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 1, 1999

                                       OR

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

          FOR THE TRANSITION PERIOD FROM ____________ TO _____________

                           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
 --------------------------------------                 --------
(Address of principal executive offices)               (Zip Code)

                                 (301) 380-7000
               --------------------------------------------------
              (Registrant's telephone number, including area code)

           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  
 (33,635,070 shares issued and               New York Stock Exchange
outstanding as of January 1, 1999)           Pacific Stock Exchange
                                             Philadelphia Stock Exchange

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

     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

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

     The aggregate market value of the 33,652,509 shares of common stock held by
non-affiliates as of March 5, 1999, was $235,567,563.

                       DOCUMENTS INCORPORATED BY REFERENCE
                Notice of 1999 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 retail  concessions  at airports,  on  tollroads,  and in
shopping  malls,  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")  was  distributed  to
shareholders in a special  dividend (the  "Distribution").  Since that time, the
Company has built a worldwide leadership position by providing recognized brands
and quality service to its customers while they are away from home.

     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,  Canada,  Malaysia and
People's Republic of China.

     The Company's operations are grouped into three business segments: Airports
(including gift and news retail outlets in off-airport locations), Travel Plazas
and Shopping Malls, which represented 74.7%,  23.7% and 1.6%,  respectively,  of
total revenues in 1998. See Note 13 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  expanding  profitably  into the
international  food and  beverage  and  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  transforming  core markets  from  generic  offerings 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 100  franchised,  licensed or  internally  developed
brands that are familiar to frequent  travelers.  The Company leads the industry
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 adapt them into its operating environment.  In 1998, the Company
continued to adapt and rollout successful unique and premium niche brands to its
portfolio,  including Cheesecake Factory, California Pizza Kitchen, Chili's too,
Victoria's Secret, Lands End and Johnston and Murphy.

     Branded  concept  revenues in all of the  Company's  venues have grown at a
compound  annual  growth rate of 13.2% over the last three years.  Revenues from
branded concepts increased by 14.7% during 1998 and accounted for $583.4 million
of the  Company's  total  annual  revenues.  The  majority of this  increase was
related to the continued expansion of branded sales at airports and on tollroads
as well as  revenues  from the  heavily  branded  mall food court  segment.  The
Company's  exposure to any one brand is limited  given the  diversity  of brands
that are offered.  The Company's  largest  branded  concept,  Burger King, is an
international favorite among consumers and accounted for 10.4% of total revenues
for 1998.

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 1996, the Company has retained
81.9% of contracts up for renewal, weighted by contract size.
                                      
                                       2
<PAGE>

     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  increased
participation  by woman-  and  minority-owned  businesses  are  expected  in the
future,  the  impact  of this  industry  trend on future  revenue  growth in the
airport segment is expected to be more than offset by operating  initiatives and
the addition of branded concessions.

     During the past few years,  several contracts have been negatively affected
by  airport  authorities  fracturing  master  contracts  into  several  separate
contracts.  However,  the  Company  has been  successful  in  retaining  a major
operating presence at most locations through its development of unique,  branded
concepts.

SECURING NEW CONTRACTS IN CORE MARKETS

     The Company's core operating markets consist of domestic airport and travel
plaza  concessions.  The Company's business  development  organization is 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.  The individuals in the business  development  organization
provide the Company with the  expertise  and depth to pursue  multiple  projects
simultaneously.  Since 1996, the Company has secured eight new contracts in core
markets, with estimated annual revenues of $67.1 million.

EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES

     The Company has identified  international food and beverage concessions and
shopping mall food courts as its primary growth markets. Since 1996, the Company
has secured 14 new contracts in growth markets with estimated annual revenues of
$91.0 million.

     During  1998,  the  Company  commenced   operations  at  the  Kuala  Lumpur
International Airport in Malaysia and added a new international airport contract
at  China's  Shenzhen  Huangtian  International  Airport,  which  increased  the
Company's presence to six countries outside of the United States.

     The Company  believes  that food court  opportunities  in large malls align
well with the operating  skills and brand expertise of the Company's  management
team. The Company  developed a concession model for shopping mall food courts in
late 1996 and since  that time has had great  success in  changing  the way real
estate developers view their food courts. By providing mall developers with food
courts  having  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
mall  developers  with  better  overall  returns  and  superior  service to mall
customers.

     During 1998, the Company opened its fourth mall food court at  Independence
Center  Mall near  Kansas  City,  Missouri  and its fifth mall food court at the
Leesburg  Corner Premium Outlets in Leesburg,  Virginia.  These mall food courts
are expected to generate  approximately  $6.0 million in annualized  revenues by
2000.

     The Company announced four new mall contracts in 1998. First,  there was an
agreement with Forest City Ratner  Companies to develop and manage 35,000 square
feet of food and beverage operations in its 42nd Street Entertainment and Retail
Project  located in New York's  Times  Square.  This  project will be one of the
Company's largest mall and entertainment  projects with annual sales expected to
exceed $15.0 million once  construction  of the units has been completed in late
1999. The second contract was a 12-year deal with The Taubman Company to operate
the food and beverage  concessions  in a 7,000 square foot food court in the 1.0
million square foot MacArthur Center in Norfolk, Virginia, which opened in March
of 1999.  The third  contract was a ten-year deal with Glimcher  Realty Trust to
operate the food and beverage  concessions in a 10,800 square foot food court in
the 1.3 million  square  foot  Jersey  Gardens  Mall in  Elizabeth,  New Jersey,
beginning in the late Fall of 1999. The fourth contract was a ten-year deal with
Michael Swerdlow Companies, Inc. to operate the food and beverage concessions in
a 9,000  square foot food court in the 1.4 million  square foot  Dolphin Mall in
Miami-Dade County, Florida,  beginning in 2000. These four new contacts, as well
as the Concord  Mills Mall contract  announced in 1997 (opening late 1999),  are
expected to generate over $50 million in annualized revenues.

                                       3

<PAGE>


AIRPORT CONCESSIONS

     The Company is the leading provider of airport food,  beverage,  and retail
concessions  in the  United  States.  The  Company  operates  concessions  at 63
domestic airports, 8 international  airports and 17 off-airport  locations.  The
Company's  portfolio of airport  contracts is highly  diversified in the U.S. in
terms of  geographic  location  and airport  terminal  type and size.  No single
airport contract constitutes a material portion of the Company's total revenues.

     Revenues in the Airport segment,  which include domestic and  international
airports as well as food, beverage,  gift and news retail outlets in off-airport
locations,  totaled  $1,028.8  million and $956.7 million in 1998 and 1997. This
segment  represented 74.7% and 74.5% of total Company revenues in 1998 and 1997,
respectively.

     Revenues from airport concessions were $985.5 million and $913.5 million in
1998 and 1997,  respectively.  The  concentration of revenues from the Company's
ten largest airport  contracts was 26.2% of the Company's total revenues in both
1998 and 1997.  Airport  revenues have grown at a compound annual growth rate of
3.4% over the last three years.  Revenues from off-airport  locations  increased
slightly to $43.3 million in 1998.

     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 was approximately 7.0 years at
the end of 1998 compared with 7.2 years at the end of 1997. Rents paid under the
contracts  averaged 16.0% of the Company's  total airport  revenues in both 1998
and 1997.  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 1998, rent payments for
most of the Company's airport contracts exceeded the minimum annual guarantee on
those contracts.

     The Company's  off-airport  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
life  remaining  on  the  Company's  17  off-airport  concession  contracts  was
approximately 1.8 years at the end of 1998.


OPERATING LOCATIONS

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

     UNITED STATES:  Anchorage,  AK; Atlanta, GA; 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; Fort Myers, FL; 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; 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); West Palm
Beach, FL; and Wichita, KS.

     INTERNATIONAL:  Auckland, New Zealand; Cairns, Australia; Christchurch, New
Zealand;  Kuala  Lumpur,  Malaysia;  Melbourne,  Australia;  Vancouver,  Canada;
Montreal,  Canada;  Schiphol, The Netherlands;  and Shenzhen,  China (operations
commenced in January 1999).

     The Company  operates or manages  concessions at the following  off-airport
locations:

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

                                       4

<PAGE>

     The airport  segment  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,  Cheesecake  Factory,  California  Pizza
Kitchen ASAP,  Nathan's  Famous,  Chili's Too, 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 6.0% in 1998.

     Branded food and beverage  revenues in the airports  segment have increased
17.5% when  comparing  1998 and 1997.  This increase can be attributed to large,
new branded concept  developments  at Chicago,  Miami,  Cleveland,  Los Angeles,
Minneapolis and San Francisco airports.  Airport branded product sales increased
to $295.8 million, or 28.8% of airport segment revenues,  for 1998 compared with
$251.8 million, or 26.3% of airport segment revenues, for 1997.

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  35.3% of airport segment revenues in 1998 and 36.6% of
airport segment revenues in 1997,  reflecting the Company's efforts to transform
its core airport  markets from  generic  offerings to a blend of  international,
internal and unique local branded  concepts.  Revenues of  non-branded  food and
beverage  products  were up $13.3  million,  or 3.8%,  to  $363.3  million  when
comparing 1998 and 1997.

ADULT BEVERAGES

     The  Company  serves  alcoholic  and  nonalcoholic  drinks,  together  with
selected food items,  through  specialty lounges  (generally  operated under the
Premium Stock Airpub name),  restaurants,  cafeterias,  and  microbrewery  pubs.
These   facilities  are  designed  to  provide  a  comfortable   and  convenient
environment for passengers  waiting for their flights.  During 1998, the Company
continued  to  introduce  its popular  microbrewery  pubs which  include,  among
others,  Samuel  Adams Brew  House and  Shipyard  Brew Pub.  These bar and grill
concepts bring local flavors to the Company's  airport  contracts and complement
the Company's proprietary Premium Stock Airpub lounges.  Other specialty lounges
introduced in 1998 include Fox Sports Sky Box, a bar and grill concept developed
with sports innovator Fox Sports; the world's first Jose Cuervo Tequilaria;  and
Casa Bacardi.  Adult beverages generated  approximately 16.8% of airport segment
revenues in both 1998 and 1997. Adult beverage sales in the airport segment were
up $12.3 million, or 7.7% in 1998 when compared with 1997.

MERCHANDISE OUTLETS

     The Company  operates  branded and non-branded  merchandise  outlets at 26
airport locations and 13 off-airport locations.  The Company's merchandise shops
sell  newspapers,   magazines,   souvenirs,   gifts,  books,  snacks  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 add internally developed specialty retail concepts
such as Simply Books, Global News, News Connection and Aviation, Inc. as well as
develop and sublease  specialty  retail  concepts  such as Tie Rack,  Victoria's
Secret,  Lands End,  The Body Shop and Johnston  and Murphy.  During  1998,  the
Company acquired Sky Gifts,  Inc., a concession  company  operating eight retail
locations  at the  Phoenix  Sky  Harbor  International  Airport  with  estimated
annualized revenues of $7.0 million. Merchandise outlets generated approximately
15.8%  and  16.1%  of  total  airport   concession   sales  in  1998  and  1997,
respectively. Merchandise sales in the airport segment increased by $7.8 million
in 1998 to $162.3 million when compared with 1997.

                                       5

<PAGE>


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 3.3% and 4.2% of total airport segment revenues in
1998 and 1997,  respectively.  Duty-free merchandise sales totaled $34.5 million
during  1998,  a decrease  of 13.3%  compared to 1997,  primarily  due to weaker
enplanements  stemming from the slowdown in the Asian economy and lower spending
by Asian travelers.

OUTLOOK

     In March of 1998, the Federal Aviation  Administration  ("FAA")  forecasted
long-term average annual passenger  enplanement  growth of U.S. carriers of 3.7%
through  the year  2009.  Given  recent  trends in the  airline  industry,  1999
enplanement  growth may be less than the long-term average growth rate. The U.S.
airport  concession  industry is  expected  to  continue to benefit  from strong
industry  fundamentals  and the  expansion  of  low-fare  airline  carriers.  In
addition,  to sustain low-fare  positioning and improve  financial  performance,
most  airlines  have  lowered  their costs by reducing or  eliminating  inflight
catering  services.  The Company  continues  to benefit  from this trend with an
increased  opportunity to serve passengers whose needs are not met in the air as
a result of the reduction in airline catering services.

     The  transformation  of the  Company's  core  airport  markets from generic
offerings  to a blend  of  international,  internal  and  unique  local  branded
concepts  will  attract  more  customers.  Currently,  branded food and beverage
revenues make up only 44.9% of the Company's total food and beverage revenues in
the airport segment (28.8% of total airport segment revenues), demonstrating the
considerable potential for growth. Further, the Company is committed to refining
its core operating processes to improve efficiencies,  reduce costs and increase
revenues.  The Company  has  renewed  its focus on managing  food cost and labor
productivity while continuing to improve customer service.  Several  initiatives
are under way to focus on loss prevention,  recruiting and associate  selection,
development and training. Further, the Company expects continued success in 1999
and beyond in making its core  airport  concessions  contracts  more  profitable
through new concepts and operating excellence initiatives.

     Over the next three years, 31 airport  concessions  contracts  representing
approximately  $183.8 million, or 12.2% of annualized total 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.  Over that same  period,  10  off-airport
concessions  contracts  representing  approximately  $26.6  million,  or 1.7% of
annualized total revenues, will come up for renewal.

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
makes those roads the highest revenue-producing tollroads.

     Revenues in the travel  plaza  business  segment  were  $326.7  million and
$312.5  million  in 1998 and 1997,  respectively.  The  Company's  travel  plaza
concession  revenues in 1998 and 1997 were approximately 23.7% and 24.3%, of the
Company's total revenues,  respectively. The five largest travel plaza contracts
accounted for  approximately  15.8% and 16.1% of the Company's total revenues in
1998 and 1997,  respectively.  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 was approximately 6.1 years at the end of 1998.

