<PAGE>

================================================================================

                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

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

                                       OR

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

For the Quarter Ended September 7, 2001              Commission File No. 1-14635


                          CRESTLINE CAPITAL CORPORATION
                              6600 Rockledge Drive
                            Bethesda, Maryland 20817
                                 (240) 694-2000

        Maryland                                                52-2151967
------------------------                                  ----------------------
(State of Incorporation)                                    (I.R.S. Employer
                                                          Identification Number)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.

                                                         Yes   X     No _____
                                                             -----



                                                             Shares outstanding
       Class                                                 at October 12, 2001
-------------------                                          -------------------
Common Stock, $.01
par value per share                                                   15,463,000
                                                                      ----------

================================================================================

<PAGE>

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

                                      INDEX
                                      -----

<TABLE>
<CAPTION>
                                                                                      Page No.
                                                                                      --------
<S>                                                                                   <C>
Part I.           FINANCIAL INFORMATION (Unaudited):

         Item 1.  Financial Statements

                  Condensed Consolidated Balance Sheets -                                3
                    September 7, 2001 and December 29, 2000

                  Condensed Consolidated Statements of Operations -                      4
                    Twelve Weeks Ended September 7, 2001 and September 8, 2000

                  Condensed Consolidated Statements of Operations -                      5
                    Thirty-six Weeks Ended September 7, 2001 and September 8, 2000

                  Condensed Consolidated Statements of Cash Flows -                      6
                    Thirty-six Weeks Ended September 7, 2001 and September 8, 2000

                  Notes to Condensed Consolidated Financial Statements                   7

         Item 2.  Management's Discussion and Analysis of Results of
                    Operations and Financial Condition                                  11

         Item 3.  Quantitative and Qualitative Disclosures About Market Risk            20

Part II.          OTHER INFORMATION AND SIGNATURE                                       21
</TABLE>

                                      -2-

<PAGE>

                          PART I. FINANCIAL INFORMATION

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                               September 7,   December 29,
                                                                                   2001           2000
                                                                               -----------    -----------
                                                                               (unaudited)
<S>                                                                            <C>            <C>
                                                ASSETS

Property and equipment, net ................................................   $   656,797    $   745,476
Property and equipment held for sale .......................................        87,530             --
Hotel working capital ......................................................         7,330         89,650
Due from hotel managers ....................................................        11,308         64,611
Due from Marriott Senior Living Services ...................................         8,787          6,106
Other assets ...............................................................        77,932         76,030
Cash and cash equivalents ..................................................       213,505         35,534
                                                                               -----------    -----------
                                                                               $ 1,063,189    $ 1,017,407
                                                                               ===========    ===========

                                 LIABILITIES AND SHAREHOLDERS' EQUITY

Debt:
   Mortgage debt ...........................................................   $   275,315    $   312,903
   Other debt ..............................................................        72,711         26,049
                                                                               -----------    -----------
                                                                                   348,026        338,952
   Hotel working capital notes payable to Host Marriott ....................         7,330         89,650
                                                                               -----------    -----------
     Total debt ............................................................       355,356        428,602
Income taxes payable .......................................................        45,899             --
Accounts payable and accrued expenses ......................................        11,500         12,518
Lease payable ..............................................................        10,287         62,005
Deferred income taxes ......................................................        64,978         67,866
Other liabilities ..........................................................        24,258         34,328
                                                                               -----------    -----------
     Total liabilities .....................................................       512,278        605,319
                                                                               -----------    -----------
Shareholders' equity:
   Common stock, 75 million shares authorized, 22.2 million and 22.1
     million shares both issued and outstanding, respectively, $.01 par
     value .................................................................           222            221
   Additional paid-in capital ..............................................       453,774        447,817
   Retained earnings .......................................................       223,821         90,956
   Treasury stock, 6.7 million shares ......................................      (126,906)      (126,906)
                                                                               -----------    -----------
     Total shareholders' equity ............................................       550,911        412,088
                                                                               -----------    -----------
                                                                               $ 1,063,189    $ 1,017,407
                                                                               ===========    ===========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.

