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 3, 1997

                                   OR

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

                        COMMISSION FILE NO. 1-14040

                     HOST MARRIOTT SERVICES CORPORATION

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

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

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

     TITLE OF EACH CLASS          NAME OF EACH  EXCHANGE  ON WHICH  REGISTERED
  ------------------------------  --------------------------------------------
  Common Stock, no par value               Chicago Stock  Exchange  
  (34,445,197 shares outstanding           New York Stock Exchange 
  as of January 3, 1997)                   Pacific Stock Exchange
                                           Philadelphia Stock Exchange

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

        The   aggregate   market  value  of  shares  of  common  stock  held  by
non-affiliates as of March 10, 1997, was $337,641,281.


                    DOCUMENT INCORPORATED BY REFERENCE
             Notice of 1997 Annual Meeting and Proxy Statement


<PAGE>


                                 PART I


ITEMS 1 AND 2.  BUSINESS AND PROPERTIES

GENERAL

       Host  Marriott  Services  Corporation  (the  "Company")  is  the  leading
operator  of  food,  beverage  and  merchandise   concessions  at  airports,  on
tollroads,  and at other travel and  entertainment  venues,  with  facilities at
nearly every major  commercial  airport and tollroad in the United  States.  The
Company operates restaurants,  gift shops and related facilities at 72 airports,
at 92 travel plazas on 13 tollroads,  and at 20 other venues (including shopping
malls,  tourist  attractions,  stadiums and arenas).  The Company's  concessions
facilities  provide air and tollroad  travelers with  convenient  access to food
service and retail  merchandise  in locations  where such travelers have limited
options.  The Company has grown through  successfully  winning new and retaining
existing concessions contracts, introducing branded food, beverage and retailing
concepts  at  both  its  airport  and  travel  plaza   locations  and  acquiring
complementary  businesses.  The  Company  has a  successful  history of renewing
contracts upon  expiration and has detailed  development  strategies in place to
maximize  revenues and cash flows. The Company operates  primarily in the United
States through two wholly owned subsidiaries:  Host  International,  Inc. ("Host
International,"  formerly Host Marriott  Travel Plazas,  Inc.) and Host Marriott
Tollroads, Inc. ("Host Marriott Tollroads").  The Company also has international
airport concessions  operations in The Netherlands,  New Zealand,  Australia and
Canada.

       The  Company  has been a pioneer  in  providing  airport  travelers  with
well-known  branded  concessions such as Burger King, Pizza Hut, Cheers,  T.G.I.
Friday's,  California Pizza Kitchen, Chili's,  Cinnabon,  Starbucks Coffee, Taco
Bell,  Sbarro,  Dunkin Donuts,  TCBY (The Country's Best Yogurt),  Mrs.  Fields,
Nathan's  Famous,  Tie Rack, The Body Shop and specialty  microbreweries.  These
branded concepts typically perform better than non-branded concepts due to brand
advertising,  customer  familiarity with product offerings and the perception of
superior value and consistency.

        All of the Company's  airport  concessions  are operated under contracts
with airport  authorities  with original  terms  typically  ranging from 5 to 15
years.  Contracts are generally awarded through a competitive process, but lease
extensions are often negotiated  before contracts  expire.  The weighted average
life remaining on the Company's airport contracts is approximately  seven years.
The portfolio of airport contracts is  geographically  diversified and no single
airport contract constitutes a material portion of the Company's total revenues.
The  concentration of revenues from the Company's ten largest airport  contracts
increased  to  37.8% of  total  airport  revenues  from  33.4% of total  airport
revenues in 1995. The Company's  airport  concession  revenues in 1996, 1995 and
1994 were approximately  71.4%, 68.7% and 66.2% of the Company's total revenues,
respectively.

       The U.S. airport concession  industry is estimated by the Company to be a
$1.65 billion  market,  with food and beverage  estimated to be $1.0 billion and
merchandise, excluding duty-free, to be $650 million in annual sales. Management
of the Company believes that the U.S. airport concession  industry will continue
to grow as a result of the proliferation of "no-frills," low-fare airlines,  and
strong demand for air travel generally. Industry experts predict that the number
of airline passengers will grow at a 4.1% compound average rate through the year
2008.  In  addition,  to sustain  low-fare  positioning,  and improve  financial
performance,  many airlines have reduced their costs by  eliminating or reducing
inflight services. Airport concessionaires will have an increased opportunity to
feed passengers  whose needs are not met in the air as a result of the reduction
in traditional inflight catering services.

       The European airport  concession  industry is estimated by the Company to
be a $900 million market.  The Company currently holds  approximately 5% of this
market. The Company has identified contract opportunities in the European market
over the next two years with annual revenues of approximately  $90 million.  The
Company is  establishing  a development  office in Europe to evaluate and pursue
these  and  other  opportunities,   including  joint  ventures  and  acquisition
opportunities.

       The Company is the leading operator of travel plazas, operating 92 travel
plazas on 13 tollroads.  The Company's travel plazas are located in Florida, and
in the  mid-Atlantic,  midwestern  and  northeastern  states.  By offering  high
quality branded  concepts in a clean,  safe  environment,  the Company's  travel
plaza  concessions  are designed to appeal to travelers who desire  high-quality
meals without exiting the tollroad.  Unlike the Company's
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<PAGE>

airport concessions, travel plaza concessions are dominated by branded concepts,
which  comprised  almost 80% of travel plaza  concessions  revenues in 1996. The
core business of most travel plazas is a mall-style food court offering  branded
restaurants,  including Burger King, Roy Rogers,  Bob's Big Boy,  Sbarro,  TCBY,
Miami Subs Grill and Dunkin  Donuts.  The  Company's  travel plazas are operated
under contracts with highway  authorities which typically extend 10 to 15 years.
The average life remaining on the Company's  tollroad contracts is approximately
eight years.  Contracts  are awarded  through a competitive  process,  but lease
extensions  often can be negotiated  before contracts  expire.  No single travel
plaza contract  constitutes a material  portion of the Company's total revenues.
The  Company's  travel  plaza  concession  revenues in 1996,  1995 and 1994 were
approximately 24.4%, 26.7%, and 27.1%, of the Company's total revenues,
respectively.

       The travel  plaza  concessions  industry  is an  estimated  $500  million
market, excluding gasoline sales. Total tollroad traffic in the United States is
projected by the International  Bridge,  Tunnel and Turnpike Association to grow
1% to 2%  annually.  The  combination  of  increased  tollroad  traffic  and the
Company's continued  introduction of new branded food and beverage concepts,  to
replace older brands, are expected to increase revenues.  Further,  management's
focus on operational excellence is expected to continue to enhance the operating
performance of the Company's travel plaza business line.

       The Company also holds 20 contracts to operate food courts,  restaurants,
concession  stands,  gift shops and related  facilities  at  shopping  malls and
sports and entertainment  venues,  which accounted for approximately  4.2%, 4.7%
and 6.8% of total revenues in 1996, 1995 and 1994, respectively.

       The United  States  shopping mall food court market is about $2.5 billion
and the mall  industry is  consolidating,  reconcepting  and  renovating,  which
creates a significant  opportunity  for the Company.  The Company  believes that
food court opportunities in large malls align well with the operating skills and
experience of the  management  team. By providing mall  developers  with turnkey
food  courts with  branded  concepts,  their  leasing  and  property  management
activities are simplified.  In addition, the Company believes that its operating
leverage  compared  to  the  leverage  of  individual   operators  will  provide
developers with better returns and more reliable service.


BUSINESS STRATEGY

       The Company's strategic objective is to generate higher revenues and cash
flows  by  increasing  revenues  per  enplaning  passenger  ("RPE")  at  airport
concession facilities,  increasing sales per vehicle at travel plaza facilities,
retaining existing contracts,  gaining incremental  business through winning new
contracts  in  core  markets  and   continuing  to  penetrate   the   profitable
international  airport concessions and shopping mall food court market segments.
Specifically,  key  elements  of the  Company's  business  strategy  include the
following:

INCREASING MARKET PENETRATION

       The  Company  has  increased  RPE and sales per  vehicle  by  introducing
branded  concepts at both its airport and travel  plaza  locations.  Since their
introduction  in 1984,  branded food and beverage  products at the travel plazas
have been a success,  representing  approximately 86.9% of travel plaza food and
beverage sales in 1996 (80.0% of total travel plaza revenues), and their success
reveals  the  considerable  potential  for  revenue  growth in the  airport  and
shopping  mall and  entertainment  business  lines.  Since the  introduction  of
branded  concepts at  airports in 1989,  branded  food and  beverage  sales have
increased sales per square foot.  Branded sales represented only 37.0% and 18.6%
of 1996 airport and shopping  mall and  entertainment  food and beverage  sales,
respectively.  The airport  merchandise  segment also has shown a high degree of
growth in branded sales over the past three years as a result of the  successful
roll out at several locations of specialty  retailing  concepts such as The Body
Shop, Tie Rack and Wilson's Leather.

       The Company  continues to expand its  international  and regional branded
concept portfolio, and it now has the most brands in the industry to select from
when designing a concession plan for its airport, shopping mall and travel plaza
contracts.  This greater variety of concept and product  offerings is attracting
new consumers to the Company's  facilities.  The  increased  market  penetration
using  branded  concepts  has  resulted in  increased  revenues  which have been
partially offset by increased costs associated with operating branded concepts.

                                   2


<PAGE>

       The Company's  success in increasing  market  penetration  is affected by
industry  trends  to award  contracts  to  multiple  operators  and to  increase
participation  by woman- and  minority-owned  businesses in airport  concessions
operations.  The Company is committed to creating  opportunities  for woman- and
minority-owned businesses and currently participates with such businesses in the
substantial  majority  of its  airport  concessions  contracts.  While  contract
fracturing  by airport  authorities  and increased  participation  by woman- and
minority-owned  businesses  are  expected  in the  future,  the  impact of these
industry  trends on future  revenue  growth in the airport  business line is not
expected  to be  significant.  See  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of Operations" for a discussion of the Company's
revenues, operating profit and net income.

RETAINING EXISTING CONTRACTS

       The Company has  maintained its market  leadership  position by providing
outstanding   service  to  its  customers  and  maintaining  high  standards  in
maintenance and innovation at each of its concession  facilities in airports, on
tollroads and in shopping malls and entertainment venues. The Company's customer
satisfaction rating improved by 10% in the airport food and beverage concessions
business  line during 1996,  following a similar 10%  improvement  in 1995.  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 1994, the Company
has  retained  74.1% of the  annualized  revenues of existing  contracts  up for
renewal.  Over that same period,  21 new contracts were secured,  with estimated
annual  revenues of $135.3  million,  which  exceeded  lost and exited  contract
revenues by $19.8 million.

SECURING NEW CONTRACTS IN CORE MARKETS

       The  Company's  world  class  contract   development   teams  are  widely
recognized as among the most  experienced  and innovative in the industry with a
demonstrated  track  record of winning  new  contracts  at  attractive  economic
returns.  Securing  new  contracts  requires  considerable  management  time and
financial  resources.  These dedicated  business  development  teams provide the
Company with the expertise and depth to pursue multiple projects simultaneously.
Of the 21 new  contracts  secured since 1994,  15 were airport  contracts  which
represented approximately $104.3 million in annualized 1996 revenues.

EXPANDING PROFITABLY INTO NEW MARKETS AND VENUES

       The Company  continues  to enhance its strategy  for  expansion  into the
international  airport  concessions  and shopping mall food court  markets.  The
Company's capital resources,  world-class contract development teams,  extensive
portfolio of internationally  known brands and strong competitive  position will
provide for profitable  expansion into these markets.  The Company expects total
annual  revenues to reach $2.0  billion in five years,  with 25% of the revenues
coming from international airports and domestic food courts in shopping malls.

       During  1996,  the  Company's   international   expansion  efforts  added
contracts at Cairns International Airport, Australia, and Montreal International
Airport - Dorval in Canada. In 1997, the Company intends to focus heavily on the
European airport  concessions  market. The Company is establishing a development
office in Europe to evaluate and pursue these and other opportunities, including
joint ventures and potential acquisitions.

     During the fourth  quarter of 1996,  the Company  entered the shopping mall
food court  concessions  business with the opening of a 1,000 seat food court at
the Ontario Mills Mall in California. The Company announced in 1996 a definitive
agreement  on a second  mall  project at the  Grapevine  Mills  Mall  outside of
Dallas,  Texas.  The  mall is  expected  to open in the  Fall of  1997,  and the
Company's food and beverage  operations will be similar in size and scope to the
Ontario Mills Mall project.


AIRPORT CONCESSIONS

       The Company is the leading operator of airport food, beverage, gift, news
and  merchandise  concessions  in the  United  States  with 1996 and 1995  total
revenues  of  $911.9  million  and  $798.3   million,   respectively.   Domestic
concessions  revenues  comprised  93.8% and 96.0% of total airport  revenues for
1996 and 1995,  respectively.  Since  1994,  airport  revenues  have  grown at a
compound annual growth rate of 10.9%.

                                   3


<PAGE>

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

       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
airport  revenues.  The  concentration of revenues from the Company's 10 largest
airport  concessions  contracts  increased to 37.8% of total airport revenues in
1996 from 33.4% of total airport revenues in 1995.

       The Company is at the  forefront of the industry in terms of  introducing
new  concepts to attract an  increasing  number of  customers  and  maintain its
leadership position as an airport  concessionaire.  The Company offers a diverse
selection of  concession  outlets in an effort to attract the maximum  number of
passengers.

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

NON-BRANDED FOOD AND BEVERAGE CONCESSIONS

       These  concessions  are  operated  under a generic  name and  serve  both
branded and  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  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  sales.  Non-branded  food and  beverage  sales
generated  approximately  40.4% and 43.0% of total  Company  airport  concession
sales in 1996 and 1995,  respectively.  Sales of  non-branded  food and beverage
products were up $25.2 million, or 7.3%, to $368.5 million when comparing fiscal
years 1996 and 1995.

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, Pizza Hut,
Cheers, T.G.I. Friday's,  California Pizza Kitchen, Chili's, Cinnabon, Starbucks
Coffee and specialty  microbreweries.  These branded concepts  typically perform
better and  produce  higher  RPE as  compared  to  non-branded  concepts.  Brand
advertising,  customer familiarity with product offerings, and the perception of
superior value and  consistency  are all factors  contributing  to higher RPE in
branded facilities,  which more than offset royalty payments required to operate
the  concepts.  As a licensee of these  brands,  the Company  pays  royalty fees
ranging from 4% to 10% of total sales.

       Branded  concession  facilities  have  proven  to be a highly  successful
marketing  concept.  Branded  revenues in  airports  have  increased  35.6% when
comparing  fiscal  years  1996 and 1995  through  the  introduction  of  branded
concepts in the Company's airports. This increase can be attributed to large new
branded concept  developments at Dulles  International  Airport (just outside of
Washington,  D.C.), San Diego International  Airport, Los Angeles  International
Airport, and Hartsfield Atlanta International  Airport.  Airport branded product
sales at the Company's airports  increased to $216.5 million,  or 23.7% of total
airport revenues,  for fiscal year 1996,  compared with $159.7 million, or 20.0%
of total airport revenues, for fiscal year 1995.


ALCOHOLIC BEVERAGES

       The Company  serves  alcoholic  and  nonalcoholic  drinks,  together with
selected food items, through lounges (generally operated under the Premium Stock
name),   restaurants,   cafeterias,   and  specialty  microbrewery  pubs.  These
facilities are designed to provide a comfortable and convenient  environment for
passengers  waiting for their  flights.  During 1996,  the Company  continued to
introduce its increasingly  popular microbrewery pubs which include Samuel Adams
Brew House and  Shipyard  Brew Port.  These bar and grill  concepts  bring local

                                   4


<PAGE>

flavors  to  the  Company's  airport  contracts  and  complement  the  Company's
proprietary Premium Stock lounges.  Alcoholic beverages generated  approximately
17.7% and 18.0% of total  Company  airport  concessions  sales in 1996 and 1995,
respectively. Alcoholic beverage sales at airports in which the Company operates
were up $17.3 million,  or 12.0%,  in fiscal year 1996 when compared with fiscal
year 1995.

MERCHANDISE OUTLETS

       The  Company  operates  over 150  merchandise  outlets  at 20 U.S.  and 2
international  airports.  These  shops  sell  souvenirs,   gifts,  snack  items,
newspapers,  magazines  and other  convenience  items.  The Company  effectively
utilizes a team of merchandise  specialists  who,  based on extensive  research,
create exciting  visual  displays,  bring in  custom-designed  merchandise  that
reflects  the  regional  flavor and develop  marketing  programs  which  capture
customer  interest.  In an effort to  maximize  RPE,  the Company  continues  to
introduce  specialty  retail  concepts  such  as Tie  Rack  and The  Body  Shop.
Merchandise  outlets  generated  approximately  13.6% and 15.0% of total Company
airport  concession  sales in 1996 and  1995,  respectively.  Merchandise  sales
increased  by $4.7 million in fiscal year 1996 to $124.5  million when  compared
with fiscal year 1995.

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 duty-free market is estimated to be a $1.2 billion U.S. industry.
The  Company's  largest  airport  duty-free  operations  are  located at Sea-Tac
International Airport,  Hartsfield Atlanta International Airport,  Detroit Metro
International Airport and Minneapolis/St.  Paul International Airport. Duty-Free
shops generated  approximately 4.5% and 4.0% of total Company airport concession
sales in 1996 and 1995,  respectively.  Duty free  merchandise  sales  increased
16.1% during fiscal year 1996.

