UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D. C. 20549
                                    FORM 10-K

(Mark One)

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

           For the fiscal year ended         December 31, 1998        

                                       OR

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

            For the transition period from ________ to ________

                         Commission file number 0-24097

                        CNL HOSPITALITY PROPERTIES, INC.
             (Exact name of registrant as specified in its charter)

            Maryland                                   59-3396369
 (State or other jurisdiction of          (I.R.S. Employer Identification No.)
 incorporation or organization)

                              400 East South Street
                             Orlando, Florida 32801
          (Address of principal executive offices, including zip code)

       Registrant's telephone number, including area code: (407) 650-1000

           Securities registered pursuant to Section 12(b) of the Act:

       Title of each class:             Name of exchange on which registered:
               None                                 Not Applicable

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

                     Common Stock, $0.01 par value per share
                                (Title of class)

         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 (or such shorter  period that the registrant
was  required  to file such  reports),  and (2) has been  subject to such filing
requirements for the past 90 days: Yes X No

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

         Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of shares of common stock (the
"Shares") on Form S-11 under the  Securities  Act of 1933, as amended.  Since no
established  market for such Shares  exists,  there is no market  value for such
Shares. Each Share was originally sold at $10 per Share.

         The number of shares of common  stock  outstanding  as of February  16,
1999, was 6,169,868.


<PAGE>


                      DOCUMENTS INCORPORATED BY REFERENCE:

         Registrant  incorporates  by reference  portions of the CNL Hospitality
Properties,  Inc.  Definitive  Proxy  Statement  for the 1999 Annual  Meeting of
Stockholders  (Items  10,  11, 12 and 13 of Part III) to be filed no later  than
April 30, 1999.


<PAGE>




                                       

                                     PART I

Item 1.  Business

         CNL Hospitality Properties, Inc., formerly known as CNL American Realty
Fund, Inc., was organized  pursuant to the laws of the state of Maryland on June
12, 1996. CNL Hospitality GP Corp. and CNL Hospitality LP Corp. are wholly owned
subsidiaries of CNL Hospitality  Properties,  Inc., each of which were organized
in Delaware in June 1998. CNL  Hospitality  Partners,  LP is a Delaware  limited
partnership  (the  "Partnership")  formed in June 1998. CNL Hospitality GP Corp.
and CNL Hospitality LP Corp. are the general and limited partners, respectively,
of CNL Hospitality  Partners,  LP. Properties acquired are generally expected to
be  held  by  the  Partnership  and,  as a  result,  owned  by  CNL  Hospitality
Properties,  Inc. through the  Partnership.  The terms "Company" or "Registrant"
include CNL Hospitality Properties,  Inc. and its subsidiaries,  CNL Hospitality
GP Corp., CNL Hospitality LP Corp. and CNL Hospitality Partners, LP. The Company
operates for federal  income tax purposes as a real estate  investment  trust (a
"REIT").

         Beginning in July 1997, the Company offered for sale up to $165,000,000
of shares of common stock (the  "Shares")  (16,500,000  Shares at $10 per Share)
(the  "Offering")  pursuant to a  registration  statement on Form S-11 under the
Securities  Act of 1933,  as amended.  As of December 31, 1998,  the Company had
received  subscription  proceeds  of  $43,019,080  (4,301,908  Shares)  from the
Offering, including $37,299 (3,730 Shares) through the distribution reinvestment
plan  provided  under  the  Company's   registration   statement.   The  Company
anticipates  significant  additional  sales of Shares prior to the completion of
the Offering.  In  accordance  with the  Company's  prospectus,  the Company has
elected to extend the Offering until a date no later than July 9, 1999.

         On November 23, 1998,  the Company  filed a  registration  statement on
Form S-11 with the  Securities  and Exchange  Commission in connection  with the
proposed   sale  by  the  Company  of  up  to   27,500,000   additional   Shares
($275,000,000)  (the  "Secondary   Offering")  which  is  expected  to  commence
immediately  following the completion of the Company's current Offering.  Of the
27,500,000  Shares of common  stock to be offered,  2,500,000  will be available
only to stockholders  purchasing Shares through the reinvestment plan. The price
per  Share  and  the  other  terms  of the  Secondary  Offering,  including  the
percentage  of gross  proceeds  payable (i) to the  managing  dealer for selling
commissions  and  expenses  in  connection  with the  offering,  and (ii) to CNL
Hospitality  Advisors,  Inc.  (formerly  CNL Real  Estate  Advisors,  Inc.) (the
"Advisor") for acquisition fees and acquisition expenses,  will be substantially
the same as those for the Company's current Offering. The Company expects to use
net proceeds from the Secondary Offering to purchase additional  Properties and,
to a lesser extent,  provide  mortgage  financing (the  "Mortgage  Loans").  The
Company believes that the net proceeds received from the Secondary  Offering and
any  additional  offerings  will enable the Company to continue to grow and take
advantage of acquisition opportunities until such time, if any, that the Company
lists on a  national  exchange,  although  there is no  assurance  that  listing
("Listing")  will occur. In addition,  if Listing does not occur by December 31,
2007,  the  Company  will  commence  the  orderly  sale  of its  assets  and the
distribution of the proceeds. Listing does not assure liquidity.

         The  Company  was  formed   primarily   to  acquire   properties   (the
"Properties")  located  across  the  United  States to be leased on a  long-term
(generally,  10 to 20 years,  plus renewal  options for up to an  additional  20
years),  "triple-net"  basis,  which  means  that the tenant  generally  will be
responsible for repairs,  maintenance,  property taxes, utilities and insurance.
The  Properties  will be leased to operators  of selected  national and regional
limited  service,  extended  stay and full  service  hotel  chains  (the  "Hotel
Chains") and  operators of national and  regional  fast-food,  family-style  and
casual dining restaurant chains (the "Restaurant Chains"). While the Company may
currently invest in both restaurant and hotel  Properties,  management  believes
that over time the Company will focus its Property  investments  exclusively  on
hotel Properties. The Company structures the leases of its Properties to provide
for payment of base rent with (i)  automatic  increases in base rent and/or (ii)
percentage  rent based on a percentage  of gross sales above a specified  level.
The Company may also provide Mortgage Loans in the aggregate principal amount of
approximately  5% to 10% of the gross  offering  proceeds.  The Company also may
offer furniture, fixture and equipment financing ("Secured Equipment Leases") to
operators of Hotel Chains and Restaurant  Chains.  Secured Equipment Leases will
be funded from the proceeds of financing that have been obtained by the Company.
The aggregate  outstanding principal amount of Secured Equipment Leases will not
exceed 10% of gross  proceeds from the  Company's  offerings of Shares of common
stock.


         As of December 31, 1998,  net proceeds to the Company from the Offering
and  capital   contributions   from  the  Advisor  after  deduction  of  selling
commissions,  marketing support and due diligence expense reimbursement fees and
organizational  and offering expenses  totalled  approximately  $37,313,000.  In
addition,  the Company  received  three  advances  under the line of credit (the
"Line of Credit") totalling $9,600,000. As of December 31, 1998, the Company had
used net  proceeds  from the  Offering and  borrowings  to invest  approximately
$27,246,000  in two hotel  Properties,  to pay  $5,000,000 as a deposit on three
additional  Properties and to pay  approximately  $3,487,000 in acquisition fees
and  expenses.  The Company  will use the  remaining  net  proceeds to invest in
additional  Properties and, to a lesser extent,  Mortgage  Loans.  The number of
Properties to be acquired and Mortgage Loans to be entered into will depend upon
the amount of net proceeds  available to the Company.  The Company  presently is
negotiating to acquire  additional  Properties,  but as of January 19, 1999, had
not acquired any such Properties.

         The Company's primary investment  objectives are to preserve,  protect,
and enhance the Company's assets while (i) making quarterly distributions;  (ii)
obtaining  fixed income  through the receipt of base rent,  and  increasing  the
Company's income (and distributions) and providing  protection against inflation
through automatic  increases in base rent and/or receipt of percentage rent, and
obtaining  fixed income  through the receipt of payments from Mortgage Loans and
Secured  Equipment  Leases;  (iii)  continuing  to qualify as a REIT for federal
income  tax  purposes;  and (iv)  providing  stockholders  of the  Company  with
liquidity of their investment within five to ten years after commencement of the
Offering,  either  in  whole  or  in  part,  through  (a)  Listing  or  (b)  the
commencement  of orderly sales of the Company's  assets and  distribution of the
proceeds  thereof  (outside the ordinary  course of business and consistent with
its  objectives of qualifying as a REIT).  There can be no assurance  that these
investment objectives will be met.

         For the first five to ten years after the commencement of the Offering,
the Company intends,  to the extent  consistent with the Company's  objective of
qualifying as a REIT, to reinvest in additional Properties or Mortgage Loans any
proceeds of the sale of a Property or Mortgage  Loan that are not required to be
distributed to  stockholders  in order to preserve the Company's REIT status for
federal income tax purposes.  Similarly,  and to the extent consistent with REIT
qualification,  the Company  plans to use the  proceeds of the sale of a Secured
Equipment Lease to fund additional  Secured  Equipment  Leases, or to reduce its
outstanding  indebtedness on the Line of Credit.  At or prior to the end of such
ten-year period, the Company intends to provide stockholders of the Company with
liquidity of their  investment,  either in whole or in part,  through Listing of
the Shares of the Company  (although  liquidity cannot be assured thereby) or by
commencing orderly sales of the Company's assets. If Listing occurs, the Company
intends  to  reinvest  in  additional  Properties,  Mortgage  Loans and  Secured
Equipment  Leases any net sales  proceeds  not  required  to be  distributed  to
stockholders in order to preserve the Company's  status as a REIT. The Company's
Articles  of  Incorporation  provide,  however,  that if Listing  does not occur
within ten years after the commencement of the Offering,  the Company thereafter
will  undertake  the  orderly  liquidation  of the  Company  and the sale of the
Company's assets and will distribute any net sales proceeds to stockholders.  In
addition,  the  Company  will not sell any  assets  if such  sale  would  not be
consistent with the Company's objective of qualifying as a REIT.

         In deciding the precise timing and terms of Property sales, the Advisor
will consider  factors such as national and local market  conditions,  potential
capital  appreciation,  cash flows, and federal income tax  considerations.  The
terms of certain leases,  however, may require the Company to sell a Property at
an earlier time if the tenant  exercises its option to purchase a Property after
a specified  portion of the lease term has  elapsed.  The  Company  will have no
obligation  to sell all or any  portion of a Property  at any  particular  time,
except as may be required  under  property  or joint  venture  purchase  options
granted to certain  tenants.  In  connection  with  sales of  Properties  by the
Company,  purchase money obligations may be taken by the Company as part payment
of the sales price.  The terms of payment will be affected by custom in the area
in which the  Property is located and  prevailing  economic  conditions.  When a
purchase  money  obligation  is  accepted  in lieu of cash  upon  the  sale of a
Property,  the Company will  continue to have a mortgage on the Property and the
proceeds  of the sale will be  realized  over a period of years  rather  than at
closing of the sale.

         The Company does not anticipate  selling the Secured  Equipment  Leases
prior to  expiration  of the lease  term,  except in the event that the  Company
undertakes orderly liquidation of its assets. In addition,  the Company does not
anticipate  selling any Mortgage Loans prior to the expiration of the loan term,
except in the event (i) the Company owns the Property (land only) underlying the
building  improvements  which  secure  the  Mortgage  Loan  and the  sale of the
Property occurs, or (ii) the Company undertakes an orderly sale of its assets.



Leases

         The leases the  Company has  entered  into to date,  and the leases the
Company  expects to enter into in the future are  long-term,  generally 10 to 20
years,  triple-net  leases.  The  following is a summarized  description  of the
general structure of the Company's leases.

         The leases of the two  Properties  owned by the  Company as of December
31, 1998,  provide for initial terms of 19 years and expire in 2017.  The leases
are on a  triple-net  basis,  with the  tenants  generally  required  to pay all
repairs, maintenance, property taxes, utilities, and insurance. The tenants also
will be required to pay for special  assessments,  sales and use taxes,  and the
cost of any renovations permitted under the leases. The leases of the Properties
provide  for  minimum   base  annual   rental   payments   (payable  in  monthly
installments) ranging from approximately $1,209,000 to $1,651,800.  In addition,
the leases  provide for  percentage  rent based on a  percentage  of gross sales
above a specified  amount to be paid by the tenant.  The leases also provide for
the annual  base rent  required  under the terms of the lease to increase in the
second lease year (August 1999).  The leases of the Properties  also provide for
the tenant to fund,  in addition to its lease  payment,  a capital  expenditures
reserve fund up to a  pre-determined  amount.  Money in that fund may be used by
the tenant, with the approval of the Company,  to pay for capital  expenditures.
The Company may be responsible for capital expenditures in excess of the amounts
in the  reserve  fund,  and  the  tenant  generally  would  be  responsible  for
replenishing  the reserve  fund and to pay a  specified  return on the amount of
capital expenditures paid for by the Company in excess of amounts in the reserve
fund.

         The leases provide for up to four,  five-year  renewal options.  During
the initial  term of each lease,  the tenant  will pay the  Company,  as lessor,
minimum  annual rent equal to a specified  percentage of the  Company's  cost of
purchasing  the  Property  payable in monthly  installments.  If the  Company is
acquiring a Property  that is to be  constructed  or  renovated  pursuant to the
development  agreement,  the cost of  purchasing  the Property  will include the
purchase price of the land,  including all fees, costs, and expenses paid by the
Company in connection  with its purchase of the land, and all fees,  costs,  and
expenses disbursed by the Company for construction of building improvements. The
minimum rental  payment under the renewal option  generally will be greater than
that due for the final lease year of the initial term of the lease.  In addition
to the minimum annual rent, the lease will generally provide for percentage rent
based on a percentage of the gross sales above a specified  amount to be paid by
the tenant.

