184.4
-------------------------------------------------
                            $500.0      $537.8
-------------------------------------------------
</TABLE>

    Revenues for international  operations totaled $63.6 million,  $56.4 million
and $32.2 million in fiscal years 1997, 1996 and 1995, respectively.
    Property and equipment, net of accumulated  depreciation,  for international
operations was $17.8 million and $13.2 million for 1997 and 1996, respectively.

                                       43



<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


15.  QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                                                               1997(1)
------------------------------------------------ ---------------------------------------------------------------------
                                                    FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                      QUARTER       QUARTER       QUARTER      QUARTER(2)       YEAR
------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S>                                                 <C>           <C>           <C>               <C>        <C>

Revenues                                            $  238.8      $  259.9      $  298.5          $349.1     $1,146.3
Operating profit                                         3.4          15.7          32.9            14.1         66.1
Net income (loss)                                       (3.1)          4.4          16.6             1.7         19.6
</TABLE>


<TABLE>
<CAPTION>
                                                                               1996(1)
------------------------------------------------ ---------------------------------------------------------------------
                                                    FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                      QUARTER       QUARTER       QUARTER        QUARTER        YEAR
------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S>                                                 <C>           <C>           <C>               <C>        <C>

Revenues                                            $  236.2      $  258.4      $  294.5          $350.6     $1,139.7
Operating profit                                         2.3          14.3          32.1            11.4         60.1
Net income (loss)                                       (3.8)          3.0          13.6             0.1         12.9
</TABLE>

<TABLE>
<CAPTION>
                                                                               1995(1)
------------------------------------------------ ---------------------------------------------------------------------
                                                    FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                      QUARTER      QUARTER(3)     QUARTER      QUARTER(4)       YEAR
------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S>                                                 <C>           <C>            <C>          <C>            <C>
Revenues                                            $  197.1      $  217.0       $  258.2     $  321.0       $993.3
Operating profit (loss)                                 (2.6)          8.0           27.3        (31.0)         1.7
Income (loss) before extraordinary item                 (7.9)         (2.2)          11.6        (43.3)       (41.8)
Net income (loss)                                       (7.9)        (11.8)          11.6        (43.3)       (51.4)
------------------------------
<FN>
(1)  The first three  quarters of 1996 consist of 12 weeks each,  and the fourth
     quarter  includes  17 weeks.  The  first  three  quarters  of 1997 and 1995
     consist of 12 weeks each, and the fourth quarter includes 16 weeks.
(2)  Fourth quarter 1997 results include $4.2 million of write-downs of
     long-lived  assets and a $3.9 million  reversal of restructuring charges
     originally recorded in 1995.
(3)  Second quarter 1995 results include an  extraordinary  loss on the
     extinguishment  of long-term debt of $9.6 million (net of related income
     tax benefit of $5.2 million).
(4)  Fourth  quarter 1995 results  include $22.0 million of  write-downs of long
     lived assets which reflected the adoption of a new accounting  standard and
     $14.5 million of  restructuring  charges  primarily  representing  employee
     severance  and lease buy-out  costs,  which were taken to  restructure  the
     Company's  business  processes,  thereby reducing  long-term  operating and
     general and administrative costs.
</FN>
</TABLE>
                     --------------------------------------




16.  SUPPLEMENTAL GUARANTOR AND NON-GUARANTOR SUBSIDIARY INFORMATION

All  material  subsidiaries  of the  Company  guarantee  the Senior  Notes.  The
separate financial  statements of each guaranteeing  subsidiary  (together,  the
"Guarantor Subsidiaries") 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.  Certain of the Company's controlled  affiliates,  in which the Company
owns between  50.01% and 90%  interests,  are not guarantors of the Senior Notes
(the "Non-Guarantor  Subsidiaries").  The ability of the Company's Non-Guarantor
Subsidiaries to make dividends to the Company is restricted to the extent of the
minority  interests' share in the affiliates'  combined net assets.  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,  results of operations  and cash flows of the
parent, Guarantor Subsidiaries and Non-Guarantor Subsidiaries:

                                       44


<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


SUPPLEMENTAL CONSOLIDATING BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                               1997
---------------------------------------- ----------------------------------------------------------------------------------
                                                          GUARANTOR      NON-GUARANTOR     ELIMINATIONS &
(IN MILLIONS)                               PARENT      SUBSIDIARIES      SUBSIDIARIES      ADJUSTMENTS      CONSOLIDATED
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
<S>                                        <C>              <C>              <C>               <C>              <C>
Current assets:
   Cash and cash equivalents                $  31.8          $  27.2            $  1.3          $    ---         $  60.3
   Other current assets                         ---             80.7               7.2               ---            87.9
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
   Total current assets                        31.8            107.9               8.5               ---           148.2

