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. 1-14040

                       HOST MARRIOTT SERVICES CORPORATION

            DELAWARE                                52-1938672
 ------------------------------        ---------------------------------------
  (State or Other Jurisdiction         (I.R.S. Employer Identification Number)
of Incorporation or Organization)

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

           SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT

TITLE OF EACH CLASS                  NAME OF EACH EXCHANGE ON WHICH REGISTERED
-------------------                  -----------------------------------------
Common Stock, no par value           Chicago Stock Exchange
(34,480,715 shares issued and        New York Stock Exchange
outstanding as of January 2, 1998)   Pacific Stock Exchange
                                     Philadelphia Stock Exchange

     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

    The aggregate market value of the 34,203,282 shares of common stock held
by non-affiliates as of March 10, 1998, was $448,918,089.


                       DOCUMENT INCORPORATED BY REFERENCE
                Notice of 1998 Annual Meeting and Proxy Statement

<PAGE>


                                     PART I

ITEM 1.  BUSINESS

GENERAL

     Host Marriott Services  Corporation (the "Company") 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  began
operations  as a separate  public  company on December 29, 1995,  when the food,
beverage and retail  concessions  business of Host Marriott  Corporation  ("Host
Marriott," formerly named Marriott  Corporation) was distributed to shareholders
in a special dividend (the "Distribution").

     The Company  operates  primarily  in the United  States  through two wholly
owned  subsidiaries:  Host International,  Inc. ("Host  International") and Host
Marriott Tollroads,  Inc. 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
71.1%, 24.3% and 4.6%, respectively,  of total sales in 1997. See Note 15 to the
Consolidated  Financial Statements for financial information about the Company's
business segments.

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 11.6% during 1997 and accounted for
approximately $500 million of the Company's total annual revenues.

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 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 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.

                                       1

<PAGE>

     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 reach $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  concession  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.

     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 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

                                       2

<PAGE>

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, 1996 and 1995 were  approximately  71.1%,
71.3% and 68.7% of the Company's total revenues, respectively. The concentration
of revenues from the Company's ten largest airport contracts  decreased to 26.2%
of the Company's  total  revenues from 27.0% of the Company's  total revenues in
1996.  Since 1995,  airport revenues have grown at a compound annual growth rate
of 7.0%.

     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 (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 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  concept  revenues in all of the Company's venues
have grown at a compound  annual  growth  rate of 8.1% over the last five 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  11.7% 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.



                                       3

<PAGE>

     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 at the Company's airports 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.

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.



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<PAGE>

     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 approximately 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 12.3% of annualized total Company revenues will
come up for renewal.  The Company  expects  continued  success 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 holds the leading market
position on each of the top ten tollroads on which it operates.  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
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  were  $312.5  million and
$312.4  million  in 1997 and 1996,  respectively.  The  Company's  travel  plaza
concession  revenues in 1997, 1996 and 1995 were approximately  24.3%, 24.4% and
26.7%, of the Company's total revenues,  respectively.  Excluding the extra week
of operations in 1996,  travel plaza revenues  increased  1.7%. The five largest
travel plaza contracts  accounted for approximately 16.1% of the Company's total
revenues in both 1997 and 1996.  No single travel plaza  contract  constitutes a
material portion of the Company's total revenues.

     Travel plazas are operated 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 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  75.5% of travel plaza  concessions  revenues in 1997 (83.0% 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  $28.2 million, or 9.0% of 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.


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<PAGE>

OPERATING LOCATIONS

     The Company operates 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.

     Over  the  next  three  years,  five  travel  plaza  concessions  contracts
representing  approximately  $52.9 million, or 4.0%, of annualized total Company
revenues,  will come up for renewal.  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  4.6% of total  Company  revenues and generated
$53.9 million in revenues in 1996, approximately 4.2% 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
                                       6

<PAGE>

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 2.1% of
annualized total Company revenues, will come up for renewal.

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 the Company, resulting in the division of Host
Marriott's  operations into two separate companies.  The shares were distributed
on the basis of one share of the Company's 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 the Company 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
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 and a Transitional  Services Agreement.  The
agreements  establish  certain  obligations for the Company 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,  the Company (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 the Company from Host Marriott,  the
Company and Marriott International entered into several transitional agreements,
each of which is described below:

     CONTINUING  SERVICES  AGREEMENT.  This agreement  provides that the Company
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 the Company's
headquarters  office space.  The office sublease was terminated in February 1997
when the Company 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

                                       7

<PAGE>

(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  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 the Company) 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,  the
Company 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,  the
Company and Marriott International entered into a new License Agreement pursuant
to which the  Company  and its  subsidiaries,  retained  the license to use such
trademarks subject to the License Agreement.

     Three directors of the Company,  William J. Shaw, J.W.  Marriott,  Jr., and
Richard E. Marriott, are also directors of Marriott International.

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.

                                       8

<PAGE>

ITEM 2.  PROPERTIES

     In addition  to the  operating  properties  discussed  in Item 1.  Business
above,  the  Company  leased  45,288  square feet of office  space in  Bethesda,
Maryland,  which served as the Company's 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 the initial  term 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 the Company's
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.


                                       9


<PAGE>

                                     PART II

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

     The Company's  closing common stock price on the New York Stock Exchange on
January 2, 1998 was $14.375 per share compared to $9.625 per share on January 3,
1997.  There  were no  dividends  declared  in 1997 or 1996.  The  Company  will
evaluate the dividend rate at least annually,  but current plans are to reinvest
the Company's earnings in the growth of its businesses. The Company's ability to
declare dividends is affected by certain dividend  restrictions  imposed on Host
International,  its primary wholly-owned subsidiary.  The indenture covering the
Company's  $400.0  million  of senior  notes and the loan  agreement  covering a
$100.0 million credit facility obtained by Host  International  limit the extent
to which Host International can pay dividends to the Company.

     The Company's high and low stock prices by quarter during 1997 and 1996 are
presented as follows:

<TABLE>
<CAPTION>

                                              1997(1)                         1996(1)
       ---------------------- ------ -------------------------- ---- ---------------------------
                                       HIGH            LOW             HIGH            LOW
       ---------------------- ------ ----------- -- ------------ ---- ---------- -- ------------
          <S>                          <C>               <C>              <C>            <C>

       First quarter                   10   5/8           8 7/8           7 5/8           5 3/4
       Second quarter                  10   5/8           8 3/4           8               6 1/2
       Third quarter                   14 11/16          10 3/8           7 5/8           6 5/8
       Fourth quarter                  15  9/16          13 3/4           9 3/4           7 5/8

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

      <FN>
      (1)  The first  three  quarters  of 1997 and 1996  consist of 12 weeks
           each,  and the fourth  quarter of 1997 and 1996 includes 16 weeks
           and 17 weeks, respectively.
       </FN>
       </TABLE>


     At January 2, 1998, there were 34,480,715 shares of common stock issued and
outstanding held by 38,321 shareholders of record. The Company's common stock is
traded on the New York Stock  Exchange,  Chicago Stock  Exchange,  Pacific Stock
Exchange and Philadelphia Stock Exchange.

     During the third quarter of 1997, the Company  announced a share repurchase
program of up to $15.0 million of the Company's  stock on the open market over a
two year  period.  The  shares may be used in  connection  with  employee  stock
ownership plans or for general corporate  purposes.  The Company expects to fund
the repurchase  program with available  cash. As of the end of 1997, the Company
had repurchased 253,100 shares at an aggregate purchase price of $3.5 million.

     During 1996,  the Company  completed an oddlot  selling/purchasing  program
that was intended to offer  holders of less than 100 shares of Company stock the
option of selling their oddlot holdings or increasing their holdings to a lot of
100 shares,  with a minimal  cost paid by the  holder.  While  benefiting  small
shareholders,  the program reduced the Company's  overall number of shareholders
which resulted in a reduction of corporate communication costs. This program was
administered by a third party. Any difference in oddlot shares sold or purchased
under the  program was met on the open market and thus did not result in any new
common  shares being issued and did not require the use of any of the  Company's
cash.