     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  food and

                                       6

<PAGE>

beverage concepts, which comprised 79.2% of travel plaza concessions revenues in
1998 (88.1% of travel plaza food and beverage  revenues).  The core  business of
most travel plazas is a food court offering branded  concepts,  including Burger
King, Roy Rogers, Bob's Big Boy, Sbarro, TCBY "Treats",  Starbucks Coffee, Pizza
Hut Express,  Miami Subs Grill,  Dunkin Donuts and  Popeye's.  Retail gift shops
selling souvenirs,  postcards,  snacks,  newspapers and magazines frequently are
located  adjacent to these food courts and  accounted  for  approximately  $33.0
million, or 10.1% of revenues in 1998. Travel plazas generally include automated
teller machines, vending machines and business centers and all of the facilities
are accessible to the disabled.

OPERATING LOCATIONS

     The Company operates 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  due to  growth in  tollroad  traffic  in the
Northeastern  corridor of the U.S. will be  approximately  1% to 2% on an annual
basis.  Moderate pricing  increases and the introduction of new branded food and
beverage  concepts,  to replace mature brands,  are expected to further increase
revenues in 1999 and beyond. Management is focused on operational excellence and
has dedicated  resources to review  opportunities for renewing key contracts and
adding new brands.

     Over  the  next  three  years,  five  travel  plaza  concessions  contracts
representing  approximately  $54.1 million, or 3.6%, of annualized total Company
revenues,  will come up for renewal.  The Company expects  continued  success in
retaining such contracts.

SHOPPING MALL CONCESSIONS

     The Shopping Malls segment  includes food facilities at six malls. The food
facilities are  principally  located in a food court setting within the shopping
mall.  The  Company's  portfolio  of  shopping  mall  concession   contracts  is
diversified in the U.S. in terms of geographic location and mall developer.

     Shopping mall food court concessions generated $22.1 million of revenues in
1998,  approximately  1.6% of total Company revenues and generated $15.4 million
in revenues in 1997,  approximately  1.2% of total Company revenues.  Total food
and beverage  revenues  accounted for 98.2% of the  segment's  revenues in 1998,
compared  with  98.7% in 1997.  Retail  sales  comprised  1.8% of the  Company's
shopping mall concession revenues compared with 1.3% in 1997. No single contract
constitutes a material portion of the Company's total revenues.

     Shopping mall food court  concessions  contracts usually have initial terms
of 10 to 12 years  with the  Company's  rights to extend an  additional  5 to 20
years.  Rent  payments  are  determined  as a percentage  of sales  subject to a
minimum fee which is negotiated at the time the concession  contract is awarded.
The  weighted-average   remaining  life,  including  extension  rights,  of  the
Company's  shopping malls contracts was  approximately  18.2 years, up from 11.8
years in 1997 due to the  addition of new mall  locations  with  longer  average
contract lives.

OPERATING LOCATIONS

     The Company operates concessions at the following shopping mall locations:

     Grapevine Mills Mall,  Ontario Mills Mall,  Vista Ridge Mall,  Independence
Center Mall,  Leesburg  Corner Premium  Outlets and MacArthur  Center (opened in
March of 1999).

                                       7

<PAGE>


OUTLOOK

     The  Company is actively  pursuing  new food court  operations  both in new
malls and malls undergoing renovation. With the opening of MacArthur Center mall
in Norfolk,  Virginia, in March of 1999, the Company increased its operations to
six shopping mall food courts and is scheduled to have four additional  openings
in 1999. The annualized  revenue from these 10 contracts is estimated to be over
$80.0 million. The Company expects to begin operations at the Concord Mills Mall
near  Charlotte,  North  Carolina,  in late  1999,  the Jersey  Gardens  Mall in
Elizabeth,  New Jersey, in Fall of 1999, the Times Square 42nd Street Project in
New York in late 1999, and the Dolphin Mall in Miami-Dade  County,  Florida,  in
2000.

     Since  entering the mall food court  business  three years ago, the Company
has gained valuable experience, especially in the area of matching the number of
concession facilities with volume of customer traffic. The Company will leverage
this experience to new projects going forward to increase the  profitability  of
this segment.  The Company will continue its aggressive shopping mall food court
development  efforts in 1999 and in future  years.  For the next several  years,
start-up  costs are  expected to be high as the Company  initially  expands into
this business segment.

THE DISTRIBUTION

     The Company is the  successor to the food,  beverage and retail  concession
businesses of Host  Marriott.  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.

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
and a  Transitional  Services  Agreement.  The  agreements  established  certain
obligations  for the  Company to issue  shares upon  exercise  of Host  Marriott
warrants,  which the Company has since  fulfilled its  obligation,  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 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 that 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  $75.4  million,  $77.3 million and $76.9 million for purchases of
food and supplies  and paid $8.8  million,  $9.8  million and $10.7  million for
corporate support services during 1998, 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 

                                       8

<PAGE>

Host  Marriott  and its  subsidiaries,  including  those  comprising  its  food,
beverage  and  retail  concession   businesses  (the  "Operating  Group"),   are
prohibited from entering into, or acquiring an ownership  interest in any entity
that  operates,  any  business  that (i) competes  with the food and  facilities
management   business  as  currently   conducted  by  Marriott   International's
wholly-owned  subsidiary,  Marriott Management Services,  Inc. ("MMS," with such
business  being  referred  to  as  the  "MMS  Business"),   provided  that  such
restrictions  do not apply to businesses  that  constitute  part of the business
comprising the then Host  Marriott's  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. On March 27,
1998,  the MMS  Business  became the  principal  business  of  Sodexho  Marriott
Services, Inc., which was combined with the North American operations of Sodexho
Alliance  S.A.  The rights and duties of the  Company  under the  noncompetition
agreement  with  Marriott  International  were  preserved  in  the  transaction.
Sodexho Marriott  Services, Inc. is now a party to the noncompetition  agreement
with 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 the
"Marriott" name, 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  international,  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 retail 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 retail
concession industry is more fragmented.  The major competitors include: Paradies
Shops, W.H. Smith, Duty Free  International,  DFS Group Limited and Hudson News.
The off-airport  concession  market has a number of large potential  competitors
including:  ARAMARK Corporation,  Ogden Food Services,  Service America,  Volume
Services,   McDonald's,   Delaware   North,  CA  One  Services  and  Concessions
International. 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 concessions  segment is fragmented and principally  dominated by individual
operators. The international concession market is fragmented, with Compass Group
holding the leading market share in European  airports and Canadian  Airways and
Railway Association holding the leading market share in Canada.

     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 and mall developers) and Brand Partners 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,  such as
environmental, employment, health and safety and regulations related to security
at airports.  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.

                                       9

<PAGE>


EMPLOYEES

     At January 1, 1999,  the Company  directly  employed  approximately  24,100
employees.  Approximately  6,100 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.

ITEM 2.  PROPERTIES

     In addition  to the  operating  properties  discussed  in Item 1.  Business
above,  the Company leased  approximately  88,000 square feet of office space in
Bethesda,  Maryland,  which serves as the Company's corporate headquarters.  The
majority of the leased space is covered  under an initial lease  agreement  that
expires on  December  31,  2003 and the Company has the right to renew the lease
for one five-year term. A second lease for certain  additional  space expires on
December 31, 2006.

   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.


                                       10


<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 1, 1999 was $10.375  compared with $14.375 per share on January 2, 1998.
There were no dividends  declared in 1998 or 1997. 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,  Inc. 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.  During 1998, Host
International paid $5.6 million of dividends to the Company.

     The Company's high and low stock prices by quarter during 1998 and 1997 are
presented as follows:

<TABLE>
<CAPTION>

                                                     1998(1)                              1997(1)
          ---------------------------- ---- -------------------------- --------- --------------------------
                                               HIGH             LOW                 HIGH           LOW
          ---------------------------- ---- ----------- --- ------------ ------- ----------- -- -----------
           <S>                                <C>               <C>                 <C>             <C>

          First quarter                      $14  1/2         $12 11/16           $10  5/8         $ 8 7/8
          Second quarter                      14 15/16         14                  10  5/8           8 3/4
          Third quarter                       14 13/16          9  7/8             14 11/16         10 3/8
          Fourth quarter                      12                7  3/16            15  9/16         13 3/4

          ---------------------------- ---- ----------- --- ------------ ------- ----------- -- -----------
<FN>
          (1) The first three  quarters  of 1998 and 1997  consist of 12 weeks 
              each,  and the fourth  quarter  includes 16 weeks.
</FN>
</TABLE>


     At January 1, 1999, there were 33,635,070 shares of common stock issued and
outstanding held by 35,839 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  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. During 1998, the Company completed the
program by  purchasing  an additional  846,510  shares at an aggregate  purchase
price of $11.6  million.  Also  during  1998,  the  Company  announced  a second
two-year  program to repurchase up to 1.9 million shares of the Company's  stock
on the open market. As of the end of 1998, 1,004,500 shares had been repurchased
at an aggregate purchase price of $11.0 million.

                                       11

<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 1, 1999. 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>

------------------------------------------------------------ ---------- ----------- ----------- ----------- -----------
                                                              1998(1)    1997(2)     1996(3)     1995(4)     1994(5)
------------------------------------------------------------ ---------- ----------- ----------- ----------- -----------
<S>                                                             <C>         <C>         <C>         <C>        <C>

                                                                                   (IN MILLIONS)

STATEMENT OF OPERATIONS DATA:
   Total revenues                                              $1,378      $1,285      $1,278      $1,162      $1,124 

   Operating profit (loss)                                         60          67          62         (20)         32 
   Income (loss) before extraordinary item                         24          21          14         (64)         (8)
   Net income (loss)                                               24          21          14         (74)         (8)
   Diluted income per common share(6)                            0.68        0.57        0.40         n/a         n/a 
   Pro forma loss per common share (Unaudited) (6)
        Loss before extraordinary item                            n/a         n/a         n/a       (2.02)        n/a 
        Net loss                                                  n/a         n/a         n/a       (2.33)        n/a 
   Dividends declared(7)                                          ---         ---         ---         n/a         n/a 
BALANCE SHEET DATA:
   Total assets                                                   567         548         582         514         609 
   Borrowings under line-of-credit agreement                       12         ---         ---         ---         --- 
   Total long-term debt                                           407         407         408         409         398 
   Investment and advances from Host Marriott                     ---         ---         ---         ---          11 
   Shareholders' deficit                                          (73)        (76)        (96)       (123)        n/a 

OTHER OPERATING DATA:
   Cash flows provided by operations(8)                            80          53         104          51          74 
   Cash flows used in investing activities                       (103)        (74)        (52)        (52)        (44)
   Cash flows (used in) provided by financing activities          (11)         (5)          5          20         (39)
   EBITDA(9)                                                      126         125         117         107         109 
   Cash interest expense                                           39          39          39          40          41 

------------------------------------------------------------ ---------- ----------- ----------- ----------- -----------
<FN>

(1)  The results for 1998 included $5.9 million of  write-downs  of long-lived  
     assets and a $11.1 million tax benefit to recognize the anticipated 
     utilization of certain tax credits previously considered unrealizable.
(2)  The results for 1997  included  $4.2 million of  write-downs  of long-lived
     assets, $3.9 million of restructuring  charge reversals related to the 1995
     restructuring  plan  and a  $1.9  million  tax  benefit  to  recognize  the
     utilization of certain tax credits previously considered unrealizable.
(3)  Fiscal year 1996 includes 53 weeks.  All other years include 52 weeks.
(4)  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.
(5)  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.
(6)  The 1995 loss per common  share is presented on a pro forma basis as if the
     Company's  spin-off and related  transactions  occurred at the beginning of
     1995. Income (loss) per common share data is not presented for 1994 because
     the Company was not publicly held during that year.
(7)  The Company did not pay dividends in 1998, 1997 or 1996 and prior to that 
     time was not a publicly traded corporation.  
(8)  Cash flows provided by operations in 1996 and 1997 were affected by the 
     Company's  transition to a new financial  system.  Current liabilities were
     temporarily  high at the end of 1996 and were reduced to seasonal levels in
     1997.
(9)  EBITDA  consists of the sum of  consolidated  net income (loss),  interest,
     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 and income taxes have been,  and will be,  incurred  which are not
     reflected  in the  EBITDA  presentations.  In order to  conform to the 1998
     presentation, EBITDA has been revised for fiscal years 1994 through 1997 to
     exclude interest income.  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>
                                       12


<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
12).

     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 1998 revenues. The
Company's  diversified  branded  concept  portfolio,  which consists of over 100
internationally  known  brands,  regional  specialty  concepts  and  proprietary
concepts, is a unique competitive advantage in the marketplace.

     The  Company's  revenues  and  operating  profit,   excluding  general  and
administrative  expenses  and  unusual  items,  have grown at a compound  annual
growth rate ("CAGR") of 3.8% and 4.0% 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.  Despite  the  growth in  revenues,
operating  profit margins were  constrained in 1998 by the slowdown in the Asian
economy, the Northwest Airlines pilots' strike,  short-term business disruptions
due to facility construction,  Year 2000 costs, tightening labor markets and the
addition of several new concepts with higher cost of sales. The lowering of menu
prices  as  part of  several  large  new  contract  renewals  during  1998  also
negatively affected margins.

     The Company's  airport segment,  which includes  domestic and international
airports as well as food, beverage,  gift and news retail outlets in off-airport
locations,  contributed  approximately  74.7% of the Company's total revenues in
fiscal year 1998. Airport segment revenues and operating profit,  before general
and administrative  expenses and unusual items, have grown at a CAGR of 3.4% and
4.1%, respectively, over the last three years.

     The Company's travel plazas concessions contributed  approximately 23.7% of
the  Company's  total  revenues in fiscal year 1998.  Since 1996,  travel plazas
revenues and operating profit,  before general and  administrative  expenses and
unusual items, have grown at a CAGR of 2.3% and 6.8%, respectively.

     The remaining  1.6% of the Company's  1998 revenues were generated from the
operation of food court  facilities  at shopping  malls.  Shopping mall revenues
have grown  significantly  since the Company entered this start-up  business and
began operations at its first mall food court in 1996. Since that time, two mall
contracts  were added in 1997 and two  additional  contracts were added in 1998.
The operating profit,  excluding general and administrative expenses and unusual
items,  has been  constrained  by  pre-opening  expenses  of new mall  projects,
start-up  inefficiencies and lower than anticipated operating performance at two
locations.