         Certain  lessees may have the right to purchase the  Property  seven to
twenty years after  commencement  of the lease at a purchase  price equal to the
greater of (i) the appraised value of the Property,  or (ii) a specified amount,
generally  equal  to  the  Company's  purchase  price  of the  Property,  plus a
pre-determined  percentage  of the  Company's  purchase  price.  The leases also
generally  provide  that,  in the event the  Company  wishes to sell a  Property
subject to that lease to a third party,  it must offer the lessee first  refusal
to  purchase  the  Property on the same terms and  conditions,  and for the same
price, as any offer which the Company has received for the sale of the Property.

         During the period January 1, 1999 through January 19, 1999, the Company
had not acquired additional Properties or invested in any Mortgage Loans.

Major Tenants

         All of the Company's rental income for the year ended December 31, 1998
was earned from one lessee, STC Leasing Associates,  LLC, which operates each of
the two Properties owned by the Company as Residence  Inn(R) by Marriott(R).  It
is anticipated  that  Marriott(R)  Brand Chains will continue to contribute more
than ten percent of the  Company's  total rental  income in 1999 and  subsequent
years.  Although the Company  intends to acquire  Properties  located in various
states and regions and to carefully  screen its tenants in order to reduce risks
of default, failure of this Hotel Chain or lessee could significantly impact the
results of operations of the Company. However, management believes that the risk
of such a default is reduced due to the  essential or important  nature of these
Properties  for the ongoing  operations  of the lessee.  It is expected that the
percentage  of total rental income  contributed  by this lessee will decrease as
additional Properties are acquired and leased in subsequent years.

Certain Management Services

         Pursuant to an advisory  agreement (the "Advisory  Agreement") with the
Company,  the Advisor provides management services relating to the Company,  the
Properties,  the Mortgage Loans and the Secured  Equipment Lease program.  Under
this  agreement,  the  Advisor  is  responsible  for  assisting  the  Company in
negotiating  leases,  Mortgage Loans,  the Line of Credit and Secured  Equipment
Leases;  collecting rental,  Mortgage Loan and Secured Equipment Lease payments;
inspecting the Properties and the tenants' books and records;  and responding to
tenants  inquiries  and notices.  The Advisor also provides  information  to the
Company about the status of the leases, the Properties,  the Mortgage Loans, the
Line of Credit and the Secured Equipment Leases. In exchange for these services,
the  Advisor  is  entitled  to  receive  certain  fees  from  the  Company.  For
supervision of the Properties and the Mortgage Loans,  the Advisor  receives the
asset management fee, which is payable monthly in an amount equal to one-twelfth
of .60% of the total amount invested in the Properties, exclusive of acquisition
fees and acquisition  expenses (the "Real Estate Asset Value") plus  one-twelfth
of .60% of the outstanding principal amount of any Mortgage Loans, as of the end
of the preceding month. For negotiating Secured Equipment Leases and supervising
the Secured  Equipment  Lease program,  the Advisor will receive,  upon entering
into each lease, a Secured  Equipment  Lease  servicing fee,  payable out of the
proceeds  of the  Line of  Credit,  equal  to 2% of the  purchase  price  of the
equipment subject to each Secured Equipment Lease (the "Secured  Equipment Lease
Servicing  Fee").  For identifying the Properties,  structuring the terms of the
acquisition  and  leases  of the  Properties  and  structuring  the terms of the
Mortgage Loans,  the Advisor will receive a fee equal to 4.5% of gross proceeds,
loan proceeds from  permanent  financing and amounts  outstanding on the Line of
Credit,  if any,  at the time of  Listing,  but  excluding  that  portion of the
permanent financing used to finance Secured Equipment Leases.

         The Advisory Agreement continues until July 9, 1999, and thereafter may
be  extended  annually  upon  mutual  consent  of the  Advisor  and the Board of
Directors of the Company unless terminated at an earlier date upon 60 days prior
written notice by each party.

Borrowing

         On July 31, 1998,  the Company  entered into a revolving Line of Credit
and security  agreement  with a bank to be used by the Company to acquire  hotel
Properties. The initial Line of Credit provides that the Company will be able to
receive advances of up to $30,000,000 until July 30, 2003, with an annual review
to be  performed  by the bank to  indicate  that  there has been no  substantial
deterioration,  in the bank's  reasonable  discretion,  of the  credit  quality.
Interest  expense  on each  advance  shall be payable  monthly,  with all unpaid
interest  and  principal  due no  later  than  five  years  from the date of the
advance.  Advances  under the Line of Credit will bear  interest at either (i) a
rate per annum equal to 318 basis points above the London Interbank Offered Rate
(LIBOR) or (ii) a rate per annum equal to 30 basis  points above the bank's base
rate,  whichever the Company selects at the time advances are made. In addition,
a fee of .5% per  advance  will be due  and  payable  to the  bank on  funds  as
advanced.  Each advance made under the Line of Credit will be  collateralized by
the  assignment of rents and leases.  In addition,  the Line of Credit  provides
that the  Company  will not be able to further  encumber  the  applicable  hotel
Property during the term of the advance without the bank's consent.  The Company
will be required,  at each closing,  to pay all costs, fees and expenses arising
in  connection  with the Line of Credit.  The  Company  must also pay the bank's
attorneys fees,  subject to a maximum cap,  incurred in connection with the Line
of Credit and each advance.  As of December 31, 1998, the Company obtained three
advances totalling $9,600,000 relating to the Line of Credit. In connection with
the Line of Credit,  the Company  incurred a  commitment  fee,  legal fees,  and
closing costs of $68,762. The proceeds were used in connection with the purchase
of  two  hotel  Properties  and  the  commitment  to  acquire  three  additional
Properties.  The Company has not yet  received a  commitment  for any  permanent
financing  and there is no assurance  that the Company will obtain any permanent
financing on satisfactory terms.

         The Company  expects to use net  proceeds it receives  from the current
Offering,  plus  any net  proceeds  from  the sale of  Shares  in the  Secondary
Offering,  to purchase additional  Properties and, to a lesser extent, to invest
in Mortgage Loans.  In addition,  the Company intends to borrow money to acquire
additional Properties, to invest in Mortgage Loans and Secured Equipment Leases,
and to pay  certain  related  fees.  The Company  intends to encumber  assets in
connection  with such  borrowing.  The Company  currently plans to obtain one or
more  revolving  Lines of  Credit  in an  aggregate  amount  initially  of up to
$45,000,000 and may, in addition,  also obtain permanent financing.  The Line of
Credit may be repaid  with  offering  proceeds,  working  capital  or  permanent
financing.  Although the Board of Directors  anticipates that the Line of Credit
will initially be in an amount up to $45,000,000  and that the aggregate  amount
of any permanent  financing  will not exceed 30% of the Company's  total assets,
the maximum amount the Company may borrow,  absent a satisfactory showing that a
higher  level of  borrowing  is  appropriate  as  approved  by a majority of the
independent directors, is 300% of the Company's net assets.



Competition

         The  hotel and  restaurant  businesses  are  characterized  by  intense
competition.  The  operators  of  the  hotels  and  restaurants  located  on the
Properties  do, and are expected to in the future,  compete  with  independently
owned hotels and restaurants,  hotels and restaurants which are part of local or
regional chains, and hotels and restaurants in other well-known national chains,
including those offering different types of food and accommodations.

         Many successful  fast-food,  family-style and casual dining restaurants
are located in "eating  islands," which are areas to which people tend to return
frequently and within which they can diversify  their eating habits,  because in
many cases local  competition  may enhance the  restaurant's  success instead of
detracting  from it.  Fast-food,  family-style  and  casual  dining  restaurants
frequently  experience better operating results when there are other restaurants
in the same area.  Similarly,  many successful hotel "pockets" have developed in
areas of concentrated  lodging demand, such as airports,  urban office parks and
resort  areas  where  this  gathering  promotes  credibility  to the market as a
lodging destination and accords the individual  Properties  efficiencies such as
area transportation, visibility and the promotion of other support amenities.

         The Company will be in competition with other persons and entities both
to locate  suitable  Properties  to  acquire  and to locate  purchasers  for its
Properties.  The Company also will compete with other financing  sources such as
banks,  mortgage lenders, and sale/leaseback  companies for suitable Properties,
tenants, Mortgage Loan borrowers and equipment tenants.

Employees

         Reference is made to Item 10.  Directors and Executive  Officers of the
Registrant for a listing of the Company's Executive Officers. The Company has no
other employees.

Item 2.  Properties

         As of December 31, 1998, the Company owned two hotel  Properties in the
Atlanta,  Georgia  area.  Reference  is made to the  Schedule of Real Estate and
Accumulated  Depreciation filed with this report for a listing of the Properties
and their respective costs,  including  acquisition fees and certain acquisition
expenses. The Company is presently negotiating to acquire additional Properties,
but as of January 19, 1999, had not acquired any such Properties.

         While the Company  may  currently  invest in both hotel and  restaurant
Properties,  management  believes  that over  time the  Company  will  focus its
Property investments exclusively on hotel Properties.  Generally,  Properties to
be acquired by the Company will consist of both land and building, although in a
number of cases the Company may acquire the land  underlying  the building  with
the  building  owned by the tenant or a third  party,  and also may  acquire the
building only with the land owned by a third party.  The two Properties owned by
the Company as of December 31, 1998  conform,  and the Advisor  expects that any
Properties  purchased by the Company will  conform,  generally to the  following
specifications of size, cost, and type of land and buildings.

         Hotel  Properties.  The lot sizes will  generally  range up to 10 acres
depending on product,  market and design considerations,  and are available at a
broad range of pricing.  It is  anticipated  that hotel sites  purchased  by the
Company  will  generally be in primary or secondary  urban,  suburban,  airport,
highway or resort markets which have been evaluated for past and future expected
lodging demand trends.

         The hotel buildings generally will be low to mid rise construction. The
Company  may  acquire  limited  service,  extended  stay or full  service  hotel
Properties.  Limited service hotels generally  minimize non-guest room space and
offer limited food service such as complimentary  continental  breakfasts and do
not have restaurant or lounge facilities on-site. Extended stay hotels generally
contain  guest  suites  with a kitchen  area and living area  separate  from the
bedroom.  Extended stay hotels vary with respect to providing on-site restaurant
facilities.  Full service hotels generally have conference or meeting facilities
and on-site food and beverage facilities.

         Restaurant Properties. Lot sizes will generally range between 25,000 to
60,000 square feet depending upon building size and local  demographic  factors.
Restaurants located on land within shopping centers will be freestanding and may
be located on smaller parcels if insufficient common parking is available. Sites
purchased  by the Company will be in locations  zoned for  commercial  use which
have been reviewed for traffic  patterns and volume.  The  restaurant  buildings
generally will be  rectangular  and  constructed  from various  combinations  of
stucco,  steel,  wood, brick and tile.  Building sizes generally will range from
2,500 to 6,000 square feet, with the larger  restaurants  having greater seating
and equipment areas.

         Before or after  construction or renovation,  both hotel and restaurant
Properties to be acquired  will be one of a Hotel Chain's or Restaurant  Chain's
approved designs. In general, the Properties will be freestanding and surrounded
by paved parking areas. Buildings will be suitable for a variety of uses, and in
the case of hotel Properties, the Properties may include equipment.

         Generally,  a  lessee  is  required,  under  the  terms  of  its  lease
agreement,  to make such capital  expenditures as may be reasonably necessary to
refurbish  buildings,  premises,  signs,  and equipment so as to comply with the
lessee's  obligations  under the  franchise  agreement  to reflect  the  current
commercial  image  of  its  Hotel  Chain  or  Restaurant  Chain.  These  capital
expenditures  generally will be paid by the lessee during the term of the lease.
Some hotel  Property  leases  may,  however,  obligate  the  lessee to fund,  in
addition  to  its  lease  payment,  a  capital  expenditures  reserve  up  to  a
pre-determined amount. Money in that reserve may be used by the lessee, with the
approval of the  Company,  to pay for capital  expenditures.  The Company may be
responsible  for  capital  expenditures  in excess of the amounts in the reserve
fund, and the lessee would be generally responsible for replenishing the reserve
fund and to pay  additional  rent equal to a  specified  return on the amount of
capital expenditures paid for by the Company in excess of amounts in the reserve
fund.

         Leases with Major  Tenants.  The terms of the leases with the Company's
major  tenants as of December 31, 1998 (see Item 1.  Business - Major  Tenants),
are substantially the same as those described in Item 1. Business - Leases.

         STC Leasing Associates,  LLC leases two Residence Inn(R) by Marriott(R)
hotel Properties.  The initial term of each lease is 19 years (expiring in 2017)
and the aggregate minimum base annual rent is approximately $2,861,000.

         Management   considers  the  Properties  to  be   well-maintained   and
sufficient for the Company's operations.

Item 3.  Legal Proceedings

         Neither the Company,  nor its Advisor or any affiliates of the Advisor,
nor any of their  respective  Properties,  is a party to,  or  subject  to,  any
material pending legal proceedings.

Item 4.  Submission of Matters to a Vote of Security Holders

         None.