                                       10

<PAGE>


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                                             $1,285      $1,278      $1,162      $1,124      $1,038

   Operating profit (loss)                                        67          62         (20)         32          38
   Income (loss) before extraordinary item
       and cumulative effect of change in
       accounting principle                                       21          14         (64)         (8)         (2)
   Net income (loss)                                              21          14         (74)         (8)         (7)
   Income per common share(6)                                   0.57        0.40         n/a         n/a         n/a
   Pro forma loss per common share (Unaudited) (6)
        Loss before extraordinary item                           n/a         n/a       (2.02)        n/a         n/a
        Net loss                                                 n/a         n/a       (2.33)        n/a         n/a

BALANCE SHEET DATA:
   Total assets                                                  548         582         514         609         641
   Total long-term debt                                          407         408         409         398         396
   Investment and advances from Host Marriott                    ---         ---         ---          11          63
   Shareholders' deficit                                         (76)        (96)       (123)        ---         ---

OTHER OPERATING DATA:
   Cash flows provided by operations                              53         104          51          74          73
   Cash flows used in investing activities                       (74)        (52)        (52)        (44)        (61)
   Cash flows (used in) provided by financing activities          (5)          5          20         (39)          7
   EBITDA(7)                                                     129         119         108         109         115
   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.
     The Company did not pay  dividends  in 1997 or 1996 and prior to that time
     was not a publicly traded corporation.
(3)  The results for 1995 included  $46.8 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)  The 1995 loss per common  share is presented on a pro forma basis as if the
     Host Marriott  Services spin-off and related  transactions  occurred at the
     beginning of 1995. Income (loss) per common share data is not presented for
     1993 through  1994  because the Company was not publicly  held during those
     years.
(7)  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  (the "Company")
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 the Company were  distributed to the holders of Host Marriott
Corporation's  common stock in a special dividend (the "Distribution" - see Note
2). 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.

     Over 80% of the Company's annual revenues 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 5.1% and 18.6%, respectively, over the past three years.
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 operating initiatives.

     The Company's airport  concessions  contributed  approximately 71.1% 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 7.0% and 19.6%, respectively.

     The Company's travel plazas concessions contributed  approximately 24.3% of
the  Company's  total  revenues in fiscal year 1997.  Since 1995,  travel plazas
revenues and operating profit,  before general and  administrative  expenses and
unusual items, have grown at a CAGR of 0.4% and 7.0%, respectively.

     The  remaining  4.6%  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 $6.8 million to $1,284.6 million compared with revenues
of $1,277.8  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

                                       12

<PAGE>

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 $312.5 million, level with a
year ago.  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  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 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 94.8% of
total  revenues  compared  with 95.1% of total  revenues in 1996.  The  improved
operating  profit margin of 5.2% in 1997 compared with 4.9% 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  $7.5 million,  or 2.0%,  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  $383.2  million during 1997, a 1.1% increase
over 1996.  Payroll and  benefits as a  percentage  of total  revenues  remained
relatively  flat at 29.8% as a result of  initiatives  put in place to  increase
revenues and decrease other cost areas.

                                       13

<PAGE>

     Rent expense  totaled  $203.0  million for 1997, a decrease of $0.3 million
from 1996.  Rent expense as a percentage of total revenues  remained  relatively
flat in 1997.  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 7.7% to  $26.7  million.  As a
percentage of total  revenues,  royalties  expense  increased 20 basis points to
2.1%.  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 6.9% 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 $53.1  million for 1997,  down 1.5%,
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  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, increased
1.5% over the $121.0  million  total for 1996.  Other  operating  expenses  as a
percentage of total revenues increased 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 $5.6  million  decrease  in  the  deferred  tax  asset
     valuation allowance.

OPERATING PROFIT

     Operating  profit  increased 7.7% to $67.1 million.  The overall  operating
profit margin,  excluding general and administrative expenses and unusual items,
increased to 9.5% in 1997 compared with 8.9% 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 $22.3 million and
$22.2 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,  remained flat at 7.1% for 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.

                                       14

<PAGE>

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  $1.2  million to $3.7  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.

INCOME TAXES

     The  provision  for income taxes for both 1997 and 1996 was $10.2  million.
Overall,  the  effective tax rate declined for 1997 to 33.0% from 41.6% 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 $5.6 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 AND INCOME PER COMMON SHARE

     The  Company's  net income  increased  45.5% to $20.8  million  and diluted
income  per  common  share  increased  42.5% to $0.57 in 1997.  These  increases
reflect  strong  EBITDA  growth,  an  increase  in  interest  income and a lower
effective tax rate (see "Liquidity and Capital Resources").

WEIGHTED AVERAGE SHARES OUTSTANDING

     The weighted  average number of common shares  outstanding for 1997 used to
calculate  basic and diluted  income per common  share  totaled 34.6 million and
36.5 million, respectively,  reflecting 1.9 million of common equivalent shares.
The  weighted  average  number of  common  shares  outstanding  for 1996 used to
calculate  basic and diluted  income per common  share  totaled 33.4 million and
35.6 million, respectively, reflecting 2.2 million of common equivalent shares.

     Common  shares  issued and  outstanding  increased  from 34.4 million as of
January 3, 1997 to 34.5 million as of January 2, 1998  primarily  reflecting the
issuance of shares under the Company's  Employee  Stock Purchase Plan and shares
issued  related to employee stock  options,  offset by 253,100 shares  purchased
under the Company's share repurchase program during 1997.


1996 COMPARED TO 1995

REVENUES

     Revenues  for the year  ended  January  3, 1997  increased  by 9.9% to $1.3
billion.  This  increase  was  driven  by  strong  performance  in  the  airport
concessions business line.

AIRPORTS

     Airport concession revenues were up 14.2% to $911.5 million for fiscal year
1996  compared  with  $798.3  million  for fiscal  year 1995.  Domestic  airport
concessions   revenues   increased   by  11.6%  to  $855.1   million  for  1996.
International airport revenues were $56.4 million in 1996, up substantially from
the  $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 last year, and the
benefit of an additional week of operations (see "Accounting  Period").  Revenue
growth at comparable airport locations 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

                                       15

<PAGE>

Company's  comparable  airport  locations in 1996.  The Company  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 $312.4 million, an increase
of 0.8% compared with $309.9 million in 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 4.2% 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.

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.

OPERATING COSTS AND EXPENSES

     The  Company's  total  operating  costs and expenses  were $1.2 billion for
1996, or 95.1% of total revenues, compared with $1.1 billion for 1995 (excluding
unusual items), or 96.5% of total revenues. The improved operating profit margin
of 4.9% in 1996 compared with 3.5% in 1995 (excluding  unusual items),  reflects
operating  leverage  benefits  derived  from  revenue  growth and reduced  costs
resulting from the implementation of several operating initiatives.

     Cost of sales for 1996 was $381.6  million,  an increase of 8.1% over 1995.
Cost of sales as a percentage of total revenues decreased 50 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  $379.1 million during 1996, a 10.1% increase
over 1995.  Payroll and benefits as a percentage of total revenues remained flat
at 29.7% for 1996 and 1995.

     Rent expense  totaled  $203.3  million for 1996,  an increase of 11.4% over
1995.  The majority of  increased  rent  expense was  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 15.7%
in 1995.  The margin  increase is primarily  attributable  to equipment  rentals
related to the 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 25.9% to $24.8 million in 1996. As
a percentage of total  revenues,  royalties  expense  increased to 1.9% for 1996
compared  with 1.7% for 1995.  The increase in royalties  expense  reflected the
Company's continued  introduction of branded concepts to its airport concessions
operations.  Royalties  expense as a percentage of branded sales totaled 5.3% in
1996 compared with 4.9% in 1995. Branded concepts in all of the Company's venues
grew 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 17.6%
in 1996, when compared with 1995, the majority of which related to branded sales
at airports.

     Branded  revenues in airports  increased  35.6% when comparing 1996 to 1995
through the  introduction  of branded  concepts in the Company's  airports.  The
increase was  attributed  to large new branded  concept  developments  at Dulles
International   Airport  (just   outside  of   Washington,   D.C.),   San  Diego
International  Airport, Los Angeles International

                                       16

<PAGE>

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 $159.7 million, or 20.0% of total airport revenues in 1995.

     Depreciation  and  amortization  expense  included in  operating  costs and
expenses was $53.9 million for 1996, a decrease of 10.9%,  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 $5.8
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 reflected  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 were $121.0 million for 1996, a 4.6% increase over
1995. As a percentage of total revenues,  other operating  expenses decreased 50
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 $46.8  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 (LOSS)

     As a result of the changes in revenues  and  operating  costs and  expenses
discussed  above,  operating  profit  increased  to  $62.3  million,  or 4.9% of
revenues for 1996. Excluding the effects of unusual items,  operating profit was
$41.0 million,  or 3.5% of revenues in 1995. 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 $22.2 million, respectively,
for 1996 as compared with $65.9  million and $19.5  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 8.3% for 1995.  The travel
plazas operating profit margins,  excluding general and administrative  expenses
and unusual items,  equaled 7.1% and 6.3% 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 1.3%
for 1995.

INTEREST EXPENSE

     Interest expense was $40.3 million for 1996 compared with $40.5 million for
1995.  This decrease was  attributable  to lower interest rates on the Company's
debt. 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.

INTEREST INCOME

     Interest  income  totaled $2.5 million for 1996  compared with $0.7 million
for 1995.  The 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.