     In 1999 the  Company  will adopt new  accounting  standards  and will incur
additional  Year 2000  costs both of which will  reduce  the 1999  earnings  per
share. Excluding these unusual items and the unusual items reported in 1998, the
Company expects to achieve average  earnings per share growth of 20% in 1999. As
a result of  experiences  gained in the  shopping  mall  segment in 1998 and the
impact of the economic  slowdown in Asia, the Company has de-emphasized its goal
of reaching $2 billion in revenues by 2001.

     Certain minor  reclassifications  were made to the 1997 and 1996  financial
information to conform to the 1998 presentation.

                                       13

<PAGE>


1998 COMPARED TO 1997

REVENUES

     Revenues for the year ended  January 1, 1999  increased by 7.2% to $1,377.6
million compared with revenues of $1,284.6 million for the year ended January 2,
1998.  Revenues  were  driven by  strong  growth in  domestic  airport  food and
beverage concessions,  particularly from sales at locations recently opening new
branded  concepts.  An increase in enplanements,  customer traffic on tollroads,
the  opening of two new mall  contracts  in the  fourth  quarter of 1997 and the
conversion  of the  Miami  International  Airport  contract  from  a  management
agreement  to an  operating  agreement  during  the  second  quarter of 1998 all
contributed to overall revenue growth.

AIRPORTS
--------

     Airport segment  revenues  increased 7.5% to $1,028.8  million in 1998 from
$956.7 million a year ago.

     Airport  concession  revenues  were up $72.0  million,  or 7.9%,  to $985.5
million for fiscal year 1998. Domestic airport concession revenues grew 8.1%, to
$918.6 million for 1998,  with passenger  enplanements up an estimated 1.7% over
last year and revenue per enplaned passenger up 6.3%. RPE is the primary measure
of how effective the Company is at capturing  potential customers and increasing
customer spending. Moderate increases in menu prices, the opening of new branded
concepts at a number of the Company's  larger  locations,  including  Miami, Los
Angeles,  San  Francisco,  Minneapolis  and  Cleveland,  and various real estate
maximization  efforts  contributed to the growth in RPE.  International  airport
revenues were up 5.2% to $66.9 million.  The opening of the Company's operations
at the Montreal International Airport - Dorval in Canada during 1997 contributed
to the increase in international  airport revenues.  International  results were
affected by exchange rate fluctuations and by weaker enplanements  stemming from
the slowdown in the Asian  economy.  The slowdown in the Asian  economy has also
had a  negative  impact on a number of the  Company's  duty-free  operations  in
several key gateway airports in the United States.

     Revenues in off-airport  locations  increased  slightly to $43.3 million in
1998 from $43.2 million in 1997.

TRAVEL PLAZAS
-------------

     Travel plaza concession  revenues for 1998 were up 4.5% to $326.7 million.
Revenue growth  benefited from  increased  tollroad  traffic due to low gasoline
prices,  moderate  increases in menu prices and the  introduction of several new
branded concepts to selected locations, including Starbucks Coffee and Pizza Hut
Express.  Travel  plazas  consistently  produce  a  significant  portion  of the
Company's  overall cash flow,  contributing  approximately  21% and 20% of total
operating cash flow in 1998 and 1997, respectively.

SHOPPING MALLS
--------------

     Shopping  mall food court  concession  revenues  increased  $6.7 million to
$22.1  million in 1998.  This increase in revenues was a result of the Company's
continued  expansion  into shopping mall food court  concessions.  The Company's
entry into this start-up business has not been without challenges.  Results were
below  expectations at one regional mall project where the operating real estate
is being phased in to the Company over several years.

     During 1998, the Company opened its fourth food court concessions  location
at the Independence Center Mall near Kansas City,  Missouri,  and its fifth food
court  concessions  location at the Leesburg Corner Premium Outlets in Leesburg,
Virginia.  Also during 1998, the Company  announced that it reached an agreement
with  Forest  City Ratner  Companies  to develop  and manage  food and  beverage
operations at the 42nd Street  Entertainment  and Retail Project  located in New
York's  Times  Square;  a deal with The Taubman  Company to operate the food and
beverage  concessions  at  MacArthur  Center in Norfolk,  Virginia;  a deal with
Glimcher  Realty  Trust to operate the food and beverage  concessions  at Jersey
Gardens  Mall  in  Elizabeth,  New  Jersey;  and a deal  with  Michael  Swerdlow
Companies,  Inc. to operate the food and beverage concessions at Dolphin Mall in
Miami-Dade County, Florida.

OPERATING COSTS AND EXPENSES

     The  Company's  total  operating  costs and expenses  increased to 95.7% of
total  revenues  compared  with 94.8% of total  revenues in 1997.  The operating
profit margin  decreased to 4.3% in 1998 compared with 5.2% in 1997 and reflects
a 60 basis  point  increase  in the cost of sales  margin  and a 60 basis  point
increase in the payroll  margin.  Further  constraints  on the operating  profit
margin  include  significant  facility  construction  at several  key  airports,
shopping mall 

                                       14

<PAGE>

start-up  activities and Year 2000 costs.  Several  initiatives are under way to
focus on loss prevention,  recruiting and associate  selection,  development and
training.  The Company is also  evaluating new ways to better  leverage its size
through technology and process changes.

     Cost of sales increased 9.4% above last year to $409.3 million,  reflecting
a 60 basis point increase in the cost of sales margin which totaled  29.7%.  The
margins are influenced by a mix shift to higher cost of product  concepts,  such
as  Starbucks,  and the  lowering  of menu  prices as part of several  large new
contract renewals in 1998. In addition,  the Company experienced  commodity cost
increases in produce,  premium  coffee beans and dairy  products when  comparing
1998 and 1997.

     Payroll and benefits  totaled  $419.3  million during 1998, a 9.4% increase
over 1997.  Payroll and benefits as a percentage of total revenues  increased 60
basis points to 30.4%.  The increase in the payroll and benefits margin reflects
the  impact  of the  Northwest  Airline's  pilots  strike,  which,  despite  the
Company's  short-term  layoffs,  more than offset benefits from the use of labor
scheduling  software and the  implementation of store manager training programs.
In addition, payroll margins increased due to construction of new concessions at
several airports and to slight tightening in local labor markets.

     Rent  expense  totaled  $212.3  million for 1998,  an increase of 4.6% from
1997. Rent expense as a percentage of total revenues  decreased to 15.4% in 1998
from 15.8% in 1997. Contract rent expense determined as a percentage of revenues
decreased 30 basis points during 1998 and can be  attributed to sales  increases
on contracts with fixed rental rates and new or renewed contracts with favorable
rent margins.

     Royalties  expense  for 1998  increased  by 11.6%  to $29.8  million.  As a
percentage of total  revenues,  royalties  expense  increased 10 basis points to
2.2%.  The  increase in  royalties  expense  reflects  the  Company's  continued
introduction of branded concepts to its airport  concessions  operations and the
continued   expansion  into  the  heavily  branded   shopping  mall  food  court
concessions  business.  Royalties  expense  as a  percentage  of  branded  sales
averaged  6.0% in 1998 compared  with 6.3% in 1997,  reflecting  the addition of
branded concepts with lower-than-average royalty percentages. Branded facilities
generate  higher sales per square foot,  contribute  toward  increased  RPE, and
position the Company to win and retain concession contracts.

     Depreciation and amortization expense,  excluding $2.0 million of corporate
depreciation  on property  and  equipment,  which is included as a component  of
general  and  administrative  expenses,  was $57.4  million  for 1998,  up 8.1%,
excluding $1.7 million of corporate  depreciation  on property and equipment for
1997. Increased depreciation related to contract extensions, the buildout of new
branded  locations and amortization of pre-opening  costs for new mall contracts
was  partially  offset by lower  depreciation  related to the  write-down of one
impaired airport unit in the fourth quarter of 1997.

     General  and  administrative  expenses  were  $58.0  million  for 1998,  an
increase of 6.8%.  Approximately half of the increase related to $1.1 million in
external costs and approximately  $0.8 million of internal costs relating to the
Company's Year 2000 compliance program. The level of corporate expenses incurred
during 1998 also reflects increased costs related to annual salary increases and
some  additional  corporate  resources  to focus on  growth  initiatives  in the
Company's core markets and new venues.

     Other operating  expenses,  which include  utilities,  casualty  insurance,
equipment maintenance, trash removal and other miscellaneous expenses, increased
2.6% to $126.0 million total for 1998. Other operating  expenses as a percentage
of total revenues decreased 50 basis points and reflects operating leverage from
revenue growth.

UNUSUAL ITEMS

>    During 1998,  the Company  determined  that its investment in an internally
     used software  system was partially  impaired  because all of the purchased
     modules of the system that were  originally  intended to provide  operating
     efficiencies  could  not be fully  implemented.  As a result,  the  Company
     recorded a partial write-down of $3.5 million of the remaining $5.5 million
     book value of the system. Also during 1998, the Company determined that its
     investment  in a shopping mall food court  contract was fully  impaired and
     recorded  a  write-down  of $2.4  million.  The food court  contract  was a
     regional mall where the  operating  real estate under the contract is being
     phased in to the Company over several years.  Customer  traffic and capture
     rates  at  this  mall  were  well  below  the  Company's  

                                       15

<PAGE>

     expectations and  insufficient to support the number of concepts  developed
     (see "Impairments of Long-Lived Assets").

     During 1997,  an  operating  cash flow  analysis of one airport  concession
     contract  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. Since the time of the write-down, two major airlines
     have increased  their  presence at this location,  resulting in significant
     unexpected enplanement growth. Accordingly, the outlook for 1999 and beyond
     for this airport location is very positive.

>    During 1998 and 1997, the Company  recognized  the expected  utilization of
     $11.1  million  and $1.9  million,  respectively,  of certain  tax  credits
     previously  considered  unrealizable,  resulting  in  a  reduction  in  the
     deferred tax asset valuation allowance.

>    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").


OPERATING PROFIT

     Operating profit, excluding unusual items, decreased 2.8% to $65.5 million.
The overall  operating  profit  margin,  excluding  general  and  administrative
expenses  and unusual  items,  decreased to 9.0% in 1998  compared  with 9.5% in
1997.  This decrease was largely due to the Northwest  Airlines'  strike and the
Asian economic slowdown.  The strike and the Asian slowdown reduced earnings per
share for 1998 by approximately  $0.08 per share. The remaining  decrease in the
operating profit margin resulted from increases in the cost of sales and payroll
margins,  offset  by lower  rent and other  operating  cost  margins.  Operating
profits for the airports  segment,  prior to the allocation of corporate general
and administrative  expenses and excluding unusual items, were $99.2 million and
$98.1 million for 1998 and 1997, respectively.  Operating profits for the travel
plazas segment, excluding general and administrative expenses and unusual items,
were $25.3 million $22.3 million for 1998 and 1997, respectively. Operating loss
for the shopping malls segment,  excluding general and  administrative  expenses
and unusual items,  totaled $1.0 million in 1998 compared with operating profits
of $1.3 million for 1997.

     The  airports  segment  operating  profit  margin,  excluding  general  and
administrative expenses and unusual items, showed a 70 basis point reduction for
1998 and totaled 9.6%.  Two of the Company's top ten airports  experienced a 75%
drop in  enplanements  and had to close  many of  their  facilities  during  the
Northwest  Airline's  pilots  strike.  The  operating  profit  margins  at these
locations  declined  substantially  during the strike,  reflecting certain fixed
operating costs. The operating profit margin was further reduced by the slowdown
in the Asian  economy,  the  short-term  impact  of  construction  and  start-up
activity,  tight labor  markets,  reduced air traffic growth and the lowering of
menu prices.

     The travel plazas segment  operating profit margin,  excluding  general and
administrative expenses and unusual items, increased 60 basis points to 7.7% for
1998, reflecting a CAGR of 6.8% over the last three years.

     The shopping  malls segment  operating loss margin,  excluding  general and
administrative  expenses and unusual  items,  was 4.5% for 1998 compared with an
operating  profit  margin  of 8.4% in 1997.  The  operating  loss in 1998 can be
attributed  to $1.2  million in  pre-opening  expenses of new mall  projects and
start-up  inefficiencies;  however,  the  Company  also  experienced  lower than
anticipated operating performance at two locations.

INTEREST EXPENSE

     Interest expense was $39.9 million for 1998 compared with $39.8 million for
1997. The minimal variance  reflects the 9.5% fixed rate of interest on the $400
million of Senior  Notes and  additional  debt  incurred  relating to two of the
Company's joint ventures.

INTEREST INCOME

     Interest  income  decreased  $1.2  million to $2.5  million for 1998.  Cash
balances  during  1998  were  lower  due  to  the  increased  level  of  capital
expenditures  as well as share  repurchases.  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 also
included $0.4 million of non-recurring  interest income relating to a negotiated
agreement with an Airport Authority which reimbursed the

                                       16

<PAGE>

Company for the cost of funding certain capital improvements.  The 1997 interest
income also reflected slightly higher short-term interest rates during 1997.

INCOME TAXES

     The benefit for income taxes in 1998 totaled $1.9 million  compared  with a
provision for income taxes of $10.2 million in 1997.  The effective tax rate was
(8.6)%  and 33.0%  for 1998 and  1997,  respectively.  The  effective  tax rates
reflect the  recognition  of $11.1 million and $1.9 million of certain  purchase
business combination tax credits previously considered  unrealizable in 1998 and
1997, respectively.  (see "Deferred Tax Assets")

NET INCOME AND INCOME PER COMMON SHARE

     The  Company's  net income  increased  15.9% to $24.1  million  and diluted
income  per  common  share  increased  19.3% to $0.68 in 1998.  These  increases
reflect the benefit from recognizing  certain tax credits  previously thought to
be unrealizable, which was offset by a decrease in operating profit, write-downs
of certain long-lived assets and lower interest income.

WEIGHTED AVERAGE SHARES OUTSTANDING

     The weighted  average number of common shares  outstanding for 1998 used to
calculate  basic and diluted  income per common  share  totaled 34.0 million and
35.6 million, respectively,  reflecting 1.6 million of common equivalent shares.
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.

     Common  shares  issued and  outstanding  decreased  from 34.5 million as of
January  2, 1998 to 33.6  million as of  January  1, 1999  primarily  reflecting
1,851,010 shares purchased under the Company's share repurchase  programs during
1998.  Offsetting  the share  repurchases  were  issuances  of shares  under the
Company's  Employee Stock Purchase Plan, shares issued related to employee stock
options  during 1998 and the issuance of restricted  share awards to certain key
executives in 1998.