Property and equipment, net                     ---            225.4              27.1               ---           252.5
Other assets                                    ---             99.0               0.3               ---            99.3
Investments in subsidiaries                   256.9              ---               ---            (256.9)            ---
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Assets                                $ 288.7          $ 432.3            $ 35.9           $(256.9)        $ 500.0
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------

Current liabilities:
   Accounts payable                        $    ---          $  56.3            $ 11.4          $    ---         $  67.7
   Accrued payroll and benefits                 ---             46.1               ---               ---            46.1
   Other current liabilities                    ---             42.1               ---               ---            42.1
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
   Total current liabilities                    ---            144.5              11.4               ---           155.9

Long-term debt                                400.0            405.8               ---            (400.0)          405.8
Other liabilities                               ---             41.7               ---               7.9            49.6
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
   Total Liabilities                          400.0            592.0              11.4            (392.1)          611.3

Owner's equity (deficit)                     (111.3)          (159.7)             24.5             135.2          (111.3)
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Liabilities and Owner's Deficit       $ 288.7          $ 432.3            $ 35.9           $(256.9)        $ 500.0
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
</TABLE>

<TABLE>
<CAPTION>
                                                                               1996
---------------------------------------- ----------------------------------------------------------------------------------
                                                          GUARANTOR      NON-GUARANTOR     ELIMINATIONS &
(IN MILLIONS)                               PARENT      SUBSIDIARIES      SUBSIDIARIES      ADJUSTMENTS      CONSOLIDATED
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
<S>                                        <C>             <C>                <C>             <C>                <C>

Current assets:
   Cash and cash equivalents                $  75.3          $  16.1            $  1.7          $    ---         $  93.1
   Other current assets                         ---             95.4               9.8               ---           105.2
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
   Total current assets                        75.3            111.5              11.5               ---           198.3

Property and equipment, net                     ---            225.3              19.8               ---           245.1
Other assets                                    ---             94.4               ---               ---            94.4
Investments in subsidiaries                   194.7              ---               ---            (194.7)            ---
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Assets                                $ 270.0          $ 431.2            $ 31.3           $(194.7)        $ 537.8
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------

Current liabilities:
   Accounts payable                        $    ---          $  83.0            $ 10.1          $    ---         $  93.1
   Accrued payroll and benefits                 ---             45.7               ---               ---            45.7
   Other current liabilities                    ---             65.0               ---               ---            65.0
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
   Total current liabilities                    ---            193.7              10.1               ---           203.8

Long-term debt                                400.0            407.4               ---            (400.0)          407.4
Other liabilities                               ---             51.8               ---               4.8            56.6
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
   Total Liabilities                          400.0            652.9              10.1            (395.2)          667.8

Owner's equity (deficit)                     (130.0)          (221.7)             21.2             200.5          (130.0)
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
Total Liabilities and Owner's Deficit       $ 270.0          $ 431.2            $ 31.3           $(194.7)        $ 537.8
---------------------------------------- ------------- ---------------- ----------------- ----------------- ---------------
</TABLE>

                                       45

<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


SUPPLEMENTAL CONSOLIDATING STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                1997
----------------------------------------- ---------------------------------------------------------------------------------
                                                         GUARANTOR      NON-GUARANTOR     ELIMINATIONS &
(IN MILLIONS)                               PARENT     SUBSIDIARIES      SUBSIDIARIES      ADJUSTMENTS      CONSOLIDATED
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
<S>                                         <C>            <C>               <C>               <C>               <C>

Revenues                                   $   ---         $1,019.7            $126.6           $   ---         $1,146.3
Operating costs and expenses                   ---            960.5             119.7               ---          1,080.2
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------

Operating profit                               ---             59.2               6.9               ---             66.1
Interest expense                             (39.3)           (39.8)              ---              39.3            (39.8)
Interest income                                2.6              0.4               ---               ---              3.0
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------

Income (loss) before income taxes            (36.7)            19.8               6.9              39.3             29.3
Provision (benefit) for income taxes         (12.1)             6.5               2.3              13.0              9.7
Equity interest in affiliates                 44.2              ---               ---             (44.2)             ---
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
Net income (loss)                           $ 19.6        $    13.3            $  4.6            $(17.9)        $   19.6
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
</TABLE>