                                       17


<PAGE>

INCOME TAXES

     The provision for income taxes for 1996 and 1995 was $10.2 million and $3.9
million, respectively. The effective income tax rate for 1996 was 41.6% compared
with 6.5% for 1995.  The  provision  in 1995 was  affected by an increase in the
deferred  tax asset  valuation  allowance  of $24.9  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 $5.6 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) AND EARNINGS (LOSS) PER COMMON SHARE

     The Company's net income for 1996 was $14.3  million,  or $0.40 per diluted
common share,  compared with a net loss of $73.6 million for 1995.  The 1995 net
loss was primarily due to certain unusual and  extraordinary  items occurring in
1995, including $46.8 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").  Historical per share data
is not available for 1995 because the Company was not publicly  held.  Pro forma
loss per diluted common share totaled $2.33 for 1995.


                                       18

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

                                                                (IN MILLIONS,
                                                                EXCEPT PER
                                                                SHARE AMOUNTS)

REVENUES                                                            $1,158.7

OPERATING COSTS AND EXPENSES
   Cost of sales                                                       353.1
   Payroll and benefits                                                343.8
   Rent                                                                182.3
   Royalties                                                            19.7
   Depreciation and amortization                                        59.2
   Write-downs of long-lived assets                                     46.8
   Restructuring and other special charges, net                         14.5
   Corporate expenses                                                   48.0
   Other                                                               112.5
-------------------------------------------------------------- -----------------
   Total operating costs and expenses                                1,179.9

OPERATING LOSS                                                         (21.2)

   Interest expense                                                    (39.1)
   Interest income                                                       0.7
--------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM (1)                                              (59.6)

Provision for income taxes                                               3.9
--------------------------------------------------------------------------------
NET LOSS BEFORE EXTRAORDINARY ITEM (1)                              $  (63.5)
--------------------------------------------------------------------------------

LOSS PER COMMON SHARE BEFORE
   EXTRAORDINARY ITEM (1)                                           $  (2.01)

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                           31.7
--------------------------------------------------------------------------------
<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>

                                       19

<PAGE>

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.  Market  capitalization  for the Company has grown
from $200 million in 1995 to over $475 million in 1997.

     In May 1995,  the  predecessor  corporation  to Host  International  issued
$400.0 million of Senior Notes, which are now obligations of Host International.
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 100 basis points.  Since 1995,  the Company's
cash interest coverage ratio has improved from 2.7 to 1.0 to 3.4 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 Host
International.  The Senior Notes Indenture  contains covenants that, among other
things,  limit the ability of Host International 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 Host  International
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 Host International and are secured by the Company's capital stock
of Host International 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 Host  International'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  $83.3 million for 1997,
$73.8 million for 1996 and $63.9 million for 1995, respectively.

                                       20

<PAGE>

     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  $68.3  million,   $57.1  million  and  $59.2  million,
respectively.  During  1998,  the Company  expects to make  capital  expenditure
investments of approximately $60.0 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.

     The  Company's  cash used in financing  activities in 1997 was $4.7 million
compared  with cash  provided by financing  activities of $5.2 million and $20.1
million in 1996 and 1995,  respectively.  During 1997,  the Company  announced a
share  repurchase  program of up to $15.0 million of the Company's  stock on the
open  market  over a two-year  period.  As of the end of 1997,  the  Company had
repurchased  253,100 shares at an aggregate  purchase price of $3.5 million.  In
addition to treasury share repurchases, 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.  Offsetting
these cash  outflows  were  proceeds  received for the issuance of common shares
relating to the Company's Employee Stock Purchase Plan totaling $2.8 million and
other employee stock plans.  The Company's cash flows from financing  activities
during 1996  primarily  consisted of proceeds  from the issuance of common stock
relating to the Host Marriott  warrants and 1995 consisted of net cash transfers
from Host Marriott during 1995.

     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 8.1% to
$129.1  million in 1997 compared with $119.4  million and $107.6 million in 1996
and 1995,  respectively.  The EBITDA margin improved 70 basis points to 10.0% of
revenues,  up from 9.3% in both  1996 and  1995.  The  Company's  cash  interest
coverage  ratio  (defined as EBITDA to interest  expense  less  amortization  of
deferred  financing  costs) was 3.4 to 1.0 in 1997  compared with 3.1 to 1.0 for
1996 and 2.7 to 1.0 for 1995. EBITDA during 1997 significantly  exceeded capital
expenditures of $68.3 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)                                       $   20.8       $   14.3       $  (73.6)
Interest expense                                            39.8           40.3           40.5
Provision for income taxes                                  10.2           10.2            3.9
Extraordinary item, net of taxes                             ---            ---            9.6
Depreciation and amortization                               54.8           54.6           61.6
Unusual items                                                0.3            ---           61.3
Other non-cash items                                         3.2            ---            4.3
-------------------------------------------------- -------------- -------------- ---------------
EBITDA                                                  $  129.1       $  119.4       $  107.6
-------------------------------------------------- -------------- -------------- ---------------
</TABLE>

                                       21

<PAGE>

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 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 $46.8  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 15 operating  units
to the extent the  carrying  value of the assets  exceeded the fair value of the
assets in 1995.  Twelve of the fifteen 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 72% of the
total 1995  write-down  of $46.8  million  related to two  operating  units (one
tollroad unit and one airport unit).

     Historically, the Company has incurred net negative cash flows at 11 of the
original 15 individual impaired operating units.  Negative cash flows from these
units,  which  were  included  in the  Company's  cash  flows  from  operations,
aggregated  approximately  $2.0 million,  $1.0 million and $5.0 million in 1997,
1996 and 1995, respectively. During 1996 and 1997, 6 of the original 15 impaired
units were either disposed of or the lease term expired.  As of the end of 1997,
the total  cash flow  deficit  (including  operating  cash  flows and  necessary
capital  expenditures)  from the remaining 9 operating units was projected to be
approximately  $10.9  million over the  remaining  weighted-average  life of the
contracts  of  4.3  years.   Substantially  all  of  the  remaining  deficit  is
attributable to three operating  units,  which include two airport units and one
tollroad unit.

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.

                                       22

<PAGE>

DEFERRED TAX ASSETS

     The Company has recognized net assets of $67.9 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 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
$5.6  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 $112.7 million and
$59.9  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.

SHAREHOLDERS' DEFICIT

     On  December  29,  1995,  one  share  of the  Company's  common  stock  was
distributed to the existing  shareholders of Host Marriott for every five shares
of Host  Marriott  stock  held by those  shareholders.  In  connection  with the
Distribution,  31.9 million  shares of the  Company's  common stock were issued.
Common shares issued and  outstanding  increased from 34.4 million as of the end
of fiscal year 1996 to 34.5 million as of the end of fiscal year 1997.

     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  shareholders'
deficit of $76.2  million and $95.5 million as of January 2, 1998 and January 3,
1997, respectively.

                                       23

<PAGE>

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.

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.

                                       24

<PAGE>

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  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 concessions 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.

                                       25

<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                                   27

  Consolidated Balance Sheets as of January 2, 1998 and January 3, 1997      28

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

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

  Consolidated Statements of Shareholders' Deficit for the Fiscal
    Years Ended January 2, 1998, January 3, 1997 and December 29, 1995       31

  Notes to Consolidated Financial Statements                            32 - 45




                                       26

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of Host Marriott Services Corporation:

        We have audited the  accompanying  consolidated  balance  sheets of Host
Marriott  Services  Corporation  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 Marriott Services Corporation 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.


                                       27

<PAGE>

HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 2, 1998 AND JANUARY 3, 1997

<TABLE>
<CAPTION>
---------------------------------------------------------------------------- ---------------- ---------------
                                                                                  1997             1996
---------------------------------------------------------------------------- ---------------- ---------------
                                                                           (IN MILLIONS, EXCEPT SHARE AMOUNTS)
<S>                                                                                <C>             <C>

                                  ASSETS
Current assets:
   Cash and cash equivalents                                                         $ 78.1         $ 104.2
   Accounts receivable, net                                                            24.5            29.2
   Inventories                                                                         41.1            43.3
   Deferred income taxes                                                               11.5            25.4
   Prepaid rent                                                                         7.0             5.9
   Other current assets                                                                 7.0             3.3
---------------------------------------------------------------------------- ---------------- ---------------
   Total current assets                                                               169.2           211.3

Property and equipment, net                                                           279.9           274.2
Intangible assets                                                                      22.1            23.4
Deferred income taxes                                                                  56.4            53.3
Other assets                                                                           20.4            20.1
---------------------------------------------------------------------------- ---------------- ---------------

Total assets                                                                        $ 548.0         $ 582.3
---------------------------------------------------------------------------- ---------------- ---------------

                   LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
   Accounts payable                                                                 $  72.2         $  97.3
   Accrued payroll and benefits                                                        46.0            45.7
   Accrued interest payable                                                             4.8             4.8
   Current portion of long-term debt                                                    1.0             0.8
   Other current liabilities                                                           41.5            62.7
---------------------------------------------------------------------------- ---------------- ---------------
   Total current liabilities                                                          165.5           211.3

Long-term debt                                                                        405.8           407.4
Other liabilities                                                                      52.9            59.1
---------------------------------------------------------------------------- ---------------- ---------------
Total liabilities                                                                     624.2           677.8

Common stock,  no par value,  100  million  shares  authorized,
   34,733,815 and 34,445,197 shares issued as of January 2, 1998
   and January 3, 1997, respectively                                                    ---             ---
Contributed deficit                                                                  (107.8)         (109.8)
Retained earnings                                                                      35.1            14.3
Treasury stock - 253,100 shares at January 2, 1998                                     (3.5)            ---
---------------------------------------------------------------------------- ---------------- ---------------
   Total shareholders' deficit                                                        (76.2)          (95.5)
---------------------------------------------------------------------------- ---------------- ---------------

Total liabilities and shareholders' deficit                                         $ 548.0         $ 582.3
---------------------------------------------------------------------------- ---------------- ---------------
</TABLE>


              See notes to the consolidated financial statements.