OPERATING LOCATIONS

       The Company operates facilities at the following airports:

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

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

OUTLOOK

       The outlook is extremely  positive for the airport  concessions  business
line.  Increased passenger  enplanements and other favorable industry trends are
expected to increase  customer  traffic,  while the  continued  introduction  of
branded food and beverage and specialty  retailing concepts in airport terminals
will attract more  customers.  Currently,  branded food and beverage  revenues
make up only 37.0% of the Company's total food and beverage  revenues in airport
concessions  (23.7% of total airport  concessions  revenues),  demonstrating the
considerable  potential  for growth.  Further,  the Company has  redesigned  and
substantially  improved its business  development  processes and is committed to
refining its core operating processes to improve efficiencies,  reduce costs and
increase  revenues.  Initiatives to control costs that were  implemented  during
1996  include  the  roll  out of the  Store  Manager  concept  intended  to move
management  closer  to  the  customer  to  improve  customer  satisfaction;  the
renegotiation  of all  distributor  agreements  for books and  magazines  in the
Company's  airport and travel plazas to improve service;  in-stock  availability
and  cost  margins  as well as a  program  under  which  brand

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<PAGE>

experts  ("Brand  Champions")  are assigned to certain of the Company's  largest
selling  branded  concepts.   The  Brand  Champions'   function  is  to  promote
operational excellence and create operating efficiencies across all locations of
a brand.  Further,  the Company expects  continued success in 1997 and beyond in
making its core  airport  concessions  contracts  more  profitable  through  new
concepts and operating excellence initiatives.

       The Company  expects total annual  revenues to reach $2.0 billion in five
years, with 25% of the revenues coming from new markets and venues. With respect
to  airport  concessions,  the  Company  intends to focus  heavily  on  European
airports.  The  European  airport  concessions  market is  estimated  to be $900
million with the Company currently holding  approximately 5% of the market.  The
Company has identified  contract  opportunities  in the European market over the
next two years with annual revenues of approximately $90 million. The Company is
establishing  a  development  office in Europe to evaluate  and pursue these and
other opportunities, including joint ventures and acquisitions.

       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 and contract fracturing by
airport  authorities  are expected in the future,  the impact of these  industry
trends on future revenue growth in the airport  business line is not expected to
be significant.

       Over the next three years, 24 airport concessions contracts  representing
approximately $202.2 million, or 22.2% of 1996 airport concessions revenues will
come up for renewal. The Company expects to retain most of these contracts based
upon its history of retaining  such  contracts and its commitment to the highest
levels of product quality and customer satisfaction.


TRAVEL PLAZA CONCESSIONS

       The Company  operates  92 travel  plazas on 13  tollroads  located in the
mid-Atlantic,  midwestern,  and northeastern  states, as well as in Florida. The
Company  operates these travel plazas under  contracts with highway  authorities
that typically extend 10 to 15 years. The weighted average life remaining on the
Company's travel plaza concessions  contracts is approximately  eight years. The
Company's  travel plazas  generated $312.3 million in revenues in 1996, or 24.4%
of total  revenues  and $309.9  million in revenues  in 1995,  or 26.7% of total
revenues.

       The  Company's  travel  plazas are  designed to appeal to  travelers  who
prefer  quick,  high-quality  meals  without  the  inconvenience  of leaving the
tollroad.  The core  business of most travel  plazas is a mall-style  food court
offering branded restaurants  including Burger King, Roy Rogers,  Bob's Big Boy,
Sbarro,  TCBY (The Country's Best Yogurt),  Miami Subs Grill, Dunkin Donuts, and
Popeye's. Branded food accounts for approximately 86.9% of travel plaza food and
beverage revenues (80.0% of total travel plaza concessions revenue). Merchandise
gift shops  selling  souvenirs,  postcards,  snacks,  newspapers  and  magazines
frequently  are  located  adjacent  to  these  food  courts  and  accounted  for
approximately  $25.0 million in sales in 1996. The travel plazas  generally also
include automated teller machines,  vending machines and business  centers.  All
facilities  are accessible to the disabled,  and many offer 24-hour  security to
create a safe, pleasant eating environment.

       The domestic  travel  plaza  concessions  industry is an  estimated  $500
million market,  excluding  gasoline sales. Total tollroad traffic in the United
States is  projected  to grow by 1% to 2%  annually.  Travel  plaza  concessions
revenues  generally  increase with traffic growth. The Company holds the leading
market  position on every tollroad on which it operates.  No single travel plaza
contract  constitutes a material portion of the Company's travel plaza revenues.
The  relatively  high level of traffic on, and long length of,  tollroads in the
mid-Atlantic   and   northeastern   states   make   those   roads  the   highest
revenue-producing  tollroads.  The five largest travel plaza contracts accounted
for  approximately  65.9% of travel plaza revenues  (16.1% of total revenues) in
1996 compared with 64.7% of travel plaza revenues  (17.3% of total  revenues) in
1995.

                                    6


<PAGE>

OPERATING LOCATIONS

       The Company operates travel plazas on the following tollroads:

     Atlantic City Expressway; Delaware Turnpike; Florida 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 Turnpike.

OUTLOOK

       The outlook is upbeat for the travel  plaza  concessions  business  line.
Moderate traffic increases and the introduction of new branded food and beverage
concepts,   to  replace  older  brands,   are  expected  to  increase  revenues.
Management's  continued  focus on operational  excellence is expected to further
enhance the operating performance of the travel plaza business line.

       Over  the  next  three  years,  5  travel  plaza  concessions   contracts
representing  approximately  $54.5  million,  or  17.5%  of  1996  travel  plaza
concessions  revenues,  will come up for renewal.  The Company expects to retain
most of these contracts based on its history of retaining such contracts.

SHOPPING MALL AND ENTERTAINMENT CONCESSIONS

       The Company holds 20 contracts to operate food courts, restaurants,  gift
shops and related  facilities  in various  venues,  including  a shopping  mall,
tourist attractions,  stadiums and arenas. The facilities are typically attached
to a larger structure at the venue site.

       Shopping mall and  entertainment  concessions  generated $53.5 million in
revenues in 1996,  approximately  4.2% of total  Company  revenues and generated
$54.1 million in revenues in 1995, approximately 4.7% of total Company revenues.
Merchandise  sales,  including  souvenirs  sold at  sporting  events and tourist
attractions,  comprise  56.7% of the Company's  shopping mall and  entertainment
concession  revenues compared with 68.0% in 1995.  Unbranded food and beverages,
including alcoholic beverages, accounted for 36.5% of revenues in 1996, compared
with  30.0% in  1995.  Branded  food and  beverage  sales  increased  to 6.4% of
revenues in 1996, up from 2.0% in 1995, primarily due to food and beverage sales
at the Ontario Mills food court, which opened in November 1996.

       Shopping mall and entertainment concession contracts usually have initial
terms of five or more years. The Ontario Mills Mall contract has an initial term
of 12 years. The Company leases its premises at a fee which is negotiated at the
time the  concession  contract is awarded.  The Company's  portfolio of shopping
mall and entertainment  concession contracts is diversified in the U.S. in terms
of  geographic  location  and  type  and  size  of  venue.  No  single  contract
constitutes a material portion of the Company's total revenues. As of January 3,
1997,  the  average  length of time  remaining  on the  Company's  20 sports and
entertainment concession contracts was approximately 4 years.

OUTLOOK

       The Company is actively  pursuing  new food court  contracts  in shopping
malls,  where the average visit time can be as high as four hours. The U.S. mall
food court market is about $2.5 billion, and the mall industry is consolidating,
reconcepting  and  renovating  which creates a significant  opportunity  for the
Company. The Company believes that food court opportunities in large malls align
well with the  operating  skills  and  experience  of the  management  team.  By
providing mall developers with turnkey food courts with branded concepts,  their
leasing and property  management  activities are  simplified.  In addition,  the
Company  believes  that its  operating  leverage  compared  to the  leverage  of
individual  operators  will  provide  developers  with  better  returns and more
reliable service.  The Company's foothold in the food court concessions  markets
at the Ontario  Mills Mall in California  and the Grapevine  Mills Mall in Texas
(opening in the fall of 1997) have provided a solid  foundation  for the Company
to  build  on in  the  future.  Over  the  next  three  years,  9  entertainment
concessions contracts representing approximately $14.2 million, or 26.6% of 1996
shopping mall and entertainment concessions revenues, will come up for renewal.

                                   7


<PAGE>

RETAINING CONTRACTS AND SECURING NEW CONTRACTS

       The Company has a history of renewing  contracts  upon their  expiration.
The Company's subsidiary, Host International, was awarded its first airport food
and beverage concession contract at San Francisco International Airport in 1954.
The Company has retained this contract for the past 42 years. Since the original
contract award, the Company has been awarded additional  merchandise  concession
contracts,  been granted  options to extend its various  contracts and rebid and
won the original contract three times.

       Contract  renewal  and new bids  are an  integral  part of the  Company's
business.  Securing new  contracts  requires  considerable  management  time and
financial resources.  The Company has dedicated business development teams, with
the expertise, talent and depth to pursue multiple projects simultaneously.  The
Company believes its business  development  resources are substantially  greater
than those of its  competitors.  Since the  beginning  of 1994,  the Company has
retained 74.1% of the annualized  revenues of existing  contracts up for renewal
and has won 21 new contracts with estimated  annual  revenues of $135.3 million.
Annualized  revenues on the new contracts exceed the annualized  revenues on the
contracts not retained by $19.8 million. The majority of the contracts that were
not retained were small,  unprofitable  contracts  that the Company chose not to
pursue.


THE DISTRIBUTION

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

       In connection with the Distribution,  Host Marriott retained all cash and
cash  equivalent  balances  of the Company  and its  subsidiaries,  except for a
defined  level of initial  cash  equaling  $25.0  million,  adjusted  to include
certain   estimated   future   restructuring   expenditures,   certain   capital
expenditures,  and  cash  maintained  at a  foreign  airport  operation.  At the
Distribution  Date,  the  Company  held cash in excess of the  defined  level of
initial  cash of $7.9  million  that was payable to Host  Marriott.  The Company
retained  certain  liabilities of Host Marriott  totaling $4.8 million as of the
Distribution Date.

       In  connection  with the  Distribution  and the sale of the Senior  Notes
(described below), the Company  transferred three full-service hotels and assets
and liabilities related to certain former restaurant operations to Host Marriott
or a subsidiary of Host Marriott. 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, $1.2 million and $2.0 million
in 1996, 1995 and 1994, respectively.


RELATIONSHIP WITH HOST MARRIOTT CORPORATION

       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.
Effective as of the Distribution  Date, these  agreements  provide,  among other
things,  for the  allocation of assets and  liabilities  between the Company and
Host  Marriott,  including  but not limited to  liabilities  related to employee
stock and other benefit plans. The agreements  establish certain obligations for
the Company to issue shares upon exercise of Host Marriott warrants and to issue
shares or pay cash to Host  Marriott  upon  exercise  of stock  options and upon
release of  deferred  stock  awards  held by certain  former  employees  of Host
Marriott.  The agreements  also provide that the Company will receive  corporate
services,  such as  accounting  and computer  systems  support,  and may receive
transitional  services  (cash  management,  accounting,  and  others)  from Host
Marriott.

                                   8

<PAGE>

RELATIONSHIP WITH MARRIOTT INTERNATIONAL

       On  October  8,  1993  (the  "MI  Distribution   Date"),   Host  Marriott
distributed through a special dividend to holders of Host Marriott common stock,
all  of  the  outstanding  shares  of  its  wholly-owned  subsidiary   Marriott
International, Inc. ("Marriott International").  In connection with the Marriott
International  distribution,  Host Marriott and Marriott  International  entered
into various management and transitional  service agreements.  In 1995 and 1994,
the Company  purchased  food and  supplies of $63.8  million and $65.0  million,
respectively,   from  affiliates  of  Marriott   International  under  one  such
agreement. In addition, under various service agreements,  Host Marriott paid to
Marriott  International  $11.9  million  and  $10.5  million  in 1995 and  1994,
respectively,  which  represented  the  Company's  allocated  portion  of  these
expenses.

       In connection  with the spin-off of the Company from Host  Marriott,  the
Company and Marriott International entered into a Continuing Services Agreement,
a Noncompetition  Agreement, and a License Agreement.  These agreements provide,
among  other  things,  that the  Company  will  receive  (i)  certain  corporate
services,  such as accounting and computer systems support, (ii) various product
supply and distribution services, and (iii) various other transitional services.
In  accordance  with  the  agreements,  the  Company  will  compensate  Marriott
International  for services  rendered  thereunder.  As a part of the  Continuing
Services  Agreement,  the Company paid Marriott  International $76.9 million for
purchases  of food and  supplies and paid $10.7  million for  corporate  support
services during 1996.

SENIOR NOTES OFFERING

       Host  International  is the obligor on $400.0 million of senior notes due
in 2005 (the "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 stock of the  Guarantors.  The
indenture  governing  the Senior Notes (the "Senior Notes  Indenture")  contains
covenants  that,  among other things,  limit the ability of the  Guarantors,  to
incur  additional  indebtedness,  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.

COMPETITION

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

       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 is able to generate  higher sales per square
foot of concession space and thereby increase returns to the airport and highway
as  well  as to the  Company.  Achieving  these  financial  results,  as well as
achieving high customer and landlord satisfaction with the products and services
provided,  enhances  the  Company's  ability  to renew  contracts  or obtain new
contracts.

                                   9


<PAGE>

GOVERNMENT REGULATION

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

EMPLOYEES

       At January 3, 1997,  the  Company  directly  employed  or managed  23,108
employees.  Approximately  6,400 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.

OTHER PROPERTIES

       In addition to the  operating  properties  discussed  above,  the Company
leased 45,288 square feet of office space in Bethesda, Maryland, which served as
the  Company's  corporate  headquarters  as of the end of fiscal  year 1996.  In
February  1997,  the  Company  relocated  its  corporate  headquarters  to  6600
Rockledge  Drive,  Bethesda,  Maryland 20817.  The new office space lease is for
75,780  square  feet of space and has an initial  lease term  expiring  in seven
years on December 31, 2003.

       The Company's telephone number is (301) 380-7000. Business results and
other financial information are available at the Host Marriott Services Website 
on the Internet's World Wide Web,  or by dialing 1-888-380-HOST.

ITEMS 3.  LEGAL PROCEEDINGS

LITIGATION

       The Company and its subsidiaries are involved in litigation 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 COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

       The Company's  closing  common stock price on the New York Stock Exchange
on  January  3, 1997 was  $9.625  per share  compared  to $7.00 per share on the
Distribution Date of December 29, 1995. There were no dividends declared in 1996
or 1995.  The Company will  evaluate the dividend  rate at least  annually,  but
current  plans are to reinvest the  Company's  earnings in its  businesses.  The
Company's   ability  to  declare  dividends  is  affected  by  certain  dividend
restrictions imposed on Host International, its primary wholly-owned subsidiary.
The Senior  Notes  Indenture  and the loan  agreement  covering a $75.0  million
credit facility  obtained by Host  International  limit the extent to which Host
International can pay dividends to the Company. In addition,  the loan agreement
covering the $75.0  million  credit  facility  requires  that no dividend can be
declared by Host International prior to 18 months after the Distribution Date of
December 29, 1995.

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

<TABLE>
<CAPTION>

                                                                                             1996 (1)
------------------------------------------------------------------------ ----- --------------- --- --------------

                                                                                    HIGH                LOW
------------------------------------------------------------------------ ----- --------------- --- --------------
<S>                                                                              <C>                 <C> 

First quarter                                                                          $7 5/8             $5 3/4
Second quarter                                                                          8                  6 1/2
Third quarter                                                                           7 5/8              6 5/8
Fourth quarter                                                                          9 3/4              7 5/8
------------------------------------------------------------------------ ----- --------------- --- --------------

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


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

       At  January  3,  1997,  there  were  34,445,197  shares of  common  stock
outstanding held by 40,286 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.