                                      -3-

<PAGE>

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
           Twelve Weeks Ended September 7, 2001 and September 8, 2000
                (unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                        2001            2000
                                                                        ----            ----
<S>                                                                  <C>            <C>
REVENUES
Hotels
     Rooms ......................................................    $   100,945    $   682,336
     Food and beverage ..........................................          4,202        256,893
     Other ......................................................          5,197         71,652
                                                                     -----------    -----------
         Total hotel revenues ...................................        110,344      1,010,881
                                                                     -----------    -----------
Senior living
     Routine ....................................................         58,439         55,444
     Ancillary ..................................................          5,744          5,130
                                                                     -----------    -----------
         Total senior living revenues ...........................         64,183         60,574
                                                                     -----------    -----------
Other revenues ..................................................             --            808
Equity in earnings (losses) of affiliates .......................            (55)           131
                                                                     -----------    -----------
     Total revenues .............................................        174,472      1,072,394
                                                                     -----------    -----------
OPERATING COSTS AND EXPENSES
Hotels
     Property-level operating costs and expenses
         Rooms ..................................................         21,652        164,745
         Food and beverage ......................................          3,794        207,047
         Other ..................................................         38,672        271,845
     Other operating costs and expenses
         Management fees ........................................          8,664         59,616
         Lease expense ..........................................         31,276        290,985
         Depreciation and amortization ..........................            866          1,342
         Other ..................................................            858            879
                                                                     -----------    -----------
              Total hotel operating costs and expenses ..........        105,782        996,459
                                                                     -----------    -----------
Senior living
     Property-level operating costs and expenses
         Routine ................................................         37,732         35,955
         Ancillary ..............................................          3,142          3,253
     Other operating costs and expenses
         Depreciation and amortization ..........................          5,627          5,689
         Management fees ........................................          4,212          3,603
         Property taxes and other ...............................          2,165          2,245
                                                                     -----------    -----------
              Total senior living operating costs and expenses...         52,878         50,745
                                                                     -----------    -----------
Other operating costs and expenses ..............................             29            878
                                                                     -----------    -----------
         Total operating costs and expenses .....................        158,689      1,048,082
                                                                     -----------    -----------
OPERATING PROFIT ................................................         15,783         24,312
Minority interest expense .......................................             --           (363)
Corporate expenses ..............................................         (7,685)        (3,391)
Interest expense ................................................         (7,346)        (7,965)
Interest income .................................................          2,653          1,461
                                                                     -----------    -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ...............          3,405         14,054
Provision for income taxes ......................................         (1,362)        (5,762)
                                                                     -----------    -----------
INCOME BEFORE EXTRAORDINARY ITEM ................................          2,043          8,292
Gain on early extinguishment of debt, net of taxes ..............             --            253
                                                                     -----------    -----------
NET INCOME ......................................................    $     2,043    $     8,545
                                                                     ===========    ===========
BASIC EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item ................................    $       .13    $       .52
                                                                     ===========    ===========
Net Income $ ....................................................            .13    $       .54
                                                                     ===========    ===========
DILUTED EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item ................................    $       .13    $       .51
                                                                     ===========    ===========
Net Income ......................................................    $       .13    $       .52
                                                                     ===========    ===========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.

                                      -4-

<PAGE>

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
         Thirty-six Weeks Ended September 7, 2001 and September 8, 2000
                (unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                        2001           2000
                                                                        ----           ----
<S>                                                                  <C>            <C>
REVENUES
Hotels
     Rooms .....................................................     $   343,915    $ 2,002,567
     Food and beverage .........................................          32,379        845,186
     Other .....................................................          22,694        223,624
                                                                     -----------    -----------
         Total hotel revenues ..................................         398,988      3,071,377
                                                                     -----------    -----------
Senior living
     Routine ...................................................         174,154        164,446
     Ancillary .................................................          16,434         16,115
                                                                     -----------    -----------
         Total senior living revenues ..........................         190,588        180,561
                                                                     -----------    -----------
Other revenues .................................................              --          3,049
Equity in earnings (losses) of affiliates ......................            (449)           384
                                                                     -----------    -----------
     Total revenues ............................................         589,127      3,255,371
                                                                     -----------    -----------
OPERATING COSTS AND EXPENSES
Hotels
     Property-level operating costs and expenses
         Rooms .................................................          72,824        467,210
         Food and beverage .....................................          24,308        629,722
         Other .................................................         132,149        775,658
     Other operating costs and expenses
         Management fees .......................................          32,290        193,951
         Lease expense .........................................         113,764        948,125
         Depreciation and amortization .........................           4,105          3,536
         Other .................................................           2,631          2,143
                                                                     -----------    -----------
              Total hotel operating costs and expenses .........         382,071      3,020,345
                                                                     -----------    -----------
Senior living
     Property-level operating costs and expenses
         Routine ...............................................         111,274        105,751
         Ancillary .............................................           9,206          9,982
     Other operating costs and expenses
         Depreciation and amortization .........................          16,717         16,591
         Management fees .......................................          12,441         11,005
         Property taxes and other ..............................           6,199          6,654
                                                                     -----------    -----------
              Total senior living operating costs and expenses..         155,837        149,983
                                                                     -----------    -----------
Other operating costs and expenses .............................             178          2,746
                                                                     -----------    -----------
         Total operating costs and expenses ....................         538,086      3,173,074
                                                                     -----------    -----------
OPERATING PROFIT ...............................................          51,041         82,297
Minority interest expense ......................................              --           (950)
Gain on sale of full-service hotel leases ......................         204,459             --
Corporate expenses .............................................         (20,939)       (11,796)
Interest expense ...............................................         (20,813)       (22,638)
Interest income ................................................           7,694          2,916
                                                                     -----------    -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM ..............         221,442         49,829
Provision for income taxes .....................................         (88,577)       (20,430)
                                                                     -----------    -----------
INCOME BEFORE EXTRAORDINARY ITEM ...............................         132,865         29,399
Gain on early extinguishment of debt, net of taxes .............              --            253
                                                                     -----------    -----------
NET INCOME .....................................................     $   132,865    $    29,652
                                                                     ===========    ===========
BASIC EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item ...............................     $      8.61    $      1.79
                                                                     ===========    ===========
Net Income .....................................................     $      8.61    $      1.80
                                                                     ===========    ===========
DILUTED EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item ...............................     $      8.22    $      1.74
                                                                     ===========    ===========
Net Income .....................................................     $      8.22    $      1.75
                                                                     ===========    ===========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.