<TABLE>
<CAPTION>
                                                                               1996
----------------------------------------- --------------------------------------------------------------------------------
                                                        GUARANTOR      NON-GUARANTOR     ELIMINATIONS &
(IN MILLIONS)                               PARENT    SUBSIDIARIES     SUBSIDIARIES        ADJUSTMENTS      CONSOLIDATED
----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
<S>                                         <C>            <C>               <C>               <C>             <C>

Revenues                                   $   ---       $1,017.1             $122.6            $   ---        $1,139.7
Operating costs and expenses                   ---          963.4              116.2                ---         1,079.6
----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------

Operating profit                               ---           53.7                6.4                ---            60.1
Interest expense                             (39.3)         (40.3)               ---               39.3           (40.3)
Interest income                                2.4            ---                ---                ---             2.4
----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------

Income (loss) before income taxes            (36.9)          13.4                6.4               39.3            22.2
Provision (benefit) for income taxes         (15.5)           5.6                2.7               16.5             9.3
Equity interest in affiliates                 34.3            ---                ---              (34.3)            ---
----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
Net income (loss)                           $ 12.9       $    7.8             $  3.7             $(11.5)       $   12.9
----------------------------------------- ----------- -------------- ------------------ ------------------ ---------------
</TABLE>


<TABLE>
<CAPTION>
                                                                                1995
----------------------------------------- ---------------------------------------------------------------------------------
                                                         GUARANTOR      NON-GUARANTOR     ELIMINATIONS &
(IN MILLIONS)                               PARENT     SUBSIDIARIES      SUBSIDIARIES      ADJUSTMENTS      CONSOLIDATED
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
<S>                                        <C>              <C>               <C>               <C>              <C>

Revenues                                   $   ---           $894.3             $99.0           $   ---          $ 993.3
Operating costs and expenses                   ---            892.6              98.0               1.0            991.6
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------

Operating profit                               ---              1.7               1.0              (1.0)             1.7
Interest expense                             (39.2)           (40.3)              ---              39.2            (40.3)
Interest income                                0.7              ---               ---               ---              0.7
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------

Income (loss) before income taxes
  and extraordinary item                     (38.5)           (38.6)              1.0              38.2            (37.9)
Provision (benefit) for income taxes           3.8              3.9               0.1              (3.9)             3.9
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------

Income (loss) before extraordinary item      (42.3)           (42.5)              0.9              42.1            (41.8)
Extraordinary item - loss on
  extinguishment of debt (net of
  income tax benefit of $5.2 million)         (9.6)            (9.6)              ---               9.6             (9.6)
Equity interest in affiliates                  0.5              ---               ---              (0.5)             ---
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
Net income (loss)                           $(51.4)          $(52.1)            $ 0.9           $  51.2          $ (51.4)
----------------------------------------- ----------- ---------------- ----------------- ----------------- ----------------
</TABLE>

                                       46


<PAGE>


                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)



SUPPLEMENTAL CONSOLIDATING STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                               1997
----------------------------------------- -------------------------------------------------------------------------------
                                                                             NON-         ELIMINATIONS
                                                          GUARANTOR       GUARANTOR            &
(IN MILLIONS)                                PARENT      SUBSIDIARIES    SUBSIDIARIES     ADJUSTMENTS      CONSOLIDATED
----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
<S>                                          <C>             <C>              <C>              <C>             <C>

Cash provided by (used in) operations        $ (35.4)         $ 31.5        $   14.4            $ 35.4          $ 45.9
----------------------------------------- ------------- --------------- --------------- ----------------- ---------------

Investing activities:
   Capital expenditures                          ---           (58.5)           (7.5)              ---           (66.0)
   Other                                         ---            (8.7)            3.9              (3.9)           (8.7)
   Advances (to) from subsidiaries              (8.1)           50.8            (7.3)            (35.4)            ---
----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
   Cash used in
      investing activities                      (8.1)          (16.4)          (10.9)            (39.3)          (74.7)
----------------------------------------- ------------- --------------- --------------- ----------------- ---------------

Financing activities:
   Repayments of debt                            ---            (1.7)            ---               ---            (1.7)
   Payment to Host Marriott Corporation
     for Marriott International options
     and deferred shares                         ---            (2.2)            ---               ---            (2.2)
   Foreign exchange translation
     adjustments                                 ---            (0.1)            ---               ---            (0.1)
   Partnership contributions
     (distributions), net                        ---             ---            (3.9)              3.9             ---
----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
   Cash used in
     financing activities                        ---            (4.0)           (3.9)              3.9            (4.0)
----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
Increase (decrease) in cash and
     cash equivalents                        $ (43.5)       $   11.1         $  (0.4)          $   ---        $  (32.8)
----------------------------------------- ------------- --------------- --------------- ----------------- ---------------
</TABLE>