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 segment  revenues  decreased $6.0 million to $956.7 million in 1997
from  $962.7  million  in 1996 and can be  attributed  to the  expiration  of an
off-airport  food and  beverage  contract  and the  planned  exit  from  several
off-airport retail contracts in late 1996.

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

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

                                       17

<PAGE>

introduced  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.

     Off-airport  concessions  revenues were $43.2 million and $51.2 million in 
1997 and 1996, respectively. This decrease reflects the expiration of a food and
beverage  contract  and the  Company's  planned  exit from  several  merchandise
contracts in late 1996.

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

     Shopping mall concession  revenues increased $12.7 million to $15.4 million
in 1997.  This  increase in  revenues  was a result of the  Company's  continued
expansion  into shopping mall food court  concessions.  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).

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 1996. 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.

     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.

     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.

                                       18

<PAGE>

     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.  

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
the  airports  segment,  prior  to  the  allocation  of  corporate  general  and
administrative  expenses and  excluding  unusual  items,  were $98.1 million and
$91.6 million for 1997 and 1996, respectively.  Operating profits for the travel
plazas segment, excluding general and administrative expenses and unusual items,
were $22.3 million and $22.2 million for 1997 and 1996, respectively.  Operating
profits for the shopping malls  segment,  excluding  general and  administrative
expenses and unusual  items,  totaled $1.3 million and $0.3 million for 1997 and
1996, respectively.

     The  airports  segment  operating  profit  margins,  excluding  general and
administrative  expenses and unusual items,  showed a 80 basis point improvement
for 1997 and totaled 10.3%. The travel plazas segment  operating profit margins,
excluding general and administrative  expenses and unusual items,  remained flat
at 7.1% for 1997. The shopping mall segment  operating profit margin,  excluding
general and  administrative  expenses and unusual  items,  decreased to 8.4% for
1997 compared with 11.1% in 1996.

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  that
reimbursed  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.


                                       19

<PAGE>


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 growth in operating  profit, 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.


LIQUIDITY AND CAPITAL RESOURCES

     Historically,  the  Company has funded its  ongoing  capital  expenditures,
debt-service  requirements and treasury  purchases from cash flow generated from
ongoing  operations  and current cash  balances.  The Company has more  recently
drawn on existing credit facilities to fund increased capital spending. In 1999,
the Company  anticipates  using the same sources,  however,  should  significant
growth   opportunities   arise,  such  as  business   combinations  or  contract
acquisitions,   alternative   financing   arrangements  will  be  evaluated  and
considered.

     In May 1995,  the  predecessor  corporation  to 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 May 2003.  Since 1996, the Company's
cash interest coverage ratio has improved from 3.1 to 1.0 to 3.3 to 1.0 in 1998.

     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.

     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.  The revolving credit
facility  provides  for working  capital  and can be used for general  corporate
purposes  other than hostile  acquisitions.  At the end of 1998, the Company had
drawn $11.6  million of  outstanding  indebtedness  under the  revolving  credit
facility  at an  average  interest  rate of  7.77%.  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,  and provide that dividends  payable to the Company are
limited to 25% of Host  International's  consolidated net income,  as defined in
the loan  agreements.  During 1998 and in compliance with the  Facilities,  Host
International paid $5.6 million of dividends to the Company. The loan agreements
also contain 
                                       20

<PAGE>

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 1, 1999, and
throughout  the two  fiscal  years  ended  January  1, 1999 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 deferred income taxes,  totaled $94.7 million for
1998, $83.3 million for 1997 and $73.8 million for 1996.

     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 in 1998, 1997 and 1996 totaled
$97.8 million, $68.3 million and $57.1 million,  respectively.  During 1999, the
Company expects to make capital  expenditure  investments of approximately $90.0
million in its core markets  (domestic  airport and travel plaza business lines)
and $35.0 million in growth markets  (international  airports and food courts in
shopping malls). Over the long-term,  capital  expenditures in core markets have
ranged  from  below 3% to nearly  10% of  revenues,  with a median of 4.4%.  The
Company's  recent  success in winning new contracts and renewing  existing ones,
which  extended the  Company's  overall  weighted-average  contract  lives,  has
resulted in 1998 capital  expenditures  as a percentage of revenues at the upper
end of the historic  range.  Multiyear  construction  projects at these recently
renewed and new  contracts  are  expected to result in capital  expenditures  of
approximately  7% of revenues in 1999.  In 2000,  the  Company  expects  capital
expenditures in its core markets to begin to decline--reaching  approximately 5%
of revenues by 2001.

     The Company's  cash used in financing  activities in 1998 was $11.3 million
compared  with  cash  used in  financing  activities  of $4.7  million  and cash
provided by  financing  activities  of $5.2 million in 1996.  During  1998,  the
Company purchased $22.6 million of treasury stock, completing its original share
repurchase program announced in 1997 and beginning a new repurchase  program. As
of the end of  1998,  approximately  0.9  million  additional  shares  could  be
repurchased under the new share repurchase  program.  In addition,  cash used in
financing  activities in 1998  included a $3.5 million  payment of the Company's
obligation  to pay for the 1997 exercise of  nonqualified  stock options and the
1997 release of deferred stock incentive shares held by certain former employees
of Host Marriott  corporation  and $1.1 million of debt  repayments.  Offsetting
these  cash  outflows  were  cash  inflows  from the  line-of-credit  borrowings
totaling  $11.6  million,  proceeds  from stock  issuances  of $2.7  million and
proceeds from the issuance of debt of $1.4 million.

     During 1997, the Company  repurchased  $3.5 million of treasury stock under
its original  share  repurchase  program.  In  addition,  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 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,  increased
capital spending 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,  taxes,  depreciation,
amortization and other non-cash items ("EBITDA")  increased to $125.7 million in
1998  compared  with  $125.4  million  and  $116.9  million  in 1997  and  1996,
respectively. The EBITDA margin decreased to 9.1% of revenues from 9.8% in 1997,
returning  to the 1996  margin.  The  Company's  cash  interest  coverage  ratio
(defined as EBITDA to interest expense less  amortization of deferred  financing
costs) was 3.3 to 1.0 in 1998  compared  with 3.4 to 1.0 for 1997 and 3.1 to 1.0
for 1996. EBITDA during 1998 exceeded capital expenditures of $97.8 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

                                       21

<PAGE>

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 to EBITDA:

<TABLE>
<CAPTION>

       ---------------------------------------------------- -------------- -------------- ---------------
                                                                1998           1997            1996
       ---------------------------------------------------- -------------- -------------- ---------------
          <S>                                                     <C>             <C>            <C>

                                                                           (IN MILLIONS)

       NET INCOME                                               $   24.1        $   20.8        $   14.3
       Interest, net                                                37.4            36.1            37.8
       (Benefit) provision for income taxes                         (1.9)           10.2            10.2
       Depreciation and amortization                                59.4            54.8            54.6
       Unusual items, net                                            5.9             0.3             ---
       Other non-cash items                                          0.8             3.2             ---
       ---------------------------------------------------- -------------- -------------- ---------------
       EBITDA                                                   $  125.7        $  125.4        $  116.9
       ---------------------------------------------------- -------------- -------------- ---------------
</TABLE>

IMPAIRMENTS OF LONG-LIVED ASSETS

     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.

     During 1998,  the Company  determined  that its investment in an internally
used software system was partially impaired because all of the purchased modules
of the system that were originally  intended to provide  operating  efficiencies
could not be fully  implemented.  As a result,  the  Company  recorded a partial
write-down  of $3.5  million of the  remaining  book value of the system of $5.5
million. The Company also determined that its investment in a shopping mall food
court contract was fully impaired and recorded a write-down of $2.4 million. The
food court contract is a regional mall where the operating real estate under the
contract is being phased in to the Company over several years.  Customer traffic
and capture  rates at this mall were well below the Company's  expectations  and
insufficient to support the number of concepts developed.

     During 1997,  the Company  determined  that its  investment  in one airport
concession   contract  was  partially  impaired  and  recorded  a  $4.2  million
write-down. The partial impairment was the result of construction cost overruns,
airline  traffic  shifts and weak operating  performance.  Since the time of the
write-down,  two major airlines have increased  their presence at this location,
resulting in significant unexpected enplanement growth. Accordingly, the outlook
for 1999 and beyond for this airport location is very positive.

1995 RESTRUCTURING

     Management  approved a formal  restructuring  plan in October  1995 and the
Company recorded a pretax  restructuring  charge to earnings of $14.5 million in
the fourth quarter of 1995. The restructuring  charge was primarily comprised of
involuntary  employee  termination  benefits  (related  to  its  realignment  of
operational  responsibilities)  and lease cancellation  penalty fees and related
costs  resulting  from the  Company's  plan to exit  certain  activities  in its
entertainment  venues.  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.

                                       22

<PAGE>


DEFERRED TAX ASSETS

     The Company has recognized net assets of $79.6 million and $67.9 million at
January 1, 1999 and January 2, 1998,  respectively,  related to deferred  taxes,
which  generally  represent tax credit  carryforwards  and tax effects of future
available  deductions from taxable income.  During 1998, the Company  recognized
$11.1 million of certain purchase business  combination tax credits,  previously
believed  unrealizable and reduced the valuation  allowance  established against
these credits to reflect their probable  utilization.  The purchase business tax
credits carryforwards and the related valuation allowance was further reduced by
$1.5 million due to adjustments by the Internal  Revenue  Service.  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.

     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 1998, the
Company  would have  generated  taxable  and pretax book income in each year and
cumulative  taxable and pretax book income for this period of $146.0 million and
$80.4  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 1, 1999 and January 2, 1998.  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 that 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.  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  decreased from 34.5 million as of the end
of  fiscal  year  1997  to  33.6  million  as of the end of  fiscal  year  1998,
reflecting 1.9 million of treasury stock repurchases in 1998.

     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 $72.6  million and $76.2 million as of January 1, 1999 and January 2,
1998, respectively.

INFLATION

     The  Company's  expenses are affected by inflation.  While price  increases
generally can be instituted as inflation occurs, most contracts require landlord
approval before prices can be increased,  which may temporarily  have an adverse

                                       23

<PAGE>

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 1998 and 1997 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 1999 and beyond;  the growth in total  revenue and  earnings in 1999
and  subsequent  years;  the amount of  additional  revenues  expected  from new
domestic and  international  shopping mall food court and airport contracts that
were added in 1997 or 1998 or that are  expected  to be added or renewed in 1999
and subsequent years; efforts and expectations relating to Year 2000 compliance;
anticipated  retention  rates of  existing  contracts  in core  business  lines;
capital  spending  plans;  projected  cash flows from certain  operating  units;
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  commodity
prices and 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 union labor  strikes  and 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,  most  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 a combination  of cash flow  generated  from ongoing
operations,  current cash balances and existing credit facilities.  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  and  regulations  related to
security at airports.  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.

     UNION LABOR STRIKES.  The Company's  operations could be adversely impacted
by union labor  strikes,  such as the  Northwest  Airlines  pilots'  strike that
occurred  during the third  quarter of 1998.  While such strikes  have  occurred
infrequently  in the past, a prolonged  strike by an airline's union labor force
could reduce air travel,  especially in hub  locations  serviced by the affected
airline.  Due to the Company's  level of fixed  operating  costs,  a significant
reduction in passenger  enplanements  could reduce  operating  profit margins at
airport locations affected by the union strike.

     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.  In January 1999, the General
Accounting Office (the "GAO") issued a report concerning the status of airports'
Year 2000 readiness. A significant number of airports surveyed did not expect to
meet the Federal Aviation Administration's  recommended preparation date and had
not completed  contingency  plans. As a result, the GAO reported that it appears
likely that there will be some critical  equipment  failure or  malfunction  and
that airport efficiencies will be degraded,  which could result in flight delays
or airport  closures.  The  Company can not predict the effect of such delays or
closures on its operations.  If significant  delays were to occur, the Company's
results  may reflect  short-term  benefits;  however,  should  extended  airport
closures  occur the Company's  results could be materially  adversely  affected.
(See "Other Matters").

     ASIAN MARKETS.  During 1998,  the deepening of the Asian economic  downturn
adversely  affected  a small  number of the  Company's  concessions  operations,
particularly its duty-free merchandise  concessions catering to Asian travelers.
The Asian  markets are not expected to improve  significantly  in the near term,
resulting in continued  negative  impact on the  Company's  operations  in these
selected airports.


OTHER MATTERS

     The Company is currently  addressing Year 2000 issues with action plans for
its: (1) information  systems,  (2) embedded chip systems,  including  equipment
that operates such items as the Company's freezers, air conditioning and cooling
systems,  fryers and security  systems,  (3)  third-party  (vendor and supplier)
relationships and (4) contingency planning.

     The Company has  established a Year 2000 Project Team,  headed by the Chief
Information  Officer,  who reports to the Chief  Financial  Officer,  to resolve
significant  Year 2000  issues in a timely  manner as they are  identified.  The
project steering team includes executive management and employees with expertise
from various disciplines including  information  technology,  finance,  internal
audit, legal and operations.  In addition, the Company has retained the services
of consulting firms with particular expertise in the Year 2000 problem.

     INFORMATION  SYSTEMS.  To date,  the  Company  has  identified  20 internal
systems that will require correction.  The Company is resolving Year 2000 issues
through  replacement of equipment,  modification  of software and replacement of
certain software systems. For mission critical systems, third-party experts will
be engaged to verify Year 2000 compliance testing.  The Company anticipates that
all mission critical information  technology systems at corporate  headquarters,
which perform  financial  management  processes,  will be Year 2000 compliant by
April 1999 and  anticipates  that other  systems  will be completed by the third
quarter of 1999.