                                      -5-

<PAGE>

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         Thirty-six weeks ended September 7, 2001 and September 8, 2000
                            (unaudited, in thousands)

<TABLE>
<CAPTION>
                                                                                 2001            2000
                                                                                 ----            ----
<S>                                                                           <C>            <C>
OPERATING ACTIVITIES
Net income ................................................................   $ 132,865      $  29,652
Adjustments to reconcile net income to cash from operations:
     Gain on early extinguishment of debt, net of taxes ...................           -           (253)
     Depreciation and amortization ........................................      21,282         20,705
     Amortization of debt premiums and deferred financing costs ...........         849            (27)
     Non-cash restructuring charge ........................................       3,614              -
     Income taxes .........................................................      44,335          3,057
     Other ................................................................       1,020          1,339
     Change in other operating accounts ...................................         (22)        (4,352)
                                                                              ---------      ---------
Cash from operations ......................................................     203,943         50,121
                                                                              ---------      ---------
INVESTING ACTIVITIES
   Acquisitions ...........................................................     (18,272)       (15,723)
   Hotel lease security deposits ..........................................      (8,346)       (12,829)
   Expansions of senior living communities ................................        (842)        (3,204)
   Other capital expenditures .............................................      (6,481)        (8,515)
   Dispositions ...........................................................           -          6,206
   Other ..................................................................      (1,921)        (1,854)
                                                                              ---------      ---------
Cash used in investing activities .........................................     (35,862)       (35,919)
                                                                              ---------      ---------
FINANCING ACTIVITIES
   Repurchases of common stock ............................................      (1,051)       (25,195)
   Draws on line of credit ................................................           -         30,000
   Repayments of line of credit ...........................................     (35,000)       (65,000)
   Repayments of other debt ...............................................      (3,104)       (47,087)
   Issuances of debt ......................................................      47,965         92,370
   Other ..................................................................       1,080         (2,921)
                                                                              ---------      ---------
Cash provided by (used in) financing activities ...........................       9,890        (17,833)
                                                                              ---------      ---------
Increase (decrease) in cash and cash equivalents ..........................     177,971         (3,631)
Cash and cash equivalents, beginning of period ............................      35,534         36,774
                                                                              ---------      ---------
Cash and cash equivalents, end of period ..................................   $ 213,505      $  33,143
                                                                              =========      =========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.

                                      -6-

<PAGE>

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1.  The accompanying condensed consolidated financial statements of Crestline
    Capital Corporation and subsidiaries (the "Company") have been prepared by
    the Company without audit. Certain information and footnote disclosures
    normally included in financial statements presented in accordance with
    generally accepted accounting principles have been condensed or omitted. The
    Company believes the disclosures made are adequate to make the information
    presented not misleading. However, the condensed consolidated financial
    statements should be read in conjunction with the consolidated financial
    statements and notes thereto included in the Company's Annual Report on Form
    10_K for the fiscal year ended December 29, 2000.

    In the opinion of the Company, the accompanying unaudited condensed
    consolidated financial statements reflect all adjustments (which include
    only normal and recurring adjustments) necessary to present fairly the
    financial position of the Company as of September 7, 2001 and the results of
    operations and cash flows for the thirty-six weeks ended September 7, 2001
    and September 8, 2000. Interim results are not necessarily indicative of
    fiscal year performance because of the impact of seasonal and short_term
    variations.

    For 2000, approximately one-fourth of the Company's leased full-service
    hotels had managers with a different accounting calendar from the Company.
    For these hotels, which record revenues on a monthly basis versus the four
    week period for the Company, the accompanying condensed consolidated
    financial statements for 2000 reflect only eight months of operations. The
    Company recorded three months of operations in the third quarter and four
    months of operations in the fourth quarter. All but one of the subsidiaries
    owning the leasehold interests in the full-service hotel leases were sold in
    the first quarter of 2001 with an effective date of January 1, 2001. The
    remaining lease was sold in the second quarter of 2001. (See Note 4).

2.  Basic earnings per common share is computed by dividing net income by the
    weighted average number of shares of common stock outstanding. Diluted
    earnings per common share is computed by dividing net income by the weighted
    average number of shares of common stock outstanding plus other potentially
    dilutive securities.

    A reconciliation of the number of shares utilized for the calculation of
    diluted earnings per common share follows:

<TABLE>
<CAPTION>
                                                                           Twelve Weeks Ended           Thirty-six   Weeks Ended
                                                                        -------------------------     ----------------------------
                                                                        September 7,    September 8,   September 7,   September 8,
                                                                            2001           2000           2001            2000
                                                                            ----           ----           ----            ----
    <S>                                                                    <C>            <C>            <C>             <C>
                                                                                              (in thousands)
    Weighted average number of common shares outstanding ................  15,451         15,907         15,424          16,467
    Assuming distribution of common shares granted under
     the comprehensive stock plan, less shares assumed
      purchased at average market price ................................      784            486            747             472
                                                                           ------         ------         ------          ------
    Shares utilized for the calculation of diluted earnings
     per share .........................................................   16,235         16,393         16,171          16,939
                                                                           ======         ======         ======          ======
    </TABLE>

    As of September 7, 2001, the Company had 2,252,000 options outstanding with
    a weighted average exercise price of $13.31.

3.  The Company currently operates in four business segments: hotel management,
    hotel ownership, limited-service hotel leasing and senior living community
    ownership. The Company's managed hotels

                                      -7-

<PAGE>

are upscale limited-service and full-service hotels operated under the Marriott,
Hilton, Hyatt, Sheraton, Crowne Plaza, Renaissance, Courtyard by Marriott,
Residence Inn, and Holiday Inn brand names. The Company's owned limited-service
hotels are operated under the Residence Inn as well as Courtyard by Marriott
brand names. The Company's leased limited-service hotels are operated under the
Courtyard by Marriott, Residence Inn, TownePlace Suites by Marriott and
SpringHill Suites by Marriott brands. The Company's senior living communities
are operated under Marriott brands.