<TABLE>
<CAPTION>
                                                                              1996
---------------------------------------- -------------------------------------------------------------------------------
                                                                             NON-        ELIMINATIONS
                                                          GUARANTOR       GUARANTOR            &
(IN MILLIONS)                               PARENT       SUBSIDIARIES    SUBSIDIARIES     ADJUSTMENTS     CONSOLIDATED
---------------------------------------- -------------- --------------- --------------- ---------------- ---------------
<S>                                           <C>             <C>             <C>             <C>            <C>

Cash provided by (used in) operations        $ (35.8)         $ 90.9         $   7.6           $ 35.8          $ 98.5
---------------------------------------- -------------- --------------- --------------- ---------------- ---------------

Investing activities:
   Capital expenditures                          ---           (39.9)          (15.0)             ---           (54.9)
   Other                                         ---             5.0             5.7             (5.7)            5.0
   Advances (to) from subsidiaries              95.3           (66.4)            6.9            (35.8)            ---
---------------------------------------- -------------- --------------- --------------- ---------------- ---------------
   Cash provided by (used in)
      investing activities                      95.3          (101.3)           (2.4)           (41.5)          (49.9)
---------------------------------------- -------------- --------------- --------------- ---------------- ---------------

Financing activities:
   Repayments of debt                            ---            (0.8)            ---              ---            (0.8)
   Partnership contributions
     (distributions), net                        ---             ---            (5.7)             5.7             ---
---------------------------------------- -------------- --------------- --------------- ---------------- ---------------
   Cash used in
     financing activities                        ---            (0.8)           (5.7)             5.7            (0.8)
---------------------------------------- -------------- --------------- --------------- ---------------- ---------------
Increase (decrease) in cash and
     cash equivalents                         $ 59.5         $ (11.2)        $  (0.5)         $   ---          $ 47.8
---------------------------------------- -------------- --------------- --------------- ---------------- ---------------
</TABLE>

                                       47


<PAGE>
                    HOST INTERNATIONAL, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


<TABLE>
<CAPTION>
                                                                              1995
---------------------------------------- -------------------------------------------------------------------------------
                                                                             NON-        ELIMINATIONS
                                                          GUARANTOR       GUARANTOR            &
(IN MILLIONS)                               PARENT      SUBSIDIARIES     SUBSIDIARIES     ADJUSTMENTS     CONSOLIDATED
---------------------------------------- ------------- ---------------- --------------- ---------------- ---------------
<S>                                          <C>              <C>             <C>             <C>               <C>

Cash provided by (used in) operations       $ (39.0)          $ 41.3           $ 5.0          $  39.0          $ 46.3
---------------------------------------- ------------- ---------------- --------------- ---------------- ---------------

Investing activities:
   Capital expenditures                         ---            (47.7)           (2.0)             ---           (49.7)
   Other                                        ---              6.2             ---              ---             6.2
   Advances from subsidiaries                  24.9            (13.4)            0.6            (12.1)            ---
---------------------------------------- ------------- ---------------- --------------- ---------------- ---------------
   Cash provided by (used in)
     investing activities                      24.9            (54.9)           (1.4)           (12.1)          (43.5)
---------------------------------------- ------------- ---------------- --------------- ---------------- ---------------

Financing activities:
   Repayments of debt                        (392.8)          (392.8)            ---            392.8          (392.8)
   Issuance of long-term debt                 388.3            388.3             ---           (388.3)          388.3
   Partnership contributions
       (distributions), net                     ---            (12.0)           (3.0)             3.0           (12.0)
   Transfers from Host Marriott
      Corporation, net                         34.4             34.4             ---            (34.4)           34.4
---------------------------------------- ------------- ---------------- --------------- ---------------- ---------------
   Cash provided by (used in)
     financing activities                      29.9             17.9            (3.0)           (26.9)           17.9
---------------------------------------- ------------- ---------------- --------------- ---------------- ---------------

Increase (decrease) in cash and
     cash equivalents                        $ 15.8           $  4.3         $   0.6         $    ---          $ 20.7
---------------------------------------- ------------- ---------------- --------------- ---------------- ---------------
</TABLE>


     Certain  reclassifications  were made to  conform  all of the  supplemental
information to the financial presentation on a consolidated basis. The principal
eliminating   entries  eliminate  Company  debt  and  related  interest  charges
reflected  in the  financial  statements  of the  Company (as  obligor)  and the
Guarantor  Subsidiaries  (as  guarantors),  investments,  advances and equity in
earnings in  subsidiaries  and the minority  partners'  equity  interests in the
partnership distributions and establish the minority interest liability.