     EMBEDDED SYSTEMS.  As of the end of 1998, a comprehensive  inventory of the
Company's  mission  critical  and  date-sensitive   embedded  systems  had  been
completed  for  approximately  half of the  Company's  locations.  The remaining
locations are expected to be fully inventoried by mid-1999. All manufacturers of
inventoried  components  utilized in the operations have been contacted in order
to determine whether the components are Year 2000 compliant. The Company intends
to remediate or replace, as applicable, any identified non-compliant systems and
expects to complete  this process by August 1999.  The quality of the  responses
received from  manufacturers,  the estimated impact of the individual  


                                       25

<PAGE>

system on the  Company,  and the  ability of the  Company to perform  meaningful
tests will  influence  its  decision  regarding  whether to conduct  independent
testing of embedded systems.

     THIRD-PARTY  RELATIONSHIPS.  Formal  communications with all critical third
parties have been initiated to determine  potential  exposure which would result
in their  failure to remediate  their own Year 2000 issues.  These third parties
have  included  the  Company's  supply  chain,  airport  authorities,  financial
institutions and utility  companies.  New business  relationships with alternate
providers of products and services will be considered if deemed necessary.
     RISKS/CONTINGENCY PLANS. As part of the Company's normal business practice,
it maintains plans to follow during emergency circumstances, some of which could
arise from Year 2000-related  problems.  The Company's  contingency planning for
the Year 2000 will address  various  alternatives  and will include  assessing a
variety of scenarios to which the Company may be required to react.  The Company
continues  to  develop  its  contingency  plans for Year 2000  issues,  and each
individual  location will develop a contingency plan for the impact of Year 2000
business  interruptions.  The Company's operations are geographically  dispersed
and it has a large  supplier  base,  which should  mitigate  any adverse  impact
resulting from supplier problems.

     POTENTIAL RISKS. Potential sources of risk include operational  disruptions
caused by equipment failure and the inability of principal  suppliers to be Year
2000  compliant,  which could result in delays in product  deliveries  from such
suppliers.  Utility  services,  including  electric,  telephone  and water,  are
necessary  for the  Company's  basic  operations.  Should any of these  critical
vendors  fail,  the  impact  of any such  failure  could  become  a  significant
challenge  to the  Company's  ability to operate its  facilities  at  individual
locations.  Based on the information  supplied to date by the Company's critical
vendors and suppliers,  the Company believes the probability of such failures to
be low. However,  the Company's action plan emphasizes  continued  monitoring of
the  progress of these  critical  vendors and  suppliers  toward their Year 2000
compliance.

     In addition,  the  Company's  operations  may also be affected by Year 2000
issues facing the Federal  Aviation  Administration  and the airlines related to
air traffic control  systems,  aircraft  equipment and security  systems used in
airports.  These  issues  could  potentially  lead to  degraded  flight  safety,
grounded or delayed flights, selected airport closures,  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 problem as it pertains to air traffic control and airport security
systems.  If airline passenger  traffic declines  significantly in late 1999 and
the year  2000 as a  result  of Year  2000  problems  experienced  by the FAA or
individual airlines or the public's fear of such problems, the Company's results
of operations may be materially adversely affected.

     FINANCIAL  IMPLICATIONS.  The Company  currently  estimates  that  external
costs, such as consulting experts,  for its Year 2000 systems compliance program
will total  approximately  $4.0  million in 1999 and $0.5  million in 2000.  The
Company currently  estimates that internal costs, such as remediation coding and
system support,  for Year 2000 compliance will total  approximately $1.1 million
in 1999 and $0.3 million in 2000.  Additionally,  final  remediation may require
further  capital  investments  to replace  equipment and software.  During 1998,
approximately  $1.1 million in external costs and approximately  $0.8 million in
internal  costs  were  incurred  relating  to  Year  2000  implementation.   The
anticipated costs associated with the Company's Year 2000 compliance  program do
not  include  time and costs that may be  expensed as a result of the failure of
any third parties,  including suppliers,  to become Year 2000 compliant or costs
to implement any contingency plans.

     The discussion of the Company's  efforts and expectations  relating to Year
2000 compliance are forward-looking statements. The Company's ability to achieve
Year 2000  compliance  and the  level of costs  associated  therewith,  could be
adversely  impacted  by,  among  other  things,  the  availability  and  cost of
programming  and  testing  resources,  vendors'  ability  to modify  proprietary
software, and anticipated problems identified in the ongoing compliance review.

     The  statements   contained  in  this  section  are  "Year  2000  Readiness
Disclosures"  as  provided  for in  the  Year  2000  Information  and  Readiness
Disclosure Act.

                                       26

<PAGE>


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The  Company is  exposed to market  risk from  changes in  interest  rates,
foreign currency exchange rates and commodity prices, which could impact results
of operations and financial condition. Changes in market interest rates over the
next year would not  materially  impact  earnings or cash flow as the  Company's
cash  investments  are  short-term,  interest  rates under the revolving  credit
facility are  short-term and the interest rates on the long-term debt are fixed.
The  Company's  exposure to changes in foreign  currency  exchange  rates is not
material to earnings or cash flows. Due to the Company's wide variety of product
offerings and diverse brand portfolio, the Company would not expect fluctuations
in commodity prices to be material to earnings or cash flows.

     The fair  value of fixed rate  long-term  debt is  sensitive  to changes in
interest  rates,  which would result in gains/losses in the market value of this
debt due to  differences  between  the  market  interest  rates and rates at the
inception of the debt  obligation.  Based on a hypothetical  immediate 150 basis
point  increase in interest  rates at the end of fiscal years 1998 and 1997, the
market  value of fixed rate  long-term  debt would  result in a net  decrease of
$28.7 million and $32.5  million,  respectively.  Conversely,  a 150 basis point
decrease in interest rates would result in a net increase in the market value of
fixed rate long-term  debt  outstanding at the end of fiscal years 1998 and 1997
of $32.1 million and $37.2 million,  respectively.  Changes in fair value of our
long-term debt does not impact earnings or cash flows.

     The  Company  has the  ability  to  borrow  up to $75.0  million  against a
revolving credit facility. As of the end of 1998,  borrowings  outstanding under
the revolving  credit facility totaled $11.6 million at an average interest rate
of 7.77%.  A  hypothetical  10% increase or decrease in interest rates would not
have  had a  material  effect  on  earnings  in  1998  as  the  average  balance
outstanding was $0.6 million.

     Significant  changes in  commodity  prices could  impact  future  operating
profit margins and cash flows. The Company has the ability to recover from sharp
increases in commodity  prices by increasing its menu prices.  However,  in some
instances, increases in menu prices require prior landlord approval.

                                       27


<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                           29

        Consolidated Balance Sheets as of January 1, 1999 
              and January 2, 1998                                          30

        Consolidated Statements of Operations for the 
              Fiscal Years Ended January 1, 1999, 
              January 2, 1998 and January 3, 1997                          31

        Consolidated Statements of Cash Flows for 
              the Fiscal Years Ended January 1, 1999,
              January 2, 1998 and January 3, 1997                          32

        Consolidated Statements of Shareholders'
              Deficit for the Fiscal Years Ended 
              January 1, 1999, January 2, 1998 and
              January 3, 1997                                              33

        Notes to Consolidated Financial Statements                      34 - 46

                                       28

<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 of January 1, 1999 and January
2, 1998, and the related consolidated  statements of operations,  cash flows and
shareholders'  deficit for each of the three  fiscal  years in the period  ended
January  1, 1999.  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 the audit to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

        In our opinion, the consolidated  financial statements referred to above
present  fairly,  in all  material  respects,  the  financial  position  of Host
Marriott Services Corporation and subsidiaries as of January 1, 1999 and January
2, 1998,  and the results of their  operations  and their cash flows for each of
the three fiscal years in the period ended January 1, 1999,  in conformity  with
generally accepted accounting principles.





ARTHUR ANDERSEN LLP
Washington, D.C.
January 27, 1999

                                       29
<PAGE>


HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 1, 1999 AND JANUARY 2, 1998

<TABLE>
<CAPTION>

----------------------------------------------------------------------------- ---------------- ---------------
                                                                                   1998             1997
----------------------------------------------------------------------------- ---------------- ---------------

<S>                                                                                    <C>            <C>
                                                                                (IN MILLIONS, EXCEPT SHARE
                                                                                         AMOUNTS)

                                   ASSETS
Current assets:
   Cash and cash equivalents                                                         $  44.4         $  78.1 
   Accounts receivable, net                                                             28.9            24.5 
   Inventories                                                                          41.1            41.1 
   Deferred income taxes                                                                17.4            11.5 
   Prepaid rent                                                                          7.4             7.0 
   Other current assets                                                                  7.9             7.0 
----------------------------------------------------------------------------- ---------------- ---------------
   Total current assets                                                                147.1           169.2 

Property and equipment, net                                                            314.2           279.9 
Intangible assets                                                                       22.1            22.1 
Deferred income taxes                                                                   62.2            56.4 
Other assets                                                                            21.4            20.4 
----------------------------------------------------------------------------- ---------------- ---------------

Total assets                                                                         $ 567.0         $ 548.0 
----------------------------------------------------------------------------- ---------------- ---------------

                   LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
   Accounts payable                                                                  $  79.7         $  72.2 
   Accrued payroll and benefits                                                         44.5            46.0 
   Accrued interest payable                                                              4.8             4.8 
   Current portion of long-term debt                                                     1.1             1.0 
   Borrowings under line-of-credit agreement                                            11.6             --- 
   Other current liabilities                                                            40.4            41.5 
----------------------------------------------------------------------------- ---------------- ---------------
   Total current liabilities                                                           182.1           165.5 

Long-term debt                                                                         405.9           405.8 
Other liabilities                                                                       51.6            52.9 
----------------------------------------------------------------------------- ---------------- ---------------
Total liabilities                                                                      639.6           624.2 

Common stock,  no par value,  100  million  shares  authorized,
   35,739,180  and 34,733,815 shares issued as of January 1, 1999
   and January 2, 1998, respectively                                                     ---             --- 
Contributed deficit                                                                   (105.8)         (107.7)
Accumulated other comprehensive income                                                   0.1            (0.1)
Retained earnings                                                                       59.2            35.1 
Treasury stock - 2,104,110 and 253,100 shares held as of
   January 1, 1999 and January 2, 1998, respectively                                   (26.1)           (3.5)
----------------------------------------------------------------------------- ---------------- ---------------
   Total shareholders' deficit                                                         (72.6)          (76.2)
----------------------------------------------------------------------------- ---------------- ---------------

Total liabilities and shareholders' deficit                                          $ 567.0         $ 548.0 
----------------------------------------------------------------------------- ---------------- ---------------
</TABLE>


               See notes to the consolidated financial statements.

                                       30

<PAGE>


                                                                 
HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997

<TABLE>
<CAPTION>

----------------------------------------------------------------------- --------------- ---------------- ---------------
                                                                             1998            1997             1996
----------------------------------------------------------------------- --------------- ---------------- ---------------
<S>                                                                             <C>             <C>             <C>

                                                                            (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

REVENUES                                                                     $1,377.6         $1,284.6        $1,277.8 

OPERATING COSTS AND EXPENSES
   Cost of sales                                                                409.3            374.1           381.6 
   Payroll and benefits                                                         419.3            383.2           379.1 
   Rent                                                                         212.3            203.0           203.3 
   Royalties                                                                     29.8             26.7            24.8 
   Depreciation and amortization                                                 57.4             53.1            53.9 
   Write-downs of long-lived assets                                               5.9              4.2             --- 
   Reversal of restructuring charges                                              ---             (3.9)            --- 
   General and administrative                                                    58.0             54.3            51.8 
   Other                                                                        126.0            122.8           121.0 
----------------------------------------------------------------------- --------------- ---------------- ---------------
Total operating costs and expenses                                            1,318.0          1,217.5         1,215.5 

OPERATING PROFIT                                                                 59.6             67.1            62.3 

   Interest expense                                                             (39.9)           (39.8)          (40.3)
   Interest income                                                                2.5              3.7             2.5 
----------------------------------------------------------------------- --------------- ---------------- ---------------
INCOME BEFORE INCOME TAXES                                                       22.2             31.0            24.5 

Provision (benefit) for income taxes                                             (1.9)            10.2            10.2 
----------------------------------------------------------------------- --------------- ---------------- ---------------

NET INCOME                                                                   $   24.1         $   20.8        $   14.3 
----------------------------------------------------------------------- --------------- ---------------- ---------------

INCOME PER COMMON SHARE:
   Basic                                                                     $   0.71         $   0.60        $   0.43 
   Diluted                                                                       0.68             0.57            0.40 


WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING:
   Basic                                                                         34.0             34.6            33.4 
   Diluted                                                                       35.6             36.5            35.6 

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

</TABLE>

               See notes to the consolidated financial statements.

                                       31
<PAGE>



HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997

<TABLE>
<CAPTION>

--------------------------------------------------------------------- ---------------- ---------------- ----------------
                                                                           1998             1997             1996
--------------------------------------------------------------------- ---------------- ---------------- ----------------
<S>                                                                           <C>               <C>              <C>

                                                                                        (IN MILLIONS)
OPERATING ACTIVITIES
Net income                                                                    $ 24.1           $ 20.8           $ 14.3 

Adjustments to reconcile cash from operations:
   Depreciation and amortization                                                59.4             54.8             54.6 
   Deferred financing                                                            1.3              1.3              1.3 
   Deferred income taxes                                                       (11.7)            10.8             (5.5)
   Write-downs of long-lived assets                                              5.9              4.2              --- 
   Reversal of restructuring charges                                             ---             (3.9)             --- 
   Other                                                                         4.0              6.1              3.6 

   Working capital changes:
        (Increase) decrease in accounts receivable                              (3.6)             5.3              2.3 
        (Increase) decrease in inventories                                      (0.8)             1.4             (5.9)
        Increase in other current assets                                        (2.4)            (6.6)            (1.6)
        Increase (decrease) in accounts payable and accruals                     3.7            (41.7)            40.4 
--------------------------------------------------------------------- ---------------- ---------------- ----------------

Cash provided by operations                                                     79.9             52.5            103.5 
--------------------------------------------------------------------- ---------------- ---------------- ----------------

INVESTING ACTIVITIES
Capital expenditures                                                           (97.8)           (68.3)           (57.1)
Net proceeds from the sale of assets                                             ---              ---              2.4 
Other, net                                                                      (4.5)            (5.6)             3.0 
--------------------------------------------------------------------- ---------------- ---------------- ----------------

Cash used in investing activities                                             (102.3)           (73.9)           (51.7)
--------------------------------------------------------------------- ---------------- ---------------- ----------------

FINANCING ACTIVITIES
Repayments of long-term debt                                                    (1.1)            (1.7)            (0.8)
Issuance of long-term debt                                                       1.4              ---              --- 
Net borrowings under line-of-credit agreement                                   11.6              ---              --- 
Proceeds from stock issuances                                                    2.7              2.8              6.0 
Payment to Host Marriott Corporation for Marriott
    International options and deferred shares                                   (3.5)            (2.2)             --- 
Purchases of treasury stock                                                    (22.6)            (3.5)             --- 
Other                                                                            0.2             (0.1)             --- 
--------------------------------------------------------------------- ---------------- ---------------- ----------------

Cash (used in) provided by financing activities                                (11.3)            (4.7)             5.2 
--------------------------------------------------------------------- ---------------- ---------------- ----------------

(DECREASE) INCREASE IN CASH AND
   CASH EQUIVALENTS                                                            (33.7)           (26.1)            57.0 

CASH AND CASH EQUIVALENTS, beginning of year                                    78.1            104.2             47.2 
--------------------------------------------------------------------- ---------------- ---------------- ----------------

CASH AND CASH EQUIVALENTS, end of year                                        $ 44.4           $ 78.1           $104.2 
--------------------------------------------------------------------- ---------------- ---------------- ----------------
</TABLE>

               See notes to the consolidated financial statements.