                                   11



<PAGE>


ITEM 6. SELECTED HISTORICAL 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 3, 1997. 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>
---------------------------------------------------------- ----------- ----------- ---------- ---------- -----------

                                                              1996      1995 (1)   1994 (2)   1993 (3)    1992 (4)
---------------------------------------------------------- ----------- ----------- ---------- ---------- -----------

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

STATEMENT OF OPERATIONS DATA:
    Total revenues                                            $1,278      $1,162     $1,124     $1,038      $  889

    Operating profit (loss)                                       62         (20)        32         38          42
    Income (loss) before extraordinary item
       and cumulative effect of change in
       accounting principle                                       14         (64)        (8)        (2)         15
    Net income (loss)                                             14         (74)        (8)        (7)         15
    Income per common share                                     0.40         n/a        n/a        n/a         n/a
    Pro forma loss per common share (Unaudited) (5)
        Loss before extraordinary item                           n/a       (2.02)       n/a        n/a         n/a
        Net loss                                                 n/a       (2.33)       n/a        n/a         n/a
BALANCE SHEET DATA:
    Total assets                                                 581         514        609        641         632
    Total long-term debt                                         408         409        398        396         396
    Investment and advances from Host Marriott                   ---         ---         11         63          55
    Shareholders' deficit                                        (96)       (123)       ---        ---         ---

OTHER OPERATING DATA:
    Cash flows provided by operations                            104          51         74         73          84
    Cash flows used in investing activities                      (52)        (52)       (44)       (61)        (80)
    Cash flows provided by (used in) financing activities          5          20        (39)         7          (2)
    EBITDA (6)                                                   119         108        109        115         100
    Cash interest expense                                         39          40         41         40          36

<FN>
(1)  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.
(2)  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.
(3)  Statement of Financial  Accounting  Standards ("SFAS") No. 109, "Accounting
     for Income Taxes," was adopted in 1993 resulting in a $4.8 million noncash 
     charge to reflect its adoption.  The Company also recorded in 1993 a 
     restructuring charge of $7.4 million.
(4)  In 1992, the Company acquired 26 food, beverage and merchandise concessions
     contracts from Dobb's Houses,  Inc.  Excluding  this  acquisition,  airport
     revenues increased $6.0 million from 1992 to 1993.
(5)  Earnings  (loss) per common  share data is not  presented  for 1992 through
     1994 because the Company was not publicly held during those years.
(6)  EBITDA  consists of the sum of  consolidated  net income  (loss),  interest
     expense,  income taxes,  depreciation  and  amortization  and certain other
     noncash items  (principally  restructuring  reserves and asset write-downs,
     including   subsequent   payments   against  such  previously   established
     reserves).  EBITDA data is  presented  because such data is used by certain
     investors  to  determine  the  Company's   ability  to  meet  debt  service
     requirements  and is used in certain debt  covenant  calculations  required
     under the Senior Notes  Indenture.  The Company  considers  EBITDA to be an
     indicative measure of the Company's  operating  performance.  EBITDA can be
     used to  measure  the  Company's  ability  to service  debt,  fund  capital
     expenditures and expand its business;  however, such information should not
     be considered an alternative to net income,  operating  profit,  cash flows
     from operations,  or any other operating or liquidity  performance  measure
     prescribed by generally accepted accounting  principles.  Cash expenditures
     for various long-term assets,  interest expense and income taxes have been,
     and will be, incurred which are not reflected in the EBITDA  presentations.
     The calculation of EBITDA for the Company may not be comparable to the same
     calculation  by other  companies  because the  definition  of EBITDA varies
     throughout the industry.
</FN>
</TABLE>

                                   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 food, beverage and merchandise concession businesses in travel and
entertainment  venues. On that date, 31.9 million of common stock of the Company
were distributed to the holders of Host Marriott Corporation's common stock in a
special dividend (the  "Distribution" - see Note 2). The following  analysis and
the  accompanying  consolidated  financial  statements  are  presented as if the
Company were formed as a separate  entity of Host  Marriott  Corporation  ("Host
Marriott") for all periods presented.

     The Company's airport  concessions  contributed  approximately 71.4% of the
Company's total revenues in fiscal year 1996. Since 1994,  airport revenues have
grown at a compound  annual growth rate ("CAGR") of 10.9% from $743.5 million in
1994 to $911.9 million in 1996.  Since 1994,  operating  profit at the Company's
airport  concessions  facilities has grown at a CAGR of 20.0%, and totaled $86.2
million, before general and administrative expenses, in 1996.

     The Company's travel plazas concessions contributed  approximately 24.4% of
the  Company's  total  revenues in fiscal year 1996.  Since 1994,  travel plazas
revenues  have  grown at a CAGR of 1.3% from  $304.1  million  in 1994 to $312.3
million in 1996.  Operating profit before general and  administrative  expenses,
increased to $22.1  million in 1996,  an increase of 12.8% over 1995,  primarily
reflecting operational improvements achieved in 1996.

     The  remaining  4.2%  of the  Company's  fiscal  year  1996  revenues  were
generated from the operation of restaurants,  gift shops and related  facilities
at a  shopping  mall food  court and at various  tourist  attractions,  casinos,
stadiums and arenas.  The operating  results of this  component of the Company's
business were  negatively  affected by a large,  unprofitable  stadium  contract
entered into in 1991 which was transferred to a third party in 1994.

1996 COMPARED TO 1995

REVENUES

     Revenues for the year ended  January 3, 1997  increased by $115.4  million,
or 9.9%,  to $1.3 billion  compared  with  revenues of $1.2 billion for the year
ended December 29, 1995.  This increase was driven by strong  performance in the
airport concessions business line.

AIRPORTS

       Airport concession  revenues were up $113.6 million,  or 14.2%, to $911.9
million for fiscal year 1996 compared with $798.3  million for fiscal year 1995.
Domestic airport  concessions  revenues increased by $89.4 million, or 11.7%, to
$855.5  million for 1996  compared with $766.1  million for 1995.  International
airport  revenues were $56.4 million in 1996,  up  substantially  from the $32.2
million in 1995,  respectively.  Revenue  growth in airport  concessions  can be
attributed  to strong  fundamentals  in the  airport  business,  with  passenger
enplanements  at comparable  airports up an estimated 7% over last year, and the
benefit of an additional week of operations (see "Accounting  Period").  Revenue
growth at comparable airport locations grew an impressive 14.2% during 1996. The
positive effects of new noncomparable  contracts,  primarily  Hartsfield Atlanta
International  Airport and Amsterdam  Airport Schiphol in the Netherlands,  were
offset by the negative impact of contracts with significant  changes in scope of
operation and contracts undergoing  significant  construction of new facilities.
Revenue per  enplaned  passenger  ("RPE")  grew 6% at the  Company's  comparable
airport  locations  in 1996.  The Company has  benefited  from annual  passenger
enplanement  growth  in  excess  of the FAA  forecast,  which  projected  annual
passenger  enplanement  growth of 4.1% through the year 2008.  The growth in RPE
can be attributed to the addition of new branded  locations,  moderate increases
in menu prices and benefits from other strategic initiatives.  The severe winter
weather  throughout  the United  States  during the first quarter of 1996 

                                   13


<PAGE>

caused  flight  delays which  resulted in longer visit times in airports for air
travelers and  translated  into  increased  revenues from the Company's  airport
food, beverage and retail concessions.

TRAVEL PLAZAS

       Travel  plaza  concession  revenues  for 1996  were  $312.3  million,  an
increase  of 0.8%  compared  with  $309.9  million in 1995.  Excluding  revenues
relating to a low margin gasoline  service  contract on one tollroad and a minor
food and beverage contract on another tollroad, both of which the Company exited
from in the fourth quarter of 1995,  revenue growth for travel plaza concessions
on a  comparable  contract  basis  was  4.2% in 1996.  Growth  in  travel  plaza
concessions  revenues was attributable to minor increases in customer traffic on
tollroads,  moderate  price  increases  and  the  benefit  of an  extra  week of
operations  in 1996 (see  "Accounting  Period").  The harsh winter  weather that
benefited  airport  concessions  constrained  travel plaza revenues in the first
quarter of 1996.

SHOPPING MALLS AND ENTERTAINMENT

       Shopping mall and entertainment concession revenues, primarily consisting
of  merchandise,  food and  beverage  sales at food  courts in  shopping  malls,
stadiums,  arenas, and other tourist  attractions,  were $53.5 million for 1996,
down slightly from $54.1 million for 1995. The decrease in revenues was a result
of the Company's  planned exit from seven retail operations in the business line
that were deemed to be inconsistent with the Company's core strategies. Revenues
from the  Company's  entrance  into the  shopping  mall food  court  concessions
business at the Ontario  Mills Mall in  California  during 1996  largely  offset
decreased  revenues  from  the  seven  exited  retail  operations.  The  Company
announced in the second quarter of 1996 a definitive  agreement on a second mall
project with The Mills Corporation to operate food and beverage locations at the
Grapevine Mills Mall outside of Dallas,  Texas.  The mall is expected to open in
the fall of 1997, and the Company's operations will be similar in size and scope
to the Ontario Mills Mall project.

OPERATING COSTS AND EXPENSES

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

       Cost of sales for 1996 was $381.6 million,  an increase of $28.5 million,
or  8.1%,  over  last  year.  Cost of sales as a  percentage  of total  revenues
decreased  50 basis  points  during  1996,  most  notably  due to  various  cost
controlling  initiatives  implemented during the year. These initiatives include
the roll out of the Store Manager concept intended to move management  closer to
the  customer  to  improve  customer  satisfaction;  the  renegotiation  of  all
distributor  agreements  for books and magazines in the  Company's  airports and
travel plazas to improve service; in-stock availability and cost margins as well
as a program  under which brand  experts  ("Brand  Champions")  are  assigned to
certain of the Company's largest selling branded concepts.  The Brand Champion's
function is to promote operational  excellence and create operating efficiencies
across all locations of a particular  brand.  Also  contributing to the improved
cost of sales margin was the closure of a low margin gasoline  service  contract
on one tollroad during the fourth quarter of 1995.

       Payroll and benefits  totaled  $379.0  million  during 1996, a 10.1%,  or
$34.7 million increase over 1995.  Payroll and benefits as a percentage of total
revenues remained flat at 29.7% for 1996 and 1995.

       Rent  expense  totaled  $203.5  million  for 1996,  an  increase of $21.0
million,  or 11.5%,  over  1995.  The  majority  of  increased  rent  expense is
attributable  to increased  revenues on contracts  with rentals  determined as a
percentage of revenues. Rent expense as a percentage of total revenues increased
to 15.9%  for  1996  from  15.7%  in 1995.  The  margin  increase  is  primarily
attributable to equipment rentals related to a new point of sale and back office
computer system rolled out to operating units in late 1995 and 1996.

 

                                   14


<PAGE>

       Royalties expense for 1996 increased by 25.9% to $24.8 million from $19.7
million for last year.  As a percentage  of total  revenues,  royalties  expense
increased  to 1.9%  for 1996  compared  with  1.7% for  1995.  The  increase  in
royalties  expense  reflects the  Company's  continued  introduction  of branded
concepts  to  its  airport  concessions  operations.   Royalties  expense  as  a
percentage  of branded  sales  totaled 5.3% in 1996  compared with 4.9% in 1995.
Branded  facilities  generate higher sales per square foot and contribute toward
increased RPE, which offset royalty  payments  required to operate the concepts.
Branded  concepts in all of the Company's venues have grown at a compound annual
growth  rate of 12.2%  over the last  five  years.  No  single  branded  concept
accounts for more than 10% of total revenues.  Branded revenues  increased 17.6%
in 1996, when compared with 1995, the majority of which related to branded sales
at airports.

       Branded  revenues in airports have increased 35.6% when comparing 1996 to
1995 through the  introduction  of branded  concepts in the Company's  airports.
This  increase can be attributed to large new branded  concept  developments  at
Dulles  International  Airport (just  outside of  Washington,  D.C.),  San Diego
International  Airport, Los Angeles International Airport and Hartsfield Atlanta
International  Airport.  Airport  branded  product  sales for 1996  increased to
$216.5  million,  or 23.7% of  total  airport  revenues,  compared  with  $159.7
million, or 20.0% of total airport revenues in 1995.

       Depreciation  and  amortization  expense  included in operating costs and
expenses was $53.9 million for 1996,  down 10.9% compared with $60.5 million for
1995,  primarily reflecting the impact of the Company's adoption of SFAS No. 121
during  the  fourth  quarter  of 1995.  The  adoption  of SFAS No.  121  reduced
depreciation expense by $5.8 million in 1996.

       General and  administrative  expenses  were $50.6  million  for 1996,  an
increase of $5.1 million,  or 11.2%,  over the $45.5 million total for 1995. The
level of corporate  expenses  incurred during 1996 reflect increased general and
administrative  costs  incurred to operate the Company on a  stand-alone  basis,
including  additional  payroll and  benefits  for a newly  established  in-house
architectural and construction management department. Prior to 1996, the Company
had  purchased  and  capitalized   construction   management   services  from  a
third-party provider.

       Other operating  expenses,  which include utilities,  casualty insurance,
equipment  maintenance,  trash removal and other  miscellaneous  expenses,  were
$122.0 million for 1996, a $6.3 million or 5.4% increase over the $115.7 million
total for 1995.  As a percentage of total  revenues,  other  operating  expenses
decreased 50 basis points for 1996 when compared with 1995.

UNUSUAL ITEMS

The 1995 results reflect the following significant unusual items:

 *   The  Company  adopted  a new  accounting  standard  for the  impairment  of
     long-lived  assets that  resulted in the  recognition  of $46.8  million of
     asset write-downs in 1995 (see "Impairments of Long-Lived Assets").

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

OPERATING PROFIT (LOSS)

       As a result of the changes in revenues and  operating  costs and expenses
discussed  above,  operating  profit  increased  to  $62.3  million,  or 4.9% of
revenues for 1996. Excluding the effects of unusual items,  operating profit was
$41.0 million,  or 3.5% of revenues in 1995. The substantial  improvement in the
cost of sales margin and the lower  depreciation  resulting from the adoption of
SFAS No. 121 in 1995 were the primary  factors  that caused the  increase in the
overall  operating  profit  margin.  Operating  profits for  airports and travel
plazas, prior to the allocation of corporate general and administrative expenses
and excluding unusual items, were $86.2 million and $22.1 million, respectively,
for 1996 as compared with $65.9  million and $19.5  million,  respectively,  for
1995.  Operating profits for shopping mall and entertainment,  excluding general
and  administrative  expenses and unusual  items,  totaled $4.6 million and $1.1
million for 1996 and 1995, respectively.



                                   15


<PAGE>

       Operating profit margins increased,  excluding general and administrative
expenses and unusual items,  in all three  business  lines during 1996.  Airport
operating  profit margins,  excluding  general and  administrative  expenses and
unusual  items,  equaled 9.5% for 1996 compared  with 8.3% for 1995.  The travel
plazas operating profit margins,  excluding general and administrative  expenses
and unusual items,  equaled 7.1% and 6.3% for 1996 and 1995,  respectively.  The
shopping mall and entertainment  operating profit margin,  excluding general and
administrative  expenses and unusual items, increased to 8.6% for 1996 from 1.3%
for 1995.

INTEREST EXPENSE

       Interest  expense was $40.1  million for 1996 compared with $40.5 million
for  1995.  This  decrease  was  attributable  to  lower  interest  rates on the
Company's  debt as a result of the May 1995 issuance of $400.0 million in Senior
Notes at a fixed rate of 9.5%,  which is nearly 100 basis  points lower than the
debt that it replaced.  The favorable  effect of these lower  interest rates was
partially  offset by the cost of incremental debt that was incurred as a part of
the Senior Notes  issuance,  the cost of debt assumed in the  acquisition of the
Schiphol  contract,  as well as an increased  level of  amortization of deferred
financing costs.

INTEREST INCOME

       Interest  income totaled $2.3 million for 1996 compared with $0.7 million
for 1995.  This increase in interest income during 1996 was primarily due to the
Company  accelerating  the  transfer  of cash  balances  from  local  depository
accounts to corporate interest bearing consolidation  accounts as well as having
increased cash available from operations.

INCOME TAXES

       The  provision  for income taxes for 1996 and 1995 was $10.2  million and
$3.9 million,  respectively.  The  effective  income tax rate for 1996 was 41.6%
compared  with 6.5% for 1995.  The provision in 1995 was affected by an increase
in the deferred tax asset valuation allowance of $24.9 million to reduce the net
deferred  tax asset to the amount  that is more  likely  than not to be realized
(see "Deferred Tax Assets").  The provision for this valuation  allowance offset
the tax benefit of the 1995 loss  included  in 1995  results.  The 1996  results
include a $5.6 million  decrease in the valuation  allowance due to the decrease
in the  state  effective  tax  rate  and the  expiration  of  purchase  business
combination tax credits.

EXTRAORDINARY ITEM

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

NET INCOME (LOSS) AND INCOME (LOSS) PER COMMON SHARE

       The Company's net income for 1996 was $14.3 million,  or $0.40 per common
share, compared with a net loss of $73.6 million for 1995. The 1995 net loss was
primarily  due to certain  unusual and  extraordinary  items  occurring in 1995,
including  $46.8 million of write-downs of long-lived  assets,  $14.5 million of
restructuring  charges and $9.6 million of losses on the  extinguishment of debt
(see "Unusual Items" and  "Extraordinary  Items").  Historical per share data is
not available for 1995 because the Company was not publicly held. Pro forma loss
per common share totaled $2.33 for 1995.

WEIGHTED AVERAGE SHARES OUTSTANDING

       The weighted average number of common shares outstanding for 1996 used to
calculate  primary and  fully-diluted  earnings  per common  share  totaled 35.5
million   and  35.9   million,   respectively.   Included  in  the  primary  and
fully-diluted  number of shares  for 1996 were 2.1  million  and 2.5  million of
common equivalent shares, respectively. Common shares outstanding increased from
31.9  million  as of  December  29,  1995 to 34.4  million as of January 3, 1997
primarily reflecting the issuance of 1.2 million shares of restricted stock as a
result of the   

                                   16


<PAGE>

Company's  executive  officers  converting their Host Marriott  restricted share
awards to 681,710  shares of the  Company's  restricted  stock and the Company's
awarding of an  additional  445,362  shares of  restricted  stock to certain key
executives during the first quarter of 1996.  Restricted stock from these awards
vest  over a  period  from  1996 to 1998  based  on both  time  and  performance
requirements. The conversion of Host Marriott restricted shares to the Company's
restricted  shares and the new awards were  designed to align the  interests  of
management with the interests of shareholders. Also contributing to the increase
in  common  shares  outstanding  was  the  issuance  of 1.3  million  shares  in
connection  with the  exercise of Host  Marriott  warrants  (see "Note 7" to the
financial statements).

1995 COMPARED TO 1994

REVENUES

       The  Company's  revenues  increased  3%, or $38.6  million,  to  $1,162.3
million for the year ended December 29, 1995 from $1,123.7  million for the year
ended  December  30,  1994,  primarily  due to an increase in airport and travel
plaza  concession  revenues,  partially  offset  by  a  decline  in  sports  and
entertainment concessions revenues.

       Airport  revenues  increased 7%, or $54.8 million,  to $798.3 million for
the year ended December 29, 1995 from $743.5 million for the year ended December
30, 1994.  Domestic airport revenues  increased 4%, or $31.6 million,  to $766.1
million in 1995 from $734.7  million in 1994.  The increase in domestic  airport
revenues was driven by an estimated 3%  enplanement  growth  during 1995 and new
contract  revenues  generated in three airports,  which were partially offset by
lost  revenues on several  expired  contracts.  International  airport  revenues
increased  $23.4 million in 1995, to $32.2  million.  Increased  revenues in the
international  sector  reflect the third  quarter  acquisition  of operations at
Schiphol  International  Airport in Amsterdam  and strong  revenues at Vancouver
Airport which opened in late 1994.