                                       28

<PAGE>

HOST MARRIOTT SERVICES CORPORATION 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, EXCEPT PER SHARE AMOUNTS)
<S>                                                                         <C>              <C>              <C>

REVENUES                                                                    $1,284.6        $1,277.8         $1,162.3

OPERATING COSTS AND EXPENSES
   Cost of sales                                                               374.1           381.6            353.1
   Payroll and benefits                                                        383.2           379.1            344.3
   Rent                                                                        203.0           203.3            182.5
   Royalties                                                                    26.7            24.8             19.7
   Depreciation and amortization                                                53.1            53.9             60.5
   Write-downs of long-lived assets                                              4.2             ---             46.8
   Restructuring and other special charges, net                                 (3.9)            ---             14.5
   General and administrative                                                   54.3            51.8             45.5
   Other                                                                       122.8           121.0            115.7
---------------------------------------------------------------------- --------------- --------------- ----------------
Total operating costs and expenses                                           1,217.5         1,215.5          1,182.6

OPERATING PROFIT (LOSS)                                                         67.1            62.3            (20.3)

   Interest expense                                                            (39.8)          (40.3)           (40.5)
   Interest income                                                               3.7             2.5              0.7
---------------------------------------------------------------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM                                                           31.0            24.5            (60.1)

Provision (benefit) for income taxes                                            10.2            10.2              3.9
---------------------------------------------------------------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                         20.8            14.3            (64.0)
   Extraordinary item - loss on extinguishment of debt
        (net of related income tax benefit of $5.2 million)                      ---             ---             (9.6)
---------------------------------------------------------------------- --------------- --------------- ----------------

NET INCOME (LOSS)                                                           $   20.8        $   14.3         $  (73.6)
---------------------------------------------------------------------- --------------- --------------- ----------------

BASIC INCOME (LOSS) PER COMMON SHARE (1):
   Loss before extraordinary item                                           $   0.60        $   0.43         $  (2.02)
   Extraordinary item                                                            ---             ---            (0.31)
---------------------------------------------------------------------- --------------- --------------- ----------------
   PRIMARY NET INCOME (LOSS)                                                $   0.60        $   0.43         $  (2.33)
---------------------------------------------------------------------- --------------- --------------- ----------------

DILUTED INCOME (LOSS) PER COMMON SHARE (1):
   Loss before extraordinary item                                           $   0.57        $   0.40         $  (2.02)
   Extraordinary item                                                            ---             ---            (0.31)
---------------------------------------------------------------------- --------------- --------------- ----------------
   FULLY-DILUTED NET INCOME (LOSS)                                          $   0.57        $   0.40         $  (2.33)
---------------------------------------------------------------------- --------------- --------------- ----------------

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (2):
   Basic                                                                        34.6            33.4             31.7
   Diluted                                                                      36.5            35.6             31.7
---------------------------------------------------------------------- --------------- --------------- ----------------
<FN>
(1) Loss per common  share is  presented on a pro forma basis for 1995 as if the
    Host Marriott  Services  spin-off and related  transactions  occurred at the
    beginning of 1995 and is unaudited.  Historical loss per common share is not
    presented  for 1995 because the Company was not  publicly  held during those
    periods.
(2) The number of shares used to compute  1995 pro forma loss per share is based
    on Host Marriott Corporation's weighted average number of outstanding common
    shares  adjusted for the  one-for-five  (i.e. one share of Company stock for
    every five shares of Host Marriott  Corporation)  distribution ratio used at
    the spin-off.
</FN>
</TABLE>

               See notes to the consolidated financial statements.

                                       29

<PAGE>

HOST MARRIOTT SERVICES CORPORATION 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)                                                            $ 20.8           $ 14.3          $ (73.6)
Extraordinary item                                                              ---              ---              9.6
------------------------------------------------------------------- ----------------- ---------------- ----------------
Income (loss) before extraordinary item                                        20.8             14.3            (64.0)

Adjustments to reconcile cash from operations:
   Depreciation and amortization                                               54.8             54.6             61.6
   Deferred financing                                                           1.3              1.3              0.7
   Deferred income taxes                                                       10.8             (5.5)            (8.6)
   Writedowns of long-lived assets                                              4.2              ---             46.8
   Restructuring and other special charges, net                                (3.9)             ---             14.5
   Other                                                                        6.1              3.6              4.3

   Working capital changes:
        Decrease in accounts receivable                                         5.3              2.3              0.6
        Decrease (increase) in inventories                                      1.4             (5.9)            (3.6)
        (Increase) decrease in other current assets                            (6.6)            (1.6)             2.4
        (Decrease) increase in accounts payable and accruals                  (41.7)            40.4             (3.3)
------------------------------------------------------------------- ----------------- ---------------- ----------------

Cash provided by operations                                                    52.5            103.5             51.4
------------------------------------------------------------------- ----------------- ---------------- ----------------

INVESTING ACTIVITIES
Capital expenditures                                                          (68.3)           (57.1)           (57.6)
Acquisitions                                                                    ---              ---             (1.6)
Net proceeds from the sale of assets                                            ---              2.4              2.3
Other, net                                                                     (5.6)             3.0              4.9
------------------------------------------------------------------- ----------------- ---------------- ----------------

Cash used in investing activities                                             (73.9)           (51.7)           (52.0)
------------------------------------------------------------------- ----------------- ---------------- ----------------

FINANCING ACTIVITIES
Repayments of long-term debt                                                   (1.7)            (0.8)          (393.0)
Issuance of long-term debt                                                      ---              ---            389.5
Proceeds from stock issuances                                                   2.8              6.0              ---
Payment to Host Marriott Corporation for Marriott
    International options and deferred shares                                  (2.2)             ---              ---
Purchases of treasury stock                                                    (3.5)             ---              ---
Foreign exchange translation adjustments                                       (0.1)             ---              ---
Transfers from Host Marriott Corporation, net                                   ---              ---             23.6
------------------------------------------------------------------- ----------------- ---------------- ----------------

Cash (used in) provided by financing activities                                (4.7)             5.2             20.1
------------------------------------------------------------------- ----------------- ---------------- ----------------

(DECREASE) INCREASE IN CASH AND
   CASH EQUIVALENTS                                                           (26.1)            57.0             19.5

CASH AND CASH EQUIVALENTS, beginning of year                                  104.2             47.2             27.7
------------------------------------------------------------------- ----------------- ---------------- ----------------

CASH AND CASH EQUIVALENTS, end of year                                       $ 78.1           $104.2          $  47.2
------------------------------------------------------------------- ----------------- ---------------- ----------------
</TABLE>

               See notes to the consolidated financial statements.

                                       30

<PAGE>

HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
    COMMON
    SHARES                                                   COMMON     CONTRIBUTED   RETAINED    TREASURY
  OUTSTANDING                                                 STOCK       DEFICIT     EARNINGS     STOCK       TOTAL
------------------------------------------------------------------------------------------------------------------------
                                                                                  (IN MILLIONS)
     <C>          <S>                                           <C>          <C>          <C>        <C>       <C>

        ---       Balance, December 30, 1994                    $ ---      $    ---       $ ---      $ ---    $    ---

       31.9          Capitalization of Company                    ---        (123.1)        ---        ---      (123.1)
------------------------------------------------------------------------------------------------------------------------
       31.9       Balance, December 29, 1995                      ---        (123.1)        ---        ---      (123.1)

                     Common stock issued for
        ---             employee stock and option plans           ---           0.2         ---        ---         0.2
                     Common stock issued for Host
        1.4             Marriott Corporation warrants             ---           5.8         ---        ---         5.8
                     Adjustments to distribution of
        ---             capitalization of Company                 ---           4.8         ---        ---         4.8
        1.1          Deferred compensation and other              ---           2.5         ---        ---         2.5
        ---          Net income                                   ---           ---        14.3        ---        14.3
------------------------------------------------------------------------------------------------------------------------
       34.4       Balance, January 3, 1997                        ---        (109.8)       14.3        ---       (95.5)

                     Common stock issued for employee
        0.5             stock and option plans                    ---           2.8         ---        ---         2.8
                     Payment to Host Marriott Corporation
                        for Marriott International options
        ---             and deferred shares                       ---          (2.2)        ---        ---        (2.2)
       (0.2)         Treasury stock purchases                     ---           ---         ---       (3.5)       (3.5)
       (0.2)         Deferred compensation and other              ---           1.4         ---        ---         1.4
        ---          Net income                                   ---           ---        20.8        ---        20.8
------------------------------------------------------------------------------------------------------------------------
       34.5       BALANCE, JANUARY 2, 1998                      $ ---       $(107.8)     $ 35.1      $(3.5)    $ (76.2)
------------------------------------------------------------------------------------------------------------------------
</TABLE>






               See notes to the consolidated financial statements.