<PAGE>


                                     PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder Matters

(a) As of February 16, 1999,  there were 2,703  stockholders of record of common
stock.  There is no public  trading  market for the Shares,  and even though the
Company  intends  to list  the  Shares  on a  national  securities  exchange  or
over-the-counter  market  within ten years of  commencement  of the  offering of
Shares,  there is no assurance that one will develop and it is not known at this
time if a public market for the Shares will develop. Prior to such time, if any,
as Listing occurs,  any stockholder  (other than the Advisor) may present all or
any portion  equal to at least 25% of such  stockholder's  Shares to the Company
for redemption at any time, in accordance  with the  procedures  outlined in the
Company's prospectus.  At such time, the Company may, at its sole option, redeem
such Shares  presented for  redemption  for cash to the extent it has sufficient
funds  available.  In addition,  the Company may, at its  discretion,  use up to
$100,000  per  calendar  quarter of the  proceeds of any public  offering of its
common stock for redemptions.  Stockholders who wish to have their distributions
used to  acquire  additional  Shares (to the extent  Shares  are  available  for
purchase),   may  do  so  pursuant  to  the  Company's  reinvestment  plan  (the
"Reinvestment  Plan"). There is no assurance that there will be sufficient funds
available for redemption and,  accordingly,  a  stockholder's  Shares may not be
redeemed.  Any Shares  acquired  pursuant to a redemption will be retired and no
longer  available  for  issuance by the  Company.  The Board of Directors of the
Company,  in their  discretion,  may amend or suspend the redemption plan at any
time they determine that such amendment or suspension is in the best interest of
the Company.  The price to be paid for any Share transferred other than pursuant
to the  redemption  plan is  subject to  negotiation  by the  purchaser  and the
selling  stockholder.  For the year ended  December  31,  1998,  no Shares  were
transferred, or retired pursuant to the redemption plan.

         As of December 31, 1998, the offering price per Share was $10.

         The  Company  expects  to  distribute  at least 95% of its real  estate
investment trust taxable income to the  stockholders  pursuant to the provisions
of the  Articles of  Incorporation.  For the years ended  December  31, 1998 and
1997,  the Company  declared  cash  distributions  of  $1,168,145  and  $29,776,
respectively,  to the stockholders.  No amounts  distributed to stockholders for
the year ended  December  31,  1998 and 1997,  are  required  to be or have been
treated by the Company as a return of capital for  purposes of  calculating  the
stockholders'  return on their invested  capital.  The following  table presents
total distributions and distributions per Share:


<TABLE>
<CAPTION>

1998 Quarter                                  First        Second         Third        Fourth       Year    
------------                                ---------    ----------     ---------    ----------  -----------
<S> <C>
Total distributions declared                 $101,356      $155,730      $362,045      $549,014   $1,168,145
Distributions per Share                         0.075         0.075         0.142         0.175        0.467

1997 Quarter                                  First        Second         Third        Fourth       Year    
------------                                ---------    ----------     ---------    ----------  -----------

Total distributions declared                      (1)           (1)           (1)       $29,776      $29,776
Distributions per Share                           (1)           (1)           (1)         0.050        0.050


</TABLE>

(1)      For the period June 12, 1996 (date of  inception)  through  October 15,
         1997,  the  Company  did  not  make  any  cash  distributions   because
         operations had not commenced.

         On  January  1,  1999  and  February  1,  1999,  the  Company  declared
distributions  totalling  $251,967 and  $314,928,  respectively,  or $0.0583 per
Share of common  stock,  payable in March  1999,  to  stockholders  of record on
January 1, 1999 and February 1, 1999, respectively.

         The Company  intends to continue  to declare  distributions  of cash to
stockholders  on a monthly  basis  during the  offering  period,  and  quarterly
thereafter.

(b) The  information  required  by this item is set forth in Item 7.  Management
Discussion and Analysis of Financial  Condition and Results of Operations and is
hereby incorporated by reference.


<PAGE>


Item 6.  Selected Financial Data
<TABLE>
<CAPTION>



                                                              1998               1997 (1)          1996 (2) 
                                                         ----------------     ------------      ------------
<S> <C>
Year Ended December 31:
    Revenues                                                   $1,955,461     $     46,071   $         -
    Net earnings                                                  958,939           22,852             -
    Cash distributions declared                                 1,168,145           29,776             -
    Funds from operations (3)                                   1,343,105           22,852             -
    Earnings per share                                               0.40             0.03             -
    Cash distributions declared per Share                            0.46             0.05             -
    Weighted average number of Shares
          outstanding (4)                                       2,402,344          686,063             -

At December 31:
    Total assets                                              $48,856,690       $9,443,476          $598,190
    Total stockholders' equity (5)                             37,116,491        9,233,917           200,000


</TABLE>

(1)      No operations  commenced until the Company  received  minimum  offering
         proceeds and funds were released from escrow on October 15, 1997.

(2)      Selected  financial  data for 1996  represents the period June 12, 1996
         (date of inception) through December 31, 1996.

(3)      Funds from operations ("FFO"),  based on the revised definition adopted
         by the Board of Governors of the  National  Association  of Real Estate
         Investment  Trusts  ("NAREIT")  and as used herein,  means net earnings
         determined in accordance with generally accepted accounting  principles
         ("GAAP"),  excluding gains or losses from debt  restructuring and sales
         of property,  plus  depreciation and amortization of real estate assets
         and  after  adjustments  for  unconsolidated   partnerships  and  joint
         ventures.  (Net earnings determined in accordance with GAAP include the
         noncash effect of straight-lining  rent increases  throughout the lease
         term. This  straight-lining is a GAAP convention  requiring real estate
         companies to report  rental  revenue based on the average rent per year
         over the life of the lease.  During the year ended  December  31, 1998,
         net earnings  included  $44,160 of these amounts.) FFO was developed by
         NAREIT as a relative  measure of performance and liquidity of an equity
         REIT  in  order  to  recognize   that   income-producing   real  estate
         historically  has not depreciated on the basis  determined  under GAAP.
         However,  FFO (i) does not  represent  cash  generated  from  operating
         activities  determined  in  accordance  with GAAP  (which,  unlike FFO,
         generally  reflects all cash effects of  transactions  and other events
         that  enter  into  the  determination  of net  earnings),  (ii)  is not
         necessarily  indicative  of cash flow  available to fund cash needs and
         (iii)  should  not be  considered  as an  alternative  to net  earnings
         determined  in  accordance  with GAAP as an indication of the Company's
         operating  performance,  or to  cash  flow  from  operating  activities
         determined in accordance with GAAP as a measure of either  liquidity or
         the Company's ability to make distributions.  Accordingly,  the Company
         believes  that in  order to  facilitate  a clear  understanding  of the
         consolidated historical operating results of the Company, FFO should be
         considered  in  conjunction  with the  Company's  net earnings and cash
         flows as reported in the  accompanying  financial  statements and notes
         thereto.

(4)      The weighted  average  number of Shares  outstanding  is based upon the
         period the Company was operational.

(5)      Includes  subscriptions of $31,693,678 and $11,325,402 received, net of
         stock issuance costs of $3,601,898 and $2,284,561,  for the years ended
         December 31, 1998 and 1997, respectively.  Stock issuance costs consist
         of selling  commissions,  marketing  support and due diligence  expense
         reimbursement fees and organizational and offering expenses.  The ratio
         of stock  issuance  costs  to  subscriptions  received  was 1:9 and 1:5
         during 1998 and 1997,  respectively.  The Advisor has agreed to pay all
         organizational  and  offering  expenses  which  exceed  3% of the gross
         offering proceeds received from the sale of Shares of the Company.

(6)      During 1998 and for the period  October  15, 1997 (the date  operations
         commenced)  through December 31, 1997,  operating  expenses incurred by
         the  Company  as a percent of net  income,  each term as defined in the
         Company's Prospectus, was 18.90% and 94.52%, respectively. In addition,
         during 1998,  operating  expenses  incurred by the Company  represented
         approximately  1.6% of  average  invested  assets,  as  defined  in the
         Company's Prospectus. In accordance with the Advisory Agreement, to the
         extent that operating  expenses payable or reimbursable by the Company,
         in any four  consecutive  fiscal  quarters  exceed the greater of 2% of
         average  invested assets or 25% of net income (the "Expense Cap"),  the
         Advisor is  required to  reimburse  the Company the amount by which the
         total  operating  expenses  paid or incurred by the Company  exceed the
         Expense Cap.  During the year ended  December 31, 1998,  the  Company's
         operating expenses exceeded the Expense Cap by $92,733;  therefore, the
         Advisor  reimbursed  the  Company  such amount in  accordance  with the
         Advisory Agreement.  As of December 31, 1998, net offering proceeds had
         been  invested  in  short  term,  highly  liquid  investments   pending
         investment  in  Properties  and Mortgage  Loans.  Therefore,  operating
         expenses  as a  percentage  of average  invested  assets for the period
         October 15 (the date operations  commenced)  through December 31, 1997,
         was not applicable.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations

         This information contains forward-looking statements within the meaning
of Section 27A of the  Securities  Act of 1933 and Section 21E of the Securities
Act of 1934.  Although the Company believes that the  expectations  reflected in
such  forward-looking  statements  are based upon  reasonable  assumptions,  the
Company's  actual  results could differ  materially  from those set forth in the
forward-looking  statements.  Certain factors that might cause such a difference
include the following: changes in general economic conditions,  changes in local
and national real estate conditions, continued availability of proceeds from the
Company's Offering,  the ability of the Company to obtain permanent financing on
satisfactory terms, the ability of the Company to identify suitable investments,
the ability of the Company to locate  suitable  tenants for its  Properties  and
borrowers for its Mortgage Loans and Secured Equipment  Leases,  and the ability
of such tenants and borrowers to make payments  under their  respective  leases,
Mortgage Loans or Secured Equipment Leases.

Introduction

         CNL Hospitality Properties, Inc., formerly known as CNL American Realty
Fund,  Inc., is a Maryland  corporation  that was organized on June 12, 1996. On
June 15, 1998, CNL Hospitality Properties, Inc. formed CNL Hospitality Partners,
LP, a  wholly  owned  Delaware  limited  partnership.  Properties  acquired  are
expected  to be  held  by  the  Partnership  and,  as a  result,  owned  by  CNL
Hospitality Properties, Inc. through the Partnership.

         The Company was formed to acquire  Properties located across the United
States to be leased on a long-term,  "triple-net" basis to operators of selected
national and regional  limited  service,  extended  stay and full service  Hotel
Chains and operators of national and regional fast-food, family-style and casual
dining  Restaurant  Chains.  While  the  Company  may  currently  invest in both
restaurant and hotel Properties,  management believes that over time the Company
will focus its Property investments exclusively on hotel Properties. The Company
may  also  provide   Mortgage  Loans  in  the  aggregate   principal  amount  of
approximately  5% to 10% of the gross  offering  proceeds.  The Company also may
offer  Secured  Equipment  Leases to operators  of Hotel  Chains and  Restaurant
Chains.  Secured  Equipment Leases will be funded from the proceeds of financing
to be obtained by the Company.  The aggregate  outstanding  principal  amount of
Secured  Equipment  Leases  will  not  exceed  10% of  gross  proceeds  from the
Company's offerings of Shares of common stock.

Liquidity and Capital Resources

         On July 9, 1997, the Company commenced the Offering to the public of up
to 16,500,000  Shares of common stock  pursuant to a  registration  statement on
Form S-11 under the Securities Act of 1933, as amended. As of December 31, 1998,
the  Company  had  received  aggregate   subscription  proceeds  of  $43,019,080
(4,301,908 Shares), from the Offering,  including $37,299 (3,730 Shares) through
the Company's Reinvestment Plan. The Company anticipates  significant additional
sales of Shares prior to the completion of the Offering.  In accordance with the
Company's  prospectus,  the Company has elected to extend the  Offering  until a
date no later than July 9, 1999.

         The managing dealer of the offering of Shares is CNL Securities  Corp.,
an affiliate of the Company.



<PAGE>


         As of December 31, 1998,  net proceeds to the Company from its Offering
and  capital  contributions  from  the  Advisor,   after  deduction  of  selling
commissions,  marketing support and due diligence expense reimbursement fees and
organizational and offering expenses,  totalled  approximately  $37,313,000.  In
addition,  the  Company had  received  three  advances  under the Line of Credit
totalling $9,600,000. As of December 31, 1998, the Company had used net proceeds
from the Offering and  borrowings  to invest  approximately  $27,246,000  in two
hotel Properties,  to pay $5,000,000 as a deposit on three additional Properties
and to pay  approximately  $3,487,000 in acquisition fees and expenses,  leaving
approximately  $11,180,000 of net offering proceeds  available for investment in
Properties and Mortgage Loans.

         On November 23, 1998,  the Company  filed a  registration  statement on
Form S-11 with the  Securities  and Exchange  Commission in connection  with the
proposed sale by the Company of up to an additional  27,500,000 Shares of common
stock  ($275,000,000) in the Secondary Offering expected to commence immediately
following the completion of the Company's  current  Offering.  Of the 27,500,000
Shares  of common  stock to be  offered,  2,500,000  will be  available  only to
stockholders  purchasing  Shares  through the  Reinvestment  Plan. The price per
Share and the other terms of the Secondary Offering, including the percentage of
gross  proceeds  payable to the  managing  dealer for  selling  commissions  and
expenses in connection with the offering, payable to the Advisor for acquisition
fees and  acquisition  expenses  and  reimbursable  to the Advisor for  offering
expenses,  will be  substantially  the same as those for the  Company's  current
Offering. The Company expects to use net proceeds from the Secondary Offering to
purchase additional Properties and, to a lesser extent, make Mortgage Loans.

         As of January 19, 1999, the Company had received  subscription proceeds
of $48,634,727 (4,863,472 Shares) from its Offering. As of January 19, 1998, net
proceeds to the Company  from its Offering  and capital  contributions  from the
Advisor,  after  deduction  of selling  commissions,  marketing  support and due
diligence expense  reimbursement  fees and  organizational and offering expenses
totalled  approximately  $42,479,000.  In addition,  the Company  received three
advances under the Line of Credit totalling $9,600,000. The Company has used net
proceeds  from the  current  Offering  and  borrowings  to invest  approximately
$27,246,000  in two hotel  Properties,  to pay  $5,000,000 as a deposit on three
additional hotel Properties and to pay  approximately  $3,740,000 in acquisition
fees and expenses, leaving approximately $16,093,000 available for investment in
Properties and Mortgage Loans.