       Travel plaza concession revenues increased 2%, or $5.8 million, to $309.9
million from prior year revenues of $304.1  million,  due to mild winter weather
in the northeast and strong traffic growth on one tollroad.

       Shopping malls and entertainment  concession revenues decreased by 28.7%,
or $21.8  million,  to $54.1  million  for 1995,  from $75.9  million  for 1994,
resulting  from  the loss of  revenues  from the  transfer  of one  unprofitable
stadium  concessions  contract to a third  party,  the loss of certain gift shop
contracts  and the  transfer  of three  hotels to Host  Marriott  as part of the
Distribution.

OPERATING COSTS AND EXPENSES

       The  Company's  total  operating  costs and expenses,  excluding  unusual
items,  were $1.1 billion in 1995, or 96.5% of total revenues,  compared to $1.1
billion in 1994, or 96.5% of total revenues.

       The overall  operating  profit  margin,  excluding the effects of unusual
items,  was 3.5% in 1995 and 1994,  despite  management's  strategy  of  holding
prices  steady  in  1995  to  increase  customer  satisfaction.  Operating  cost
increases  in 1995  reflect  higher  food,  merchandise  and other  supply costs
associated with the higher revenues.

UNUSUAL ITEMS

The 1995 and 1994 results reflect the following significant unusual items:

 *   The  Company  adopted  a new  accounting  standard  for the  impairment  of
     long-lived  assets that  resulted in the  recognition  of $46.8  million of
     asset write-downs in 1995. (See "Impairments of Long-Lived Assets").

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

 *   The Company  recognized a $12.0 million charge in 1994 for the  disposition
     of an unprofitable  stadium concessions  contract that was transferred to a
     third party.


                                   17


<PAGE>

The  Company  reduced  self-insurance  reserves  by  $4.4  million  for  general
liability  and workers'  compensation  claims in 1994,  as a result of favorable
claims experience.

OPERATING PROFIT (LOSS)

       As a result of the changes in revenues and  operating  costs and expenses
discussed  above,  operating  profit,  excluding  the effects of unusual  items,
increased to $41.0 million,  or 3.5% of revenues in 1995, from $39.4 million, or
3.5% of revenues, for 1994.

INTEREST EXPENSE

       Interest  expense  decreased $2.4 million to $39.8 million in 1995 due to
lower  interest  rates on the Company's  debt as a result of the issuance of the
Senior  Notes at a fixed  rate of 9.5%  (approximately  a 100 basis  point  rate
reduction as compared to the Hospitality Notes and line of credit).

PROVISION (BENEFIT) FOR INCOME TAXES

       The  results for 1995 were also  affected by an increase in the  deferred
tax asset  valuation  allowance of $24.9  million to reduce the net deferred tax
asset to the amount that is more likely than not to be realized.  The  provision
for this valuation allowance offset the tax benefit of the 1995 loss included in
1995 earnings (see "Deferred Tax Assets").

EXTRAORDINARY ITEM

       In connection with the redemption and defeasance of Hospitality  Notes in
the second  quarter of 1995,  the Company  recognized an  extraordinary  loss of
$14.8 million ($9.6 million  after taxes),  primarily  representing  premiums of
$7.0  million  paid on the  redemptions  and the  write-off  of $7.8  million of
deferred financing costs on the Hospitality Notes.

NET LOSS

       The Company's net loss for 1995 was $73.6 million, compared to a net loss
of $7.9 million for 1994.  The increase in the Company's net loss  primarily was
due to certain  unusual and  extraordinary  items  occurring in 1995,  including
$46.8  million  of   write-downs   of  long-lived   assets,   $14.5  million  of
restructuring  charges and $9.6 million of losses on the  extinguishment of debt
(see "Unusual Items" and "Extraordinary Items").

                                   18


<PAGE>


PRO FORMA FISCAL YEAR FINANCIAL DATA

       The following table presents  summary  unaudited pro forma  statements of
operations  data for the fiscal  years ended  December 29, 1995 and December 30,
1994, as if the Distribution and related transactions  occurred at the beginning
of each fiscal year. The data is presented for  informational  purposes only and
may not reflect the Company's  future  results of operations or what the results
of  operations  would have been had the  Distribution  and related  transactions
occurred at the beginning of each fiscal year.

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



PRO FORMA FISCAL YEAR FINANCIAL DATA
<TABLE>
<CAPTION>

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

                                                                                  1995              1994
--------------------------------------------------------------------------- ----------------- --------------------

                                                                           (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<S>                                                                            <C>               <C>  

REVENUES                                                                           $1,158.7          $1,118.5
------------------------------------------------------------------------------------------------------------------

OPERATING COSTS AND EXPENSES
   Cost of sales                                                                      353.1             329.9
   Payroll and benefits                                                               343.8             332.1
   Rent                                                                               182.3             182.5
   Royalties                                                                           19.7              15.2
   Depreciation and amortization                                                       59.2              59.5
   Write-downs of long-lived assets                                                    46.8               ---
   Restructuring and other special charges, net                                        14.5               7.6
   Corporate expenses                                                                  48.0              48.2
   Other                                                                              112.5             112.5
--------------------------------------------------------------------------- ----------------- -----------------
   Total operating costs and expenses                                               1,179.9           1,087.5

OPERATING PROFIT (LOSS)                                                               (21.2)             31.0

   Interest expense                                                                   (39.1)            (39.2)
   Interest income                                                                      0.7               0.1
--------------------------------------------------------------------------- ----------------- -----------------
LOSS BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM (1)                                                             (59.6)             (8.1)

Provision (benefit) for income taxes                                                    3.9              (1.7)
--------------------------------------------------------------------------- ----------------- -----------------
NET LOSS BEFORE EXTRAORDINARY ITEM (1)                                             $  (63.5)         $   (6.4)
===============================================================================================================


LOSS PER COMMON SHARE BEFORE
   EXTRAORDINARY ITEM (1)                                                          $  (2.01)         $  (0.20)
===============================================================================================================

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                                          31.7              30.3
---------------------------------------------------------------------------------------------------------------
<FN>

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

                                   19


<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

       In May 1995, the  predecessor  corporation to 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 an
interest rate of 9.5%.  The net proceeds from the issuance were used to defease,
and subsequently redeem, bonds issued by another subsidiary of Host Marriott and
to pay down a  portion  of a line of  credit  with  Marriott  International.  In
connection  with the  redemption  and  defeasance  of these  bonds,  the Company
recognized an extraordinary  loss in the second quarter of 1995 of approximately
$14.8 million ($9.6 million after taxes).

       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  of Host  International  (the
"Guarantors").  The Senior Notes Indenture  contains covenants that, among other
things,  limit the ability of the Guarantors' 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 in
an  aggregate  principal  amount  of $75.0  million  for a 5-year  term  ("Total
Commitment").  The Total Commitment  consists of (i) a letter of credit facility
in the amount of $40.0 million ("Letter of Credit Facility") for the issuance of
financial  and  non-financial  letters  of credit  and (ii) a  revolving  credit
facility  in the  amount of $35.0  million  ("Revolver  Facility")  for  working
capital and general  corporate  purposes  other than hostile  acquisitions.  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,  all  of  the  capital  stock  of  Host  International  and  certain  of its
subsidiaries.

       The loan agreements relating to the Facilities contain dividend and stock
retirement  covenants that are  substantially  similar to those set forth in the
Senior  Notes  Indenture,  provided  that  dividends  payable to the Company are
limited to 25% of Host  International's  consolidated  net income and  provided,
further,  that no  dividends  can be  declared by Host  International  within 18
months after the closing date of the  Facilities on December 29, 1995.  The loan
agreements  also  contain  certain  financial  ratio  and  capital   expenditure
covenants.  Outstanding borrowings under the Revolver Facility are also required
to be repaid in full for 30  consecutive  days  during  each  fiscal  year.  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 3,
1997, and  throughout  the year ended January 3, 1997,  there was no outstanding
indebtedness  under the Revolver Facility and the Company was in compliance with
the covenants described above.

    The  Company  incurs  capital  expenditures  to  build  out new  facilities,
including growth  initiatives,  expand or reposition  existing facilities and to
maintain  the  quality and  operations  of existing  facilities.  The  Company's
capital  expenditures,  including  acquisitions,  in 1996, 1995 and 1994 totaled
$57.1  million,   $59.2  million  and  $40.4  million,   respectively.   Capital
expenditures  incurred  in  1996  relating  to  the  airport  and  travel  plaza
concessions  business lines were $45.3 million,  approximately half of which was
invested in new facilities at

                                   20


<PAGE>

Atlanta's Hartsfield  International  Airport, Los Angeles  International Airport
and San Diego International  Airport The remaining capital expenditures incurred
in 1996 were related to the food court at the Ontario  Mills  Shopping  Mall and
the installation of a new financial system.  During 1997, the Company expects to
make capital expenditure  investments of approximately $80.0 million in its core
markets (domestic airport and travel plaza business lines) and in growth markets
(international airports and food courts in U.S. shopping malls).

    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,  totaled  $73.5  million for 1996 as compared  with
$55.3 million and $66.3 million for 1995 and 1994, respectively.

       The Company's cash provided by financing  activities in 1996 and 1995 was
$5.2  million  and $20.1  million,  respectively,  while cash used in  financing
activities  was $39.5 million in 1994.  The Company's  cash flows from financing
activities  primarily  consisted  of proceeds  from the issuance of common stock
relating to the Host Marriott  warrants  during 1996 and net cash transfers from
Host Marriott during 1995 and 1994.

       The  Company  manages  its  working   capital   throughout  the  year  to
effectively  maximize the  financial  returns to the Company.  As a  cash-driven
business,  the Company benefits from maintaining  negative working capital.  The
Company's  working capital at year-end 1996 resulted in its current  liabilities
exceeding  its current  assets by $1.8 million  compared  with $42.6  million in
1995. If needed,  the Company's  Revolver Facility provides funds for liquidity,
seasonal  borrowing needs and other general  corporate  purposes.  In the fourth
quarter of 1996,  the Company  transitioned  to a new  financial  system,  which
included the centralization of the accounts payable function. As a result of the
transition, the Company experienced unusually high year-end balances in cash and
cash equivalents and current liabilities.

       The Company's  consolidated  earnings  before  interest  expense,  taxes,
depreciation,  amortization and other non-cash items ("EBITDA")  increased $11.8
million,  or 11.0%, to $119.4 million in 1996. EBITDA totaled $107.6 million and
$108.0 million in 1995 and 1994, respectively.  The Company's ratio of EBITDA to
cash interest expense (defined as interest expense less amortization of deferred
financing  costs)  was 3.1 to 1.0 in 1996  compared  with  2.8 to 1.0 for  1995.
EBITDA  during 1996  significantly  exceeded  capital  expenditures  in core and
growth  markets  of $57.1  million  and  scheduled  interest  payments  of $38.8
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  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 EBITDA to net income (loss):

<TABLE>
<CAPTION>

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

                                                                        1996             1995             1994
------------------------------------------------------------------ ---------------- ---------------- ----------------

                                                                                     (IN MILLIONS)

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

EBITDA                                                                   $  119.4         $  107.6         $  108.6
Interest expense                                                            (40.1)           (40.5)           (42.3)
Provision for income taxes                                                  (10.2)            (3.9)             2.5
Extraordinary item, net of taxes                                              ---             (9.6)             ---
Depreciation and amortization                                               (54.6)           (61.6)           (63.1)
Writedowns of long-lived assets                                               ---            (46.8)             ---
Restructuring and other special charges, net                                  ---            (14.5)            (7.6)
Other non-cash items                                                         (0.2)            (4.3)            (6.0)
------------------------------------------------------------------ ---------------- ---------------- ----------------

NET INCOME (LOSS)                                                        $   14.3        $   (73.6)        $   (7.9)
=====================================================================================================================
</TABLE>

                                   21


<PAGE>

IMPAIRMENTS OF LONG-LIVED ASSETS

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

       Historically, the Company reviewed such assets for impairment by grouping
along its three  general  business  lines  (i.e.,  airports,  travel  plazas and
shopping  mall and  entertainment  concessions).  Although  the Company has been
aware that certain operating units were generating losses and cash flow deficits
since the late 1980s,  because the estimated future undiscounted cash flows on a
business-line  basis  exceeded the carrying  amount of the Company's  long-lived
assets on a  business-line  basis,  the Company  offset such negative cash flows
with  positive cash flows from other  operating  units and did not recognize any
impairment charges in 1995 or 1994, prior to the adoption of SFAS No. 121. Under
SFAS No. 121,  the Company is required to assess  impairment  of its  long-lived
assets at the  operating  unit level  (representing  the lowest  level for which
there are identifiable cash flows that are largely independent of the cash flows
of other  groups of  assets).  Generally,  each  airport and  shopping  mall and
entertainment  facility at which the Company operates and each tollroad on which
the Company  operates (as opposed to each travel plaza on a tollroad)  comprises
an  operating  unit.  As a result of its  adoption of SFAS No. 121,  the Company
recognized a non-cash,  pretax charge against earnings during the fourth quarter
of 1995 of $46.8 million.

     In adopting  SFAS No. 121 (and  thereby  changing  its method of  measuring
long-lived  asset  impairments  from  a  business-line  basis  to an  individual
operating-unit basis),  the Company wrote down the assets of 15 operating  units
to the extent the  carrying  value of the assets  exceeded the fair value of the
assets in 1995.  Twelve of the fifteen units had projected  cash flow  deficits,
and,  accordingly  the assets of these units were written off in their entirety.
The remaining three units had projected  positive cash flows and the assets were
partially written down to their estimated fair values.  Approximately 72% of the
total 1995  write-down  of $46.8  million  related to two  operating  units (one
tollroad unit and one airport unit).

       Historically,  the Company has incurred negative  cash flows at 11 of the
15 individual operating units, which aggregated  approximately $1.0 million,
$5.0 million and $3.6  million in 1996,  1995 and 1994,  respectively,  and were
included in the Company's reported cash flows from operations. During 1996, five
of the  original  15 impaired  units were  either  disposed of or the lease term
expired. As of the end of 1996, the total cash flow deficit (including operating
cash flows and necessary capital  expenditures)  from the remaining 10 operating
units was projected to be approximately $27.8 million during the remaining terms
of  the  lease  agreements.  Substantially  all  of  the  remaining  deficit  is
attributable to three operating  units,  which include two airport units and one
tollroad unit.

1995 RESTRUCTURING

       During 1995,  the Company  performed a review of its operating  structure
and core  business  processes  to identify  opportunities  to improve  operating
effectiveness.  As a  result  of  this  review,  management  approved  a  formal
restructuring   plan  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 shopping
mall and entertainment business line.

       The employee  termination  benefits included in the restructuring  charge
reflect the  immediate  elimination  of  approximately  100  corporate and field
operations  positions and the elimination of approximately  200 additional field
operations  positions,   all  of  which  were  specifically  identified  in  the
restructuring plan. Certain initiatives of the restructuring plan were scheduled
to be systematically  implemented throughout the duration of the plan, 

                                   22


<PAGE>

resulting in an extended period over which the 200 additional  field  operations
positions  would be  eliminated.  The Company  expects to  complete  its plan to
involuntarily  terminate  employees  by the end of the  second  quarter of 1997,
although  severance  payments  are  expected to  continue  beyond the end of the
second quarter of 1997 due to the provisions of the severance program that allow
for extended  severance  payments.  Termination  benefits accrued and charged to
expense in 1995  amounted  to $11.6  million and are  included in  restructuring
charges  in  the  consolidated  statements  of  operations.  Actual  termination
benefits paid and charged  against the liability as of January 3, 1997 were $5.3
million.  As of the end of fiscal  year 1996,  the Company  had  terminated  185
positions in connection with the restructuring plan.

       The  exit  plan  specifically  identified  ten  operating  units  in  the
Company's shopping mall and entertainment  business line that were to be closed.
These retail  operations were deemed to be inconsistent  with the Company's core
operating strategies. As of the end of fiscal year 1996, seven of the ten stores
had been closed, and the Company expects to complete the exit plan by the end of
the first quarter of 1997. Lease cancellation penalty fees and related costs and
asset write-downs accrued and charged to expense amounted to $2.9 million during
1995 and are included in restructuring charges in the consolidated statements of
operations.  Actual  penalty fees or related costs paid and charged  against the
liability  as of  January  3, 1997 were $2.5  million.  Revenues  and  operating
profits / (losses) of the ten closed concessions stores amounted to $6.0 million
and $40  thousand,  respectively,  in 1996,  $8.0  million  and $(0.5)  million,
respectively,  in 1995 and $8.4  million and $(0.2)  million,  respectively,  in
1994.

DEFERRED TAX ASSETS

       The Company has  recognized net assets of $78.7 million and $74.9 million
at January 3, 1997 and  December  29,  1995,  respectively,  related to deferred
taxes,  which generally  represent tax credit  carryforwards  and tax effects of
future available deductions from taxable income. Prior to the Distribution,  the
Company was  included in the Host  Marriott  Corporation  affiliated  group (the
"Host  Marriott  Group")  for  purposes  of  its  Federal  income  tax  filings.
Management believes that the realization of the net deferred tax assets recorded
through the Distribution  Date is more likely than not to occur because the Host
Marriott Group has deferred tax liabilities that must be paid in the future that
are substantially in excess of the Company's recognized net deferred tax assets.