The Company evaluates the performance of its segments based primarily on
operating profit before depreciation, corporate expenses, and interest expense.
The Company's income taxes are included in the consolidated Federal income tax
return of the Company and its affiliates and are allocated based upon the
relative contribution to the Company's consolidated taxable income or loss and
changes in temporary differences. The allocation of income taxes is not
evaluated at the segment level and, therefore, the Company does not believe the
information is material to the condensed consolidated financial statements.

<TABLE>
<CAPTION>
                                                                    Twelve Weeks Ended September 7, 2001
                                        -------------------------------------------------------------------------------------------
                                         Full-Service Limited-Service        Hotel       Hotel    Senior     Corporate
                                        Hotel Leasing  Hotel Leasing      Ownership   Management  Living      & Other  Consolidated
                                        -------------  -------------      ---------   ----------  ------      -------  ------------
                                                                       (in thousands)
<S>                                     <C>            <C>                <C>         <C>         <C>         <C>      <C>
Revenues .............................  $           -  $      93,460      $  11,752   $    5,132  $64,183     $   (55) $    174,472
Operating profit (loss) ..............              -            676          4,344         (458)  11,305         (84)       15,783
Interest expense .....................              -            (97)        (1,034)           -   (4,967)     (1,248)       (7,346)
Interest income ......................              -            207             94           32      209       2,111         2,653
Other ................................              -              -              -            -        -      (7,685)       (7,685)
Income (loss) before income taxes ....              -            786          3,404         (426)   6,547      (6,906)        3,405
Depreciation and amortization ........              -              5            402          458    5,774           6         6,645

<CAPTION>
                                                                    Twelve Weeks Ended September 8, 2000
                                        -------------------------------------------------------------------------------------------
                                         Full-Service Limited-Service        Hotel       Hotel     Senior    Corporate
                                        Hotel Leasing  Hotel Leasing      Ownership   Management   Living     & Other  Consolidated
                                        -------------  -------------      ---------   ----------   ------     -------  ------------
                                                                       (in thousands)
<S>                                     <C>            <C>                <C>         <C>         <C>         <C>      <C>
Revenues .............................  $     898,954  $      93,157      $   9,757   $    9,013  $60,574     $   939  $  1,072,394
Operating profit (loss) ..............          8,219          2,898          3,186          119    9,829          61        24,312
Interest expense .....................           (981)           (93)        (1,059)           -   (5,832)          -        (7,965)
Interest income ......................            646            149            128           35      413          90         1,461
Other ................................              -              -           (363)           -        -      (3,391)       (3,754)
Income (loss) before income taxes ....          7,884          2,954          1,892          154    4,410      (3,240)       14,054
Depreciation and amortization ........              -              -            885          456    5,689         195         7,225

<CAPTION>
                                                                   Thirty-six Weeks Ended September 7, 2001
                                        -------------------------------------------------------------------------------------------
                                         Full-Service Limited-Service        Hotel       Hotel     Senior    Corporate
                                        Hotel Leasing  Hotel Leasing      Ownership   Management   Living     & Other  Consolidated
                                        -------------  -------------      ---------   ----------   ------     -------  ------------
                                                                       (in thousands)
<S>                                     <C>            <C>                <C>          <C>       <C>         <C>       <C>
Revenues .............................  $      58,986  $     283,578      $  32,584    $  23,840 $190,588    $   (449) $    589,127
Operating profit (loss) ..............          1,295          5,675          9,937           10   34,751        (627)       51,041
Interest expense .....................            (47)          (271)        (3,124)           -  (15,826)     (1,545)      (20,813)
Interest income ......................              -            225            241           98      611       6,519         7,694
Other ................................        204,459              -              -            -        -     (20,939)      183,520
Income (loss) before income taxes ....        205,707          5,629          7,054          108   19,536     (16,592)      221,442
Depreciation and amortization ........              -             17          2,751        1,337   16,717         460        21,282

<CAPTION>
                                                                  Thirty-six Weeks Ended September 8, 2000
                                        -------------------------------------------------------------------------------------------
                                         Full-Service Limited-Service        Hotel       Hotel     Senior    Corporate
                                        Hotel Leasing  Hotel Leasing      Ownership   Management   Living     & Other  Consolidated
                                        -------------  -------------      ---------   ----------   ------     -------  ------------
                                                                       (in thousands)
<S>                                     <C>            <C>              <C>            <C>       <C>          <C>       <C>
Revenues .............................  $   2,779,902  $     239,011    $    27,960    $  24,504 $180,561     $ 3,433   $ 3,255,371
Operating profit (loss) ..............         35,675          6,688          8,525          144   30,578         687        82,297
Interest expense .....................         (2,941)          (282)        (3,197)           -  (16,218)          -       (22,638)
Interest income ......................          1,495            158            290           38      640         295         2,916
Other ................................              -              -           (950)           -        -     (11,796)      (12,746)
Income (loss) before income taxes ....         34,229          6,564          4,668          182   15,000     (10,814)       49,829
Depreciation and amortization ........              -              -          2,535        1,001   16,591         578        20,705
</TABLE>

                                       -8-

<PAGE>

4.  On November 13, 2000, the Company entered into an agreement with a
    subsidiary of Host Marriott Corporation ("Host Marriott') for the purchase
    and sale of the Company's subsidiaries owning the leasehold interests in the
    full-service hotels leased from Host Marriott. The purchase and sale
    transaction generally transferred ownership of the Company's subsidiaries
    owning the full-service hotel leasehold interests to a subsidiary of Host
    Marriott for a total consideration of $205 million in cash. On January 10,
    2001, upon the receipt of all required consents, the purchase and sale
    transaction was completed for $201 million, which reflected the deferral of
    the sale of one of the leases for $4 million. The effective date of the
    transaction was January 1, 2001. The remaining lease was sold in the second
    quarter of 2001. The Company recognized a pre-tax gain on the transaction of
    $204 million in 2001, net of transaction costs.