         The Company  expects to use net  proceeds it receives  from the current
Offering,  plus  any net  proceeds  from  the sale of  Shares  in the  Secondary
Offering,  to  purchase  additional  Properties  and, to a lesser  extent,  make
Mortgage  Loans.  In  addition,  the Company  intends to borrow money to acquire
additional Properties, to invest in Mortgage Loans and Secured Equipment Leases,
and to pay  certain  related  fees.  The Company  intends to encumber  assets in
connection  with such  borrowing.  The Company  currently plans to obtain one or
more revolving Lines of Credit in an aggregate amount up to $45,000,000 and may,
in addition,  also obtain permanent financing.  The Line of Credit may be repaid
with offering  proceeds,  working capital or permanent  financing.  Although the
Board of Directors  anticipates  that the Line of Credit will initially be in an
amount  initially  of up to  $45,000,000  and that the  aggregate  amount of any
permanent  financing  will not exceed 30% of the  Company's  total  assets,  the
maximum  amount the Company may borrow,  absent a  satisfactory  showing  that a
higher  level of  borrowing  is  appropriate  as  approved  by a majority of the
independent directors, is 300% of the Company's net assets.

         On July 31,  1998,  the Company  entered into an initial Line of Credit
and security  agreement  with a bank to be used by the Company to acquire  hotel
Properties. The initial Line of Credit provides that the Company will be able to
receive advances of up to $30,000,000 until July 30, 2003, with an annual review
to be  performed  by the bank to  indicate  that  there has been no  substantial
deterioration,  in the bank's  reasonable  discretion,  of the  credit  quality.
Interest  expense  on each  advance  shall be payable  monthly,  with all unpaid
interest  and  principal  due no  later  than  five  years  from the date of the
advance.  Advances  under the Line of Credit will bear  interest at either (i) a
rate per annum equal to 318 basis points above the London Interbank Offered Rate
(LIBOR) or (ii) a rate per annum equal to 30 basis  points above the bank's base
rate,  whichever the Company selects at the time advances are made. In addition,
a fee of .5% per  advance  will be due  and  payable  to the  bank on  funds  as
advanced.  Each advance made under the Line of Credit will be  collateralized by
the  assignment of rents and leases.  In addition,  the Line of Credit  provides
that the  Company  will not be able to further  encumber  the  applicable  hotel
Property during the term of the advance without the bank's consent.  The Company
will be required,  at each closing,  to pay all costs, fees and expenses arising
in  connection  with the Line of Credit.  The  Company  must also pay the bank's
attorneys fees,  subject to a maximum cap,  incurred in connection with the Line
of Credit and each advance.  As of December 31, 1998, the Company obtained three
advances totalling $9,600,000 relating to the Line of Credit. In connection with
the Line of Credit, the Company incurred a commitment


<PAGE>


fee,  legal  fees,  and  closing  costs of $68,762.  The  proceeds  were used in
connection  with the  purchase of two hotel  Properties  and the  commitment  to
acquire  three  additional  Properties.  The  Company  has  not yet  received  a
commitment  for any  permanent  financing  and  there is no  assurance  that the
Company will obtain any permanent financing on satisfactory terms.

         As of January 19, 1999, the Company had initial  commitments to acquire
three hotel  Properties.  The acquisition of each of these Properties is subject
to the  fulfillment  of certain  conditions,  including,  but not  limited to, a
satisfactory  environmental  survey and property appraisal.  In order to acquire
these  Properties,  the Company must obtain additional funds through the receipt
of additional offering proceeds and/or debt financing.  In connection with these
agreements, the Company was required by the seller to obtain a letter of credit.
The letter of credit was collateralized by a $5,000,000  certificate of deposit.
In connection with the letter of credit, the Company incurred $22,500 in closing
costs.  There can be no assurance  that any or all of the  conditions  described
above will be satisfied or, if satisfied,  that one or more of these  Properties
will be acquired by the Company.

         As  of  January  19,  1999,  the  Company  had  not  entered  into  any
arrangements  creating a reasonable  probability  a particular  Mortgage Loan or
Secured Equipment Lease would be funded. The Company is presently negotiating to
acquire additional  Properties,  but as of January 19, 1999, the Company had not
acquired any such Properties or entered into any Mortgage Loans.

         The  Properties  are,  and are  expected to be,  leased on a long-term,
triple-net basis, meaning that tenants are generally required to pay all repairs
and maintenance,  property taxes, insurance and utilities. Rental payments under
the leases are expected to exceed the Company's  operating  expenses.  For these
reasons, no short-term or long-term liquidity problems associated with operating
the Properties are currently anticipated by management.

         Until Properties are acquired,  or Mortgage Loans are entered into, net
offering  proceeds  are held in  short-term,  highly  liquid  investments  which
management  believes to have  appropriate  safety of principal.  This investment
strategy  provides high  liquidity in order to  facilitate  the Company's use of
these  funds to  acquire  Properties  at such time as  Properties  suitable  for
acquisition  are located or to fund Mortgage  Loans.  At December 31, 1998,  the
Company had $13,228,923  invested in such short-term  investments as compared to
$8,869,838  at  December  31,  1997.  The  increase  in the amount  invested  in
short-term  investments  reflects  proceeds received from the sale of shares and
advances on the line of credit during the year ended  December 31, 1998,  net of
the  investment in  Properties.  The remaining  funds will be used  primarily to
purchase  additional  Properties,  to make Mortgage  Loans,  to pay offering and
acquisition  expenses,  to pay  distributions  to  stockholders,  to meet  other
Company expenses and, in management's discretion, to create cash reserves.

         During the years ended  December  31, 1998 and 1997 and the period June
12, 1996 (date of  inception)  through  December  31,  1996,  affiliates  of the
Company  incurred  on behalf of the Company  $459,250,  $638,274  and  $555,812,
respectively,  for certain  organizational and offering  expenses.  In addition,
during the years ended  December  31, 1998 and 1997,  affiliates  of the Company
incurred  on behalf of the  Company  $392,863  and  $26,149,  respectively,  for
certain acquisition expenses and $98,212 and $11,003,  respectively, for certain
operating  expenses.  As of December  31,  1998,  the  Company  owed the Advisor
$318,937 for such amounts, unpaid fees and administrative  expenses. The Advisor
has agreed to pay or reimburse to the Company all organizational and offering
expenses in excess of three percent of gross offering proceeds. In addition, the
Advisor is required to reimburse the Company the amount by which total operating
expenses paid or incurred by the Company exceed, in any four consecutive  fiscal
quarters, the greater of two percent of average invested assets or 25 percent of
net income (the "Expense  Cap").  During the year ended  December 31, 1998,  the
Company's operating expenses exceeded the Expense Cap by $92,733;  therefore the
Advisor  reimbursed  the Company  such amount in  accordance  with the  Advisory
Agreement.

         During  the  years  ended  December  31,  1998 and  1997,  the  Company
generated cash from operations  (which includes cash received,  from tenants and
interest and other income  received  less cash paid for  operating  expenses and
interest  expense) of $2,776,965 and $22,469,  respectively.  Based on cash from
operations, the Company declared distributions to its stockholders of $1,168,145
and $29,776  during the year ended  December 31, 1998 and the period October 15,
1997 (the date operations commenced) through December 31, 1997, respectively. In
addition, on January 1, 1999, the Company declared distributions to stockholders
of record on January 1, 1999, totalling $251,967 ($0.0583 per Share), payable in
March 1999.


         For the  years  ended  December  31,  1998 and 1997,  approximately  76
percent  and  100  percent,  respectively,  of  the  distributions  received  by
stockholders  were  considered  to be  ordinary  income  and for the year  ended
December 31, 1998,  approximately  24 percent was considered a return of capital
for federal income tax purposes.  No amounts distributed or to be distributed to
the  stockholders  as of January  19,  1999,  were  required  to be or have been
treated by the Company as a return of capital for  purposes of  calculating  the
stockholders' return on their invested capital.

         Management  believes  that the  Properties  are  adequately  covered by
insurance.  In addition,  the Advisor has obtained contingent liability coverage
for the  Company.  This  insurance  policy is intended  to reduce the  Company's
exposure  in the  unlikely  event  a  tenant's  insurance  policy  lapses  or is
insufficient to cover a claim relating to a Property.

         The tenant of the two Properties owned by the Company as of January 19,
1999 has established  capital  expenditure  reserve funds which will be used for
the replacement and renewal of furniture, fixtures and equipment relating to the
hotel Properties (the "FF&E Reserve"). Funds in the FF&E Reserve have been paid,
granted  and  assigned  to the Company as  additional  rent.  For the year ended
December 31, 1998,  revenues from the FF&E Reserve  totalled  $98,099,  of which
$15,692 is included in  receivables  and $82,407 is restricted  cash. Due to the
fact that the Properties are leased on a long term, triple-net basis, management
does not believe  that  working  capital  reserves  are  necessary at this time.
Management  has the right to cause the Company to maintain  additional  reserves
if, in their  discretion,  they determine such reserves are required to meet the
Company's working capital needs.

         Management  expects that the cash to be generated from  operations will
be adequate to pay operating expenses and to make distributions to stockholders.

Results of Operations

         No operations commenced until the Company received the minimum offering
proceeds of $2,500,000 on October 15, 1997. As of December 31, 1998, the Company
had acquired two Properties,  each  consisting of land,  building and equipment,
and had entered into a long-term, triple-net lease agreement relating to each of
the Properties.

         The Property  leases  provide for minimum base annual  rental  payments
ranging  from  approximately  $1,209,000  to  $1,651,800,  which are  payable in
monthly  installments.  The leases also provide  that,  commencing in the second
lease  year,  the annual base rent  required  under the terms of the leases will
increase.  In addition to annual base rent,  the tenant pays a  percentage  rent
computed as a percentage  of the gross sales of the  Property.  No such rent was
owed during 1998.  The Company's  leases also require the  establishment  of the
FF&E Reserves.  The FF&E Reserves established for the Properties at December 31,
1998 are owned by the  Company  and are thus  reported as  additional  rent.  In
connection  therewith,  the Company earned $1,316,599 (including $98,099 in FF&E
Reserve income) from the two Properties during the year ended December 31, 1998.
Because  the  Company  has  not  yet  acquired  all of its  Properties  and  the
Properties  owned as of  December  31, 1998 were owned for only a portion of the
year, revenues for the year ended December 31, 1998, represent only a portion of
revenues which the Company is expected to earn in future periods.

         During the years ended  December 31, 1998 and 1997,  the Company earned
$638,862 and $46,071, respectively, in interest income from investments in money
market accounts and other short-term highly liquid investments.  Interest income
is expected to increase as the Company invests subscription proceeds received in
the future in highly liquid  investments  pending  investment in Properties  and
Mortgage Loans. However, as net offering proceeds are invested in Properties and
used to make Mortgage Loans, the percentage of the Company's total revenues from
interest  income from  investments in money market accounts or other short term,
highly liquid investments is expected to decrease.

         Operating  expenses,  including  interest  expense and depreciation and
amortization expense, were $996,522 and $23,219 for the years ended December 31,
1998 and 1997, respectively.  Operating expenses increased during the year ended
December 31, 1998 as compared to the year ended December 31, 1997,  primarily as
a result of the fact that the Company did not commence  operations until October
15, 1997 and due to the fact that the Company  acquired  Properties and received
advances  under the Line of Credit during 1998.  Operating  expenses,  including
asset  management  fees,  interest  expense and  depreciation  and  amortization
expense,  represent  only a portion of operating  expenses  which the Company is
expected to incur during a full year in which the Company owns  Properties.  The
dollar


<PAGE>


amount of  operating  expenses is  expected to increase as the Company  acquires
additional  Properties  and  invests in  Mortgage  Loans.  However,  general and
administrative  expenses  as a  percentage  of total  revenues  is  expected  to
decrease as the Company acquires  additional  Properties and invests in Mortgage
Loans.

         During the year ended December 31, 1998, the Company reduced  operating
expenses by $92,733 as a result of operating expenses  reimbursed by the Advisor
due to such  expenses  exceeding  the  Expense  Cap as defined  in the  Advisory
Agreement as described above in "Liquidity and Capital Resources".

         The Company has made an election  under Section  856(c) of the Internal
Revenue Code of 1986, as amended (the  "Code"),  to be taxed as a REIT under the
Code  beginning  with its taxable year ended  December 31, 1997. As a REIT,  for
federal  income  tax  purposes,  the  Company  generally  will not be subject to
federal  income tax on income that it distributes  to its  stockholders.  If the
Company  fails to qualify as a REIT in any taxable  year,  it will be subject to
federal income tax on its taxable income at regular corporate rates and will not
be permitted to qualify for treatment as a REIT for federal  income tax purposes
for four years  following the year during which  qualification  is lost. Such an
event could materially affect the Company's net earnings.  However,  the Company
believes  that it is  organized  and operates in such a manner as to qualify for
treatment as a REIT for the years ended December 31, 1998 and 1997. In addition,
the Company intends to continue to operate the Company so as to remain qualified
as a REIT for federal income tax purposes.