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

       Realization of the net deferred tax assets are dependent on the Company's
ability to generate future taxable  income.  During the period 1994 to 1996, the
Company  would have  generated  taxable  and pretax book income in each year and
cumulative  taxable and pretax book income for this period of $95.7  million and
$33.4  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 3, 1997 and December 29, 1995. Management  anticipates that increases in
taxable  income  will  arise in  future  periods  primarily  as a result  of the
business  strategies  discussed  herein (see  "Business  Strategy")  and reduced
operating  costs  resulting  from the  ongoing  restructuring  of the  Company's
business processes. The anticipated improvement in operating results is expected
to increase the taxable income base to a level which would allow  realization of
the existing net deferred tax assets within nine to twelve years.

       Future  levels of operating  income and other taxable gains are dependent
upon general economic and industry  conditions,  including  airport and tollroad
traffic,  inflation,  competition  and demand for  development of concepts,  and
other factors beyond the Company's  control,  and no assurance can be given that
sufficient  taxable  income will be generated for full  utilization of these tax
credits and  deductible  temporary  differences.  

                                   23


<PAGE>

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.

STOCKHOLDERS' 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  outstanding  increased  from 31.9 million as of the end of fiscal
year 1995 to 34.4 million as of the end of fiscal year 1996.  This  increase can
be attributed to the issuance of 1.2 million  common shares of restricted  stock
to certain  officers and key  executives in 1996 and the issuance of 1.3 million
common  shares in  connection  with the  exercise of Host  Marriott  warrants in
October 1996 (see Note 7).

       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  Company
generated  EBITDA in excess of 3.1 times cash  interest  expense in 1996 and 2.8
times in both 1995 and 1994. The level of distributed long-term debt resulted in
the  Company  reflecting  a  shareholders  deficit of $95.5  million  and $123.1
million as of January 3, 1997 and December 29, 1995, respectively.

INFLATION

       The Company's  expenses are impacted by inflation.  While price increases
can be instituted as inflation occurs,  many contracts require landlord approval
before prices can be increased,  which may temporarily  adversely  impact 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  1996 fiscal year  contained 53 weeks,  while the 1995 fiscal
year contained 52 weeks. The Company's fiscal year ends on the Friday nearest to
December 31.

FORWARD-LOOKING STATEMENTS

       Certain  matters  discussed and statements made within this Annual Report
on Form 10-K are  forward-looking  statements  within the meaning of the Private
Litigation  Reform Act of 1995 and as such may involve known and unknown  risks,
uncertainties,  and other factors that may cause the actual results, performance
or  achievements  of the  Company  to be  different  from  any  future  results,
performance  or  achievements  expressed  or  implied  by  such  forward-looking
statements.  Although the Company  believes the  expectations  reflected in such
forward-looking  statements are based on reasonable assumptions,  it can give no
assurance that its expectations will be attained.  These risks are detailed from
time  to  time  in the  Company's  filings  with  the  Securities  and  Exchange
Commission or other public statements.

                                   24


<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                              26

   Consolidated Balance Sheets as of January 3, 1997 
      and December 29, 1995                                              27

   Consolidated Statements of Operations for the Fiscal Years 
      Ended January 3, 1997, December 29, 1995 and December 30, 1994     28

   Consolidated Statements of Cash Flows for the Fiscal Years 
      Ended January 3, 1997, December 29, 1995 and December 30, 1994     29

   Consolidated Statements of Shareholders' Deficit for the Fiscal 
      Years Ended January 3, 1997 and December 29, 1995                  30

   Notes to Consolidated Financial Statements                            31 - 45


                                   25


<PAGE>


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of Host Marriott Services Corporation:

        We have audited the  accompanying  consolidated  balance  sheets of Host
Marriott  Services  Corporation  and  subsidiaries,  as defined in Note 1, as of
January 3, 1997 and December 29, 1995, and the related  consolidated  statements
of  operations  and cash flows for each of the three  fiscal years in the period
ended January 3, 1997 and shareholders'  deficit for the two fiscal years in the
period ended January 3, 1997. These financial  statements are the responsibility
of the  Company's  management.  Our  responsibility  is to express an opinion on
these financial statements based on our audits.

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

        In our opinion, the consolidated  financial statements referred to above
present  fairly,  in all  material  respects,  the  financial  position  of Host
Marriott  Services  Corporation  and  subsidiaries  as of  January  3,  1997 and
December 29, 1995, and the results of their operations  and their cash flows for
each of the  three  fiscal  years  in the  period  ended  January  3,  1997,  in
conformity with generally accepted accounting principles.

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



                                                      ARTHUR ANDERSEN LLP

Washington, D.C.
February 4, 1997

                                   26


<PAGE>

HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 3, 1997 AND DECEMBER 29, 1995

<TABLE>
<CAPTION>

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

                                                                                   1996            1995
----------------------------------------------------------------------------- --------------- ---------------

                                                                                      (IN MILLIONS)
<S>                                                                                <C>             <C>  


                                   ASSETS
Current assets:
   Cash and cash equivalents                                                        $ 104.2         $  47.2
   Accounts receivable, net                                                            27.4            26.9
   Inventories                                                                         43.3            38.9
   Deferred income taxes                                                               25.4            15.3
   Prepaid rent                                                                         5.9             5.1
   Other current assets                                                                 3.3             2.7
----------------------------------------------------------------------------- --------------- ---------------
   Total current assets                                                               209.5           136.1

Property and equipment, net                                                           274.2           271.2
Intangible assets                                                                      23.4            24.4
Deferred income taxes                                                                  53.3            59.6
Other assets                                                                           20.1            22.6
----------------------------------------------------------------------------- --------------- ---------------

Total assets                                                                        $ 580.5         $ 513.9
=============================================================================================================

                   LIABILITIES AND SHAREHOLDERS' DEFICIT

Current liabilities:
   Accounts payable                                                                 $  97.3         $  84.5
   Accrued payroll and benefits                                                        45.7            39.4
   Accrued interest payable                                                             4.8             4.7
   Current portion of long-term debt                                                    0.8             1.2
   Other current liabilities                                                           62.7            48.9
----------------------------------------------------------------------------- --------------- ---------------
   Total current liabilities                                                          211.3           178.7

Long-term debt                                                                        407.4           407.6
Other liabilities                                                                      57.3            50.7
----------------------------------------------------------------------------- --------------- ---------------
Total liabilities                                                                     676.0           637.0

Common stock,  no par value,  100  million  shares  authorized,  
   34,445,197  and 31,927,474 shares issued and outstanding as of
   January 3, 1997 and December 29, 1995, respectively                                  ---             ---
Contributed deficit                                                                  (109.8)         (123.1)
Retained earnings                                                                      14.3             ---
----------------------------------------------------------------------------- --------------- ---------------
   Total shareholders' deficit                                                        (95.5)         (123.1)
----------------------------------------------------------------------------- --------------- ---------------

Total liabilities and shareholders' deficit                                         $ 580.5         $ 513.9
=============================================================================================================
</TABLE>



       See   notes   to  the   consolidated  financial statements.

                                   27



<PAGE>


HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>

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

                                                                            1996            1995            1994
---------------------------------------------------------------------- --------------- --------------- ----------------

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


REVENUES                                                                    $1,277.7        $1,162.3         $1,123.7

OPERATING COSTS AND EXPENSES
   Cost of sales                                                               381.6           353.1            331.9
   Payroll and benefits                                                        379.0           344.3            334.2
   Rent                                                                        203.5           182.5            183.4
   Royalties                                                                    24.8            19.7             15.5
   Depreciation and amortization                                                53.9            60.5             62.4
   Write-downs of long-lived assets                                              ---            46.8              ---
   Restructuring and other special charges, net                                  ---            14.5              7.6
   General and administrative                                                   50.6            45.5             43.2
   Other                                                                       122.0           115.7            113.7
---------------------------------------------------------------------- --------------- --------------- ----------------
Total operating costs and expenses                                           1,215.4         1,182.6          1,091.9

OPERATING PROFIT (LOSS)                                                         62.3           (20.3)            31.8

   Interest expense                                                            (40.1)          (40.5)           (42.3)
   Interest income                                                               2.3             0.7              0.1
---------------------------------------------------------------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES AND
   EXTRAORDINARY ITEM                                                           24.5           (60.1)           (10.4)

Provision (benefit) for income taxes                                            10.2             3.9             (2.5)
---------------------------------------------------------------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM                                         14.3           (64.0)            (7.9)
   Extraordinary item - loss on extinguishment of debt
        (net of related income tax benefit of $5.2 million)                      ---            (9.6)             ---
---------------------------------------------------------------------- --------------- --------------- ----------------

NET INCOME (LOSS)                                                           $   14.3        $  (73.6)        $   (7.9)
=======================================================================================================================

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

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

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (2):
   Primary                                                                      35.5            31.7
   Fully-diluted                                                                35.9            31.7

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

(1) Loss per common  share is  presented on a pro forma basis for 1995 as if the
    Host Marriott  Services  spin-off and related  transactions  occurred at the
    beginning of 1995 and is unaudited.  Historical loss per common share is not
    presented for 1995 and 1994 because the Company was not publicly held during
    those periods.
(2) The number of shares used to compute  1995 pro forma loss per share is based
    on Host Marriott Corporation's weighted-average number of outstanding common
    shares  adjusted for the  one-for-five  (i.e. one share of Company stock for
    every five shares of Host Marriott  Corporation)  distribution ratio used at
    the spin-off.

</FN>
</TABLE>


             See notes to the consolidated financial statements.

                                   28


<PAGE>


HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 AND DECEMBER 30, 1994
<TABLE>
<CAPTION>

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

                                                                         1996             1995              1994
------------------------------------------------------------------ ----------------- ---------------- -----------------

                                                                                      (IN MILLIONS)
<S>                                                                   <C>               <C>               <C>  

OPERATING ACTIVITIES
Net income (loss)                                                           $ 14.3          $ (73.6)          $  (7.9)
Extraordinary item                                                             ---              9.6               ---
------------------------------------------------------------------ ----------------- ---------------- -----------------
Income (loss) before extraordinary item                                       14.3            (64.0)             (7.9)

Adjustments to reconcile cash from operations:
   Depreciation and amortization                                              55.9             62.3              64.1
   Income taxes                                                               (5.5)            (8.6)             (3.6)
   Writedowns of long-lived assets                                             ---             46.8               ---
   Restructuring and other special charges                                     ---             14.5               7.6
   Other                                                                       3.6              4.3               6.1

   Working capital changes:
        (Increase) decrease in accounts receivable                             2.3              0.6              (2.6)
        (Increase) decrease in inventories                                    (5.9)            (3.6)              0.5
        (Increase) decrease in other current assets                           (1.6)             2.4               1.9
        Increase (decrease) in accounts payable and accruals                  40.4             (3.3)              7.9
------------------------------------------------------------------ ----------------- ---------------- -----------------

Cash provided by operations                                                  103.5             51.4              74.0
------------------------------------------------------------------ ----------------- ---------------- -----------------

INVESTING ACTIVITIES
Capital expenditures                                                         (57.1)           (57.6)            (40.4)
Acquisitions                                                                   ---             (1.6)              ---
Net proceeds from the sale of assets                                           2.4              2.3               ---
Other, net                                                                     3.0              4.9              (3.2)
------------------------------------------------------------------ ----------------- ---------------- -----------------

Cash used in investing activities                                            (51.7)           (52.0)            (43.6)
------------------------------------------------------------------ ----------------- ---------------- -----------------

FINANCING ACTIVITIES
Repayments of long-term debt                                                  (0.8)          (393.0)             (1.3)
Issuance of long-term debt                                                     ---            389.5               2.3
Proceeds from stock issuances                                                  6.0              ---               ---
Transfers from Host Marriott Corporation, net                                  ---             23.6             (40.5)
------------------------------------------------------------------ ----------------- ---------------- -----------------

Cash provided by (used in) financing activities                                5.2             20.1             (39.5)
------------------------------------------------------------------ ----------------- ---------------- -----------------

INCREASE (DECREASE) IN CASH AND
   CASH EQUIVALENTS                                                           57.0             19.5              (9.1)

CASH AND CASH EQUIVALENTS, beginning of year                                  47.2             27.7              36.8
------------------------------------------------------------------ ----------------- ---------------- -----------------

CASH AND CASH EQUIVALENTS, end of year                                      $104.2          $  47.2           $  27.7
=======================================================================================================================
</TABLE>



            See notes to the consolidated financial statements.

                                   29



<PAGE>

HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIT
FISCAL YEARS ENDED JANUARY 3, 1997 AND DECEMBER 29, 1995
<TABLE>
<CAPTION>

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

                                                         COMMON       CONTRIBUTED       RETAINED
                                                          STOCK         DEFICIT         EARNINGS          TOTAL
----------------------------------------------------- -------------- --------------- ---------------- ---------------

                                                                              (IN MILLIONS)
<S>                                                       <C>             <C>             <C>             <C>   

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

   Capitalization of Company                                   ---          (123.1)             ---          (123.1)
--------------------------------------------------------------------------------------------------------------------

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

   Common stock issued for employee stock plans                ---             0.2              ---             0.2
   Common stock issued for Host Marriott warrants              ---             5.8              ---             5.8
   Adjustments to distribution of capitalization
        of Company                                             ---             4.8              ---             4.8
   Deferred compensation                                       ---             2.5              ---             2.5
   Net income                                                  ---             ---             14.3            14.3
----------------------------------------------------- -------------- --------------- ---------------- ---------------

BALANCE, JANUARY 3, 1997                                     $ ---         $(109.8)          $ 14.3         $ (95.5)
=====================================================================================================================
</TABLE>


































            See notes to the consolidated financial statements.

                                   30



<PAGE>

           HOST MARRIOTT SERVICES CORPORATION AND SUBSIDIARIES
                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       (In millions, except per share amounts and as where indicated)



1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

On December 29, 1995, Host Marriott Services  Corporation (the "Company") became
a  publicly  traded  company  and  the  successor  to  the  food,  beverage  and
merchandise   concession   businesses  of  Host  Marriott   Corporation   ("Host
Marriott").  On that date,  31.9  million  shares of common stock of the Company
were distributed to the holders of Host Marriott Corporation's common stock in a
special dividend (the "Distribution"-see Note 2).
     Prior to the Distribution,  the Company operated as a unit of Host Marriott
Corporation,  utilizing Host Marriott's centralized systems for cash management,
payroll,  purchasing and  distribution,  employee  benefit plans,  insurance and
administrative services. Except for unit operating cash accounts,  substantially
all cash  received by the  Company was  deposited  in and  commingled  with Host
Marriott's general corporate funds. Operating expenses, capital expenditures and
other cash  requirements  of the Company were paid by Host  Marriott and charged
directly or allocated to the Company.  Certain general and administrative  costs
of Host  Marriott  were  allocated  to the  Company,  principally  based on Host
Marriott's specific  identification of individual cost items and otherwise based
upon  estimated  levels of effort  devoted  by its  general  and  administrative
departments to individual  entities or relative measures of size of the entities
based on assets or  operating  profit.  Such  allocated  amounts are included in
corporate  expenses  and were $8.0 million and $4.8 million in fiscal years 1995
and 1994, respectively. In the opinion of management, the methods for allocating
corporate  general  and  administrative  expenses  and  other  direct  costs are
reasonable in their  respective  years.  It is not  practicable  to estimate the
costs that would have been  incurred by the Company if it had been operated on a
stand-alone basis.
     The consolidated  financial  statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in 50% or less owned
affiliates  over  which the  Company  has the  ability to  exercise  significant
influence are accounted for using the equity method.  All material  intercompany
transactions  and balances  between the Company and its  subsidiaries  have been
eliminated. 
     The  Company's  1995 statement of financial position and 1995 and 1994  
results  of  operations  and  cash  flows  are  presented  in  the  accompanying
consolidated  financial  statements  as if the Company were formed as a separate
entity of Host Marriott,  the Company's  parent  corporation  until December 29,
1995.  Host  Marriott's  historical  basis in the assets and  liabilities of the
Company has been carried over.

DESCRIPTION OF THE BUSINESS

The  Company  operates  restaurants,  gift shops and  related  facilities  at 72
airports,  on 13 tollroads  (including 92 travel  plazas) and in 20 other venues
(including  shopping  malls,  tourist  attractions,  stadiums and  arenas).  The
Company  conducts  its  operations  primarily in the United  States  through two
wholly owned  subsidiaries:  Host  International,  Inc.  ("Host  International,"
formerly Host Marriott Travel Plazas,  Inc.) and Host Marriott  Tollroads,  Inc.
("Tollroads"). The Company also has international operations in The Netherlands,
New Zealand, Australia and Canada.

FISCAL YEAR

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

REVENUES

The Company's revenues include sales of food, beverage and retail merchandise at
various  airport and travel plaza  locations  and at shopping  malls,  stadiums,
arenas and other tourist attractions.

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.  These  investments
include money market assets and commercial paper used as a part of the Company's
cash management activities.

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   

                                   31


<PAGE>

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



is  determined  using  the  first-in,   first-out   method.Merchandise  cost  is
determined using the retail method.

PROPERTY AND EQUIPMENT

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

INTANGIBLE ASSETS

Intangible  assets  consist of goodwill of $5.4 million in 1996 and $6.0 million
in 1995, and contract rights of $18.0 million in 1996 and $18.4 million in 1995.
These  intangibles are being amortized on a straight-line  basis over periods of
40 years for goodwill and the life of the contract, generally 5 to 15 years, for
contract rights. Amortization expense totaled $2.8 million in 1996, $2.6 million
in 1995 and $3.0 million in 1994. Accumulated amortization totaled $11.1 million
and $8.4 million as of January 3, 1997, and December 29, 1995, respectively.