                                       31


<PAGE>

               HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

On December 29, 1995, Host Marriott Services  Corporation (the "Company") became
a  publicly  traded  company  and  the  successor  to  the  food,  beverage  and
merchandise   concession   businesses  of  Host  Marriott   Corporation   ("Host
Marriott").  On that date,  31.9  million  shares of common stock of the Company
were  distributed  to the holders of Host  Marriott's  common stock in a special
dividend (the "Distribution" - see Note 2).
     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  and  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, the Company's parent corporation until December 29, 1995.

DESCRIPTION OF THE BUSINESS

The  Company  operates  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  through two
wholly owned subsidiaries:  Host International,  Inc. ("Host International") and
Host Marriott Tollroads,  Inc. 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.

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 $16.9 million in 1997 and $18.0 million in 1996.
These  intangibles are being amortized on a straight-line  basis

                                       32

<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


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 $2.6 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
$11.3 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.
128,  "Earnings  Per Share,"  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 Notes 14 and 15).  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
$46.8 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.

INCOME (LOSS) PER COMMON SHARE

In 1997,  the Company  adopted  SFAS No. 128,  "Earnings  per Share,"  effective
December 15, 1997. As a result,  the Company's  reported  earnings per share for
1996 were  restated.  Earnings  per share for  fiscal  years  1997 and 1996 were
computed  by  dividing  net  income by the  diluted  weighted-average  number of
outstanding  common shares of 36.5 million and 35.6 million,  respectively.  Per
share data is not  presented on a historical  basis for 1995 because the Company
was not a publicly-held company during that period. The Company's pro forma loss
per  common   share  for  1995  is  computed   by  dividing   net  loss  by  the
weighted-average   number  of  pro  forma  outstanding  common  shares.   Common
equivalent shares and other potentially  dilutive  securities have been excluded
from the 1995 pro forma  weighted-average  number of outstanding  shares because
they  were  antidilutive.   The  1995  pro  forma  weighted-average   number  of
outstanding  common shares was  determined as if the shares issued in connection
with  the  Distribution  were  outstanding  from the  beginning  of the year and
adjusted for the one-for-five distribution ratio (see Note 2).

USE OF ESTIMATES

The preparation of the consolidated  financial statements requires management to
make estimates and

                                       33

<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported  amounts of revenues and expenses during the 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 the Company
through a special  dividend.  The shares  were  distributed  on the basis of one
share of the  Company's  common  stock for every  five  shares of Host  Marriott
stock.
     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.
     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.
     An analysis of the activity in the "Investments and advances from Host
Marriott Corporation" for the two years ended December 29, 1995 is as follows
(in millions):

<TABLE>
<CAPTION>

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

Balance, December 30, 1994                      $  11.4
Assets transferred from Host Marriott, net        (84.5)
Cash transfers from Host Marriott, net             23.6
Net loss                                          (73.6)
Capitalization of Company                         123.1
--------------------------------- ----------- -----------
Balance, December 29, 1995                      $   ---
--------------------------------- ----------- -----------
</TABLE>

     The average balance for fiscal year 1995 was $(67.3) million.


3.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

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

Leasehold improvements              $ 409.1     $ 402.6
Furniture and equipment               239.6       231.5
Construction in progress               34.0        29.0
--------------------------------- ----------- -----------
Subtotal                              682.7       663.1
Less:  accumulated
       depreciation and
       amortization                  (402.8)     (388.9)
--------------------------------- ----------- -----------
Total property and equipment, net   $ 279.9     $ 274.2
--------------------------------- ----------- -----------
</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,   airline   traffic  shifts  and  weak  operating
performance.
     Effective  September 9, 1995,  the Company  adopted SFAS No. 121, and wrote
down the assets of 15  individual  operating  units by  recognizing  a non-cash,
pretax charge against earnings of $46.8 million. Twelve of the fifteen 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 72% of the total 1995 write-down related to two operating
units (one tollroad unit and one airport  unit).  Historically,  the Company has
incurred negative cash flows at 11 of the 15 individual  operating units,  which
aggregated  approximately $2.0 million,  $1.0 million and $5.0 million, in 1997,
1996 and 1995,  respectively,  and were included in the Company's  reported cash
flows from operations. During 1996 and 1997, 6 of the original 15 impaired units
either were  disposed of or the lease term expired.  As of the end of 1997,  the
total cash flow deficit from the remaining nine operating units was projected to
be approximately $10.9 million over the remaining  weighted-average  life of 4.3
years  compared to $27.8  million in 1996.  Substantially  all of the  remaining
deficit is  attributable  to three  operating  units,  which include two airport
units and one tollroad unit.

                                       34

<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



     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 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                  $ (3.1)   $ 11.9   $   ---
   Foreign                     ---       0.2       ---
   State                       2.5       3.6       1.5
-------------------------- --------- --------- ---------
Total current (benefit)
   provision                  (0.6)     15.7       1.5

Deferred:
   Federal                    10.4      (2.4)    (17.4)
   Foreign                     ---      (0.2)      ---
   State                       2.3       2.7      (5.1)
   (Decrease) increase
      in valuation
      allowance               (1.9)     (5.6)     24.9
-------------------------- --------- --------- ---------
Total deferred
   provision (benefit)        10.8      (5.5)      2.4
-------------------------- --------- --------- ---------
Total provision             $ 10.2    $ 10.2    $  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              58.6       55.0
   Casualty insurance                   9.8        8.8
   Reserves                             5.7       10.4
   Employee benefits                    2.1       16.7
   Accrued rent                        11.8       12.3
   Other                                1.0        ---
------------------------------------ -------- ----------
Gross deferred tax assets             110.7      124.9

Less:  valuation allowance            (34.1)     (36.0)
------------------------------------ -------- ----------
Net deferred tax assets                76.6       88.9
------------------------------------ -------- ----------

Deferred tax liabilities:
   Safe harbor lease investments       (3.7)      (5.0)
   Other deferred tax liabilities      (5.0)      (5.2)
------------------------------------ -------- ----------
Gross deferred tax liabilities         (8.7)     (10.2)
------------------------------------ -------- ----------
Net deferred income taxes            $ 67.9     $ 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 that 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 $5.6 million
due to the  decrease  in the  state  effective  tax rate and the  expiration  of
purchase business  combination tax credits.  The Company increased the valuation
allowance  during  1995  by  $24.9  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.

                                       35

<PAGE>

     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                4.8       4.8        1.6
Tax credits                  (3.1)      5.8       (0.9)
Change in valuation
   allowance                 (6.1)    (22.9)      41.4
Effect of state tax
   rate changes
   on deferred taxes           ---      13.6       ---
Other, net                     2.4       5.3      (0.6)
----------------------- ------------ --------- ----------
Effective income
   tax rate                   33.0%     41.6%      6.5 %
----------------------- ------------ --------- ----------
</TABLE>

     Beginning  with the 1996 fiscal year,  the Company will file a consolidated
Federal income tax return, including all of its domestic subsidiaries.  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 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                          $11.0     $20.8
Operating insurance accruals            8.9       9.9
Accrued restructuring costs             0.5       7.1
International accruals                  3.5       3.6
Accrued franchise fees                  1.8       2.0
Other                                  15.8      19.3
-------------------------------- ----------- ---------
Total other current liabilities       $41.5     $62.7
-------------------------------- ----------- ---------
</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, Host International,  Inc. 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 Host International (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 Host International 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

                                       36

<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


the Guarantors and enter into certain mergers and consolidations.
     As of January 2, 1998, Host International had approximately  $103.2 million
of  unrestricted  funds  available  for  distribution  to the Company  under the
provisions of the Senior Notes Indenture. However, certain covenants of the loan
agreements  referred to below further restrict Host  International's  ability to
dividend these funds to the Company. 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  ("First  Chicago"),  as agent for a group of
participating lenders, has provided credit facilities (the "Facilities") to Host
International.  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 principal  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  ("Letter of Credit  Facility")  for the issuance of financial and
non-financial  letters of credit and (ii) a  revolving  credit  facility  in the
amount of $75.0  million  (the  "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 Host
International  and are secured by the Company's pledge of, and a first perfected
security interest in, the capital stock of Host International 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; however, dividends payable to the Company are limited to
25% of Host  International'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 Year
---------------------------------- -------------------
                                     (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.  SHAREHOLDERS' DEFICIT

One hundred million shares of common stock,  without par value,  are authorized,
of which 34.5 million shares were issued and outstanding as of the end of fiscal
year 1997 and 34.4 million  shares were issued and  outstanding as of the end of
fiscal year 1996. One million shares of preferred stock,  without par value, are
authorized, of which 100,000 shares of junior participating preferred stock have
been  authorized  and  reserved for issuance in  connection  with the  Company's
stockholder rights plan described below.