         The Company  anticipates that its leases will be triple-net  leases and
will contain  provisions  that  management  believes will mitigate the effect of
inflation.  Such  provisions  will  include  clauses  requiring  the  payment of
percentage  rent based on certain  gross sales above a  specified  level  and/or
automatic  increases  in base rent at  specified  times  during  the term of the
lease. Management expects that increases in gross sales volumes due to inflation
and real sales growth  should  result in an increase in rental income over time.
Continued  inflation  also  may  cause  capital  appreciation  of the  Company's
Properties.  Inflation and changing  prices,  however,  also may have an adverse
impact on the sales of the Properties and on potential  capital  appreciation of
the Properties.

         In April 1998, the American  Institute of Certified Public  Accountants
issued Statement of Position  ("SOP") 98-5,  "Reporting on the Costs of Start-Up
Activities,"  which is effective for the Company as of January 1, 1999. This SOP
requires  start-up  and  organization  costs to be expensed as incurred and also
requires  previously  deferred  start-up  costs to be recognized as a cumulative
effect adjustment in the statement of income. Management of the Company does not
believe that  adoption of this SOP will have a material  effect on the Company's
financial position or results of operations.

Market Risk

         The  Company is  subject  to  interest  rate risk  through  outstanding
balances on its variable rate Line of Credit. The Company may mitigate this risk
by paying down the Line of Credit from offering  proceeds  should interest rates
rise substantially.

Year 2000

         The Year 2000 problem is the result of information  technology  systems
and embedded  systems  (products which are made with  microprocessor  (computer)
chips such as HVAC systems,  physical  security  systems and elevators)  using a
two-digit  format,  as  opposed  to four  digits,  to  indicate  the year.  Such
information  technology and embedded systems may be unable to properly recognize
and process date-sensitive information beginning January 1, 2000.

         The  Company  does  not  have  any  information   technology   systems.
Affiliates of the Advisor provide all services  requiring the use of information
technology  systems  pursuant to a management  agreement  with the Company.  The
maintenance  of embedded  systems,  if any, at the  Company's  Properties is the
responsibility  of the tenants of the Properties in accordance with the terms of
the Company's  leases.  The Advisor and its affiliates  have  established a team
dedicated to reviewing the internal  information  technology systems used in the
operation of the Company,  and the information  technology and embedded  systems
and the  Year  2000  compliance  plans  of the  Company's  tenants,  significant
suppliers, financial institutions and transfer agent.


         The  information  technology  infrastructure  of the  affiliates of the
Advisor  consists  of a network of  personal  computers  and  servers  that were
obtained from major suppliers. The affiliates utilize various administrative and
financial software  applications on that  infrastructure to perform the business
functions of the Company.  The  inability of the Advisor and its  affiliates  to
identify and timely  correct  material  Year 2000  deficiencies  in the software
and/or infrastructure could result in an interruption in, or failure of, certain
of the Company's business activities or operations. Accordingly, the Advisor and
its  affiliates  have  requested  and  are  evaluating  documentation  from  the
suppliers of the software and  infrastructure  of the  affiliates  regarding the
Year 2000 compliance of their products that are used in the business  activities
or  operations  of the  Company.  The  Advisor has not yet  received  sufficient
certifications  to be  assured  that the  suppliers  have fully  considered  and
mitigated any potential material impact of the Year 2000 deficiencies. The costs
expected to be incurred  by the Advisor and its  affiliates  to become Year 2000
compliant will be incurred by the Advisor and its affiliates;  therefore,  these
costs  will have no impact on the  Company's  financial  position  or results of
operations.

         The Company has material  third party  relationships  with its tenants,
financial  institutions  and transfer agent.  The Company depends on its tenants
for rents and cash flows,  its financial  institutions  for availability of cash
and its transfer  agent to maintain and track  investor  information.  If any of
these third parties are unable to meet their  obligations to the Company because
of the Year 2000 deficiencies,  such a failure may have a material impact on the
Company.  Accordingly, the Advisor has requested and is evaluating documentation
from the Company's tenants, financial institutions,  and transfer agent relating
to their Year 2000 compliance plans. The Advisor has not yet received sufficient
certifications  to be assured  that the  tenants,  financial  institutions,  and
transfer agent have fully considered and mitigated any potential material impact
of the Year 2000  deficiencies.  Therefore,  the Advisor does not, at this time,
know of the  potential  costs to the Company of any adverse  impact or effect of
any Year 2000 deficiencies by these third parties.

         The Advisor currently expects that all year 2000 compliance testing and
any necessary  remedial measures on the information  technology  systems used in
the business activities and operations of the Company will be completed prior to
June 30, 1999. Based on the progress the Advisor and its affiliates have made in
identifying  and  addressing  the  Company's  Year 2000  issues and the plan and
timeline to  complete  the  compliance  program,  the  Advisor  does not foresee
significant  risks  associated  with the Company's Year 2000  compliance at this
time.  Because the Advisor and its affiliates are still evaluating the status of
the systems used in business  activities  and  operations of the Company and the
systems of the third parties with which the Company  conducts its business,  the
Advisor has not yet developed a comprehensive  contingency plan and is unable to
identify "the most  reasonably  likely worst case scenario" at this time. As the
Advisor  identifies  significant  risks  related  to  the  Company's  Year  2000
compliance or if the Company's Year 2000 compliance  program's progress deviates
substantially   from  the  anticipated   timeline,   the  Advisor  will  develop
appropriate contingency plans.

Item 7A.  Quantitative and Qualitative Disclosures About Market Risk.

         See Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Market Risk for information  related to quantitative
and qualitative disclosure about market risk.

Item 8.   Financial Statements and Supplementary Data


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES


                                    CONTENTS






                                                                        Page
                                                                        ----

Report of Independent Accountants                                        16

Financial Statements:

  Consolidated Balance Sheets                                            17

  Consolidated Statements of Earnings                                    18

  Consolidated Statements of Stockholders' Equity                        19

  Consolidated Statements of Cash Flows                                  20

  Notes to Consolidated Financial Statements                             22


<PAGE>







                        Report of Independent Accountants



To the Board of Directors
CNL Hospitality Properties, Inc.


In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 14(a)(1) and (2) present fairly, in all material  respects,
the  financial  position  of  CNL  Hospitality  Properties,   Inc.  (a  Maryland
corporation) and its subsidiaries at December 31, 1998 and 1997, and the results
of their  operations  and  their  cash  flows  for each of the two  years  ended
December  31,  1998 and 1997 and the period  June 12,  1996 (date of  inception)
through  December 31, 1996, in conformity  with  generally  accepted  accounting
principles.  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 of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.





/s/ PRICEWATERHOUSECOOPERS LLP

Orlando, Florida
January 19, 1999



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                           CONSOLIDATED BALANCE SHEETS



<TABLE>
<CAPTION>

                                                                                   December 31,
                                                                             1998                1997
                                                                          ------------        ------------
                          ASSETS
<S> <C>

Land, building and equipment on operating leases,
    less accumulated depreciation                                        $28,368,383        $         --
Cash and cash equivalents                                                 13,228,923           8,869,838
Restricted cash                                                               82,407                  --
Certificate of deposit                                                     5,016,575                  --
Receivables                                                                   28,257                  --
Due from related party                                                                             7,500
                                                                                  --
Prepaid expenses                                                               9,391              11,179
Organization costs, less accumulated amortization of
    $5,221 and $833, respectively                                             19,752              19,167
Loan costs, less accumulated amortization of $12,980                          78,282                  --
Accrued rental income                                                         44,160                  --
Other assets                                                               1,980,560             535,792
                                                                        -------------      -------------

                                                                         $48,856,690          $9,443,476
                                                                        =============      =============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Line of credit                                                            $9,600,000              $   --
Accounts payable and accrued expenses                                        333,726              16,305
Due to related parties                                                       318,937             193,254
Security deposits                                                          1,417,500                  --
Rents paid in advance                                                          3,489                  --
Interest payable                                                              66,547                  --
                                                                        -------------       -------------
       Total liabilities                                                  11,740,199             209,559
                                                                        -------------       -------------

Commitments (Note 10)

Stockholders' equity:
    Preferred stock, without par value.
       Authorized and unissued  3,000,000  shares                                 --                  --
    Excess shares,  $.01 par value per share.
       Authorized and unissued 63,000,000 shares                                  --                  --
    Common stock, $.01 par value per share. Authorized
       60,000,000 shares, issued and outstanding
       4,321,908 and 1,152,540 shares, respectively                           43,219              11,525
    Capital in excess of par value                                        37,289,402           9,229,316
    Accumulated distributions in excess of net earnings                     (216,130 )            (6,924 )
                                                                        -------------       -------------
          Total stockholders' equity                                      37,116,491           9,233,917
                                                                        -------------       -------------

                                                                         $48,856,690         $ 9,443,476
                                                                        =============       =============


</TABLE>

          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                       CONSOLIDATED STATEMENTS OF EARNINGS


<TABLE>
<CAPTION>

                                                                                     June 12, 1996
                                                                                        (Date of
                                                                                       Inception)
                                                                                        through
                                                                                      December 31,
                                                          Year Ended
                                                         December 31,
                                                   1998                1997              1996
                                                ------------       -------------      ------------

<S> <C>
Revenues:
    Rental income from
       operating leases                         $1,218,500              $   --            $   --
    FF&E Reserve income                             98,099                  --                --
    Interest and other income                      638,862              46,071                --
                                               ------------        ------------      ------------
                                                 1,955,461              46,071                --
                                               ------------        ------------      ------------

Expenses:
    Interest and loan cost
       amortization                                350,322                  --                --
    General operating and
       administrative                              167,951              22,386                --
    Professional services                           21,581                  --                --
    Asset management fees to
       related party                                68,114                  --                --
    Depreciation and amortization                  388,554                 833                --
                                               ------------        ------------      ------------
                                                   996,522              23,219                --
                                               ------------        ------------      ------------

Net Earnings                                     $ 958,939            $ 22,852       $        --
                                               ============        ============      ============

Earnings Per Share of Common
    Stock (Basic and Diluted)                     $   0.40            $   0.03       $        --
                                               ============        ============      ============

Weighted Average Number of
    Shares of Common Stock
    Outstanding                                  2,402,344             686,063                --
                                               ============        ============      ============

</TABLE>


          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


<TABLE>
<CAPTION>

                                                                                     
                                                                                    Accumulated
                                            Common stock                           distributions
                                       ------------------------     Capital in       in excess
                                         Number         Par         excess of          of net
                                       of Shares       value        par value         earnings           Total
                                       -----------    ---------    -------------    --------------    -------------
<S> <C>

Balance at June 12, 1996                       --         $ --            $   --         $    --            $   --

Sale of common stock to
    related party                          20,000          200           199,800              --           200,000
                                       -----------    ---------     -------------   -------------      ------------

Balance at December 31, 1996               20,000          200           199,800                        
                                                                                              --           200,000

Subscriptions received for common
    stock through public offering
    and distribution reinvestment
    plan                                1,132,540       11,325        11,314,077              --        11,325,402

Stock issuance costs                           --           --        (2,284,561 )            --        (2,284,561 )

Net earnings                                   --           --                --          22,852            22,852

Distributions declared and paid
    ($.05 per share)                           --           --                --         (29,776 )         (29,776 )
                                       -----------    ---------     -------------   -------------      ------------

Balance at
    December 31, 1997                   1,152,540       11,525         9,229,316          (6,924 )       9,233,917

Subscriptions received for common
    stock through public offering
    and distribution reinvestment
    plan                                3,169,368       31,694        31,661,984              --        31,693,678

Stock issuance costs                           --           --        (3,601,898 )            --        (3,601,898 )

Net earnings                                   --           --                --         958,939           958,939

Distributions declared and paid
    ($.46 per share)                           --           --                --      (1,168,145 )      (1,168,145 )
                                       -----------    ---------     -------------   -------------      ------------

Balance at
    December 31, 1998                   4,321,908      $43,219       $37,289,402      $ (216,130 )     $37,116,491
                                       ===========    =========     =============   =============      ============

</TABLE>






          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



<TABLE>
<CAPTION>
                                                                                           
                                                                                           
                                                                                            June 12, 1996 
                                                                                              (Date of    
                                                                                              Inception)   
                                                                  Year Ended                   through   
                                                                 December 31,                December 31,
                                                             1998            1997               1996
                                                          -----------    -------------      -------------

<S> <C>

Increase (Decrease) in Cash and Cash
    Equivalents:

    Cash Flows from Operating Activities:
       Cash received from tenants                        $2,665,171       $        --         $       --
       Interest received                                    622,237            46,071                 --
       Cash paid for expenses                              (239,648 )         (23,602 )               --
       Cash paid for interest                              (270,795 )              --                 --
                                                        ------------      ------------        -----------
              Net cash provided by operating
                  activities                              2,776,965            22,469                 --
                                                        ------------      ------------        -----------

    Cash Flows from Investing Activities:
       Additions to land,  buildings and equipment on   
          operating leases                              (28,216,757 )              --                 --
       Investment in certificate of deposit              (5,000,000 )              --                 --
       Increase in restricted cash                          (82,407 )              --                 --
       Increase in other assets                          (1,211,818 )        (463,470 )               --
                                                        ------------      ------------        -----------
               Net cash used in investing activities    (34,510,982 )        (463,470 )               --
                                                        ------------      ------------        -----------

    Cash Flows from Financing Activities:
       Reimbursement of acquisition, organization,
          deferred  offering  and  stock  issuance
          costs paid by related parties on
          behalf of the Company                            (862,068 )      (1,003,031 )         (197,916 )
       Sale of common stock to related party                     --                --            200,000
       Proceeds from borrowing on line of credit          9,600,000                --                 --
       Payment of loan costs                                (91,262 )              --                 --
       Subscriptions received from stockholders          31,693,678        11,325,402                 --
       Distributions to stockholders                     (1,168,145 )         (29,776 )               --
       Payment of stock issuance costs                   (3,086,630 )        (986,338 )               --
       Other                                                  7,529             2,498                 --
                                                        ------------      ------------        -----------
              Net cash provided by financing
                 activities                              36,093,102         9,308,755              2,084
                                                        ------------      ------------        -----------