IMPAIRMENTS OF LONG-LIVED ASSETS

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

SELF-INSURANCE PROGRAM

Prior to October 1993,  Host  Marriott was  self-insured  for certain  levels of
general   liability  and  workers'   compensation.   Estimated  costs  of  these
self-insurance  programs were accrued at present values of projected settlements
for  known  and  anticipated   claims.   Host  Marriott's   costs  for  workers'
compensation and general liability insurance were allocated to the Company based
on specific  identification  of claims.  Host  Marriott,  including the Company,
discontinued its self-insurance program for claims arising subsequent to October
1993.  Self-insurance  liabilities of the Company  amounted to $11.3 million and
$18.7 million at January 3, 1997 and December 29, 1995, 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'  equity
(deficit) as cumulative translation adjustments.

INCOME TAXES

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

NEW STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS

The Company  adopted SFAS No. 112,  "Employer's  Accounting  for  Postemployment
Benefits"  during  1994.  The  Company  adopted  SFAS No.  114,  "Accounting  by
Creditors  for  Impairment  of a Loan"  and SFAS No.  121,  "Accounting  for the
Impairment of  Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of"
during  1995.  The  adoption  of SFAS No.  112 and  SFAS No.  114 did not have a
material effect on the Company's consolidated financial statements, however, the
adoption of SFAS No. 121  resulted  in the  recognition  of a  non-cash,  pretax
charge against earnings in the fourth quarter of 1995 of $46.8 million (see Note
3).  The  Company  adopted  the  disclosure-only  provisions  of SFAS  No.  123,
"Accounting for Stock-Based Compensation," during 1996 (see Note 8).

INCOME (LOSS) PER COMMON SHARE

Primary  and  fully-diluted  income per common  share for fiscal  year 1996 were
computed by dividing net income by the  weighted-average  number of  outstanding
common shares  adjusted for common    

                                   32


<PAGE>

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



equivalent  shares.  The  Company's  pro forma loss per common share for 1995 is
computed by dividing  pro forma net loss by the  weighted-average  number of pro
forma outstanding common shares.  Common equivalent shares and other potentially
dilutive securities have been excluded from the 1995 pro forma  weighted-average
number of outstanding shares because they were antidilutive.  The 1995 pro forma
weighted-average  number of outstanding  common shares were determined as if the
shares issued in connection  with the  Distribution  were  outstanding  from the
beginning of the year and adjusted for the one-for-five  distribution ratio. Per
share data is not presented on a historical  basis for 1995 and 1994 because the
Company was not a publicly-held company during those periods.

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 1996 presentation.



2.  THE DISTRIBUTION

On December 29, 1995 (the  "Distribution  Date"),  Host Marriott  distributed to
holders of its common stock,  31.9 million shares of common stock of the Company
through a special  dividend.  The shares  were  distributed  on the basis of one
share of the  Company's  common  stock for every  five  shares of Host  Marriott
stock.
     In connection with the  Distribution,  Host Marriott  retained all cash and
cash  equivalent  balances  of the Company  and its  subsidiaries,  except for a
defined  level of initial  cash  equaling  $25.0  million,  adjusted  to include
certain   estimated   future   restructuring   expenditures,   certain   capital
expenditures,  and  cash  maintained  at a  foreign  airport  operation.  At the
Distribution  Date,  the  Company  held cash in excess of the  defined  level of
initial  cash of $7.9 that was payable to Host  Marriott.  The Company  retained
certain  liabilities of Host Marriott totaling $4.8 as of the Distribution Date.
The net  liability  to Host  Marriott of $3.1 million as of December 29, 1995 is
included in accounts payable in the accompanying consolidated balance sheets.
     Prior to the Distribution,  the Company issued, through Host International,
$400.0  million of senior notes due in 2005 (the "Senior  Notes").  The proceeds
from the sale of the Senior Notes were  distributed to a wholly owned subsidiary
of Host  Marriott and were used (i) to redeem  certain  senior notes and (ii) to
repay a portion of the borrowings  under a revolving  line of credit  agreement.
The  Senior  Notes are  obligations  of Host  International  and  certain of its
subsidiaries.
     In  connection  with  the  Distribution,   the  Company  transferred  three
full-service  hotels  and  assets and  liabilities  related  to  certain  former
restaurant operations to Host Marriott. The Company also entered into management
agreements related to certain restaurant  operations  retained by Host Marriott.
Management fees related to these  contracts were $0.2 million,  $1.2 million and
$2.0 million in 1996, 1995 and 1994, respectively.
     Summarized  unaudited pro forma data as of and for the years ended December
29, 1995 and December 30, 1994, assuming the above transactions  occurred at the
beginning of each year, are as follows:

<TABLE>
<CAPTION>

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

                                   1995        1994
------------------------------- ----------- -----------

                                    (IN MILLIONS)

<S>                                <C>          <C>   

Revenues                         $1,158.7    $1,118.5
Operating profit (loss)             (21.2)       31.0
Net loss before
   extraordinary item               (63.5)       (6.4)
Total assets                        513.9       550.1
Long-term debt                      408.8       404.1
Investments and advances
   from Host Marriott
   Corporation                        ---       (52.3)
Shareholders' deficit              (123.1)        ---

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

                                   33


<PAGE>

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



     An analysis of the  activity in the  "Investments  and  advances  from Host
Marriott  Corporation"  for the two years ended  December 29, 1995 is as follows
(in millions):

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

Balance, January 1, 1994                       $ 62.5

Assets transferred from Host Marriott, net       (2.7)
Cash transfers to Host Marriott, net            (40.5)
Net loss                                         (7.9)
------------------------------------------- -----------

Balance, December 30, 1994                       11.4

Assets transferred from Host Marriott, net      (84.5)
Cash transfers from Host Marriott, net           23.6
Net loss                                        (73.6)
Capitalization of Company                       123.1
------------------------------------------- -----------

Balance, December 29, 1995                     $  ---
=======================================================
</TABLE>


     The average  balance for the fiscal years 1995 and 1994 was $(67.3) million
and $37.0 million, 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  (see Note 4) and a  Transitional  Services
Agreement.  Effective as of the Distribution  Date,  these  agreements  provide,
among other things,  for the  allocation of assets and  liabilities  between the
Company and Host Marriott.  The agreements establish certain obligations for the
Company to issue  shares upon  exercise of Host  Marriott  warrants and to issue
shares or pay cash to Host  Marriott  upon  exercise  of stock  options and upon
release of  deferred  stock  awards  held by certain  former  employees  of Host
Marriott (see Note 7). The agreements also provide that the Company will receive
corporate  services,  such as accounting and computer systems  support,  and may
receive transitional services (cash management, accounting and others) from Host
Marriott.  Payments made to Host Marriott  relating to these agreements  totaled
$0.1 million in 1996.



3.  PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<TABLE>
<CAPTION>
-------------------------------- ----------- -----------

                                    1996        1995
-------------------------------- ----------- -----------

                                     (IN MILLIONS)

<S>                                <C>         <C>   

Leasehold improvements             $ 402.6     $ 399.7
Furniture and equipment              231.5       230.7
Construction in progress              29.0        15.5
-------------------------------- ----------- -----------
Subtotal                             663.1       645.9
Less:  accumulated
       depreciation and
       amortization                 (388.9)     (374.7)
-------------------------------- ----------- -----------

Total property and equipment       $ 274.2     $ 271.2
========================================================
</TABLE>


     Under SFAS No.  121,  the  Company  reviews  the  impairment  of its assets
employed in its  business  lines  (airports,  tollroads  and  shopping  mall and
entertainment) on an individual operating-unit basis.
     For each operating unit determined to be impaired, an impairment loss equal
to the  difference  between  the  carrying  value  and  the  fair  value  of the
individual  operating unit's assets is recognized.  Fair value, on an individual
operating  unit basis,  is estimated to be the present value of expected  future
cash flows,  as  determined by  management,  after  considering  such factors as
future air travel,  toll-paying  vehicle data and inflation.  As a result of the
adoption of SFAS No. 121,  the Company  recognized  a non-cash,  pre-tax  charge
against earnings during the fourth quarter of 1995 of $46.8 million.
     Prior to  September  9, 1995,  the Company  determined  the  impairment  of
operating unit assets on a business-line  basis. Using the business-line  basis,
if the net carrying costs exceeded the estimated future  undiscounted cash flows
from a  business-line  basis,  such  excess  costs  would be charged to expense.
Although the Company has been aware that certain operating units were generating
losses and cash flow deficits since the late 1980s, because the estimated future
undiscounted cash flow on a business-line  basis exceeded the carrying amount of
the Company's  long-lived  assets on a business-line  basis,  the Company offset
such negative cash flows with positive cash flows from other  operating units in
the applicable  business lines and did not recognize any impairment prior to the
adoption of SFAS No. 121.

                                   34

<PAGE>

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


     Effective  September 9, 1995,  the Company  adopted SFAS No. 121 and wrote
down the assets of 15  individual  operating  units by  recognizing  a non-cash,
pretax charge against earnings of $46.8 million. Twelve of the fifteen units had
projected  cash flow deficits and,  accordingly,  the assets of these units were
written off in their entirety.  The remaining three units had projected positive
cash flows, and the assets were partially  written down to their respective fair
values.  Approximately 72% of the total 1995 write-down related to two operating
units (one tollroad unit and one airport  unit).  Historically,  the Company has
incurred negative cash flows at 11 of the 15 individual  operating units,  which
aggregated  approximately $1.0 million,  $5.0 million and $3.6 million, in 1996,
1995 and 1994,  respectively,  and were included in the Company's  reported cash
flows from  operations.  During 1996, 5 of the original 15 impaired units either
were  disposed of or the lease term  expired.  As of the end of 1996,  the total
cash flow deficit from the  remaining  10  operating  units was  projected to be
approximately $27.8 million over the remaining weighted-average life of 5 years.
Substantially  all of the remaining  deficit is  attributable to three operating
units, which include two airport units and one tollroad unit.


4.  INCOME TAXES

The provision (benefit) for income taxes consists of:
<TABLE>
<CAPTION>
------------------------- -------- ---------- ----------
                           1996      1995       1994
------------------------- -------- ---------- ----------

                                  (IN MILLIONS)
<S>                        <C>       <C>         <C>  

Current:
   Federal                $ 11.9    $   ---     $  0.1
   Foreign                   0.2        ---        ---
   State                     3.6        1.5        3.7
------------------------- -------- ---------- ----------
Total current
   provision                15.7        1.5        3.8
--------------------------------------------------------

Deferred:
   Federal                  (2.4)     (17.4)      (4.9)
   Foreign                  (0.2)       ---        ---
   State                     2.7       (5.1)      (1.4)
   Increase (decrease)
      in valuation
      allowance             (5.6)      24.9        ---
------------------------- -------- ---------- ----------
Total deferred
   provision (benefit)      (5.5)       2.4       (6.3)
------------------------- -------- ---------- ----------

Total provision
   (benefit)              $ 10.2     $  3.9     $ (2.5)
========================================================
</TABLE>

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

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

                                      (IN MILLIONS)
<S>                                  <C>        <C>   

Deferred tax assets:
   Tax credit carryforwards          $ 21.7     $ 30.0
   Property and equipment              55.0       57.8
   Casualty insurance                   8.8       10.4
   Reserves                            10.4       11.9
   Employee benefits                   16.7        8.0
   Accrued rent                        12.3       11.4
---------------------------------- ---------- ----------
Gross deferred tax assets             124.9      129.5

Less:  valuation allowance            (36.0)     (41.6)
---------------------------------- ---------- ----------
Net deferred tax assets                88.9       87.9
---------------------------------- ---------- ----------

Deferred tax liabilities:
   Safe harbor lease investments       (5.0)      (7.2)
   Other deferred tax liabilities      (5.2)      (5.8)
---------------------------------- ---------- ----------
Gross deferred tax liabilities        (10.2)     (13.0)
---------------------------------- ---------- ----------

Net deferred income taxes            $ 78.7     $ 74.9
========================================================
</TABLE>

     At the end of fiscal year 1996, the Company had approximately  $3.3 million
of alternative  minimum tax credit  carryforwards which do not expire, and $18.4
million of other tax credits that expire through 2011. The Company establishes a
valuation  allowance to reduce its net deferred tax assets to the amount that is
more likely than not to be realized.  During  1996,  the Company  decreased  the
deferred tax asset and  valuation  allowance by $5.6 million due to the decrease
in the  state  effective  tax  rate and the  expir-ation  of  purchase  business
combination  tax  credits.  During 1995,  the Company  increased  the  valuation
allowance by $24.9 million based on its assessment of the  realizability  of the
net deferred tax assets.
     Realization  of the net deferred  tax assets is dependent on the  Company's
ability to generate sufficient future taxable income during the periods in which
temporary  differences  reverse.  The  amount  of the net  deferred  tax  assets
considered realizable,  however, could be reduced if estimates of future taxable
income are not  achieved.  Although  realization  is not  assured,  the  Company
believes  it is more likely  than not that the net  deferred  tax assets will be
realized.
                                   35


<PAGE>

           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>
---------------------- ---------- ---------- ----------
                         1996       1995       1994
---------------------- ---------- ---------- ----------

                                (IN MILLIONS)
<S>                      <C>        <C>        <C>    

Statutory Federal
   tax rate               35.0 %    (35.0)%    (35.0)%
State income tax,
   net of Federal
   tax benefit             4.8        1.6       14.4
Tax credits                5.8       (0.9)      (6.7)
Change in valuation
   allowance             (22.9)      41.4        ---
Effect of state tax
   rate changes
   on deferred taxes      13.6        ---        ---
Other, net                 5.3       (0.6)       3.3
---------------------- ---------- ---------- ----------

Effective income
   tax rate                41.6%      6.5 %    (24.0)%
=======================================================
</TABLE>

     Beginning  with the 1996 fiscal year,  the Company will file a consolidated
Federal income tax return, including all of its domestic subsidiaries.  Prior to
fiscal year 1996,  the Company was included in the  consolidated  Federal income
tax return of Host  Marriott  and its  affiliates.  The income tax  provision or
benefit included in these financial statements reflects the income tax provision
or benefit and  temporary  differences  attributable  to the  operations  of the
Company on a separate income tax return basis.
     In connection with the Distribution,  the Company and Host Marriott entered
into a tax sharing agreement (the "Tax Sharing  Agreement") that defines each of
their  rights and  obligations  with  respect  to  deficiencies  and  refunds of
Federal,  state and other income or franchise  taxes  relating to the  Company's
business for tax years prior to the Distribution and with respect to certain tax
attributes of the Company after the Distribution.
     In general,  with respect to periods ending on or before December 29, 1995,
Host Marriott is responsible for (i) filing both consolidated Federal income tax
returns for the Host  Marriott  affiliated  group and  combined or  consolidated
state tax returns for any group that  includes  any member of the Host  Marriott
affiliated  group and the Company or any of the Company's  subsidiaries  for the
relevant  periods of time that such  companies were members of the Host Marriott
affiliated group; and (ii) paying the taxes relating to such returns  (including
any  subsequent  adjustments  resulting  from  the  redetermination  of such tax
liabilities by the applicable taxing  authorities).  The Company reimburses Host
Marriott for a defined portion of such taxes.
     Prior to the  existence  of the Tax  Sharing  Agreement,  all  current  tax
provision  amounts were treated as paid to, or received  from,  Host Marriott in
accordance with Host Marriott's tax sharing policy.
     The  Company  made income tax  payments  of $15.9  million in 1996 and paid
$12.6  million and $1.0  million to Host  Marriott  for income taxes in 1995 and
1994, respectively.


5.  DETAIL OF OTHER CURRENT LIABILITIES

Other current liabilities consist of the following:
<TABLE>
<CAPTION>
------------------------------- ----------- ----------
                                   1996       1995
------------------------------- ----------- ----------

                                    (IN MILLIONS)
<S>                                <C>         <C>

Accrued rent                         $20.8      $12.0
Operating insurance accruals           9.9        7.1
Accrued restructuring costs            7.1       13.5
International accruals                 3.6        1.7
Accrued franchise fees                 2.0        1.5
Other                                 19.3       13.1
------------------------------- ----------- ----------
Total other current liabilities      $62.7      $48.9
======================================================
</TABLE>


6.  DEBT

Debt consists of the following:
<TABLE>
<CAPTION>
-------------------------------- ---------- ----------
                                   1996       1995
-------------------------------- ---------- ----------

                                    (IN MILLIONS)
<S>                                <C>        <C>  

Senior Notes with a fixed rate
   of 9.5%, due 2005               $400.0     $400.0
Capital lease obligations             0.7        ---
Other                                 7.5        8.8
-------------------------------- ---------- ----------
Total debt                          408.2      408.8
Less:  current portion               (0.8)      (1.2)
-------------------------------- ---------- ----------

Total long-term debt               $407.4     $407.6
======================================================
</TABLE>
                                   36


<PAGE>

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




SENIOR NOTES

In May  1995,  Host  International  (and its  former  parent  corporation,  Host
Marriott Travel Plazas,  Inc., which was merged into Host International)  issued
$400.0  million  of  senior  notes  due in 2005 (the  "Senior  Notes"),  the net
proceeds  of  which  were  distributed  to  Host  Marriott  Hospitality,   Inc.,
("Hospitality"),  and were used to retire portions of Hospitality's senior notes
(the "Hospitality Notes") and to repay a portion of Hospitality's line of credit
(the  "Line  of  Credit").  The  Senior  Notes  are  fully  and  unconditionally
guaranteed  (limited only to the extent necessary to avoid such guarantees being
considered a fraudulent  conveyance under applicable law) on a joint and several
basis by certain  subsidiaries of Host  International  (the  "Guarantors").  The
Senior  Notes  are  also  secured  by a  pledge  of  the  capital  stock  of the
Guarantors.  The  indenture  governing  the  Senior  Notes  (the  "Senior  Notes
Indenture")  contains  covenants that, among other things,  limit the ability of
Host   International  and  certain  of  its  subsidiaries  to  incur  additional
indebtedness   and  issue   preferred   stock,   pay  dividends  or  make  other
distributions,  repurchase  capital stock or 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.
     At and  subsequent  to the issuance of the Senior Notes,  distributions  of
Host International's  equity,  including earnings accumulated  subsequent to the
date of issuance (but excluding an amount equal to capital contributions made by
the Company or pursuant to a sale of Host International's capital stock) will be
restricted  but  available  for the payment of  dividends  to the Company to the
extent  that the  cumulative  amount of such  dividends  does not  exceed  $25.0
million  plus an amount  equal to the  excess of Host  International's  earnings
before interest expense,  taxes,  depreciation,  amortization and other non-cash
items  ("EBITDA,"  as defined in the Senior Notes  Indenture)  over 200% of Host
International's  interest expense. As of January 3, 1997, Host International had
approximately  $57.3 million of unrestricted funds available for distribution to
the Company under the provisions of the Senior Notes Indenture. However, certain
covenants  of the loan  agreements  referred  to  below  further  restrict  Host
International's ability to dividend these funds to the Company.