SHARE REPURCHASE PROGRAM

During 1997,  the Company  announced a program to repurchase up to $15.0 million
of the Company's stock on the open market over a two-year period.  As of the end
of 1997, the Company had  repurchased  253,100  shares at an aggregate  purchase
price of $3.5 million.

WARRANTS

Under the terms of the  Distribution  Agreement,  the Company was  obligated  to
issue up to 1,438,185  shares of common stock upon the exercise of Host Marriott
warrants  issued to certain  bondholders of Host Marriott in connection with the
March 1993 settlement of a class action lawsuit.

                                       37

<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



     As of the end of fiscal year 1997, the Company had issued  1,381,668 common
shares resulting from the exercise of Host Marriott warrants.  Proceeds received
from the issuance of these  common  shares were $5.9  million.  As of January 2,
1998,  the Company was  obligated to issue 56,517 shares of common stock for the
remaining  unexercised  Host  Marriott  warrants at a price of $5.33 per Company
share. The warrants expire on October 8, 1998.

STOCKHOLDER RIGHTS PLAN

In conjunction with the Distribution,  the Company adopted a stockholder  rights
plan  entitling the holders of each share of the  Company's  common stock to one
preferred stock purchase right.  Each right entitles the holder to purchase from
the Company one one-thousandth of a share (a "Unit") of a newly issued series of
the  Company's  junior  participating  preferred  stock at a price of $75.00 per
Unit.  The rights will be  exercisable  10 days after a person or group acquires
beneficial  ownership of 20 percent or more of the Company's  common  stock,  or
begins a tender or exchange offer for 30 percent or more of the Company's common
stock.  The rights are nonvoting and expire December 29, 2006,  unless exercised
or  previously  redeemed  by the  Company at the  redemption  price of $0.01 per
right.  If the  Company  is  involved  in a merger  or  certain  other  business
combinations  not approved by the Board of  Directors,  each right  entitles its
holder,  other than the acquiring  person or group,  to purchase common stock of
the Company having a value of twice the exercise price of the right.

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 was 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.
     The  Company may issue to Host  Marriott  up to 1.4  million  shares of the
Company's  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.  At the Company's  option,  the Company may satisfy these  obligations by
paying to Host  Marriott cash equal to the value of such shares of the Company's
common  stock on the last  day of the  fiscal  year in  which  the  options  are
exercised  or the  deferred  shares  are  released.  The  Company  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 are  recorded  at an average  price of $5.29 per
share,  are shown as a component  of  shareholders'  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 $4.8 million
of adjustments to the original capitalization of the Company.

8.  STOCK-BASED COMPENSATION PLANS

In conjunction  with the  Distribution,  the Company  adopted the  Comprehensive
Stock Plan,  under which the Company  may make to  participating  employees  (i)
awards of restricted  shares of the Company's common stock, (ii) deferred awards
of shares of the Company's  common stock and (iii) awards of options to purchase
the  Company's  common  stock.  In addition,  the Company has an Employee  Stock
Purchase  Plan.  The Company  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 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.  As of
January 2, 1998,  there were 631,185  restricted share awards  outstanding,  the
majority of

                                       38

<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


which expire at the end of fiscal year 1998.  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 the Company's
common stock during the award period and is  contingent on attainment of certain
annual performance criteria.
     The  Company  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  quarter 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 the Company's 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.
     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 Company 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 the Company's  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 the Company's stock options,  calculated
using the Black-Scholes  option-pricing  model,  granted during the fiscal years
ended 1997,  1996 and 1995 totaled $2.5  million,  $5.3 million and $4 thousand,
respectively.

                                       39

<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



     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 the Company's  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  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  common
shares  were  sold to  employees  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 of the option feature of the Company's  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 the 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) and income  (loss) per
common share would have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
-----------------------------------------------------------
                                  1997     1996     1995
-----------------------------------------------------------
                                 (IN MILLIONS, EXCEPT PER
                                      SHARE AMOUNTS)

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

Net income (loss)  As reported     $20.8    $14.3  $(73.6)
                   Pro forma        19.7     13.7   (73.6)

EPS:
    Basic          As reported     $0.60    $0.43  $(2.33)
                   Pro forma        0.57     0.41   (2.33)

    Diluted        As reported     $0.57    $0.40  $(2.33)
                   Pro forma        0.55     0.39   (2.33)
---------------------------------------------------------------
<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
     and income per common share expected in future years.
</FN>
</TABLE>

     Fair values of stock  options  used to compute pro forma net income  (loss)
and  income  (loss) per  common  share  disclosures  were  determined  using the
Black-Scholes  option-pricing  model.  The 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.
                                       40


<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



     Host  International  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 the Company's  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
reflected 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 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 the end of fiscal year 1997 follows:

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

1998                                           $145.4
1999                                            132.8
2000                                            111.6
2001                                             98.3
2002                                             81.9
Thereafter                                      201.4
---------------------------------- -------------------
Total minimum lease payments                   $771.4
---------------------------------- -------------------
</TABLE>

     The Company  leases  property and equipment  under  noncancellable  leases.
Certain leases contain provisions 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 $771.4 million have not been reduced
by minimum  sublease  rentals of $60.9  million  payable  to the  Company  under
noncancellable subleases as of the end of fiscal year 1997.
     Certain  leases  require  a  minimum  level  of  capital  expenditures  for
renovations and facility expansions during the lease terms. At the end of fiscal
year 1997, the Company was committed to invest  approximately

                                       41

<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


$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        $130.6    $124.9    $107.7
Additional rental
   based on sales            72.4      78.4      74.8
------------------------- -------- --------- ---------
Total rent expense         $203.0    $203.3    $182.5
------------------------- -------- --------- ---------
</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 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,  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,   the  Company  and   Marriott
International  entered into a Continuing  Services  Agreement,  a Noncompetition
Agreement and a License Agreement. These agreements provide, among other things,
that the Company 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,  the Company 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 MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


14.  INCOME PER SHARE

<TABLE>
<CAPTION>
                                                                                      FOR FISCAL YEAR 1997
                                                                           ---------------------------------------------
                                                                                                            PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                                      INCOME          SHARES          AMOUNT
----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
<S>                                                                            <C>             <C>             <C>

BASIC INCOME PER SHARE:
    Income available to common shareholders                                      $20.8           34.6             $0.60

EFFECT OF DILUTIVE SECURITIES:
    Stock options                                                                                 0.4
    Host Marriott Corporation stock options held by former
       employees of Host Marriott Corporation                                                     1.0
    Host Marriott Corporation deferred stock held by former
       employees of Host Marriott Corporation                                                     0.2
    Deferred stock incentive plan                                                                 0.3
----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
DILUTED INCOME PER SHARE:
    Income available to common shareholders plus assumed conversions             $20.8           36.5             $0.57
----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                       FOR FISCAL YEAR 1996
                                                                           ---------------------------------------------
                                                                                                            PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                                      INCOME          SHARES          AMOUNT
----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
<S>                                                                              <C>            <C>              <C>

BASIC INCOME PER SHARE:
    Income available to common shareholders                                      $14.3           33.4             $0.43

EFFECT OF DILUTIVE SECURITIES:
    Warrants                                                                                      0.5
    Stock options                                                                                 0.2
    Host Marriott Corporation stock options held by former
       employees of Host Marriott Corporation                                                     1.0
    Host Marriott Corporation deferred stock held by former
       employees of Host Marriott Corporation                                                     0.2
    Employee stock purchase plan                                                                  0.1
    Deferred stock incentive plan                                                                 0.2
----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
DILUTED INCOME PER SHARE:
    Income available to common shareholders plus assumed conversions             $14.3           35.6             $0.40
----------------------------------------------------------------------- -- ------------ -- ----------- -- --------------
</TABLE>

In 1997,  the Company  adopted SFAS No. 128,  "Earnings per Share." As a result,
the Company's reported income per share for 1996 was restated. Per share data is
not  presented  on a  historical  basis for 1995  because  the Company was not a
publicly-held company during that period.
     Basic  income per common  share was  computed by dividing net income by the
weighted-average  number of outstanding common shares.  Diluted income per share
was  computed by dividing net income by the diluted  weighted-average  number of
outstanding common shares.
     Options to purchase  40,000  shares of common stock at $14.75 per share and
393,400 shares of common stock at $14.16 per share were outstanding during 1997.
Options to purchase  4,300 shares of common stock at $7.75 per share and 671,300
shares of common stock at $8.88 per share were  outstanding  during 1996.  These
shares were not included in the  computation of diluted income per share because
the option  exercise  prices were greater than the average  market prices of the
common  shares in those years.  The options  excluded in 1997 and 1996 expire in
2007 and  2006,  respectively,  and  were  still  outstanding  at the end of the
respective years.
     The effect of adopting SFAS No. 128 on previously reported income per share
data was as follows:

<TABLE>
<CAPTION>
           PER SHARE AMOUNTS                  1996
----------------------------------------- -- --------
<S>                                             <C>

Primary income per share as reported           $0.40
Effect of SFAS No. 128                          0.03
----------------------------------------- -- --------
Basic income per share as restated             $0.43
----------------------------------------- -- --------

Fully diluted income per share as              $0.40
reported
Effect of SFAS No. 128                           ---
----------------------------------------- -- --------
Diluted income per share as restated           $0.40
----------------------------------------- -- --------
</TABLE>

                                       43



<PAGE>
              HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


15.  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     $ 798.3
  Travel plazas                312.5       312.4       309.9
  Shopping malls
    and entertainment           58.6        53.9        54.1
-------------------------------------------------------------
                            $1,284.6    $1,277.8    $1,162.3
-------------------------------------------------------------

OPERATING PROFIT:(1)
  Airports                   $  94.3    $   87.7    $   65.9
  Travel plazas                 22.3        22.2        19.5
  Shopping malls
    and entertainment            5.1         4.2         1.1
-------------------------------------------------------------
                             $ 121.7    $  114.1    $   86.5
-------------------------------------------------------------

CAPITAL EXPENDITURES: (2)
  Airports                     $52.1       $42.4       $51.2
  Travel plazas                  4.3         4.1         7.2
  Shopping malls
    and entertainment            7.4         4.5         0.5
-------------------------------------------------------------
                               $63.8       $51.0       $58.9
-------------------------------------------------------------

DEPRECIATION AND AMORTIZATION:
  Airports                     $38.3       $38.9       $41.0
  Travel plazas                 12.1        13.0        15.3
  Shopping malls
    and entertainment            2.7         2.0         4.2
-------------------------------------------------------------
                               $53.1       $53.9       $60.5
-------------------------------------------------------------

ASSETS:
  Airports                    $272.9      $266.9
  Travel plazas                 95.7       104.0
  Shopping malls
    and entertainment           32.9        19.4
---------------------------------------------------
                              $401.5      $390.3
---------------------------------------------------

<FN>
(1)  Before general and administrative expenses and unusual items.
(2)  Includes acquisitions.
</FN>
</TABLE>


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

<TABLE>
<CAPTION>

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

OPERATING PROFIT (LOSS):
  Segments                   $121.7    $ 114.1    $  86.5
  General and
    administrative expenses   (54.3)     (51.8)     (45.5)
  Write-downs of
    long-lived assets          (4.2)       ---      (46.8)
  Restructuring and other
    special charges, net        3.9        ---      (14.5)
-----------------------------------------------------------
                             $ 67.1     $ 62.3    $ (20.3)
-----------------------------------------------------------

CAPITAL EXPENDITURES:
  Segments                   $ 63.8     $ 51.0     $ 58.9
  Corporate and other           4.5        6.1        0.3
-----------------------------------------------------------
                             $ 68.3     $ 57.1     $ 59.2
-----------------------------------------------------------

ASSETS:
  Segments                   $401.5      $390.3
  Corporate and other         146.5       192.0
-------------------------------------------------
                             $548.0      $582.3
-------------------------------------------------
</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.


                                       44


<PAGE>

               HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


16.  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                                            $  263.1      $  292.6      $  340.7        $  388.2     $1,284.6
Operating profit                                         1.3          16.6          36.6            12.6         67.1
Net income (loss)                                       (4.3)          5.1          18.9             1.1         20.8
Income (loss) per common share:(3)
    Basic                                              (0.12)         0.15          0.54            0.03         0.60
    Diluted                                            (0.12)         0.14          0.52            0.03         0.57
</TABLE>


<TABLE>
<CAPTION>
                                                                               1996(1)
------------------------------------------------ ---------------------------------------------------------------------
                                                    FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                      QUARTER       QUARTER       QUARTER        QUARTER        YEAR
------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S>                                                 <C>           <C>           <C>             <C>          <C>
Revenues                                            $  259.8      $  290.0      $  335.1        $  392.9     $1,277.8
Operating profit                                         0.3          15.0          34.4            12.6         62.3
Net income (loss)                                       (4.9)          3.3          15.0             0.9         14.3
Income (loss) per common share:(3)
    Basic                                              (0.15)         0.10          0.45            0.03         0.43
    Diluted                                            (0.15)         0.09          0.42            0.03         0.40
</TABLE>


<TABLE>
<CAPTION>
                                                                               1995(1)
------------------------------------------------ ---------------------------------------------------------------------
                                                    FIRST         SECOND        THIRD        FOURTH         FISCAL
(IN MILLIONS)                                      QUARTER      QUARTER(4)     QUARTER     QUARTER(5)        YEAR
------------------------------------------------ ------------- -------------- ----------- -------------- -------------
<S>                                                 <C>           <C>           <C>             <C>          <C>
Revenues                                            $  232.3       $  259.7     $  311.0      $  359.3     $1,162.3
Operating profit (loss)                                 (2.6)           9.6         30.6         (57.9)       (20.3)
Income (loss) before extraordinary item                 (7.9)          (1.2)        13.7         (68.6)       (64.0)
Net income (loss)                                       (7.9)         (10.8)        13.7         (68.6)       (73.6)
Pro Forma income (loss) per common share:
    Income (loss) before extraordinary item                                                                   (2.02)
    Net income (loss)                                                                                         (2.33)

<FN>
(1)  The first three quarters of 1997 and 1995 consist of 12 weeks each, and the
     fourth quarter includes 16 weeks. The first three quarters of 1996 consists
     of 12 weeks each, and the fourth quarter includes 17 weeks. The Company did
     not pay dividends in 1997 or 1996 and prior to that time was not a publicly
     traded corporation.
(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)  The sum of income  (loss) per  common  share for the four  fiscal  quarters
     differs from the annual  income (loss) per common share due to the required
     method of computing the weighted-average number of shares in the respective
     periods.
(4)  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).
(5)  Fourth  quarter 1995 results  include $46.8 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>

                                       45

<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.   Condensed Financial Information of Registrant         S-1 to S-5

           II.  Valuation and Qualifying Accounts                        S-6

                    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)  REPORTS ON FORM 8-K

           Form 8-K dated  October 9, 1997  announcing  third  quarter and first
              three  quarters  of 1997  results and  containing  forward-looking
              statements.


                                       46


<PAGE>

(3)  EXHIBITS

EXHIBIT
  NO.                              DESCRIPTION

2.1*    Distribution Agreement dated December 22, 1995 by and between Host
        Marriott Corporation and Host Marriott Services Corporation

2.2*    Amendment No. 1 to the Distribution Agreement dated September 15, 1993
        by and among Host Marriott Corporation, Host Marriott Services
        Corporation and Marriott International, Inc.

3.1*    Amended and Restated Certificate of Incorporation of Host Marriott
        Services Corporation

3.2**   Amended and Restated Bylaws of Host Marriott Services Corporation

4.1*    Certificate of Designation, Preferences and Rights of Series A Junior
        Participating Preferred Stock of the Company

4.2*    Rights Agreement dated as of December 22, 1995 between the Company and
        First Chicago Trust Company of New York, as Rights agent

4.5*    Indenture between Host Marriott Travel Plazas, Inc. and Marine Midland
        Bank dated as of May 25, 1995

4.6*    First Supplemental Indenture dated as of December 4, 1995 between Host
        Marriott Travel Plazas, Inc. and Marine Midland Bank

4.7*    Warrant Agreement dated as of October 19, 1994 by (incorporated by
        reference to Registration Statement No. 33-80801) and between Host
        Marriott Corporation and First Chicago Trust Company of New York as
        Warrant Agent

4.8*    First  Supplemental  Warrant  Agreement  dated  December 22, 1995 by and
        between Host Marriott  Corporation,  Host Marriott Services  Corporation
        and First Chicago Trust Company of New York, as Warrant Agent.

10.1*   Transitional Corporate Services Agreement dated December 20, 1995 by and
        between Host Marriott Corporation and Host Marriott Services Corporation

10.2*   Employee Benefits and Other Employment Matters Allocations Agreement
        dated as of December 29, 1995 by and between Host Marriott Corporation
        and Host Marriott Services Corporation

10.3*   Tax Sharing Agreement dated as of December 29, 1995 by and between Host
        Marriott Corporation and Host Marriott Services Corporation

10.4*   Assignment and Assumption Agreement dated December 28, 1995 by and
        between Host Marriott Corporation and Host Marriott Services Corporation

10.5*   Termination Agreement dated as of December 29, 1995 among Host Marriott
        Corporation, Host Marriott Corporation, and Host Marriott
        International, Inc.