Net Increase in Cash and Cash Equivalents                 4,359,085         8,867,754              2,084

Cash and Cash Equivalents at Beginning
    of Period                                             8,869,838             2,084                 --
                                                        ------------      ------------        -----------

Cash and Cash Equivalents at End of
    Period                                              $13,228,923        $8,869,838         $    2,084
                                                        ============      ============        ===========

</TABLE>





          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                      STATEMENTS OF CASH FLOWS - CONTINUED


<TABLE>
<CAPTION>

                                                                                           
                                                                                           
                                                                                            June 12, 1996
                                                                                              (Date of   
                                                                                              Inception)  
                                                                 Year Ended                    through       
                                                                December 31,                 December 31, 
                                                            1998              1997              1996
                                                        -------------      -----------       -----------

<S> <C>

Reconciliation of Net Earnings to Net Cash
    Provided by Operating Activities:

       Net earnings                                       $ 958,939         $  22,852             $   --
                                                        ------------       -----------        -----------
       Adjustments to reconcile
          net earnings to net cash
          provided by operating
          activities:
             Depreciation                                   384,166                --                 --
             Amortization                                    17,368               833                 --
             Increase in receivables                        (44,832 )              --                 --
             Decrease (increase) in prepaid
                expenses                                      1,788           (11,179 )               --
             Increase in accrued rental income              (44,160 )              --                 --
             Increase in accounts payable
                 and other accrued expenses                  71,869             6,141                 --
             Increase  in  due  to  related
                parties, excluding reimbursement
                of acquisition, organization,
                deferred offering and stock                  
                issuance   costs   paid  on
                behalf of the Company                        10,838             3,822                 --
             Increase in security deposits                1,417,500                --                 --
             Increase in rents paid in advance                3,489                --                 --
                                                        ------------       -----------        -----------
                   Total adjustments                      1,818,026              (383 )               --
                                                        ------------       -----------        -----------

Net Cash Provided by Operating Activities                $2,776,965         $  22,469             $   --
                                                        ============       ===========        ===========

Supplemental Schedule of Non-Cash
    Investing and Financing Activities:

       Related parties paid certain
          acquisition, organization, deferred
          offering and stock issuance costs
          on behalf of the Company as
          follows:
             Acquisition costs                            $ 392,863         $  26,149             $   --
             Organization costs                               4,973                --             20,000
             Deferred offering costs                             --                --            535,812
             Stock issuance costs                           454,277           638,274                 --
                                                        ============       ===========        ===========
                                                          $ 852,113         $ 664,423          $ 555,812
                                                        ============       ===========        ===========



</TABLE>



          See accompanying notes to consolidated financial statements.


<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


1.       Significant Accounting Policies:

         Organization and Nature of Business - CNL Hospitality Properties, Inc.,
         formerly  known as CNL American  Realty Fund,  Inc.,  was  organized in
         Maryland on June 12, 1996. CNL Hospitality GP Corp. and CNL Hospitality
         LP Corp. are wholly owned  subsidiaries of CNL Hospitality  Properties,
         Inc.,  each of which were  organized  in  Delaware  in June  1998.  CNL
         Hospitality  Partners,  LP is a Delaware limited  partnership formed in
         June 1998. CNL  Hospitality  GP Corp. and CNL  Hospitality LP Corp. are
         the general  and limited  partners,  respectively,  of CNL  Hospitality
         Partners, LP. The term "Company" includes, unless the context otherwise
         requires, CNL Hospitality  Properties,  Inc., CNL Hospitality Partners,
         LP, CNL Hospitality GP Corp. and CNL Hospitality LP Corp.

         The  Company  was  formed   primarily   to  acquire   properties   (the
         "Properties")  located  across  the  United  States  to be  leased on a
         long-term, triple-net basis. The Company intends to invest the proceeds
         from its public offering,  after deducting offering expenses,  in hotel
         Properties  to be leased to operators of national and regional  limited
         service,  extended  stay and full  service  hotel  chains  (the  "Hotel
         Chains")  and in  restaurant  properties  to be leased to  operators of
         selected  national  and  regional  fast-food,  family-style  and casual
         dining restaurant chains (the "Restaurant  Chains").  While the Company
         may  currently   invest  in  both  restaurant  and  hotel   Properties,
         management  believes that over time the Company will focus its Property
         investments  exclusively  on hotel  Properties.  The  Company  may also
         provide  mortgage  financing (the "Mortgage  Loans").  The Company also
         intends to offer furniture,  fixture and equipment  financing ("Secured
         Equipment Leases") to operators of Hotel Chains and Restaurant Chains.

         The  Company  was a  development  stage  enterprise  from June 12, 1996
         through October 15, 1997.  Since  operations had not begun,  activities
         through October 15, 1997 were devoted to organization of the Company.

         Principles of Consolidation - The accompanying  consolidated  financial
         statements  include the accounts of CNL Hospitality  Properties,  Inc.,
         and its wholly owned  subsidiaries,  CNL  Hospitality  GP Corp. and CNL
         Hospitality  LP  Corp.,  as well  as the  accounts  of CNL  Hospitality
         Partners,  LP. All significant  intercompany  balances and transactions
         have been eliminated.

         Real Estate and Lease  Accounting - The Company records the acquisition
         of land,  buildings and equipment at cost,  including  acquisition  and
         closing  costs.  Land,  buildings and equipment are leased to unrelated
         third  parties on a triple-net  basis,  whereby the tenant is generally
         responsible  for  all  operating  expenses  relating  to the  Property,
         including property taxes, insurance, maintenance and repairs.

         The Property leases are accounted for using the operating method. Under
         the operating method,  land, building and equipment leases are recorded
         at cost,  revenue is recognized as rentals are earned and  depreciation
         is charged to  operations  as incurred.  Buildings  and  equipment  are
         depreciated on the  straight-line  method over their  estimated  useful
         lives of 40 and seven years, respectively.  When scheduled rentals vary
         during the lease term, income is recognized on a straight-line basis so
         as to produce a constant  periodic rent over the lease term  commencing
         on the date the Property is placed in service.  Accrued  rental  income
         represents the aggregate amount of income recognized on a straight-line
         basis in excess of scheduled rental payments to date.




<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


1.       Significant Accounting Policies - Continued:

         When the  Properties  or  equipment  are  sold,  the  related  cost and
         accumulated  depreciation,  plus any  accrued  rental  income,  will be
         removed  from the  accounts  and any  gain or loss  from  sale  will be
         reflected in income.  Management  reviews its Properties for impairment
         whenever events or changes in circumstances  indicate that the carrying
         amount  of the  assets  may  not  be  recoverable  through  operations.
         Management  determines  whether an  impairment in value has occurred by
         comparing the estimated future  undiscounted cash flows,  including the
         residual  value  of  the  Property,  with  the  carrying  cost  of  the
         individual  Property.  If an impairment  is  indicated,  the assets are
         adjusted to their fair value.

         Cash and Cash  Equivalents  - The Company  considers  all highly liquid
         investments  with a maturity of three months or less when  purchased to
         be cash  equivalents.  Cash  and cash  equivalents  consist  of  demand
         deposits at commercial  banks and money market funds.  Cash equivalents
         are stated at cost plus accrued  interest,  which  approximates  market
         value.

         Cash accounts maintained on behalf of the Company in demand deposits at
         commercial  banks and money market funds may exceed  federally  insured
         levels;  however,  the Company has not  experienced  any losses in such
         accounts.  The Company limits  investment of temporary cash investments
         to  financial  institutions  with  high  credit  standing;   therefore,
         management believes it is not exposed to any significant credit risk on
         cash and cash equivalents.

         Organization  Costs - Organization  costs are amortized over five years
         using the straight-line method.

         Loan Costs - Loan  costs  incurred  in  connection  with the  Company's
         $9,600,000  line of credit and a $5,000,000  letter of credit have been
         capitalized  and are  being  amortized  over  the  term of the loan and
         letter  of credit  commitment,  respectively,  using the  straight-line
         method which approximates the effective interest method.

         Income  Taxes - The  Company has made an election to be taxed as a real
         estate  investment trust ("REIT") under Sections 856 through 860 of the
         Internal Revenue Code of 1986, as amended, and related regulations. The
         Company generally will not be subject to federal corporate income taxes
         on amounts  distributed  to  stockholders,  providing it distributes at
         least 95 percent of its REIT  taxable  income and meets  certain  other
         requirements  for qualifying as a REIT.  Accordingly,  no provision for
         federal  income  taxes has been made in the  accompanying  consolidated
         financial statements.  Notwithstanding the Company's  qualification for
         taxation as a REIT,  the  Company is subject to certain  state taxes on
         its income and property.

         Earnings Per Share - Basic earnings per share are calculated based upon
         net earnings (income available to common  stockholders)  divided by the
         weighted  average number of shares of common stock  outstanding  during
         the reporting period.  The Company does not have any dilutive potential
         common shares.

         Reclassification   -  Certain  items  in  the  prior  years'  financial
         statements   have  been   reclassified   to   conform   with  the  1998
         presentation.  These  reclassifications  had no effect on stockholders'
         equity or net earnings.



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


1.       Significant Accounting Policies - Continued:

         Use of  Estimates  -  Management  of the  Company  has made a number of
         estimates  and  assumptions  relating  to the  reporting  of assets and
         liabilities and the disclosure of contingent  assets and liabilities to
         prepare  these  financial   statements  in  conformity  with  generally
         accepted accounting principles.  Actual results could differ from those
         estimates.

         New  Accounting  Standards - In April 1998,  the American  Institute of
         Certified Public Accountants issued Statement of Position ("SOP") 98-5,
         "Reporting  on  the  Costs  of  Start-Up  Activities,"  which  will  be
         effective  for the  Company as of January  1, 1999.  This SOP  requires
         start-up  and  organization  costs to be expensed as incurred  and also
         requires  previously  deferred  start-up  costs to be  recognized  as a
         cumulative effect  adjustment in the statement of earnings.  Management
         of the Company does not believe  that  adoption of this SOP will have a
         material  effect on the  Company's  financial  position  or  results of
         operations.

2.       Public Offerings:

         The Company has a currently  effective  registration  statement on Form
         S-11  with  the  Securities  and  Exchange  Commission  for the sale of
         16,500,000 shares of common stock (the  "Offering").  Of the 16,500,000
         shares of common stock,  the Company has  registered  1,500,000  shares
         ($15,000,000)  which are available  only to  stockholders  who elect to
         participate in the Company's reinvestment plan. The Company has adopted
         a reinvestment  plan pursuant to which  stockholders  may elect to have
         the full amount of their cash distributions from the Company reinvested
         in additional shares of common stock of the Company. As of December 31,
         1998,  the Company had received  subscription  proceeds of  $43,019,080
         (4,301,908  shares),  including  $37,299  (3,730  shares)  through  the
         reinvestment plan.

         On November 23, 1998,  the Company  filed a  registration  statement on
         Form S-11 with the  Securities  and Exchange  Commission  in connection
         with the proposed  sale by the Company of up to  27,500,000  additional
         shares of common stock ($275,000,000) (the "Secondary  Offering") in an
         offering expected to commence  immediately  following the completion of
         the Company's  current  Offering.  Of the  27,500,000  shares of common
         stock to be offered,  2,500,000 will be available only to  stockholders
         purchasing  shares through the  reinvestment  plan. The price per share
         and the other terms of the Secondary Offering, including the percentage
         of gross  proceeds  payable  to (i) the  managing  dealer  for  selling
         commissions  and expenses in connection  with the offering and (ii) the
         advisor  for  acquisition   fees  and  acquisition   expenses  will  be
         substantially the same as those for the Company's current Offering. The
         Company  expects to use net  proceeds  from the  Secondary  Offering to
         purchase  additional  Properties and, to a lesser extent, make Mortgage
         Loans.



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


3.       Land, Buildings and Equipment on Operating Leases:

         The  Company  leases  its  land,  buildings  and  equipment  to a hotel
         operator.  The  leases  are  accounted  for  under  the  provisions  of
         Statement of Financial  Accounting  Standards No. 13,  "Accounting  for
         Leases," and have been classified as operating  leases.  The leases are
         for 19 years,  provide for minimum and  contingent  rentals and require
         the tenant to pay  executory  costs.  In addition,  the tenant pays all
         property  taxes and  assessments  and carries  insurance  coverage  for
         public  liability,  property damage,  fire and extended  coverage.  The
         lease  options  allow the  tenant to renew each of the leases for three
         successive  five-year  periods subject to the same terms and conditions
         of the initial  leases.  The leases also require the  establishment  of
         capital   expenditure   reserve  funds  which  will  be  used  for  the
         replacement and renewal of furniture,  fixtures and equipment  relating
         to the hotel Properties (the "FF&E Reserve"). Funds in the FF&E Reserve
         have been  earned,  granted and  assigned to the Company as  additional
         rent.  For the year ended  December  31, 1998,  revenues  from the FF&E
         Reserve totalled  $98,099,  of which $15,692 is included in receivables
         and $82,407 is restricted cash.

         Land,  buildings  and  equipment on operating  leases  consisted of the
         following at:

                                                December 31,     December 31,
                                                    1998            1997
                                                -------------   -------------

                Land                               $2,926,976         $   --
                Buildings                          23,476,442             --
                Equipment                           2,349,131             --
                                                --------------  -------------
                                                   28,752,549              --
                Less accumulated depreciation        (384,166 )           --
                                                ==============  =============
                                                  $28,368,383         $   --
                                                ==============  =============

         The  leases  provide  an  increase  in the  minimum  annual  rent  at a
         predetermined  interval during the terms of the leases.  Such amount is
         recognized  on a  straight-line  basis  over the  terms  of the  leases
         commencing on the date the Property is placed in service.  For the year
         ended December 31, 1998, the Company  recognized $44,160 of such rental
         income.