CREDIT FACILITIES

The First National Bank of Chicago  ("First  Chicago"),  as agent for a group of
participating  lenders,  has provided credit  facilities  ("Facilities") to Host
International  in an aggregate  principal  amount of $75.0  million for a 5-year
term  ("Total  Commitment").  The Total  Commitment  consists of (i) a letter of
credit facility in the amount of $40.0 million for the issuance of financial and
non-financial  letters of credit and (ii) a  revolving  credit  facility  in the
amount of $35.0 million  ("Revolver  Facility") for working  capital and general
corporate  purposes other than hostile  acquisitions.  An annual  commitment fee
ranging from 0.25% to 0.375% is charged on the unused portion of the Facilities.
All borrowings under the Facilities are senior obligations of Host International
and are  secured by the  Company's  pledge of,  and a first  perfected  security
interest  in,  the  capital  stock  of Host  International  and  certain  of its
subsidiaries.
        The loan  agreements  relating to the  Facilities  contain  dividend and
stock retirement covenants that are substantially  similar to those set forth in
the Senior Notes Indenture,  provided that dividends  payable to the Company are
limited to 25% of Host  International's  consolidated  net income and  provided,
further,  that no  dividends  can be  declared by Host  International  within 18
months after the closing date of the  Facilities on December 29, 1995.  The loan
agreements  also  contain  certain  financial  ratio  and  capital   expenditure
covenants.  Outstanding borrowings under the Revolver Facility are also required
to be repaid in full for 30  consecutive  days  during  each  fiscal  year.  Any
indebtedness  outstanding  under the Facilities will become 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 the end of fiscal year
1996, and throughout the fiscal year 1996, there was no outstanding indebtedness
under the Revolver Facility and the Company was in compliance with the covenants
described above.

                                   37


<PAGE>

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




HOSPITALITY NOTES

In   connection   with  the  Marriott   International   Distribution   (the  "MI
Distribution")  discussed in Note 13, Host Marriott  completed an exchange offer
(the  "Exchange  Offer")  pursuant to which  holders of notes,  in the aggregate
principal amount of approximately $1.2 billion ("Old Notes"), exchanged such Old
Notes for a  combination  of (i) cash,  (ii) common  stock of Host  Marriott and
(iii) the  Hospitality  Notes.  The coupon and maturity  date for each series of
Hospitality  Notes was 100 basis points higher and  generally  four years later,
respectively,  than the  series of Old Notes  for which it was  exchanged.  Host
Marriott  secured one series of Old Notes due in 1995 that did not tender in the
Exchange  Offer  equally and ratably  with the New Notes  issued in the Exchange
Offer. For accounting purposes, such Old Notes were pushed down to Hospitality.
     The  Hospitality  Notes were secured by a pledge of the stock of, and fully
and  unconditionally,  jointly and severally  guaranteed  by,  Hospitality,  its
direct subsidiaries and most of Hospitality's indirect  subsidiaries,  including
Host  International.  The indenture  governing the  Hospitality  Notes contained
covenants that, among other things,  limited the ability of Hospitality and Host
International to incur  additional  debt,  create  additional  liens,  engage in
certain  transactions  with  related  parties,  or enter into  agreements  which
restrict a subsidiary in paying dividends or making certain other payments.

LINE OF CREDIT

In connection with the MI Distribution, Host Marriott, through one of its wholly
owned subsidiaries, entered into the Line of Credit with Marriott International.
Pursuant  to the Line of Credit,  the parent  company of  Hospitality  (a wholly
owned  subsidiary of Host  Marriott) was entitled to borrow up to $630.0 million
for certain  permitted uses from Marriott  International  through 2007, with all
unpaid  advances due August 31, 2008.  Borrowings  under the Line of Credit bore
interest at LIBOR plus 4% (10.125% at December 30,  1994),  with any interest in
excess of 10.5% per annum  deferred.  An  annual  fee of 1% was  charged  on the
unused  portion of the  commitment.  The Line of Credit was  guaranteed  by Host
Marriott and certain of Host Marriott's subsidiaries.

     Aggregate debt maturities,  excluding capital lease obligations, at the end
of fiscal year 1996 are as follows:


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

1997                                            $  0.8
1998                                               0.9
1999                                               0.9
2000                                               1.0
2001                                               1.0
Thereafter                                       402.9
---------------------------------- --------------------

Total debt                                      $407.5
=======================================================
</TABLE>


     Deferred financing costs,  which are included in other assets,  amounted to
$10.2  million  and  $11.2  million  at the end of  fiscal  year  1996 and 1995,
respectively.  Cash paid for interest was $38.8 million, $39.8 million and $40.5
million in 1996, 1995 and 1994, respectively.



7.  SHAREHOLDERS' DEFICIT

One hundred million shares of common stock,  without par value,  are authorized,
of which 34.4  million  shares were issued as of the end of fiscal year 1996 and
31.9 million  shares were issued as of the end of fiscal year 1995.  One million
shares of preferred stock,  without par value, are authorized,  of which 100,000
shares of junior participating preferred stock have been authorized and reserved
for issuance in connection with the Company's  stockholder rights plan described
below.


WARRANTS

In March 1993, Host Marriott  settled a class action lawsuit  involving  certain
bondholders by originally issuing to the bondholders  warrants to purchase up to
7.7 million shares of Host Marriott common stock,  approximately  7.2 million of
which  were  unissued  as  of  the  Distribution   Date.  As  a  result  of  the
Distribution,  such warrants are  exercisable  for one share of Host  Marriott's
common  stock and one fifth of one share of the  Company's  common  stock at the
exercise  price of (i) $8.00,  if  exercised  before  October  8, 1996,  or (ii)
$10.00,  if exercised  after October 8, 1996, but before the expiration  date of
the warrants of October 8, 1998.
     As of the end of fiscal year 1996, the Company had issued  1,369,621 common
shares of the Company  resulting  from the exercise of Host  Marriott  warrants.
Proceeds received from the

                                   38


<PAGE>

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



issuance of these common  shares were $5.8  million.  As of January 3, 1997,
the  Company  was  obligated  to issue  68,564  shares of  common  stock for the
remaining  unexercised Host Marriott  warrants at a price of $1.07. The warrants
expire on October 8, 1998.

STOCKHOLDER RIGHTS PLAN

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

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

On the Distribution  Date,  certain  employees of Marriott  International,  Inc.
("Marriott  International" - see Note 13) held Host Marriott  nonqualified stock
options (the "MI Host Marriott  Options") and deferred  stock  incentive  shares
(the "MI Deferred Stock"). As a result of the Distribution, the MI Host Marriott
Options  remained  options to acquire only shares of Host Marriott common stock,
except that the  exercise  price of, and the number of shares  underlying,  such
options was  adjusted to preserve  the  intrinsic  value of the options to their
holders.  Likewise,  each award for MI 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 Deferred Stock.
     The  Company may issue to Host  Marriott  up to 1.4  million  shares of the
Company's  common  stock upon the exercise of the MI Host  Marriott  Options and
approximately  204,000 shares upon the release of the MI Deferred  Stock. At the
Company's  option,  the Company may satisfy these  obligations by paying to Host
Marriott cash equal to the value of such shares of the Company's common stock on
the last day of the  fiscal  year in which  the  options  are  exercised  or the
deferred shares are released.  The Company will receive approximately 11% of the
exercise price of each MI Host Marriott Option exercised.
     These  obligations,  which are  included  as a component  of  shareholders'
deficit,  totaled  $8.6  million and $7.2  million as of year end 1996 and 1995,
respectively. The increase in the obligation during 1996 was attributable to the
adjustment  made to the  capitalization  of the Company in  connection  with its
spin-off from Host Marriott.

ADJUSTMENTS TO DISTRIBUTION OF CAPITALIZATION OF THE COMPANY

The  carrying  amounts of  certain  assets and  liabilities  distributed  to the
Company in connection  with the  Distribution  were based on  estimates.  During
1996, the Company  revised  certain of these estimates and recorded $4.8 million
of adjustments to the original capitalization of the Company.



8.  STOCK-BASED COMPENSATION PLANS

In conjunction  with the  Distribution,  the Company  adopted the  Comprehensive
Stock Plan,  under which the Company  may make to  participating  employees  (i)
awards of restricted  shares of the Company's common stock, (ii) deferred awards
of shares of the Company's common stock, and (iii) awards of options to purchase
the  Company's  common  stock.  In addition,  the Company has an Employee  Stock
Purchase Plan. The Company has reserved 6.5 million and 750,000 shares of common
stock for  issuance  in  connection  with the  Comprehensive  Stock Plan and the
Employee Stock Purchase Plan,  respectively.  The principal terms and conditions
of each of the plans are summarized below.

                                   39


<PAGE>

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



RESTRICTED STOCK AWARDS

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

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.  During  1996 and 1995,
deferred stock incentive shares granted to employees totaled 163,813 and 31,600,
respectively.  Company  executives  holding  restricted  stock  awards  are  not
eligible  to receive  new  deferred  stock  awards.  As of January 3, 1997,  and
December  29,  1995,  there were 265,202 and 146,809  deferred  stock  incentive
shares,  respectively,  of the Company that were granted and not yet distributed
to employees.  Subsequent to January 3, 1997, the Company granted  approximately
145,000 deferred stock incentive shares to employees relating to the 1996 fiscal
year.

STOCK OPTION AWARDS

Employee  stock  options may be granted to key  employees  at not less than fair
market  value on the date of the grant.  Options  granted  before May 11,  1990,
expire 10 years after the date of grant and  nonqualified  options granted on or
after May 11,  1990,  expire from 10 to 15 years  after the date of grant.  Most
options vest ratably over each of the first four years following the date of the
grant.  There was no  compensation  cost  recognized by the Company  relating to
stock options during the 1996 and 1995 fiscal years. 
     In connection with the Distribution, the outstanding Host Marriott options 
held by current  employees of the Company and  employees of Host  Marriott  were
redenominated in both Company and Host Marriott stock and the exercise prices of
the options were adjusted based on the relative  trading prices of shares of the
common stock of the two companies immediately following the Distribution.
     Presented below is a summary of the Company's stock option activity:

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

Balance, December 30, 1994          433,940        $3.75

Granted                               1,300         5.07
Exercised                               ---          ---
Forfeited/Expired                       ---          ---
------------------------------- ------------ ------------

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
=========================================================
</TABLE>


 

                                   40


<PAGE>

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



     The weighted-average fair value of the Company's stock options,  calculated
using the Black-Scholes  option-pricing  model,  granted during the fiscal years
ended 1996 and 1995 is $5.3 million and $4 thousand, respectively. 
     At the end of fiscal year 1995,  247,881 options were exercisable with 
exercise  prices ranging from $0.86 per share to $5.50 per share.  At the end of
fiscal year 1996,  254,970 of the 2.0 million  stock  options  outstanding  were
exercisable   and  had  exercise   prices  between  $0.86  and  $5.50,   with  a
weighted-average  exercise  price  of  $3.35  and a  weighted-average  remaining
contractual  life of 11.0 years.  The remaining 1.7 million options had exercise
prices between $4.03 and $8.88, with a weighted-average  exercise price of $7.12
and a  weighted-average  remaining  contractual  life  of  12.3  years.  Company
executives holding restricted stock awards are not eligible to receive new stock
option awards.

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 1997,  277,180  common shares were sold to employees  under
the terms of the Employee  Stock Purchase Plan at an exercise price of $6.06 per
share.  Proceeds  received  by the  Company  from the sale of these  shares were
approximately  $1.7  million.  
     There was no compensation  cost recognized by the Company relating to the
Employee  Stock  Purchase Plan during the 1996 and 1995 fiscal  years.  The fair
value of the option  feature of the 277,180  shares,  calculated  using the
Black-Scholes option-pricing model, was $285 thousand.

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 $3.7 million and $0.8 million for fiscal years 1996
and 1995,  respectively.  
     Had the Company elected to recognize compensation cost for all awards 
granted under the Comprehensive  Stock Plan and the Employee Stock Purchase Plan
based on the fair value of the awards at the grant  dates,  consistent  with the
method  prescribed  by SFAS No. 123, net income  (loss) and income  (loss) per
common share would have been changed to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
---------------------- -------------- -------- -- ---------

                                       1996         1995
---------------------- -------------- -------- -- ---------
                                      (IN MILLIONS EXCEPT
                                       PER SHARE AMOUNTS)

<S>                                     <C>         <C>  

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

Income (loss) per common share:
    Primary            As reported      $0.40      $(2.33)
                       Pro forma         0.39       (2.33)

    Fully-diluted      As reported      $0.40      $(2.33)
                       Pro forma         0.38       (2.33)
---------------------- -------------- -------- -- ---------

<FN>
Note:Because  the SFAS No.  123  method of  accounting  has not been  applied to
     options  granted  prior  to  January  1,  1995,  the  resulting  pro  forma
     compensation  cost may not be  representative  of the effects on net income
     and income per common share expected in future years.
</FN>
</TABLE>


     Fair values of stock  options  used to compute pro forma net income  (loss)
and  income  (loss) per common share  disclosures  were  determined  using the
Black-Scholes option-pricing model. The significant weighted-average assumptions
used in the model for 1996 and 1995 included the following:  a dividend yield of
0%; an expected  volatility of 34.7%; a risk-free  interest rate of 6.0%; and an
expected holding period of seven years.



9.  PROFIT SHARING AND POSTEMPLOYMENT 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 $2.5 million in 1996 and $2.0 million in both 1995 and 1994.
     Host  International  has a  supplemental  retirement  plan for  certain key
officers. The liability relating to this plan recorded as of the end of 1996   

                                   41


<PAGE>

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



and 1995 was $5.8 million and $5.6 million,  respectively. The compensation cost
recognized for each of the fiscal years of 1996, 1995 and 1994 was $0.3 million.
     Prior to the  Distribution,  the Company  provided  postretirement  medical
benefits  to a very  limited  number of retired  employees  meeting  restrictive
eligibility  requirements.  For the 1995 and 1994 fiscal years, medical expenses
accrued and/or paid under these  arrangements  were  immaterial to the financial
statements.  In  connection  with the  Distribution,  Host  Marriott  became the
obligor with respect to these postretirement benefits.