                                       32
<PAGE>


HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997

<TABLE>
<CAPTION>

----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
                                                                                        ACCUMULATED
    COMMON                                                                                 OTHER
    SHARES                                                 CONTRIBUTED    RETAINED     COMPREHENSIVE     TREASURY
  OUTSTANDING                                                DEFICIT      EARNINGS        INCOME          STOCK        TOTAL
----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
          <C>         <S>                                       <C>            <C>             <C>            <C>        <C>

                                                                                      (IN MILLIONS)

          31.9    Balance, December 29, 1995                   $(123.1)      $ ---              $ ---       $ ---      $(123.1)

                    Comprehensive income:
           ---         Net income                                  ---        14.3                ---         ---         14.3 
----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
           ---      Total comprehensive income                     ---        14.3                ---         ---         14.3 

                    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                          2.5         ---                ---         ---          2.5 
----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------

          34.4    Balance, January 3, 1997                      (109.8)       14.3                ---         ---        (95.5)

                    Comprehensive income:
           ---        Net income                                   ---        20.8                ---         ---         20.8 
                      Foreign currency translation
           ---           adjustments                               ---         ---               (0.1)        ---         (0.1)
----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
           ---      Total comprehensive income                     ---        20.8               (0.1)        ---         20.7 

                    Common stock issued for
           0.5        employee stock and option plans              2.7         ---                ---         ---          2.7 
                    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                          1.6         ---                ---         ---          1.6 
----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------

          34.5    Balance, January 2, 1998                      (107.7)       35.1               (0.1)       (3.5)       (76.2)

                    Comprehensive income:
           ---        Net income                                   ---        24.1                ---         ---         24.1 
                      Foreign currency translation 
           ---           adjustments                               ---         ---                0.2         ---          0.2 
----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
           ---      Total comprehensive income                     ---        24.1                0.2         ---         24.3 

                    Common stock issued for
           0.4        employee stock and option plans              2.7         ---                ---         ---          2.7 
                    Payment to Host Marriott Corporation
                      for Marriott International options
           ---        and deferred shares                         (3.5)        ---                ---         ---         (3.5)
          (1.9)     Treasury stock purchases                       ---         ---                ---       (22.6)       (22.6)
           0.6      Deferred compensation                          2.7         ---                ---         ---          2.7 
----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------

          33.6    BALANCE, JANUARY 1, 1999                     $(105.8)     $ 59.2              $ 0.1      $(26.1)     $ (72.6)
----------------- ---------------------------------------- ------------- ----------- ------------------ ----------- ------------
</TABLE>

               See notes to the consolidated financial statements.


                                       33
<PAGE>

               HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Host Marriott Services Corporation (the "Company") is the successor to the food,
beverage and retail concession  businesses of Host Marriott  Corporation  ("Host
Marriott").  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 (the "Distribution").
     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.

DESCRIPTION OF THE BUSINESS

The  Company  operates  restaurants,  gift shops and  related  facilities  at 71
airports and 17  off-airport  locations,  on 13 tollroads  (including  92 travel
plazas) and in 5 shopping malls. 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, Canada,
Malaysia and China.

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 years 1998 and 1997  include 52 weeks while fiscal year 1996  includes 53
weeks.  Fiscal  year 1998  ("1998")  ended on January 1, 1999;  fiscal year 1997
("1997")  ended on January  2, 1998;  and  fiscal  year 1996  ("1996")  ended on
January 3, 1997.

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.  Leasehold  improvements,  net of
estimated residual value, are amortized using the straight-line  method 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 $5.0 million in 1998 and $5.2 million
in 1997, and contract rights of $17.1 million in 1998 and $16.9 million in 1997.
These  intangibles  are  amortized on a  straight-line  basis over periods of 40
years for goodwill and the life of the  contract,  generally 5 to 15 years,  for
contract rights. Amortization expense totaled $2.3 million in 1998, $2.9 million
in 1997 and $2.8 million in 1996. Accumulated amortization totaled $14.8 million
and $13.9 million as of January 1, 1999 and January 2, 1998, 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

                                       34

<PAGE>

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

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  amounted to $5.5 million and $9.9 million at
January 1, 1999 and January 2, 1998, 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 foreign currency translation adjustments.

INCOME TAXES

The Company recognizes deferred tax assets and liabilities based on 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  Statement of Financial  Accounting  Standards  ("SFAS") No.
130, "Reporting Comprehensive Income," during 1998 and the adoption did not have
a material effect on the Company's 1998 consolidated  financial statements.  The
Company adopted 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  1997
consolidated financial statements (see Notes 12 and 13). The Company adopted the
disclosure  only  provisions  of  SFAS  No.  123,  "Accounting  for  Stock-Based
Compensation,"  during 1996 (see Note 7).  Statement of Position  ("SOP")  98-1,
"Accounting  for the  Costs of  Computer  Software  Developed  or  Obtained  for
Internal Use" and SOP 98-5, "Reporting on the Costs of Start-Up Activities" were
issued  subsequent  to the end of 1997  and  must be  adopted  in  fiscal  years
beginning after December 15, 1998, with earlier adoption  permitted.  Subsequent
to the end of 1998,  the Company  adopted SOP 98-1 and SOP 98-5.  As a result of
the  adoption  of SOP 98-1,  the  Company  anticipates  that it will  capitalize
approximately  $0.8 million of internal  payroll and benefits  costs during 1999
that previously would have been expensed.  The adoption of SOP 98-5 in the first
quarter of 1999 resulted in a $0.7 million  charge,  net of tax of $0.5 million,
for a change in  accounting  principle.  Additionally,  the  Company  expects to
expense  approximately  $2.6 million of anticipated  start-up costs in 1999 that
otherwise would have been  capitalized and amortized in 2000 under the Company's
former accounting policy.

INCOME PER COMMON SHARE

Income per share for 1998, 1997 and 1996 were computed by dividing net income by
the  diluted  weighted-average  number  of  outstanding  common  shares  of 35.6
million, 36.5 million and 35.6 million, respectively.

USE OF ESTIMATES

The preparation of the consolidated  financial statements requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  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 1998 presentation.

2.  PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

<TABLE>
<CAPTION>

------------------------------------ ---------- -----------
                                       1998        1997
------------------------------------ ---------- -----------
<S>                                      <C>        <C>

                                         (IN MILLIONS)

Leasehold improvements                $ 453.0     $ 409.1 
Furniture and equipment                 241.2       239.6 
Construction in progress                 37.3        34.0 
------------------------------------ ---------- -----------
Total property and equipment            731.5       682.7 
Less:  accumulated
       depreciation and
       amortization                    (417.3)     (402.8)
------------------------------------ ---------- -----------

Property and equipment, net           $ 314.2     $ 279.9 
------------------------------------ ---------- -----------
</TABLE>

     During 1998, an operating  cash flow  analysis  revealed that the Company's
investment  in one  shopping  mall food  court was  fully  impaired  and that an
investment in an internally  used software system was partially  impaired.  As a
result, the Company

                                       35

<PAGE>

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


recognized  non-cash,  pretax charges against  earnings of $2.4 million and $3.5
million,  respectively.  The shopping mall contract is a regional mall where the
operating  real estate under the contract is being phased in to the Company over
several years.  Customer  traffic and capture rates at this mall were well below
the Company's  expectations  and  insufficient to support the number of concepts
developed.  The  capitalized  system  software  was  determined  to be partially
impaired because all of the purchased modules of the system that were originally
intended  to  provide  operating  efficiencies  could not be fully  implemented.
     During 1997, the Company  recognized a non-cash,  pretax charge against 
earnings of $4.2 million  related to one airport  unit.  The partial  impairment
stemmed  from  construction  cost  overruns,  airline  traffic  shifts  and weak
operating performance.


3.  INCOME TAXES

The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>

---------------------------- --------- --------- ---------
                               1998      1997      1996
---------------------------- --------- --------- ---------
<S>                              <C>       <C>      <C>

                                    (IN MILLIONS)
Current:
   Federal                     $ 7.1    $ (3.1)   $ 11.9 
   Foreign                       0.2       ---       0.2 
   State                         2.5       2.5       3.6 
---------------------------- --------- --------- ---------
Total current provision
   (benefit)                     9.8      (0.6)     15.7 

Deferred:
   Federal                       0.6      10.4      (2.4)
   Foreign                       ---       ---      (0.2)
   State                         0.3       2.3       2.7 
   Decrease in
      valuation allowance      (12.6)     (1.9)     (5.6)
---------------------------- --------- --------- ---------
Total deferred
   (benefit) provision         (11.7)     10.8      (5.5)
---------------------------- --------- --------- ---------

Total (benefit) provision     $ (1.9)   $ 10.2    $ 10.2 
---------------------------- --------- --------- ---------
</TABLE>

     At the end of fiscal year 1998, the Company had approximately $10.6 million
of  alternative  minimum  tax credit  carryforwards  that do not expire and $7.4
million of other tax credits that expire through 2018.
     The  Company  establishes  a valuation  allowance  in  accordance  with the
provisions  of  SFAS  No.  109,  "Accounting  for  Income  Taxes."  The  Company
continually reviews the adequacy of the valuation allowance and recognizes these
benefits only when  reassessment  indicates  that it is more likely than not the
benefits will be realized.
     In 1998,  the  Company  assessed  its past  earnings  history  and  trends,
budgeted sales and expiration dates of  carryforwards  and determined that it is
more likely than not that $11.1 million of certain purchase business combination
tax credits,  previously believed unrealizable,  will be realized. The valuation
allowance  established  against  these  credits  was  reduced to  reflect  their
probable  utilization.  The purchase business tax credit  carryforwards and the
related  valuation  allowance  were  further  reduced  by  $1.5  million  due to
adjustments  by the Internal  Revenue  Service.  During  1997,  the Company also
recognized  the  utilization  of $1.9  million of these  purchase  business  tax
credits and reduced the valuation allowance accordingly.
     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 or the tax credits are utilized. 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.
     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>
------------------------------------- --------- ----------
                                        1998      1997
------------------------------------- --------- ----------
<S>                                      <C>        <C>

                                         (IN MILLIONS)
Deferred tax assets:
   Tax credit carryforwards            $ 18.0     $ 21.7 
   Property and equipment                63.7       58.6 
   Casualty insurance                     9.7        9.8 
   Reserves                               4.1        5.7 
   Employee benefits                      ---        2.1 
   Accrued rent                          10.8       11.8 
   Other                                  2.2        1.0 
------------------------------------- --------- ----------
Gross deferred tax assets               108.5      110.7 

Less:  valuation allowance              (21.5)     (34.1)
------------------------------------- --------- ----------
Net deferred tax assets                  87.0       76.6 
------------------------------------- --------- ----------

Deferred tax liabilities:
   Safe harbor lease investments         (2.2)      (3.7)
   Employee benefits                     (0.2)       --- 
   Other deferred tax liabilities        (5.0)      (5.0)
------------------------------------- --------- ----------
Gross deferred tax liabilities           (7.4)      (8.7)
------------------------------------- --------- ----------

Net deferred income taxes              $ 79.6     $ 67.9 
------------------------------------- --------- ----------
</TABLE>
                                       36

<PAGE>

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


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

<TABLE>
<CAPTION>
---------------------------- ---------- --------- ----------
                               1998       1997      1996
---------------------------- ---------- --------- ----------
<S>                              <C>        <C>       <C> 

Statutory Federal tax rate      35.0 %    35.0 %     35.0 %
State income tax, net of
   Federal tax benefit           4.9       4.8        4.8  
Tax credits                      1.2      (3.1)       5.8  
Change in valuation
   allowance                   (56.6)     (6.1)     (22.9) 
Effect of state tax rate
   changes on deferred
   taxes                         ---       ---       13.6 
Other, net                       6.9       2.4        5.3 
---------------------------- ---------- --------- ----------

Effective income tax rate       (8.6)%    33.0 %     41.6 %
---------------------------- ---------- --------- ----------
</TABLE>

     The Company files a consolidated  Federal income tax return, which includes
all of its domestic  subsidiaries.  The Company made income tax payments of $9.1
million, $2.5 million and $15.9 million in 1998, 1997 and 1996, respectively.