10.6*   Corporate Services Agreement by  and between Marriott Corporation and
        Marriott International, Inc. dated as of October 8, 1993.

10.7*   Procurement Services Agreement by and between Marriott Corporation and
        Marriott International, Inc. dated as of October 8, 1993


                                       47


<PAGE>

EXHIBIT
  NO.                               DESCRIPTION


10.8*   Supply Agreement by and between Marriott Corporation and Marriott
        International, Inc. dated as of October 8, 1993

10.9*   Casualty Claims Administration Agreement by and between Marriott
        Corporation and Marriott International, Inc. dated as of October 8, 1993

10.10*  Employee Benefits Administration Agreement by and between Marriott
        Corporation and Marriott International, Inc. dated as of October 8, 1993

10.11*  Architecture and Construction Services Agreement by and between
        Marriott Corporation and Marriott International, Inc. dated as of
        October 8, 1993

10.12*  Consulting Agreement by and between Marriott Corporation and Marriott
        International, Inc. dated as of October 8, 1993

10.13*  Certificate of Assistant Secretary with respect to the Host Marriott
        Services Corporation Comprehensive Stock Plan

10.14*  Certificate of Assistant Secretary with respect to the Host Marriott
        Services Corporation Employee Stock Purchase Plan

11      Computation of Earnings (Loss) Per Common Share

21      Listing of Subsidiaries of the Registrant

23.1    Consent of Arthur Andersen LLP, Independent Public Accountants

27     Financial Data Schedule (EDGAR Filing Only)











*    Incorporated by reference to Company's 1995 annual report on Form 10-K.
**   Incorporated by reference to Company's 1996 annual report on Form 10-K.


                                       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 MARRIOTT SERVICES CORPORATION


                            By: /S/ BRIAN W. BETHERS
                                --------------------
                                Brian W. Bethers
                Senior Vice President and Chief Financial Officer

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, Chief Executive Officer (Principal
-------------------------      Executive Officer) and Director
William W. McCarten

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

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

 /S/ WILLIAM J. SHAW           Chairman of the Board of Directors
-------------------------
William J. Shaw

 /S/ ROSEMARY M. COLLYER       Director
-------------------------
Rosemary M. Collyer

                               Director
-------------------------
J. W. Marriott, Jr.

 /S/ RICHARD E. MARRIOTT       Director
-------------------------
Richard E. Marriott

 /S/ R. MICHAEL MCCULLOUGH     Director
--------------------------
R. Michael McCullough

                               Director
--------------------------
Gilbert T. Ray

                               Director
--------------------------
Andrew J. Young


                                       50



<PAGE>

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES



To the Shareholders of Host Marriott Services Corporation:

        We  have  audited  in  accordance  with  generally   accepted   auditing
standards,  the  consolidated  financial  statements of Host  Marriott  Services
Corporation  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 schedules  appearing on pages S-2 through S-6 are the  responsibility
of the Company's management and are presented for purposes of complying with the
Securities  and  Exchange  Commission's  rules  and  are not  part of the  basic
consolidated  financial  statements.  These schedules have been subjected to the
auditing  procedures applied in the audits of the basic  consolidated  financial
statements  and, in our  opinion,  fairly  state 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
                                                                    PAGE 1 OF 4


                       HOST MARRIOTT SERVICES CORPORATION
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            CONDENSED BALANCE SHEETS


<TABLE>
<CAPTION>
--------------------------------------------------------------------------- ------------------ -- ------------------
                                                                               JANUARY 2,            JANUARY 3,
                                                                                  1998                  1997
--------------------------------------------------------------------------- ------------------ -- ------------------
                                                                                         (IN MILLIONS)
<S>                                                                               <C>                    <C>
                                  ASSETS

Cash and cash equivalents                                                            $   5.9               $   6.0
--------------------------------------------------------------------------- ------------------ -- ------------------
     Total assets                                                                    $   5.9               $   6.0
--------------------------------------------------------------------------- ------------------ -- ------------------

                  LIABILITIES AND SHAREHOLDERS' DEFICIT

Other liabilities                                                                    $   0.3              $    ---
Advances received and losses in excess of investment in
     wholly owned subsidiaries                                                          81.8                 101.5
Shareholders' deficit                                                                  (76.2)                (95.5)
--------------------------------------------------------------------------- ------------------ -- ------------------
      Total liabilities and shareholders' deficit                                    $   5.9               $   6.0
--------------------------------------------------------------------------- ------------------ -- ------------------
</TABLE>







                See notes to the condensed financial information.



                                      S-2


<PAGE>
                                                                   SCHEDULE I
                                                                   PAGE 2 OF 4

                       HOST MARRIOTT SERVICES CORPORATION
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                       CONDENSED STATEMENTS OF OPERATIONS




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

Earnings (losses) of combined subsidiaries                             $20.5            $14.3           $(73.6)
Interest income                                                          0.4              ---              ---
Tax provision                                                            0.1              ---              ---
-------------------------------------------------------------- -------------- -- ------------- -- --------------
    Net income (loss)                                                  $20.8            $14.3           $(73.6)
-------------------------------------------------------------- -------------- -- ------------- -- --------------
</TABLE>










               See notes to the condensed financial information.


                                      S-3


<PAGE>
                                                                   SCHEDULE I
                                                                   PAGE 3 OF 4

                       HOST MARRIOTT SERVICES CORPORATION
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                       CONDENSED STATEMENTS OF CASH FLOWS




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

Cash from operations:
    Net income                                                      $ 20.8              $ 14.3               $(73.6)
    Investment in subsidiaries                                       (20.5)              (14.3)                73.6
    Increase in other liabilities                                      0.3                 ---                  ---
----------------------------------------------------------- ---------------- --- --------------- -- -----------------
Cash provided by operations                                            0.6                 ---                  ---
----------------------------------------------------------- ---------------- --- --------------- -- -----------------

Cash from investing activities                                         ---                 ---                  ---
Cash from financing activities:
    Proceeds from stock issuances                                      2.8                 6.0                  ---
    Purchases of treasury stock                                       (3.5)                ---                  ---
    Advances (to) from affiliates                                      ---                 ---                (23.6)
    Distributions (to) from Host Marriott                              ---                 ---                 23.6
----------------------------------------------------------- ---------------- --- --------------- -- -----------------
Cash (used in) provided by financing activities                       (0.7)                6.0                  ---
----------------------------------------------------------- ---------------- --- --------------- -- -----------------

Change in cash and cash equivalents                                 $ (0.1)              $ 6.0               $  ---
----------------------------------------------------------- ---------------- --- --------------- -- -----------------
</TABLE>





               See notes to the condensed financial information.


                                      S-4


<PAGE>
                                                                   SCHEDULE I
                                                                   PAGE 4 OF 4

                       HOST MARRIOTT SERVICES CORPORATION
           CONDENSED CONSOLIDATED FINANCIAL INFORMATION OF REGISTRANT
                    NOTES TO CONDENSED FINANCIAL INFORMATION



1.    BASIS OF PRESENTATION

      On December 29, 1995, Host Marriott  Services  Corporation (the "Company")
became  a  publicly   traded   company  and  the   successor  to  Host  Marriott
Corporation's  ("Host  Marriott")  food,  beverage and  merchandise  concessions
businesses in travel and entertainment venues (the "Distribution").  The Company
operates restaurants, gift shops and related facilities at 63 domestic airports,
at 7 international airports, on 13 tollroads (including 92 travel plazas) and at
21  shopping  malls,  tourist  attractions,  stadiums  and  arenas.  The Company
operates  primarily in the United States through two wholly-owned  subsidiaries:
Host International,  Inc. and Host Marriott Tollroads,  Inc. Host International,
Inc.  also  has  international  operations  in  The  Netherlands,  New  Zealand,
Australia and Canada.

      The Company's  1995 results of operations  and cash flows are presented as
if the Company were formed as a separate  entity of Host Marriott until December
29, 1995. Host Marriott's  historical basis in the assets and liabilities of the
Company has been carried over.


2.    PRO FORMA INFORMATION

      In  connection  with  the  Distribution,  the  Company  transferred  three
full-service  hotels  and  assets and  liabilities  related  to  certain  former
restaurant operations to Host Marriott. The Company also entered into management
agreements related to certain restaurant  operations  retained by Host Marriott.
Management fees related to these contracts were $1.2 million in 1995.

      Summarized  unaudited pro forma data as of and for the year ended December
29, 1995, assuming the above transactions occurred at the beginning of the year,
are as follows:


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

Earnings (losses) of combined subsidiaries                                                                 $ (63.5)
Net income (loss)                                                                                            (63.5)
</TABLE>


                                      S-5


<PAGE>
                                                                  SCHEDULE II


                       HOST MARRIOTT SERVICES CORPORATION
                        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-6