10.  RESTRUCTURING

During 1995, the Company performed a review of its operating  structure and core
business processes to identify opportunities to improve operating effectiveness.
As a result of this review,  management approved a formal  restructuring plan in
October 1995 and the Company recorded a pretax  restructuring charge to earnings
of $14.5 million in the fourth  quarter of 1995.  The  restructuring  charge was
primarily comprised of involuntary employee termination benefits (related to its
realignment of operational responsibilities) and lease cancellation penalty fees
and related costs  resulting from the Company's plan to exit certain  activities
in its entertainment venues.
     The employee  termination  benefits  included in the  restructuring  charge
reflect the  immediate  elimination  of  approximately  100  corporate and field
operations  positions and the elimination of approximately  200 additional field
operations  positions,   all  of  which  were  specifically  identified  in  the
restructuring plan. Certain initiatives of the restructuring plan were scheduled
to be implemented  systematically throughout the duration of the plan, resulting
in an extended period over which the 200 additional field  operations  positions
would be eliminated.  The Company expects to complete its plan to  involuntarily
terminate employees by the end of the second quarter of 1997, although severance
payments are expected to continue  beyond the end of the second  quarter of 1997
due to the provisions of the program that allow for extended severance payments.
As of the end of fiscal year 1996,  the Company had  terminated 185 positions in
connection with the restructuring plan.
     The exit plan  specifically  identified 10 operating units in entertainment
venues  that  were to be  closed.  These  retail  operations  were  deemed to be
inconsistent  with the Company's  core  operating  strategies.  As of the end of
fiscal year 1996, 7 of the 10 stores had been closed, and the Company expects to
complete  the exit plan by the end of the first  quarter of 1997.  Revenues  and
operating  profits / (losses) of the 10 stores  amounted to $6.0 million and $40
thousand,  respectively, in 1996, $8.0 million and $(0.5) million, respectively,
in 1995, and $8.4 million and $(0.2) million, respectively, in 1994.
     The  following  table  sets forth the  restructuring  reserve  and  related
activity as of January 3, 1997:

<TABLE>
<CAPTION>
---------------- ----------- --------------------- ---------
                               ACTIVITY TO DATE
                             ---------------------
                                         CHANGES   RESERVE
                 PROVISION     COSTS       IN       AS OF
                  RECORDED   INCURRED   ESTIMATE    1/3/97
---------------- ----------- ---------- ---------- ---------

                               (IN MILLIONS)

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

Employee
  termination
  benefits            $11.6      $ 5.3     $ ---      $ 6.3
Asset
  writedowns            0.5        0.8       0.3        ---
Lease
  cancellation
  penalty fees
  and related
  costs                 2.4        1.7      (0.3)       0.4
---------------- ----------- ---------- ---------- ---------

Total                 $14.5      $ 7.8     $ ---      $ 6.7
============================================================
</TABLE>



11.  COMMITMENTS AND CONTINGENCIES

Future minimum annual rental commitments for noncancellable  operating leases as
of the end of fiscal year 1996 follows:

<TABLE>
<CAPTION>
---------------------------------- -------------------
Fiscal Years
---------------------------------- -------------------

                                     (IN MILLIONS)

<S>                                          <C>  

1997                                           $121.9
1998                                            111.2
1999                                            105.0
2000                                             85.7
2001                                             77.1
Thereafter                                      218.2
---------------------------------- -------------------

Total minimum lease payments                   $719.1
======================================================
</TABLE>

                                   42


<PAGE>

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



     The Company leases property and equipment under  noncancellable  leases.  A
number of leases are with airport and tollroad  authorities  and provide for the
Company's  exclusive right to operate concessions subject to stipulated sublease
arrangements  and certain  approvals  for  product  pricing  structures  and the
avoidance of events of uncured defaults.  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 $719.1 million have not been reduced by minimum  sublease rentals
of $39.3 million payable to the Company under noncancellable subleases as of the
end of fiscal year 1996.
     Certain  leases  require  a  minimum  level  of  capital  expenditures  for
renovations and facility expansions during the lease terms. At the end of fiscal
year 1996, the Company was committed to invest  approximately  $69.4 million for
initial  investment  and mid-term  refurbishments  over various  contract  dates
ranging from 2 to 15 years.
     Rent expense consists of:


<TABLE>
<CAPTION>
----------------------- ------------------------------

                          1996      1995       1994
----------------------- --------- ---------- ---------

                                (IN MILLIONS)

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

Minimum rental on
   operating leases       $125.1    $107.7     $111.7
Additional rental
   based on sales           78.4      74.8       71.7
----------------------- --------- --------- ----------

Total rent expense        $203.5    $182.5     $183.4
======================================================
</TABLE>


     Certain of the Company's  leases  related to facilities  used in the former
restaurant business.  Most of these leases contained one or more renewal options
generally  for 5 or  10-year  periods.  Rent  expense on such  operating  leases
totaled  $2.3  million in 1995 and $3.3  million in 1994.  The Company  also had
capital lease obligations  related to its former restaurant  business with total
lease payments of $17.0 million and a present value of minimum lease payments of
$9.0 million at December 30, 1994. All of the restaurant  operations,  including
the  related  capital,   operating  and  contingent  lease   obligations,   were
transferred to Host Marriott in 1995.
     The Company's  facilities are operated under numerous long-term  concession
agreements   with  various  airport  and  tollroad   authorities.   The  Company
historically has been successful at retaining such  arrangements and winning new
business,  enabling  it to replace  lost  concession  facilities.  However,  the
expiration of certain of these agreements could have a significant impact on the
Company's  financial  condition and results of  operations,  and there can be no
assurance that the Company will succeed in replacing lost concession  facilities
and retaining the remainder of its facilities in the future.
     The Company is from time to time the subject of, or involved in, litigation
matters.  Management  believes  that any liability or loss  resulting  from such
matters will not have a material  adverse  effect on the  financial  position or
results of operations of the Company.



12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of the  Company's  financial  instruments,  including  cash and cash
equivalents,   accounts   receivable,   accounts   payable  and  other   accrued
liabilities,  the  carrying  amounts  approximate  fair value due to their short
maturities. The fair value of the Senior Notes are 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 would be provided from lenders for the same remaining maturities.
     The carrying  values and fair values of certain of the Company's  financial
instruments are shown in the table below:

<TABLE>
<CAPTION>

                     JANUARY 3, 1997     DECEMBER 29, 1995
------------------ --------------------- ------------------

                   CARRYING     FAIR     CARRYING   FAIR
                    AMOUNT      VALUE     AMOUNT    VALUE
------------------ ---------- ---------- --------- --------

                                (IN MILLIONS)
<S>                 <C>         <C>        <C>       <C> 

Financial
liabilities:
   Senior Notes       $400.0     $402.6    $400.0   $396.0
   Other debt            8.2        8.6       8.8      8.8
------------------ ---------- ---------- --------- --------
</TABLE>



13.  RELATIONSHIP WITH MARRIOTT INTERNATIONAL

On October  8, 1993 (the "MI  Distribution  Date"),  Host  Marriott  distributed
through a special  dividend to holders of Host Marriott  common stock all of the

                                   43



<PAGE>

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



outstanding  shares of its wholly owned subsidiary  Marriott  International.
     In  connection  with  the  MI  Distribution,  Host  Marriott  and  Marriott
International   entered  into  various   management  and  transitional   service
agreements.  In 1995 and 1994, the Company  purchased food and supplies of $63.8
million  and  $65.2   million,   respectively,   from   affiliates  of  Marriott
International  under one such  agreement.  In addition,  under  various  service
agreements, Host Marriott paid to Marriott International $11.9 million and $10.5
million  in  1995  and  1994,  respectively,  which  represented  the  Company's
allocated portion of these expenses.
     In connection with the Distribution, the Company and Marriott International
entered into several transitional agreements, each of which is described below:

CONTINUING SERVICES AGREEMENT

This  agreement  provides  that the Company will  receive (i) various  corporate
services such as computer systems support and telecommunication  services;  (ii)
various  procurement  services,   such  as  developing  product  specifications,
selecting  vendors and  distributors  for  proprietary  products and  purchasing
certain  identified  products;  (iii) various  product  supply and  distribution
services;  (iv) casualty claims administration  services solely for claims which
arose on or before October 8, 1993; (v) employee benefit administration services
and (vi) a sublease for the Company's  headquarters  office space.  The 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  $76.9  million for  purchases of food and supplies and paid $10.7
million for corporate support services during 1996.

NONCOMPETITION AGREEMENT

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

LICENSE AGREEMENT

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

                                   44



<PAGE>

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




14.  QUARTERLY FINANCIAL INFORMATION  (UNAUDITED)

<TABLE>
<CAPTION>


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

Revenues                                            $  259.8      $  290.3      $  335.1        $  392.5     $1,277.7
Operating profit                                         0.4          14.9          34.3            12.7         62.3
Net income (loss)                                       (4.9)          3.3          15.0             0.9         14.3
Income (loss) per common share:
    Primary (2)                                        (0.15)         0.09          0.42            0.03         0.40
    Fully-diluted (2)                                  (0.15)         0.09          0.42            0.03         0.40
</TABLE>


<TABLE>
<CAPTION>

                                                                               1995(1)
------------------------------------------------ ---------------------------------------------------------------------
                                                    FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                      QUARTER     QUARTER (3)     QUARTER      QUARTER (4)      YEAR
------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S>                                                <C>            <C>           <C>            <C>          <C>   

Revenues                                            $  232.3      $  259.7       $  311.0      $  359.3    $1,162.3
Operating profit (loss)                                 (2.6)          9.6           30.6         (57.9)      (20.3)
Income (loss) before extraordinary item                 (7.9)         (1.2)          13.7         (68.6)      (64.0)
Net income (loss)                                       (7.9)        (10.8)          13.7         (68.6)      (73.6)
Pro Forma income (loss) per common share:
    Income (loss) before extraordinary item                                                                    (2.02)
    Net income (loss)                                                                                          (2.33)
</TABLE>


<TABLE>
<CAPTION>

                                                                               1994(1)
------------------------------------------------ ---------------------------------------------------------------------
                                                    FIRST         SECOND        THIRD         FOURTH        FISCAL
(IN MILLIONS)                                      QUARTER     QUARTER (5)     QUARTER        QUARTER        YEAR
------------------------------------------------ ------------- ------------- ------------- -------------- ------------
<S>                                                <C>            <C>           <C>            <C>          <C>   
Revenues                                            $  221.2      $  263.9       $  305.5      $  333.1     $1,123.7
Operating profit (loss)                                 (3.8)          2.8           30.2           2.6         31.8
Net income (loss)                                       (9.3)         (4.9)          13.3          (7.0)        (7.9)


<FN>
(1)  The first three  quarters of 1996 consist  of 12 weeks each, and the fourth
     quarter  includes  17 weeks.  The  first  three  quarters  of 1995 and 1994
     consist of 12 weeks each, and the fourth quarter includes 16 weeks.
(2)  The sum of income  (loss) per common  share for the four fiscal  quarters
     differs  from the  annual  income  (loss)  per  common  share  due to the
     required method of computing the  weighted-average  number of shares in the
     respective periods.
(3)  Second quarter 1995 results  include an  extraordinary  loss on the  
     extinguishment of long-term debt of $9.6 million (net of related income tax
     benefit of $5.2 million).
(4)  Fourth  quarter 1995 results  include $46.8 million of  write-downs of long
     lived assets which reflected the adoption of a new accounting  standard and
     $14.5 million of  restructuring  charges  primarily  representing  employee
     severance  and lease buy-out  costs,  which were taken to  restructure  the
     Company's  business  processes,  thereby reducing  long-term  operating and
     general and administrative costs.
(5)  Second  quarter  results for 1994  include 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.
</FN>
</TABLE>

                                   45


<PAGE>


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

          None.



                                  PART III

        The  information  called for by Items 10-13 is incorporated by reference
from  the  Host  Marriott  Services  Corporation  1997  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

      (3)  REPORTS ON FORM 8-K

           News Release dated February 5, 1997 announcing  fiscal year 1996 
           results and containing  forward-looking statements.



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

                                   46



<PAGE>


(3)  EXHIBITS

EXHIBIT
  NO.                              DESCRIPTION
-------  --------------------------------------------------------------------
3.2      Amended and Restated Bylaws of Host Marriott Services Corporation

11       Computation of Income (Loss) Per Common Share

21       Listing of Subsidiaries of the Registrant

23.1     Consent of Arthur Andersen LLP, Independent Public Accountants

27       Financial Data Schedule (EDGAR Filing Only)


                                   47




<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 Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 2nd day of April,
1997.

                                        HOST MARRIOTT SERVICES CORPORATION


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

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

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


  /S/  WILLIAM W. MCCARTEN           President, Chief Executive Officer  
------------------------------       (Principal Executive Officer) and Director
    William W. McCarten              

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

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

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

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

  /S/  J. W. MARRIOTT, JR.           Director
------------------------------
    J. W. Marriott, Jr.

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

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

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

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


                                   48


<PAGE>


              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES



To the Shareholders of Host Marriott Services Corporation:

        We  have  audited  in  accordance  with  generally   accepted   auditing
standards,  the  consolidated  financial  statements of Host  Marriott  Services
Corporation  and  subsidiaries,  included  in this Form 10-K and have issued our
report  thereon dated  February 4, 1997. Our audits were made for the purpose of
forming an opinion on the basic  consolidated  financial  statements  taken as a
whole. The schedules  appearing on pages S-2 through S-6 are the  responsibility
of the Company's management and are presented for purposes of complying with the
Securities  and  Exchange  Commission's  rules  and  are not  part of the  basic
consolidated  financial  statements.  These schedules have been subjected to the
auditing  procedures applied in the audits of the basic  consolidated  financial
statements  and, in our  opinion,  fairly  state in all  material  respects  the
financial  data  required  to be set  forth  therein  in  relation  to the basic
consolidated financial statements taken as a whole.


                                                    ARTHUR ANDERSEN LLP

Washington, D.C.
February 4, 1997


                                   S-1


<PAGE>

                                                                   SCHEDULE 1
                                                                   PAGE 1 OF 4



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

<TABLE>
<CAPTION>
--------------------------------------------------------------------------- ------------------ -- ------------------
                                                                               JANUARY 3,           DECEMBER 29,
                                                                                  1997                  1995
--------------------------------------------------------------------------- ------------------ -- ------------------
<S>                                                                              <C>                     <C>  

                                                                                         (IN MILLIONS)

                                  ASSETS


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

                  LIABILITIES AND SHAREHOLDERS' DEFICIT

Advances received and losses in excess of investment in
     wholly owned subsidiaries                                                       $ 101.5               $ 123.1
Shareholders' deficit                                                                  (95.5)               (123.1)
--------------------------------------------------------------------------- ------------------ -- ------------------
      Total liabilities and shareholders' deficit                                    $   6.0               $   ---
====================================================================================================================
</TABLE>















               See notes to the condensed financial information.


                                   S-2


<PAGE>
                                                                   SCHEDULE I
                                                                   PAGE 2 OF 4


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


<TABLE>
<CAPTION>
                                                                                FISCAL YEARS
-------------------------------------------------------------- -------------------------------------------------
                                                                   1996              1995             1994
-------------------------------------------------------------- -------------- -- ------------- -- --------------

                                                                                (IN MILLIONS)

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

Earnings (losses) of combined subsidiaries                             $14.3          $(73.6)            $(7.9)
Tax provision                                                            ---             ---               ---
-------------------------------------------------------------- -------------- -- ------------- -- --------------

    Net income (loss)                                                  $14.3          $(73.6)            $(7.9)
================================================================================================================
</TABLE>














          See   notes   to   the   condensed    financial information.



                                   S-3


<PAGE>


                                                                  SCHEDULE 1
                                                                  PAGE 3 OF 4


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



<TABLE>
<CAPTION>
                                                                                  FISCAL YEARS
----------------------------------------------------------- ----------------------------------------------------------

                                                                 1996                 1995                1994
----------------------------------------------------------- ---------------- --- --------------- -- -----------------

                                                                                  (IN MILLIONS)

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


Cash from operations                                                  $ ---             $  ---               $  ---
Cash from investing activities                                          ---                ---                  ---
Cash from financing activities:
    Proceeds from stock issuances                                       6.0                ---                  ---
    Advances (to) from affiliates                                       ---              (23.6)                40.5
    Distributions (to) from Host Marriott                               ---               23.6                (40.5)
----------------------------------------------------------- ---------------- --- --------------- -- -----------------

Cash from financing activities                                          6.0                ---                  ---
----------------------------------------------------------- ---------------- --- --------------- -- -----------------

Change in cash and cash equivalents                                   $ 6.0             $  ---               $  ---
=====================================================================================================================
</TABLE>







         See   notes   to   the   condensed  financial information.


                                   S-4




<PAGE>
                                                                 SCHEDULE 1
                                                                 PAGE 4 OF 4


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



1.    BASIS OF PRESENTATION

      On December 29, 1995, Host Marriott  Services  Corporation (the "Company")
became  a  publicly   traded   company  and  the   successor  to  Host  Marriott
Corporation's  ("Host  Marriott")  food,  beverage and  merchandise  concessions
businesses in travel and entertainment venues ("the Distribution").  The Company
operates  restaurants,  gift shops and related facilities at 72 airports,  on 13
tollroads  (including  92  travel  plazas)  and at 20  shopping  malls,  tourist
attractions,  stadiums and arenas.  Many of the  Company's  concessions  operate
under branded names. The Company conducts its operations primarily in the United
States through two wholly-owned  subsidiaries:  Host International,  Inc. ("Host
International,"  which was merged into its former parent,  Host Marriott  Travel
Plazas,   Inc.)  and  Host  Marriott   Tollroads,   Inc.   ("Tollroads").   Host
International also has international operations in The Netherlands, New Zealand,
Australia and Canada.

      The Company's 1995 statement of financial position and 1995 and 1994 
results of operations and cash flows are presented as if the Company were formed
as a separate  entity of Host Marriott until December 29, 1995.  Host Marriott's
historical  basis in the assets and  liabilities of the Company has been carried
over.


2.    PRO FORMA INFORMATION

      In  connection  with  the  Distribution,  the  Company  transferred  three
full-service  hotels  and  assets and  liabilities  related  to  certain  former
restaurant operations to Host Marriott. The Company also entered into management
agreements related to certain restaurant  operations  retained by Host Marriott.
Management fees related to these contracts were $1.2 million and $2.0 million in
1995 and 1994, respectively.

      Summarized unaudited  pro forma data as of and for the years ended  
December 29,  1995,  and  December  30,  1994,  assuming the above  transactions
occurred at the beginning of each year, are as follows:

<TABLE>
<CAPTION>
----------------------------------------------------------- --------------- -- ---------------- -- -----------------

                                                                                    1995                 1994
----------------------------------------------------------- --------------- -- ---------------- -- -----------------

                                                                                               (IN MILLIONS)

<S>                                                                                  <C>                 <C>  

Earnings (losses) of combined subsidiaries                                            $ (63.5)             $  (6.4)
Net income (loss)                                                                       (63.5)                (6.4)
Total assets                                                                              ---                  ---
Combined amounts due to affiliates                                                        ---                (52.3)
Shareholders' deficit                                                                  (123.1)                 ---

</TABLE>

                                   S-5



<PAGE>
                                                                 SCHEDULE II



                    HOST MARRIOTT SERVICES CORPORATION
                     VALUATION AND QUALIFYING ACCOUNTS
         FOR THE FISCAL YEARS ENDED JANUARY 3, 1997, DECEMBER 29, 1995 
                          AND DECEMBER 30, 1994


<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
      1994                                                $4.6             $1.6               $(0.7)               $5.5
      1995                                                 5.5              3.7                (0.1)                9.1
      1996                                                 9.1              2.9                (1.7)               10.3


Allowance for notes receivable
      1994                                                $7.0              ---                (0.6)                6.4
      1995                                                 6.4              ---                (6.4)                ---
      1996                                                 ---              0.4                  ---                0.4


<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