4.  DETAIL OF OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:

<TABLE>
<CAPTION>
---------------------------------- ---------- ---------
                                     1998       1997
---------------------------------- ---------- ---------
<S>                                    <C>       <C>

                                      (IN MILLIONS)

Accrued rent                           $10.2     $11.0
Operating insurance accruals            10.2       8.9
International accruals                   4.8       3.5
Accrued franchise fees                   2.1       1.8
Other                                   13.1      16.3
---------------------------------- ---------- ---------

Total other current liabilities        $40.4     $41.5
---------------------------------- ---------- ---------
</TABLE>


5.  DEBT

Debt consists of the following:

<TABLE>
<CAPTION>
----------------------------------- --------- ---------
                                      1998      1997
----------------------------------- --------- ---------
<S>                                    <C>       <C>

                                      (IN MILLIONS)

Senior Notes with a fixed rate
   of 9.5%, due 2005                 $400.0    $400.0 
Capital lease obligations               0.3       0.6 
Other                                   6.7       6.2 
----------------------------------- --------- ---------
Total debt                            407.0     406.8 
Less:  current portion                 (1.1)     (1.0)
----------------------------------- --------- ---------

Total long-term debt                 $405.9    $405.8 
----------------------------------- --------- ---------
</TABLE>

SENIOR NOTES

The  $400.0  million  of  senior  notes  (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
"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 the  Guarantors  and enter into
certain mergers and consolidations.
     As of January 1, 1999, Host International had approximately  $148.2 million
of  unrestricted  funds  available  for  distribution  to the Company  under the
provisions of the 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 May 2003.

CREDIT FACILITIES

The  First  National  Bank of  Chicago,  as agent  for a group of  participating
lenders, has provided credit facilities (the "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 maturing in April 2002.
The $75.0 million  Revolver  Facility  provides for working  capital and general
corporate purposes other than hostile acquisitions. As of the end of 1998, there
was $11.6 million of outstanding indebtedness under the Revolver Facility, at an
average  interest rate of 7.77%. 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
Indenture,  except that  dividends  payable to the Company are 

                                       37

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


limited to 25% of Host  International's  consolidated net income,  as defined in
the loan  agreement.  During 1998 and in compliance  with the  Facilities,  Host
International paid $5.6 million of dividends to the Company.
     Aggregate debt maturities,  excluding capital lease obligations, at the end
of 1998 are as follows:

<TABLE>
<CAPTION>

------------------------------------ ------------------
Fiscal Year                             (IN MILLIONS)
------------------------------------ ------------------
 <S>                                               <C>
                                     
1999                                            $  1.1
2000                                               1.2
2001                                               1.3
2002                                               1.2
2003                                               1.0
Thereafter                                       400.9
------------------------------------ ------------------

Total debt                                      $406.7
------------------------------------ ------------------
</TABLE>

     The Company's other indebtedness  totaled $6.7 million with an average rate
of 8.1%.  Nearly $1.5 million of other debt is  denominated  in Dutch  Guilders.
     Deferred financing costs,  which are included in other assets,  amounted to
$7.8  million and $9.1 million at the end of 1998 and 1997,  respectively.  Cash
paid for interest was $38.6  million,  $38.5  million and $38.8 million in 1998,
1997 and 1996, respectively.


6.  SHAREHOLDERS' DEFICIT

One hundred million shares of common stock,  without par value,  are authorized,
of which 33.6 million shares were issued and outstanding as of the end of fiscal
year 1998 and 34.5 million  shares were issued and  outstanding as of the end of
fiscal year 1997. One million shares of preferred stock,  without par value, are
authorized, of which 100,000 shares of junior participating preferred stock have
been reserved for issuance in connection with the Company's  stockholder  rights
plan described below.

WARRANTS

In connection  with the  Distribution,  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.
     As of the end of fiscal year 1998, the Company had issued  1,401,269 common
shares resulting from the exercise of Host Marriott warrants.  Proceeds received
from the issuance of these common shares were $6.0 million. The remaining 36,916
unexercised warrants expired on October 8, 1998.

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.  During  1998,  the  Company  completed  the  program by
purchasing an additional  846,510 shares at an aggregate purchase price of $11.6
million.
     Also during  1998,  the  Company  announced  a second  two-year  program to
repurchase up to 1.9 million  shares of the Company's  stock on the open market.
As of the end of 1998,  1,004,500  shares had been  repurchased  at an aggregate
purchase price of $11.0 million.

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 14) held Host Marriott  nonqualified stock
options (the "MI Host Marriott  Options") and deferred  stock  incentive  shares
(the "MI Host Marriott Deferred Stock"). As a result of the Distribution, the MI
Host Marriott  Options  remained options to acquire only shares of Host Marriott
common  stock,  except  that the  exercise  price of and the  number  of  shares
underlying such options were adjusted to preserve the intrinsic value of

                                       38

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


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
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.   Additionally,   the  Company  will  receive
approximately  11% of the  exercise  price  of  each  MI  Host  Marriott  Option
exercised.  During 1998,  the Company paid Host Marriott $3.5 million in partial
settlement  of its  obligation  to pay  for  the  1997  exercise  of the MI Host
Marriott Options and the release of the MI Host Marriott Deferred Stock.  During
1997,  the Company paid Host  Marriott $2.2 million 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  $5.5
million and $7.0 million as of year-end 1998 and 1997, respectively.


7.  STOCK-BASED COMPENSATION PLANS

Under the  Comprehensive  Stock  Plan,  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 has reserved  10.0 million and 1.3
million 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 key executives.  As of January 1, 1999,
there  were  1.0  million   restricted  share  awards   outstanding,   of  which
approximately 751,000 were new restricted shares issued in 1998 and 256,000 were
shares issued in prior years.
     Compensation expense related to the 751,000 new share awards consists of an
annual  time-based   component  as  well  as  a   performance-based   component.
Compensation expense under both components is calculated using the fair value of
the shares on the date of issuance and is  contingent  on continued  employment.
The vesting, and corresponding compensation expense, of 256,000 shares under the
annual time-based component occurs ratably over a three-year period beginning on
the grant date. The vesting, and corresponding  compensation expense, of 495,000
shares under the  performance-based  component can be accelerated from a maximum
seven-year  period to a minimum  three-year  period by the attainment of certain
performance criteria during fiscal years 2001 through 2005.
     Restricted  share awards  outstanding from prior grants totaled 256,000 at
the end of fiscal  year  1998.  Subsequent  to  year-end,  131,000  shares  were
released,  53,000 shares were  forfeited and 72,000 shares will be released upon
retirement.  Compensation  expense  related  to share  grants  prior to 1998 was
recognized  over the award period and  consisted of time- and  performance-based
components.  The time-based  expense was calculated  using the fair value of the
shares on the date of issuance and was contingent on continued  employment.  The
performance-based  expense was calculated  using the fair value of the Company's
common stock during the award period and was contingent on attainment of certain
performance criteria.

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:

                                       39

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

<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 
Granted                                             7,500 
Issued                                            (38,091)
Forfeited/expired                                 (24,641)
---------------------------------- ---------- -------------

Balance, January 1, 1999                          367,315 
---------------------------------- ---------- -------------
</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 1998, 1997 and 1996.
     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 weighted-average fair value of the Company's stock options at the grant
date,  calculated using the Black-Scholes  option-pricing  model, granted during
1998,  1997 and 1996  totaled  $7.6  million,  $2.5  million  and $5.3  million,
respectively.
     Presented below is a summary of the Company's stock option activity:

<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
Granted                             1,564,609         12.71
Exercised                            (165,528)         5.85
Forfeited/expired                    (179,030)         7.11
---------------------------------- ------------ ------------

Balance, January 1, 1999            3,327,547        $10.54
---------------------------------- ------------ ------------
</TABLE>


     Presented below is a summary of the Company's exercisable and unexercisable
stock options as of the end of 1998, 1997 and 1996:

<TABLE>
<CAPTION>

                              EXERCISABLE    UNEXERCISABLE
---------------------------- -------------- ----------------
<S>                                <C>             <C>
JANUARY 1, 1999
   Shares                          785,489        2,542,058
   Exercise price range       $0.86-$14.75     $5.07-$14.75
   Weighted-average
     exercise price                  $7.57           $11.46
   Weighted-average
     remaining contractual
     life in years                     9.8              9.7
---------------------------- -------------- ----------------

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>
                                       40

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


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 1999,  approximately  154,000  common  shares were sold to
employees at an exercise  price of $7.88 per share.  During the first quarter of
1998, 194,573 common shares were sold to employees 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 1998,  1997 and 1996. The fair value of the
option feature of the Company's  Employee Stock Purchase Plan,  calculated using
the Black-Scholes  option-pricing model, was $170,000, $274,000 and $285,000 for
1998, 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 $3.8  million,  $4.0  million and $3.7 million for
1998,  1997  and  1996,  respectively.  Had the  Company  elected  to  recognize
compensation  cost for all awards  granted  under the  Comprehensive  Stock Plan
based on the fair value of the awards at the grant  dates,  consistent  with the
method  prescribed by SFAS No. 123, net income and income per common share would
have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

-----------------------------------------------------------
                                   1998     1997    1996
-----------------------------------------------------------
<S>                                 <C>       <C>     <C>

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

Net income:         As reported     $24.1    $20.8   $14.3
                    Pro forma        22.3     19.7    13.7
Income per share:
    Basic           As reported     $0.71    $0.60   $0.43
                    Pro forma        0.66     0.57    0.41

    Diluted         As reported     $0.68    $0.57   $0.40
                    Pro forma        0.63     0.55    0.39

----------------------------------------------------------------
<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 and
income per common share  disclosures  were  determined  using the  Black-Scholes
option-pricing model with the following assumptions:

<TABLE>
<CAPTION>
                          1998      1997      1996
-----------------------------------------------------
<S>                        <C>        <C>       <C>

Dividend yield                0%        0%        0%
Expected volatility        27.9%     30.8%     34.7%
Risk-free interest rate     6.3%      6.3%      6.0%
Expected holding
   period (in years)           7         7         7
-----------------------------------------------------
</TABLE>


8.  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 $2.6  million,  $2.5  million and $2.6  million in 1998,  1997 and 1996,
respectively.
     Host  International  has a  supplemental  retirement  plan for  certain key
officers. The liability relating to this plan recorded as of the end of 1998 and
1997 was $4.9 million and $5.1  million,  respectively.  The  compensation  cost
recognized for each of the years 1998, 1997 and 1996 was $0.3 million.


9.  RESTRUCTURING

Management  approved  a formal  restructuring  plan in  October  of 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 off-airport  merchandise
contracts.
    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.

                                       41
<PAGE>
               HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10.  COMMITMENTS AND CONTINGENCIES

Future minimum annual rental commitments for noncancellable  operating leases as
of the end of 1998 follows:

<TABLE>
<CAPTION>

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

1999                                            $162.5
2000                                             148.6
2001                                             135.7
2002                                             116.6
2003                                             100.6
Thereafter                                       314.2
----------------------------------------- -------------

Total minimum lease payments                    $978.2
----------------------------------------- -------------
</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 $978.2 million have not been reduced
by minimum  sublease  rentals of $91.8  million  payable  to the  Company  under
noncancellable subleases as of the end of 1998.
     Certain leases require a minimum level of capital  expenditures for initial
investment,  renovations and facility  expansions during the lease terms. At the
end of 1998, the Company was committed to invest approximately $123.8 million in
capital expenditures over the various lease terms.
     Rent  expense,  included  in the  consolidated  statements  of  operations,
consists of:

<TABLE>
<CAPTION>

 ------------------------ ----------------------------
                           1998      1997      1996
 ------------------------ -------- --------- ---------
<S>                         <C>       <C>       <C>

                                 (IN MILLIONS)
Minimum rental on
   operating leases        $138.8    $130.6    $124.9
Additional rental
   based on sales            73.5      72.4      78.4
------------------------- -------- --------- ---------

Total rent expense         $212.3    $203.0    $203.3
------------------------- -------- --------- ---------
</TABLE>

     Rent expense  related to the Company's  corporate  operations,  included in
general and administrative expenses, totaled $3.0 million, $2.9 million and $2.4
million in 1998, 1997 and 1996, 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 remaining 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.

11.  FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of the  Company's  financial  instruments,  including  cash and cash
equivalents,  accounts receivable,  accounts payable,  line-of-credit borrowings
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  are
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>

                             1998                 1997
-------------------- --------------------- -------------------
                     CARRYING     FAIR     CARRYING    FAIR
                      AMOUNT      VALUE     AMOUNT    VALUE
-------------------- ---------- ---------- --------- ---------
<S>                      <C>        <C>        <C>      <C>

                                  (IN MILLIONS)
Financial
liabilities:
   Senior notes         $400.0     $415.4    $400.0    $426.8
   Other debt              6.7        7.3       6.2       6.6

-------------------- ---------- ---------- --------- ---------
</TABLE>
                                       42

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



12.  INCOME PER SHARE

<TABLE>
<CAPTION>
                                                                                        FOR FISCAL YEAR 1998
                                                                            ---------------------------------------------
                                                                                                             PER SHARE
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)                                       INCOME          SHARES           AMOUNT
------------------------------------------------------------------------ -- ------------ -- ------------ -- -------------
<S>                                                                               <C>              <C>              <C>

BASIC INCOME PER SHARE:
    Income available to common shareholders                                       $24.1            34.0            $0.71

EFFECT OF DILUTIVE SECURITIES:
    Stock options                                                                                   0.4
    Host Marriott Corporation stock options held by former
       employees of Host Marriott Corporation                                                       0.8
    Host Marriott Corporation deferred stock held by former
       employees of Host Marriott Corporation                                                       0.1
    Deferred stock incentive plan                                                                   0.3
------------------------------------------------------------------------ -- ------------ -- ------------ -- -------------

DILUTED INCOME PER SHARE:
    Income available to common shareholders plus assumed conversions              $24.1            35.6            $0.68
------------------------------------------------------------------------ -- ------------ -- ------------ -- -------------
</TABLE>

<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>
                                       43

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


     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.
     The following  table details options to purchase common stock that 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.