5.  On March 23, 2001, the Company acquired the remaining 18% limited
    partnership interest in Marriott Residence Inn USA Limited Partnership
    ("Residence Inn USA") for $11.4 million. Residence Inn USA owns ten
    Residence Inn hotels that are managed by Marriott International, Inc.
    ("Marriott International") under a long-term management agreement. The
    purchase price of the limited partnership interests approximated fair value,
    and accordingly, no portion of the purchase price has been expensed.

6.  In the second quarter of 2001, the Company restructured its corporate
    operations due to the sale of the full-service hotel leases in the first
    quarter of 2001. As a result, the Company recorded a corporate restructuring
    charge in the second quarter of 2001 for the severance of 17 corporate
    employees of approximately $6.1 million, which is included in corporate
    expenses on the accompanying condensed consolidated statements of
    operations. Included in the restructuring charge is a $3.6 million non-cash
    charge for the acceleration of the vesting of stock options and stock
    awards. As of September 7, 2001, the restructuring accrual was $1.5 million
    which reflects $1.0 million of cash payments.

7.  On September 28, 2001, the Company sold its ten Residence Inn hotels in
    Residence Inn USA to Apple Hospitality Two, Inc. ("Apple") for total
    consideration of $119 million, including approximately $53 million of debt
    assumed by Apple. The Company has classified the ten hotels as "Property and
    equipment held for sale" on the accompanying condensed consolidated balance
    sheet and, accordingly ceased recording depreciation expense on the property
    and equipment beginning in the third quarter of 2001. The Company will
    recognize a gain on the sale in the fourth quarter of 2001. The results of
    operations for the ten hotels were as follows:

<TABLE>
<CAPTION>
                                           Twelve Weeks Ended       Thirty-six Weeks Ended
                                     -------------------------------------------------------
                                      September 7,  September 8,  September 7, September 8,
                                          2001       2000             2001      2000
                                          ----       ----             ----      ----
    <S>                              <C>          <C>             <C>
                                                         (in thousands)
    Revenues .......................   $  9,294   $  9,757         $ 27,565  $ 27,567
    Operating profit ...............      3,715      3,186            8,771     8,441
    Minority interest expense ......          -       (363)               -      (950)
    Interest expense ...............     (1,034)    (1,059)          (3,124)   (3,197)
</TABLE>

    In connection with the transaction, Apple made a $47 million loan to the
    Company during the second quarter. The loan bore interest at 12% and was
    repaid on September 28, 2001.

8.  In the third quarter of 2001, the Company purchased stock options of two
    former executives. In accordance with Accounting Principles Board Opinion
    No. 25 ("APB 25") and FASB Interpretation No. 44 ("FIN 44"), the Company
    recorded a charge of $3.0 million for this purchase in the third quarter of
    2001, which is included in corporate expenses on the accompanying condensed
    consolidated statements of operations. In the fourth quarter of 2001, the
    Company purchased the remaining stock options of these two former executives
    and recorded an additional charge of $2.5

                                      -9-

<PAGE>

    million in the fourth quarter of 2001.

9.  In the third quarter of 2001, the Company recorded a $1.5 million charge for
    terminated merger costs with a third party, which is included in corporate
    expenses on the accompanying condensed consolidated statements of
    operations.

10. On August 9, 2001, the Company entered into an agreement to sell its
    portfolio of 31 senior living communities to Senior Housing Properties
    Trust, a real estate investment trust based in Newton, Massachusetts. Total
    consideration for the transaction is $600 million, including approximately
    $235 million of existing debt. The transaction is expected to close in the
    first quarter of 2002 and is subject to a successful vote by at least two
    thirds of the Company's shareholders, arranging additional debt financing of
    $150 million to $175 million, obtaining certain consents, and customary
    closing conditions.

                                      -10-

<PAGE>

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
                     MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  RESULTS OF OPERATIONS AND FINANCIAL CONDITION

FORWARD-LOOKING STATEMENTS

     Certain matters discussed herein or delivered in connection with this Form
10-Q are forward-looking statements within the meaning of the Private Litigation
Reform Act of 1995. Certain, but not necessarily all, of such statements can be
identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," "estimates" or "anticipates" or the negative
thereof or comparable terminology. All forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
transactions, results, performance or achievements of the Company to be
materially different from any future transactions, results, performance or
achievements expressed or implied by such forward-looking statements. These may
include: (i) national and local economic and business conditions or governmental
regulations that will affect demand, prices, wages or other costs for hotels and
senior living communities; (ii) the level of rates and occupancy that can be
achieved by such properties; (iii ) the Company's ability to compete effectively
in areas such as access, location, quality of properties and rate structures;
(iv) the ability to maintain the properties in a first-class manner (including
meeting capital expenditure requirements); (v) the availability and terms of
financing; and (vi) changes to the public pay systems for medical care and the
need for compliance with environmental, licensure and safety requirements.
Although the Company believes the expectations reflected in such forward-looking
statements are based upon reasonable assumptions and business opportunities, it
can give no assurance that its expectations will be attained or that any
deviations will not be material. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
that may be made to reflect any future events or circumstances.