                                       48


<PAGE>

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

   None.


                                    PART III

        The  information  called for by Items 10-13 is incorporated by reference
from  the  Host  Marriott  Services  Corporation  1998  Annual  Meeting  of  the
Shareholders--Notice  and Proxy  Statement--(to  be filed pursuant to Regulation
14A not later than 120 days after the close of the fiscal year).

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.  EXECUTIVE COMPENSATION

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, 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 SCHEDULES:                                          PAGE

           I.   Valuation and Qualifying Accounts                     S-1 to S-2

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

        (3)  EXHIBITS

EXHIBIT
  NO.                        DESCRIPTION
-------         --------------------------------------------
21              Listing of Subsidiaries of the Registrant

27              Financial Data Schedule (EDGAR Filing Only)


                                       49


<PAGE>

                                   SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 30th day of March,
1998.

                            HOST INTERNATIONAL, INC.


                            By: /S/ BRIAN W. BETHERS
                        -------------------------------
                                Brian W. Bethers
            Vice President (Principal Financial Officer and Director)


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in their indicated capacities and
on the date set forth above.


        SIGNATURE                                        TITLE
---------------------------              ---------------------------------------


/S/ WILLIAM W. MCCARTEN                  President (Principal Executive Officer)
-------------------------
William W. McCarten

/S/ BRIAN W. BETHERS                     Vice President (Principal Financial
-------------------------                  Officer and Director)
Brian W. Bethers

/S/ BRIAN J. GALLANT                     Vice President (Principal Accounting
-------------------------                  Officer)
Brian J. Gallant

/S/ THOMAS G. O'HARE                     Director
-------------------------
Thomas G. O'Hare

/S/ JOHN J. MCCARTHY                     Senior Vice President and Director
-------------------------
John J. McCarthy




                                       50


<PAGE>

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES


To the Shareholder of Host International, Inc.:

        We  have  audited  in  accordance  with  generally   accepted   auditing
standards, the consolidated financial statements of Host International, Inc. and
subsidiaries,  included  in this Form 10-K and have  issued our  report  thereon
dated  February  3,  1998.  Our audits  were made for the  purpose of forming an
opinion on the basic  consolidated  financial  statements  taken as a whole. The
schedule appearing on page S-2 is the responsibility of the Company's management
and is  presented  for purposes of complying  with the  Securities  and Exchange
Commission's  rules  and  is  not  part  of  the  basic  consolidated  financial
statements.  This schedule has been subjected to the auditing procedures applied
in the  audits  of the  basic  consolidated  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 consolidated  financial statements
taken as a whole.


ARTHUR ANDERSEN LLP

Washington, D.C.
February 3, 1998


                                      S-1


<PAGE>
                                                                    SCHEDULE I


                            HOST INTERNATIONAL, INC.
                        VALUATION AND QUALIFYING ACCOUNTS
           FOR THE FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997
                             AND DECEMBER 29, 1995



<TABLE>
<CAPTION>
------------------------------------------- ---------------- -- -------------- -- ---------------- -- --------------
                                                                  ADDITIONS
                                              BALANCE AT         CHARGED TO                            BALANCE AT
                                               BEGINNING          COSTS AND                                END
              DESCRIPTION(2)                   OF PERIOD          EXPENSES         DEDUCTIONS(1)        OF PERIOD
------------------------------------------- ---------------- -- -------------- -- ---------------- -- --------------
                                                                         (IN MILLIONS)
<S>                                                    <C>              <C>                <C>              <C>

Allowance for doubtful accounts
      1995                                            $ 5.5             $ 3.7             $ (0.1)             $ 9.1
      1996                                              9.1               2.9               (1.7)              10.3
      1997                                             10.3               7.4               (0.1)              17.6

Allowance for notes receivable
      1995                                              6.4               ---               (6.4)               ---
      1996                                              ---               0.4                 ---               0.4
      1997                                              0.4               0.2                 ---               0.6
------------------------------------------- ---------------- -- -------------- -- ---------------- -- --------------
<FN>

(1) Charges to the  accounts  are for the purpose  for which the  reserves  were
    created.
(2) The  deferred  tax asset  valuation  allowance  has been omitted from this
    schedule  because the  required  information  is shown in the notes to the
    financial statements.
</FN>
</TABLE>


                                      S-2