<TABLE>
<CAPTION>

------------ -- ------------ -- ---------- --- -------------
   YEAR           SHARES          PRICE         EXPIRATION
------------ -- ------------ -- ---------- --- -------------
  <S>                <C>            <C>             <C>

   1998              40,000        $14.75           2007
                    373,400         14.16           2007
                    167,581         14.44           2008
                      7,000         12.97           2008
                    902,796         13.47           2008
------------ -- ------------ -- ---------- --- -------------

   1997              40,000        $14.75           2007
                    393,400         14.16           2007
------------ -- ------------ -- ---------- --- -------------

   1996               4,300        $ 7.75           2006
                    671,300          8.88           2006
------------ -- ------------ -- ---------- --- -------------
</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.  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 reported      $0.40
Effect of SFAS No. 128                            ---
------------------------------------------ -- --------
Diluted income per share as restated            $0.40
------------------------------------------ -- --------
</TABLE>


13.  BUSINESS SEGMENTS

The Company's  principal  business is providing  food,  beverage and retail
concessions at airports,  in travel plazas and at shopping malls.  The Company's
management  evaluates  performance  of each segment based on profit or loss from
operations before  allocation of general and  administrative  expenses,  unusual
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)                   1998       1997        1996
---------------------------------------------------------------
<S>                              <C>         <C>         <C>

REVENUES:
   Airports                   $1,028.8     $ 956.7     $ 962.7
   Travel Plazas                 326.7       312.5       312.4
   Shopping Malls                 22.1        15.4         2.7
---------------------------------------------------------------
                              $1,377.6    $1,284.6    $1,277.8
---------------------------------------------------------------

OPERATING PROFIT (LOSS)(1):
    Airports                    $ 99.2      $ 98.1      $ 91.6
    Travel Plazas                 25.3        22.3        22.2
    Shopping Malls                (1.0)        1.3         0.3
---------------------------------------------------------------
                                $123.5      $121.7      $114.1
---------------------------------------------------------------

CAPITAL EXPENDITURES:
    Airports                     $85.7       $52.6       $42.7
    Travel Plazas                  5.9         4.3         4.1
    Shopping Malls                 5.1         6.9         4.2
---------------------------------------------------------------
                                 $96.7       $63.8       $51.0
---------------------------------------------------------------

DEPRECIATION AND
  AMORTIZATION
    Airports                     $41.0       $39.5       $40.7
    Travel Plazas                 13.9        12.1        13.0
    Shopping Malls                 2.5         1.5         0.2
---------------------------------------------------------------
                                 $57.4       $53.1       $53.9
---------------------------------------------------------------

ASSETS:
    Airports                    $347.2      $291.7
    Travel Plazas                 85.2        95.7
    Shopping Malls                12.8        14.1
---------------------------------------------------
                                $445.2      $401.5
---------------------------------------------------
<FN>

(1) Before general and administrative expenses and unusual items.

</FN>
</TABLE>
                                       44
<PAGE>
               HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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

<TABLE>
<CAPTION>

       (IN MILLIONS)            1998        1997        1996
---------------------------------------------------------------
<S>                            <C>          <C>         <C>    

OPERATING PROFIT:
  Segments                    $123.5       $121.7     $ 114.1 
  General and
    administrative             (58.0)       (54.3)      (51.8)
    expenses
  Write-downs of
    long-lived assets           (5.9)        (4.2)        --- 
  Reversal of
    restructuring
    charges                      ---          3.9         --- 
---------------------------------------------------------------
                              $ 59.6       $ 67.1      $ 62.3 
---------------------------------------------------------------

CAPITAL EXPENDITURES:
  Segments                    $ 96.7       $ 63.8      $ 51.0 
  Corporate and other            1.1          4.5         6.1 
---------------------------------------------------------------
                              $ 97.8       $ 68.3      $ 57.1 
---------------------------------------------------------------

ASSETS:
  Segments                    $445.2       $401.5 
  Corporate and other(1)       121.8        146.5 
---------------------------------------------------
                              $567.0       $548.0 
---------------------------------------------------
<FN>

(1) The majority  of the  decrease  in  corporate  and  other was  related  to a
    decrease in corporate cash concentration  accounts with a significant amount
    related to $22.6 million of treasury stock purchases during 1998.
</FN>
</TABLE>

     Revenues for international operations totaled $66.9 million, $63.6 million,
and $56.4 million in 1998, 1997, and 1996, respectively.
     Property and equipment, net of accumulated depreciation,  for international
operations  was $23.6  million  and $17.8  million  at the end of 1998 and 1997,
respectively.
     The Company's largest branded concept,  Burger King, accounted for 10.4% of
total revenues in 1998.



14.  RELATIONSHIPS WITH MARRIOTT INTERNATIONAL AND HOST MARRIOTT

On October 8, 1993,  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 (the "MI Distribution").
      In  connection  with  the MI  Distribution,  Host  Marriott  and  Marriott
International   entered  into  various   management  and  transitional   service
agreements.  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
purchased  food and  supplies  through  Marriott  International  totaling  $75.4
million, $77.3 million and $76.9 million and paid $8.8 million, $9.8 million and
$10.7  million  for  corporate  support  services  during  1998,  1997 and 1996,
respectively.
     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 $0.2 million,  $0.1 million and
$0.2 million in 1998, 1997 and 1996, respectively.
     For purposes of governing certain of the ongoing  relationships between the
Company  and Host  Marriott  after the  special  dividend  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.
Payments made to Host Marriott relating to these agreements totaled $0.1 million
in 1996. No payments were made during 1998 or 1997.

                                       45
<PAGE>


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


15.  QUARTERLY FINANCIAL INFORMATION  (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                1998(1)
------------------------------------------------- ---------------------------------------------------------------------
                                                     FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                       QUARTER      QUARTER(2)    QUARTER(3)    QUARTER(4)       YEAR
------------------------------------------------- ------------- ------------- ------------- -------------- ------------
<S>                                                     <C>           <C>            <C>            <C>         <C>    

Revenues                                             $  277.3      $  322.6      $  362.2        $  415.5     $1,377.6
Operating profit                                          2.0          18.5          35.2             3.9         59.6
Net income (loss)                                        (3.9)          6.2          18.5             3.3         24.1
Income (loss) per common share: (7)
    Basic                                               (0.11)         0.18          0.55            0.10         0.71
    Diluted                                             (0.11)         0.17          0.52            0.09         0.68


                                                                                1997(1)
------------------------------------------------- ---------------------------------------------------------------------
                                                     FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                       QUARTER       QUARTER      QUARTER(5)    QUARTER(6)       YEAR
------------------------------------------------- ------------- ------------- ------------- -------------- ------------

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: (7)
    Basic                                               (0.12)         0.15          0.54            0.03         0.60
    Diluted                                             (0.12)         0.14          0.52            0.03         0.57


                                                                                1996(1)
------------------------------------------------- ---------------------------------------------------------------------
                                                     FIRST          SECOND        THIRD        FOURTH        FISCAL
(IN MILLIONS)                                       QUARTER        QUARTER       QUARTER       QUARTER        YEAR
------------------------------------------------- ------------- --------------- ----------- -------------- ------------

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: (7)
    Basic                                               (0.15)         0.10          0.45            0.03         0.43
    Diluted                                             (0.15)         0.09          0.42            0.03         0.40

<FN>

(1)  The first three quarters of 1998 and 1997 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 1998, 1997 or 1996.
(2)  Second  quarter 1998 results  include a $2.5 million tax benefit to 
     recognize the  anticipated  utilization of certain tax credits
     previously considered unrealizable.
(3)  Third quarter 1998 results  include a $0.7 million tax benefit to recognize
     the anticipated utilization of certain tax credits previously considered 
     unrealizable.
(4)  Fourth quarter 1998 results  include $5.9 million of write-downs of 
     long-lived assets and a $7.9 million tax benefit to recognize the 
     anticipated utilization of certain tax credits previously considered
     unrealizable.
(5)  Third  quarter 1997 results include a $1.9 million tax benefit to recognize
     the utilization of certain tax credits previously considered unrealizable.
(6)  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.
(7)  The sum of income (loss) per common share for the four fiscal  quarters may
     differ from the annual  income per common share due to the required  method
     of  computing  the  weighted-average  number of  shares  in the  respective
     periods.
</FN>
</TABLE>
                                       46


<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  1999  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 September 16, 1998  reporting,  under Item 5, that the
              Company will fall short of third  quarter  analysts'  expectations
              and containing forward-looking statements.

           Form 8-K dated  October 8, 1998  reporting,  under Item 5, third
              quarter and first three  quarters of 1998  results and  containing
              forward-looking statements.

                                       47


<PAGE>


(4)  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

                                       48

<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

10.15***   Amendment to the Host Marriott Services Corporation Comprehensive  
           Stock Plan

10.16***   Amendment to the Host Marriott Services Corporation Employee Stock 
           Purchase Plan

10.17      Restated Noncompetition Agreement among Host Marriott Services 
           Corporation and Sodexho Marriott Services, Inc., successor by name
           change to Marriott International, Inc.

11         Computation of Earnings 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.
***    Incorporated by reference to Company's Proxy Statement for the 1998 
          Annual Meeting.

                                       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,
1999.

                       HOST MARRIOTT SERVICES CORPORATION


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

 /S/ TIMOTHY H. PEASE        Vice President--Corporate Controller and Chief
--------------------------     Accounting Officer (Principal Accounting Officer)
Timothy H. Pease               

 /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.

                             Director
--------------------------
Richard E. Marriott

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

/S/ GILBERT T. RAY           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 January 27, 1999.  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.
January 27, 1999

                                      S-1
<PAGE>


                                                                      SCHEDULE I
                                                                     PAGE 1 OF 4



                       HOST MARRIOTT SERVICES CORPORATION
                  CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            CONDENSED BALANCE SHEETS
                       JANUARY 1, 1999 AND JANUARY 2, 1998
<TABLE>
<CAPTION>


---------------------------------------------------------------------------- ------------------ -- ------------------
                                                                                   1998                  1997
---------------------------------------------------------------------------- ------------------ -- ------------------
<S>                                                                                     <C>                    <C>

                                                                                          (IN MILLIONS)

                                  ASSETS

Cash and cash equivalents                                                             $   1.1               $   5.9 
---------------------------------------------------------------------------- ------------------ -- ------------------

     Total assets                                                                     $   1.1               $   5.9 
---------------------------------------------------------------------------- ------------------ -- ------------------

                   LIABILITIES AND SHAREHOLDERS' DEFICIT

Intercompany loan with Host Marriott Tollroads, Inc.                                  $   9.0               $   --- 
Other liabilities                                                                         0.9                   0.3 
Advances received and losses in excess of investment in
     wholly owned subsidiaries                                                           63.8                  81.8 
Shareholders' deficit                                                                   (72.6)                (76.2)
---------------------------------------------------------------------------- ------------------ -- ------------------

      Total liabilities and shareholders' deficit                                     $   1.1               $   5.9 
---------------------------------------------------------------------------- ------------------ -- ------------------
</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
     FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997


<TABLE>
<CAPTION>

--------------------------------------------------------------- --------------------------------------------------
                                                                     1998             1997              1996
--------------------------------------------------------------- --------------- - -------------- -- --------------
<S>                                                                     <C>              <C>                <C>

                                                                                  (IN MILLIONS)

Earnings of combined subsidiaries                                       $24.1             $20.5             $14.3
Interest expense                                                         (0.2)              ---               ---
Interest income                                                           0.2               0.4               ---
Tax provision                                                             ---               0.1               ---
--------------------------------------------------------------- --------------- - -------------- -- --------------

    Net income                                                          $24.1             $20.8             $14.3
--------------------------------------------------------------- --------------- - -------------- -- --------------
</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
     FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997


<TABLE>
<CAPTION>

------------------------------------------------------------ ----------------------------------------------------------
                                                                  1998                 1997                1996
------------------------------------------------------------ ---------------- --- --------------- -- ------------------
<S>                                                                  <C>                 <C>                    <C>

                                                                                   (IN MILLIONS)

Cash from operations:
    Net income                                                       $ 24.1              $ 20.8                $ 14.3 
    Investment in subsidiaries                                        (24.1)              (20.5)                (14.3)
    Increase in other liabilities                                       0.5                 0.3                   --- 
    Dividend from affiliate                                             5.6                 ---                   --- 
------------------------------------------------------------ ---------------- --- --------------- -- ------------------

Cash provided by operations                                             6.1                 0.6                   --- 
------------------------------------------------------------ ---------------- --- --------------- -- ------------------

Cash from investing activities                                          ---                 ---                   --- 
Cash from financing activities:
    Proceeds from stock issuances                                       2.7                 2.8                   6.0 
    Purchases of treasury stock                                       (22.6)               (3.5)                  --- 
    Proceeds from intercompany loan                                     9.0                 ---                   --- 
------------------------------------------------------------ ---------------- --- --------------- -- ------------------

Cash (used in) provided by financing activities                       (10.9)               (0.7)                  6.0 
------------------------------------------------------------ ---------------- --- --------------- -- ------------------

Change in cash and cash equivalents                                  $ (4.8)             $ (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  food,  beverage and retail  concessions  businesses in travel and
entertainment  venues (the  "Distribution").  The Company operates  restaurants,
gift shops and related  facilities at 63 domestic  airports,  at 8 international
airports,  at 17  off-airport  locations,  on 13 tollroads  (including 92 travel
plazas) and at 5 shopping malls.  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, Malaysia,  China and
Canada.


2.    INTERCOMPANY LOAN WITH HOST MARRIOTT TOLLROADS, INC.

     During the third  quarter of 1998,  Host  Marriott  Tollroads,  Inc. loaned
the Company  $9.0  million in three equal  installments.  The  nonrecourse  loan
installments had interest rates equal to Libor plus 1.25%,  which totaled 6.84%,
6.84%  and  6.56%,  respectively.  Under the  terms of the  agreement,  the loan
installments  could be repaid in full or in part at any time  prior to the March
31, 1999 maturity date and interest payments could be deferred until the earlier
of the maturity date or the repayment of the full  principal  amount.  As of the
end of 1998,  the full amount of the loan remained  outstanding  and the related
accrued  interest  totaled  $0.2  million.  Subsequent  to the end of 1998,  the
Company repaid $1.0 million of the loan.


                                      S-5
<PAGE>

                                                                     SCHEDULE II


                       HOST MARRIOTT SERVICES CORPORATION
                        VALUATION AND QUALIFYING ACCOUNTS
 FOR THE FISCAL YEARS ENDED JANUARY 1, 1999, JANUARY 2, 1998 AND JANUARY 3, 1997


<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
      1996                                              9.1                 2.9             (1.7)                10.3
      1997                                             10.3                 7.4             (0.1)                17.6
      1998                                             17.6                 1.4             (8.7)                10.3


Allowance for notes receivable
      1996                                              ---                 0.4              ---                  0.4
      1997                                              0.4                 0.2              ---                  0.6
      1998                                              0.6                 0.9             (0.2)                 1.3
<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