RESULTS OF OPERATIONS

Revenues

     Hotel revenues represent property-level revenues from owned and leased
hotels, as well as managed hotels operated under lease agreements and management
fees from managed hotels operated under management agreements. Senior living
revenues represent property-level revenues. Total revenues decreased by $898
million to $174 million for the third quarter of 2001 from $1.1 billion for the
third quarter of 2000. Year-to-date revenues decreased by almost $2.7 billion to
$589 million in 2001. The significant decrease in revenues is attributable
primarily to the sale of the full-service hotel leases in 2001.

     Revenues by segment were as follows:

<TABLE>
<CAPTION>
                                                                   Twelve Weeks Ended                   Thirty-six Weeks Ended
                                                             ------------------------------         ------------------------------
                                                               September 7,    September 8,          September 7,      September 8,
                                                                  2001            2000                  2001              2000
                                                                  ----            ----                  ----              ----
                                                                                    (in thousands)
<S>                                                          <C>               <C>                  <C>                <C>
     Full-Service Hotel Leasing ...................          $        --       $   898,954          $    58,986        $ 2,779,902
     Limited-Service Hotel Leasing ................               93,460            93,157              283,578            239,011
     Hotel Ownership ..............................               11,752             9,757               32,584             27,960
     Hotel Management .............................                5,132             9,013               23,840             24,504
     Senior Living ................................               64,183            60,574              190,588            180,561
     Other ........................................                  (55)              939                 (449)             3,433
                                                             -----------       -----------          -----------        -----------
                                                             $   174,472       $ 1,072,394          $   589,127        $ 3,255,371
                                                             ===========       ===========          ===========        ===========
</TABLE>

                                      -11-

<PAGE>

     Full-Service Hotel Leasing. Due to the sale of the full-service hotel
leases, there were no revenues in the third quarter of 2001 compared to $899
million in 2000. Year-to-date full-service hotel lease revenues were $59.0
million in 2001 compared to $2.8 billion in 2000. Full-service hotel leasing
revenues in 2001 consisted of the one remaining lease that was sold in the
second quarter of 2001.

     Limited-Service Hotel Leasing. Leased limited-service hotel revenues
increased $.3 million, or .3%, to $93.5 million in the third quarter of 2001.
Year-to-date revenues increased $44.6 million, or 19%, to $284 million in 2001.
The significant increase in revenues is due primarily to the incremental
revenues from the addition of two limited-service hotel portfolios during the
second half of 2000 and first quarter of 2001. Excluding the new limited-service
hotel lease portfolios, comparable revenues decreased by 6.4% for the quarter
and 2.4% year-to-date. The significant decrease in comparable revenue is
primarily due to the decrease in room revenue per available room ("REVPAR").
REVPAR for the Company's subleased Courtyard by Marriott hotel properties
decreased 6.4% for the third quarter and 1.0% year-to-date. Average occupancy
decreased significantly by almost seven percentage points for the quarter and
almost five percentage points year-to-date, partially offset by increases in
average room rates of 1.8% for the quarter and 4.8% year-to-date. REVPAR for the
Company's subleased Residence Inn properties decreased 6.0% for the quarter and
4.4% year-to-date. Average occupancy decreased significantly by over four
percentage points for the quarter and over five percentage points year-to-date
while average room rates decreased 1.0% for the quarter and increased 1.8%
year-to-date. The table below sets forth information for the Company's leased
limited-service hotels:

<TABLE>
<CAPTION>
                                                                      Twelve Weeks Ended           Thirty-six Weeks Ended
                                                              ----------------------------------   ---------------------------
                                                                  September 7,      September 8,    September 7,  September 8,
                                                                      2001              2000           2001          2000
                                                                      ----              ----           ----          ----
<S>                                                               <C>             <C>               <C>          <C>
Subleased Courtyard (53 Properties)
Room rate ..............................................          $    101.56     $     99.74       $ 104.03     $   99.25
Occupancy ..............................................                 77.5%           84.3%          76.8%         81.3%
REVPAR .................................................          $     78.70     $     84.12       $  79.89     $   80.68

Subleased Residence Inns (18 Properties)
Room rate ..............................................          $    104.08     $    105.08       $ 106.12     $  104.21
Occupancy ..............................................                 81.7%           86.1%          79.8%         85.0%
REVPAR .................................................          $     85.01     $     90.48       $  84.67     $   88.55

Leased Limited-Service Hotels (28 Properties)
Room rate ..............................................          $     90.01     $     93.01       $  96.24     $   92.98
Occupancy ..............................................                 69.5%           72.6%          70.1%         72.5%
REVPAR .................................................          $     62.57     $     67.55       $  67.49     $   67.44
</TABLE>

     Hotel Ownership. Revenue for the Company's owned hotels increased $2.0
million, or 20%, to $11.8 million in the third quarter of 2001. Year-to-date
revenues increased $4.6 million, or 17%, to $32.6 million in 2001. The increase
in revenues is due primarily to the addition of the Baltimore Inner Harbor
Courtyard that opened in December 2000 partially offset by the sale of one hotel
in February 2000. Comparable hotel revenue decreased 4.7% for the quarter and
remained unchanged year-to-date. The decrease in comparable revenues for the
quarter is due to the decrease in comparable REVPAR. Comparable REVPAR for the
Company's owned Residence Inns decreased 4.6% for the quarter due to a
significant decrease in average occupancy of almost six percentage points
despite a 2.1% increase in average room rates. Year-to-date comparable REVPAR
increased .2% as a result of an increase in average daily rates of 4.2% although
average occupancy decreased over three percentage points. The table below sets
forth information for the Company's owned Residence Inns.