         The  following  is a schedule of future  minimum  lease  payments to be
         received on the noncancellable operating leases at December 31, 1998:

               1999                                      $2,889,162
               2000                                       2,928,895
               2001                                       2,928,895
               2002                                       2,928,895
               2003                                       2,928,895
               Thereafter                                40,028,238
                                                     ===============
                                                        $54,632,980
                                                     ===============





<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


3.       Land, Buildings and Equipment on Operating Leases - Continued:

         Since leases are renewable at the option of the tenant, the above table
         only  presents  future  minimum  lease  payments due during the initial
         lease terms.  In addition,  this table does not include any amounts for
         future  contingent rents which may be received on the leases based on a
         percentage of the tenant's gross sales.

4.       Other Assets:

         Other  assets as of  December  31,  1998 and 1997 were  $1,980,560  and
         $535,792,   respectively,  which  consisted  of  acquisition  fees  and
         miscellaneous  acquisition  expenses  that will be  allocated to future
         Properties.

5.       Line of Credit:

         On July 31, 1998, the Company entered into an initial revolving line of
         credit and security  agreement with a bank to be used by the Company to
         acquire hotel Properties.  The line of credit provides that the Company
         may receive advances of up to $30,000,000  until July 30, 2003, with an
         annual  review to be performed  by the bank to indicate  that there has
         been no substantial deterioration, in the bank's reasonable discretion,
         of the  credit  quality.  Interest  expense  on each  advance  shall be
         payable  monthly,  with all unpaid  interest and principal due no later
         than five years from the date of the advance.  Advances  under the line
         of credit  will bear  interest  at either (i) a rate per annum equal to
         318 basis  points  above the London  Interbank  Offered Rate (LIBOR) or
         (ii) a rate per annum  equal to 30 basis  points  above the bank's base
         rate,  whichever the Company  selects at the time advances are made. In
         addition,  a fee of .5% per advance will be due and payable to the bank
         on funds as  advanced.  Each advance made under the line of credit will
         be  collateralized  by the assignment of rents and leases. In addition,
         the  line of  credit  provides  that  the  Company  will not be able to
         further  encumber the applicable  hotel Property during the term of the
         advance  without the bank's consent.  The Company will be required,  at
         each closing, to pay all costs, fees and expenses arising in connection
         with the line of credit. The Company must also pay the bank's attorneys
         fees, subject to a maximum cap, incurred in connection with the line of
         credit and each advance.

         As of  December  31,  1998,  the Company had  obtained  three  advances
         totalling $9,600,000 relating to the line of credit. In connection with
         the line of credit,  the Company  incurred a commitment fee, legal fees
         and closing costs of $68,762. The proceeds were used in connection with
         the  purchase of two hotel  Properties  and the  commitment  to acquire
         three  additional  Properties  (see Note 10). The interest  rate of the
         line of credit at December 31, 1998 was 8.05% (bank's base rate plus 30
         basis points).



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


6.       Stock Issuance Costs:

         The Company has incurred  certain  expenses of its Offering,  including
         commissions,  marketing support and due diligence expense reimbursement
         fees, filing fees, legal,  accounting,  printing and escrow fees, which
         have been deducted from the gross proceeds of the Offering. Preliminary
         costs incurred  prior to raising  capital were advanced by an affiliate
         of the Company, CNL Hospitality Advisors,  Inc., (formerly known as CNL
         Real Estate Advisors, Inc.) (the "Advisor").  The Advisor has agreed to
         pay all organizational and offering expenses (excluding commissions and
         marketing support and due diligence expense  reimbursement  fees) which
         exceed three percent of the gross Offering  proceeds  received from the
         sale of shares of the Company in connection with the Offering.

         During the years ended December 31, 1998 and 1997, the Company incurred
         $3,606,871 and $2,304,561, respectively, in organizational and offering
         costs, including $2,535,494 and $906,032,  respectively, in commissions
         and marketing support and due diligence expense reimbursement fees (see
         Note 8). Of these amounts $3,601,898 and $2,284,561, respectively, have
         been  treated  as  stock   issuance   costs  and  $4,973  and  $20,000,
         respectively,  have  been  treated  as  organization  costs.  The stock
         issuance costs have been charged to stockholders' equity subject to the
         three percent cap described above.

7.       Distributions:

         For the  years  ended  December  31,  1998 and 1997,  approximately  76
         percent and 100 percent,  respectively,  of the  distributions  paid to
         stockholders  were considered  ordinary income,  and for the year ended
         December 31, 1998,  approximately 24 percent was considered a return of
         capital to  stockholders  for federal  income tax purposes.  No amounts
         distributed to the  stockholders  for the years ended December 31, 1998
         and 1997 are  required  to be or have been  treated by the Company as a
         return of capital for purposes of calculating the stockholders'  return
         on their invested capital.

8.       Related Party Transactions:

         Certain  affiliates of the Company  received fees and  compensation  in
         connection with the Offering, and the acquisition,  management and sale
         of the assets of the Company.

         On  June  12,  1996  (date  of  inception),  CNL  Fund  Advisors,  Inc.
         contributed  $200,000  in cash  to the  Company  and  became  its  sole
         stockholder.  In February  1997,  the Advisor  purchased  the Company's
         outstanding  common stock from CNL Fund  Advisors,  Inc. and became the
         sole stockholder of the Company.

         During the years ended December 31, 1998 and 1997, the Company incurred
         $2,377,026 and $849,405,  respectively,  in selling  commissions due to
         CNL Securities  Corp. for services in connection  with the Offering.  A
         substantial   portion  of  these  amounts   ($2,200,516  and  $792,832,
         respectively)  were  or  will  be  paid  by  CNL  Securities  Corp.  as
         commissions to other broker-dealers.



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


8.       Related Party Transactions - Continued:

         In addition,  CNL  Securities  Corp. is entitled to receive a marketing
         support and due diligence  expense  reimbursement  fee equal to 0.5% of
         the total amount raised from the sale of shares, a portion of which may
         be reallowed to other  broker-dealers.  During the years ended December
         31,  1998  and  1997,  the  Company  incurred   $158,468  and  $56,627,
         respectively,  of such fees,  the  majority of which were  reallowed to
         other  broker-dealers  and  from  which  all bona  fide  due  diligence
         expenses were paid.

         CNL  Securities  Corp.  will  also  receive,  in  connection  with  the
         Offering,  a soliciting  dealer  servicing fee payable  annually by the
         Company  beginning  on  December 31 of the year  following  the year in
         which the  Offering is completed in the amount of 0.20% of the invested
         capital of the  stockholders  that invest in the Company  through  this
         Offering.  CNL Securities Corp. in turn may reallow all or a portion of
         such fee to soliciting  dealers whose clients held shares on such date.
         As of December 31, 1998, no such fees had been incurred.

         The  Advisor is entitled to receive  acquisition  fees for  services in
         identifying the Properties and structuring the terms of the acquisition
         and leases of the  Properties  and Mortgage  Loans equal to 4.5% of the
         gross proceeds of the Offering,  loan proceeds from permanent financing
         and amounts  outstanding on the line of credit,  if any, at the time of
         listing,  but excluding that portion of the permanent financing used to
         finance Secured Equipment  Leases.  During the years ended December 31,
         1998  and  1997,   the  Company   incurred   $1,426,216  and  $509,643,
         respectively,  of such fees. Such fees are included in land,  buildings
         and equipment on operating leases and other assets.

         The Company and the Advisor  have  entered  into an advisory  agreement
         pursuant to which the Advisor will receive a monthly  asset  management
         fee of  one-twelfth  of 0.60% of the Company's  real estate asset value
         and the outstanding  principal  balance of any Mortgage Loans as of the
         end of the preceding  month.  The management fee, which will not exceed
         fees which are competitive for similar  services in the same geographic
         area,  may or may not be taken,  in whole or in part as to any year, in
         the  sole  discretion  of  the  Advisor.  All  or  any  portion  of the
         management  fee not  taken as to any  fiscal  year  shall  be  deferred
         without  interest  and may be taken in such  other  fiscal  year as the
         Advisor shall  determine.  During the year ended December 31, 1998, the
         Company  incurred  $68,114 of such fees.  No such fees were incurred by
         the Company for 1997.

         The Company incurs  operating  expenses  which,  in general,  are those
         expenses relating to administration of the Company on an ongoing basis.
         Pursuant to the  advisory  agreement  described  above,  the Advisor is
         required  to  reimburse  the  Company  the  amount  by which  the total
         operating  expenses paid or incurred by the Company  exceed in any four
         consecutive  fiscal  quarters,  the  greater of two  percent of average
         invested assets or 25 percent of net income (the "Expense Cap"). During
         the year ended  December 31, 1998,  the  Company's  operating  expenses
         exceeded the Expense Cap by $92,733;  therefore the Advisor  reimbursed
         the Company such amount in accordance with the advisory agreement.




<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


8.       Related Party Transactions - Continued:

         The Advisor and its affiliates provide various administrative  services
         to the Company,  including  services related to accounting;  financial,
         tax and regulatory compliance reporting;  stockholder distributions and
         reporting;   due  diligence  and  marketing;   and  investor  relations
         (including administrative services in connection with the Offering), on
         a day-to-day  basis.  The expenses  incurred  for these  services  were
         classified as follows:


<TABLE>
<CAPTION>

                                                                                                  June 12, 1996
                                                                                                    (Date of
                                                                                                   Inception)
                                                                                                     through
                                                                                                  December 31,
                                                                   Year Ended
                                                                  December 31,
                                                             1998                1997                 1996
                                                        ---------------      -------------        --------------

<S> <C>
               Deferred offering costs                       $     --            $     --              $28,665
               Stock issuance costs                           494,729             185,335                   --
               Land, buildings and equipment
                    on operating leases and
                    other assets                                9,084                  --                   --
               General operating and
                    administrative expenses                   140,376               6,889                   --
                                                         =============        ============         ============
                                                             $644,189            $192,224              $28,665
                                                         =============        ============         ============

         The  amounts  due to related  parties  consisted  of the  following  at
December 31:

                                                                                 1998                1997
                                                                              ------------        ------------
                  Due to CNL Securities Corp.:
                       Commissions                                                $66,063            $100,709
                       Marketing support and due diligence
                          expense reimbursement fee                                 4,404               7,268
                                                                              ------------        ------------
                                                                                   70,467             107,977
                                                                              ------------        ------------

                  Due to the Advisor:
                          Expenditures incurred on behalf
                             of the Company and for
                             accounting, administrative and
                             acquisition services                                 110,496              39,105
                          Acquisition fees                                        137,974              46,172
                                                                              ------------        ------------
                                                                                  248,470              85,277
                                                                              ============        ============
                                                                                 $318,937            $193,254
                                                                              ============        ============

</TABLE>



<PAGE>


                        CNL HOSPITALITY PROPERTIES, INC.
                                AND SUBSIDIARIES
               (formerly known as CNL American Realty Fund, Inc.)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                 Years Ended December 31, 1998 and 1997 and the
                Period June 12, 1996 (Date of Inception) through
                                December 31, 1996


9.       Concentration of Credit Risk:

         All of the Company's rental income for the year ended December 31, 1998
         was earned from one lessee, STC Leasing Associates, LLC, which operates
         each of the two Properties as a Residence Inn by Marriott. Although the
         Company  intends to acquire  Properties  located in various  states and
         regions and to carefully screen its tenants in order to reduce risks of
         default,  failure of this  Hotel  Chain or lessee  could  significantly
         impact the results of  operations of the Company.  However,  management
         believes  that  the  risk  of  such a  default  is  reduced  due to the
         essential  or  important  nature of these  Properties  for the  ongoing
         operations of the lessee.

         It is expected that the  percentage of total rental income  contributed
         by this lessee will decrease as additional  Properties are acquired and
         leased in subsequent years.

10.      Commitments:

         In July 1998,  the Company  entered into  agreements  to acquire  three
         additional hotel Properties for an anticipated aggregate purchase price
         of approximately $100 million. In connection with these agreements, the
         Company was  required  by the seller to obtain a letter of credit.  The
         letter of credit  is  collateralized  by a  $5,000,000  certificate  of
         deposit.

11.      Subsequent Events:

         During the period January 1, 1999 through January 19, 1999, the Company
         received   subscription  proceeds  for  an  additional  561,565  shares
         ($5,615,647) of common stock.

         On  January 1,  1999,  the  Company  declared  distributions  totalling
         $251,967 or $0.0583 per share of common  stock,  payable in March 1999,
         to stockholders of record on January 1, 1999.




<PAGE>


Item 9.  Changes in and  Disagreements  with  Accountants  on Accounting  and
         Financial Disclosure

         None.

                                    PART III


Item 10.  Directors and Executive Officers of the Registrant

         The  information  required by this Item is incorporated by reference to
the  Company's  Definitive  Proxy  Statement to be filed with the  Commission no
later than April 30, 1999.

Item 11.  Executive Compensation

         The  information  required by this Item is incorporated by reference to
the  Company's  Definitive  Proxy  Statement to be filed with the  Commission no
later than April 30, 1999.

Item 12.  Security Ownership of Certain Beneficial Owners and Management

         The  information  required by this Item is incorporated by reference to
the  Company's  Definitive  Proxy  Statement to be filed with the  Commission no
later than April 30, 1999.

Item 13.  Certain Relationships and Related Transactions

         The  information  required by this Item is incorporated by reference to
the  Company's  Definitive  Proxy  Statement to be filed with the  Commission no
later than April 30, 1999.

                                     PART IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a)      The following documents are filed as part of this report.

         1.  Consolidated Financial Statements

                  Report of Independent Accountants

                  Consolidated Balance Sheets at December 31, 1998 and 1997

                  Consolidated  Statements  of  Earnings  for  the  years  ended
                  December 31, 1998 and 1997, and the period June 12, 1996 (date
                  of inception) through December 31, 1996

                  Consolidated  Statements of Stockholders' Equity for the years
                  ended December 31, 1998 and 1997, and the period June 12, 1996
                  (date of inception) through December 31, 1996

                  Consolidated  Statements  of Cash  Flows for the  years  ended
                  December 31, 1998 and 1997, and the period June 12, 1996 (date
                  of inception) through December 31, 1996

                  Notes to Consolidated Financial Statements
2.

<PAGE>


         Financial Statement Schedules

                  Schedule  III - Real Estate and  Accumulated  Depreciation  at
                  December 31, 1998

                  Notes  to  Schedule   III  -  Real   Estate  and   Accumulated
                  Depreciation at December 31, 1998

                  All other Schedules are omitted as the required information is
                  inapplicable  or is presented in the  financial  statements or
                  notes thereto.

3.  Exhibits

3.1      CNL  American  Realty  Fund,  Inc.  Amended  and  Restated  Articles of
         Incorporation (Included as Exhibit 3.4 to the Registration Statement on
         Form S-11  (Registration  No.  333-9943)  (the  "1996  Form  S-11") and
         incorporated herein by reference.)

3.2      CNL American Realty Fund,  Inc. Bylaws  (Included as Exhibit 3.3 to the
         1996 Form S-11 and incorporated herein by reference.)

4.1      Reinvestment  Plan  (Included  as Exhibit 4.4 to the 1996 Form S-11 and
         incorporated herein by reference.)

10.1     Advisory Agreement,  dated as of July 10, 1998, between CNL Hospitality
         Properties,  Inc. and CNL Hospitality Advisors, Inc. (formerly CNL Real
         Estate Advisors, Inc.) (Filed herewith.)

10.2     Indemnification Agreement between CNL Hospitality Properties,  Inc. and
         C. Brian  Strickland  dated  October 31,  1998.  Each of the  following
         director and/or officer has signed a substantially similar agreement as
         follows:  James M. Seneff, Jr., Robert A. Bourne, G. Richard Hostetter,
         J. Joseph Kruse, Richard C. Huseman, Charles A. Muller, John T. Walker,
         Jeanne A. Wall and Lynn E. Rose dated July 9,  1997,  John A.  Griswold
         dated  January 7, 1999 and  Charles  E.  Adams and Craig M.  McAllaster
         dated February 10, 1999 (Filed herewith.)

10.3     Agreement  of  Limited  Partnership  of CNL  Hospitality  Partners,  LP
         (Included  as  Exhibit  10.10 to the 1996  Form  S-11 and  incorporated
         herein by reference.)

10.4     Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
         and Gwinnett Residence Associates, LLC, relating to the Residence Inn -
         Gwinnett  Place  (Included  as Exhibit  10.11 to the 1996 Form S-11 and
         incorporated herein by reference.)

10.5     Assignment and Assumption  Agreement  between CNL Real Estate Advisors,
         Inc. and CNL Hospitality Partners,  LP, relating to the Residence Inn -
         Gwinnett  Place  (Included  as Exhibit  10.12 to the 1996 Form S-11 and
         incorporated herein by reference.)

10.6     Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
         and Buckhead Residence Associates, LLC, relating to the Residence Inn -
         Buckhead  (Lenox Park) (Included as Exhibit 10.13 to the 1996 Form S-11
         and incorporated herein by reference.)

10.7     Assignment and Assumption  Agreement  between CNL Real Estate Advisors,
         Inc. and CNL Hospitality Partners,  LP, relating to the Residence Inn -
         Buckhead  (Lenox Park) (Included as Exhibit 10.14 to the 1996 Form S-11
         and incorporated herein by reference.)

10.8     Lease Agreement  between CNL Hospitality  Partners,  LP and STC Leasing
         Associates,  LLP, dated August 1, 1998, relating to the Residence Inn -
         Gwinnett  Place  (Included  as Exhibit  10.15 to the 1996 Form S-11 and
         incorporated herein by reference.)

10.9     Lease Agreement  between CNL Hospitality  Partners,  LP and STC Leasing
         Associates,  LLC, dated August 1, 1998, relating to the Residence Inn -
         Buckhead  (Lenox Park) (Included as Exhibit 10.16 to the 1996 Form S-11
         and incorporated herein by reference.)

10.10    Master  Revolving Line of Credit Loan  Agreement  with CNL  Hospitality
         Properties, Inc., CNL Hospitality Partners, LP and Colonial Bank, dated
         July 31,  1998  (Included  as  Exhibit  10.17 to the 1996 Form S-11 and
         incorporated herein by reference.)

27       Financial Data Schedule (Filed herewith.)

(b)      No  reports on Form 8-K were  filed  during the period  October 1, 1998
         through December 31, 1998.



<PAGE>








                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the  undersigned,  thereunto duly  authorized,  on the 19th day of
February, 1999.

                                              CNL HOSPITALITY PROPERTIES, INC.

                                              By:      ROBERT A. BOURNE
                                                       President

                                                       /s/ Robert A. Bourne
                                                       --------------------
                                                       ROBERT A. BOURNE


<PAGE>


         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>



              Signature                                    Title                                   Date
              ---------                                    -----                                   ----
<S> <C>

/s/ James M. Seneff, Jr.                   Chairman   of  the   Board  and  Chief             February 19, 1999
----------------------------               Executive      Officer      (Principal
James M. Seneff, Jr.                       Executive Officer)                    
                                             



/s/ Robert A. Bourne                       Director and President                             February 19, 1999
---------------------------
Robert A. Bourne



/s/ C. Brian Strickland                    Vice     President,      Finance     &             February 19, 1999
---------------------------                Administration   (Principal  Financial
C. Brian Strickland                        and Accounting Officer)                  
                                           



/s/ Charles E. Adams                       Independent Director                               February 19, 1999
---------------------------
Charles E. Adams



/s/ John A. Griswold                       Independent Director                               February 19, 1999
----------------------------
John A. Griswold



/s/ Craig M. McAllaster                    Independent Director                               February 19, 1999
----------------------------
Craig M. McAllaster

</TABLE>

<PAGE>




                CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES

             SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                                December 31, 1998


<TABLE>
<CAPTION>
                                                                                                       Costs Capitalized  
                                                                                                           Subsequent     
                                                                                                         To Acquisition   
                                                                         Initial Cost                  ------------------   
                                            Encum-          ---------------------------------          Improve-  Carrying
                                           brances          Land         Buildings     Equipment       ments     Costs   
                                           -------          ----         ---------     ---------       -----     -----   

<S> <C>

Properties the Company
  has Invested in Under
  Operating Leases:

    Residence Inns by Marriott:
         Atlanta, Georgia                   (b)         $1,907,479     $13,459,040     $1,234,689       $     -     $     -
         Duluth, Georgia                    (c)          1,019,497      10,017,402      1,114,442             -           -
                                                        ----------     -----------     ----------       -------     -------

                                                        $2,926,976     $23,476,442     $2,349,131       $     -     $     -
                                                        ==========     ===========     ==========       =======     =======




<PAGE>






                                                                                                      Life
                                                                                                    on Which
                                                                                                  Depreciation
    Gross Amount at Which Carried                                                                   in Latest
       at Close of Period (d)                                            Date                         Income
 ------------------------------------                 Accumulated       of Con-       Date         Statement is
  Land       Buildings      Equipment       Total     Depreciation     struction     Acquired       Computed  
  ----       ---------      ---------       -----     ------------     ---------     --------       --------  






$1,907,479  $13,459,040    $1,234,689    $16,601,208    $213,483          1997         07/98           (e)
 1,019,497   10,017,402     1,114,442     12,151,341     170,683          1997         07/98           (e)
----------  -----------    ----------    -----------    --------

$2,926,976  $23,476,442    $2,349,131    $28,752,549    $384,166
==========  ===========    ==========    ===========    ========



</TABLE>


                                                                  F-1


<PAGE>


                CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES

        NOTES TO SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

                                December 31, 1998

(a)      Transactions  in real estate and accumulated  depreciation  during 1998
         and 1997 are summarized as follows:

                                                                  Accumulated
                                                    Cost (d)      Depreciation
                                                    --------      ------------

            Properties the Company
              has Invested in Under
              Operating Leases:

                Balance, December 31, 1997        $         -      $       -
                Acquisitions                       28,752,549        384,166
                                                  -----------       --------

                Balance, December 31, 1998        $28,752,549       $384,166
                                                  ===========       ========


(b)      In  connection  with the  purchase  of this  Property,  the Company has
         obtained  a loan in the  amount  of  $6,000,000  collateralized  by the
         assignment of the rents and leases related to the Property.

(c)      In  connection  with the  purchase  of this  Property,  the Company has
         obtained  a loan in the  amount  of  $3,600,000  collateralized  by the
         assignment of the rents and leases related to the Property.

(d)      As of December 31, 1998, the aggregate cost of the Properties  owned by
         the Company and its  subsidiaries  for federal  income tax  purposes is
         $28,752,549.  All of the leases are  treated  as  operating  leases for
         federal income tax purposes.

(e)      Depreciation expense is computed for buildings and equipment based upon
         estimated lives of 40 and seven years, respectively.

(f)      During the years ended December 31, 1998 and 1997, the Company incurred
         acquisition fees totalling $1,426,216 and $509,643,  respectively, paid
         to the Advisor.  Acquisition fees are included in land and buildings on
         operating leases and other assets at December 31, 1998 and 1997.






























                                       F-2



<PAGE>


                                    EXHIBITS


<PAGE>


                                  EXHIBIT INDEX


Exhibit Number
--------------

3.1      CNL  American  Realty  Fund,  Inc.  Amended  and  Restated  Articles of
         Incorporation (Included as Exhibit 3.4 to the Registration Statement on
         Form S-11  (Registration  No.  333-9943)  (the  "1996  Form  S-11") and
         incorporated herein by reference.)

3.2      CNL American Realty Fund,  Inc. Bylaws  (Included as Exhibit 3.3 to the
         1996 Form S-11 and incorporated herein by reference.)

4.1      Reinvestment  Plan  (Included  as Exhibit 4.4 to the 1996 Form S-11 and
         incorporated herein by reference.)

10.1     Advisory Agreement,  dated as of July 10, 1998, between CNL Hospitality
         Properties,  Inc. and CNL Hospitality Advisors, Inc. (formerly CNL Real
         Estate Advisors, Inc.) (Filed herewith.)

10.2     Indemnification Agreement between CNL Hospitality Properties,  Inc. and
         C. Brian  Strickland  dated  October 31,  1998.  Each of the  following
         director and/or officer has signed a substantially similar agreement as
         follows:  James M. Seneff, Jr., Robert A. Bourne, G. Richard Hostetter,
         J. Joseph Kruse, Richard C. Huseman, Charles A. Muller, John T. Walker,
         Jeanne A. Wall and Lynn E. Rose dated July 9,  1997,  John A.  Griswold
         dated  January 7, 1999 and  Charles  E.  Adams and Craig M.  McAllaster
         dated February 10, 1999 (Filed herewith.)

10.3     Agreement  of  Limited  Partnership  of CNL  Hospitality  Partners,  LP
         (Included  as  Exhibit  10.10 to the 1996  Form  S-11 and  incorporated
         herein by reference.)

10.4     Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
         and Gwinnett Residence Associates, LLC, relating to the Residence Inn -
         Gwinnett  Place  (Included  as Exhibit  10.11 to the 1996 Form S-11 and
         incorporated herein by reference.)

10.5     Assignment and Assumption  Agreement  between CNL Real Estate Advisors,
         Inc. and CNL Hospitality Partners,  LP, relating to the Residence Inn -
         Gwinnett  Place  (Included  as Exhibit  10.12 to the 1996 Form S-11 and
         incorporated herein by reference.)

10.6     Hotel Purchase and Sale Contract between CNL Real Estate Advisors, Inc.
         and Buckhead Residence Associates, LLC, relating to the Residence Inn -
         Buckhead  (Lenox Park) (Included as Exhibit 10.13 to the 1996 Form S-11
         and incorporated herein by reference.)

10.7     Assignment and Assumption  Agreement  between CNL Real Estate Advisors,
         Inc. and CNL Hospitality Partners,  LP, relating to the Residence Inn -
         Buckhead  (Lenox Park) (Included as Exhibit 10.14 to the 1996 Form S-11
         and incorporated herein by reference.)

10.8     Lease Agreement  between CNL Hospitality  Partners,  LP and STC Leasing
         Associates,  LLP, dated August 1, 1998, relating to the Residence Inn -
         Gwinnett  Place  (Included  as Exhibit  10.15 to the 1996 Form S-11 and
         incorporated herein by reference.)

10.9     Lease Agreement  between CNL Hospitality  Partners,  LP and STC Leasing
         Associates,  LLC, dated August 1, 1998, relating to the Residence Inn -
         Buckhead  (Lenox Park) (Included as Exhibit 10.16 to the 1996 Form S-11
         and incorporated herein by reference.)

10.10    Master  Revolving Line of Credit Loan  Agreement  with CNL  Hospitality
         Properties, Inc., CNL Hospitality Partners, LP and Colonial Bank, dated
         July 31,  1998  (Included  as  Exhibit  10.17 to the 1996 Form S-11 and
         incorporated herein by reference.)

27       Financial Data Schedule (Filed herewith.)




<PAGE>