                                      -12-

<PAGE>

<TABLE>
<CAPTION>
                                                                   Twelve Weeks Ended              Thirty-six Weeks Ended
                                                              --------------------------------   -------------------------------
                                                              September 7,      September 8,      September 7,  September 8,
                                                                   2001            2000               2001          2000
                                                                   ----            ----               ----          ----
<S>                                                           <C>              <C>                <C>           <C>
Comparable Owned Residence Inns (10 Properties)
Room rate ..................................................   $   108.19       $  106.01         $108.30       $  103.94
Occupancy ..................................................         84.9%           90.8%           84.0%           87.4%
REVPAR .....................................................   $    91.87       $   96.26         $ 91.02       $   90.87
</TABLE>

     Hotel Management. Revenue for the Company's managed hotels decreased $3.9
million, or 43%, to $5.1 million in the third quarter of 2001. Year-to-date
revenues decreased $.7 million, or 2.7%, to $23.8 million in 2001. The Company
entered into the hotel management business in March 2000 with the acquisition of
two hotel management portfolios. The significant decrease in revenue for the
quarter is due to the conversion of a lease agreement to a management agreement
in the third quarter of 2001 for one of the Company's managed hotels. The
decrease in revenue year-to-date is due primarily to this conversion, partially
offset by the incremental impact of a full period of revenues from the hotels in
the two hotel management portfolios acquired in March 2000. The table below sets
forth certain information for the Company's managed hotels. The information
includes periods prior to the Company's management and includes comparable
hotels that were open for both periods.

<TABLE>
<CAPTION>
                                                                   Twelve Weeks Ended              Thirty-six Weeks Ended
                                                              --------------------------------   -------------------------------
                                                              September 7,      September 8,      September 7,  September 8,
                                                                   2001            2000               2001          2000
                                                                   ----            ----               ----          ----
<S>                                                           <C>              <C>                <C>           <C>
Comparable Full-Service Hotels
Room rate .............................................         $    105.78     $     105.56      $    115.63   $     114.67
Occupancy .............................................                70.7%            72.0%            72.4%         71.90%
REVPAR ................................................         $     74.75     $      75.99      $     83.70   $      82.41

Comparable Limited-Service Hotels
Room rate .............................................         $     74.65     $      77.03      $     77.48   $      77.53
Occupancy .............................................                74.4%            78.8%            73.4%          78.0%
REVPAR ................................................         $     55.52     $      60.66      $     56.90   $      60.46
</TABLE>

     Senior Living. Senior living community revenues increased by $3.6 million,
or 6.0%, to $64.2 million in the third quarter of 2001. Year-to-date revenues
increased by $10.0 million, or 5.6%, to $191 million. For the third quarter, the
average daily rate increased 5.7%, while average occupancy decreased almost one
percentage point. The year-to-date average daily rate increased by 5.9%, while
average occupancy decreased slightly. The table below sets forth information for
the Company's senior living communities.

<TABLE>
<CAPTION>
                                                                       Twelve Weeks Ended
                                                     ------------------------------------------------------
                                                        September 7, 2001            September 8, 2000
                                                     -------------------------- ---------------------------
                                                       Average                   Average
                                                     Daily Rate  Occupancy      Daily Rate      Occupancy
                                                     ----------  ---------      ----------      ----------
<S>                                                  <C>         <C>            <C>             <C>
Independent Living.....................                $  86.77       92.5%     $    82.93            94.3%
Assisted Living .......................                   99.14       89.2           93.82            87.7
Special Care ..........................                  129.18       93.1          124.60            91.0
Healthcare ............................                  140.52       88.9          131.38            89.3
                                                       --------  ---------      ----------      ----------
  Combined.............................                $ 102.40       91.1%     $    96.90            91.7%
                                                       ========  =========      ==========      ==========

<CAPTION>
                                                                     Thirty-six Weeks Ended
                                                     ------------------------------------------------------
                                                        September 7, 2001           September 8, 2000
                                                     -------------------------- ---------------------------
                                                       Average                   Average
                                                     Daily Rate  Occupancy      Daily Rate      Occupancy
                                                     ----------  ---------      ----------      ----------
<S>                                                  <C>         <C>            <C>             <C>
Independent Living.....................
Assisted Living .......................                $  86.06       92.9%     $    82.49            94.4%
Special Care ..........................                   98.72       88.4           93.12            86.7
Healthcare ............................                  128.16       92.1          124.30            83.7
                                                         139.70       89.3          129.29            89.5
                                                       --------  ---------      ----------      ----------
  Combined.............................                $ 101.71       91.1%     $    96.00            91.3%
                                                       ========  =========      ==========      ==========
</TABLE>

                                      -13-

<PAGE>

     Other. Other revenues totaled a net loss of $55,000 in the third quarter of
2001 compared to $939,000 in the third quarter of 2000. Year-to-date other
revenues totaled a net loss of $449,000 in 2001 compared to $3.4 million in
2000. Other revenues in 2000 consisted primarily of fees earned from Host
Marriott for the Company's full-service hotel asset management group. The
Company terminated its asset management agreement in connection with the sale of
the full-service hotel leases in 2001. The losses in 2001 are attributable
primarily to the equity in losses of an entity that owns a hotel that opened in
the first quarter of 2001.

Operating Profit

     The Company's operating profit decreased $8.5 million, or 35%, to $15.8
million for the third quarter of 2001 and $31.3 million, or 38%, to $51.0
million year-to-date. The significant decrease in operating profit is
attributable primarily to the sale of the full-service hotel leases in 2001, as
well as a significant decrease in operating profit of the Company's
limited-service hotel leasing segment. Overall, the comparable operating profit
from the Company's lodging segments were lower than the prior year due primarily
to the weaker economy and its impact on travel, while operating profit from the
Company's senior living segment was higher than the prior year due to rate
growth and improvements in profit margins. The terrorist attacks on September
11, 2001 are expected to have a significant negative impact on fourth quarter
2001 results. As a result, the Company expects operating results for our lodging
segments to be significantly lower in the fourth quarter of 2001 as compared to
the prior year. Operating profit by segment was as follows:

<TABLE>
<CAPTION>
                                                                 Twelve Weeks Ended       Thirty-six Weeks Ended
                                                              ------------------------- --------------------------
                                                              September 7, September 8, September 7, September 8,
                                                                 2001        2000           2001        2000
                                                                 ----        ----           ----        ----
                                                                                (in thousands)
<S>                                                           <C>        <C>            <C>         <C>
Full-Service Hotel Leasing .............................       $     -    $  8,219       $  1,295    $ 35,675
Limited-Service Hotel Leasing ..........................           676       2,898          5,675       6,688
Hotel Ownership ........................................         4,344       3,186          9,937       8,525
Hotel Management .......................................          (458)        119             10         144
Senior Living ..........................................        11,305       9,829         34,751      30,578
Other ..................................................           (84)         61           (627)        687
                                                               -------    --------       --------    --------
                                                               $15,783    $ 24,312       $ 51,041    $ 82,297
                                                               =======    ========       ========    ========
</TABLE>

     Full-Service Hotel Leasing. There was no operating profit for the Company's
full-service hotel leases in the third quarter of 2001 compared to $8.2 million
in the prior year. Year-to-date full-service hotel operating profit was $1.3
million in 2001 compared to $35.7 million in 2000. The significant decrease in
operating profit is due to the sale of the full-service hotel leases in 2001.

     Limited-Service Hotel Leasing. Operating profit for the Company's
limited-service hotel leases decreased by $2.2 million, or 77%, to $.7 million
in the third quarter of 2001. Year-to-date operating profit decreased $1.0
million, or 15%, to $5.7 million in 2001. The significant decrease in operating
profit is primarily attributable to the acquisition of two limited-service hotel
lease portfolios in the second half of 2000 and the first quarter of 2001. These
new lease portfolios experienced operating losses for 2001 due to start-up costs
for new hotel openings as well as the impact of the weak economy on the lodging
industry. The new limited-service lease portfolios recorded an operating loss of
$1.4 million for the third quarter of 2001 compared to an operating profit of
$162,000 in 2000, and recorded an operating loss of $354,000 in year-to-date
2001 compared to an operating profit of $162,000 in 2000. Excluding the impact
of the two new limited-service hotel lease portfolios, comparable operating
profit decreased by 25% in the third quarter of 2001 and 7.6% year-to-date. The
decrease in comparable operating profit is due to the decrease in REVPAR and
profit margins.

        Hotel Ownership. Operating profit for the Company's owned hotels
increased by $1.2 million, or 36%, to $4.3 million in the third quarter of 2001
and increased $1.4 million, or 17%, to $9.9 million year-to-

                                      -14-

<PAGE>

date. The increase in operating profit is due to the addition of the Baltimore
Inner Harbor Courtyard which opened in December 2000 and the decrease in
depreciation expense on the Company's Residence Inns. At the beginning of the
third quarter of 2001, the Company classified its owned Residence Inns as
"property and equipment held for sale" and therefore ceased recording
depreciation expense. Comparable operating profit of the Company's owned hotels,
excluding depreciation expense, decreased 8.1% for the quarter and 1.8%
year-to-date due mostly to decreases in REVPAR.

     Hotel Management. The Company's managed hotels recorded an operating loss
of $458,000 in the third quarter of 2001 compared to an operating profit of
$119,000. The year-to-date operating profit was $10,000 in 2001 compared to
$144,000 in 2000. The decrease in operating profit for the Company's managed
hotels is due primarily to the operating losses in 2001 in the three hotels that
the Company manages through lease agreements. Operating results for the
Company's hotel management business were impacted by the timing of the revenue
recognition of certain base and incentive management revenue and the
amortization expense of the acquisition cost of the management business. The
Company recognizes management fee revenue in accordance with Staff Accounting
Bulletin ("SAB") No. 101 which provides that contingent revenue should be
recorded in the period in which the contingency is resolved. For certain of the
Company's management contracts, certain management fees are earned after
specified thresholds for annual operating profit have been attained. The Company
recognizes management fee revenue for those contracts when those thresholds are
achieved which usually occurs in the fourth quarter. In addition, the Company
recorded amortization expense of $458,000 and $456,000 in the third quarter 2001
and 2000, respectively, and $1.3 million and $1.0 million in year-to-date 2001
and 2000, respectively, representing the amortization of the acquisition cost of
the hotel management contracts and leases.

     Senior Living. Senior living community operating profit increased $1.5
million, or 15.0% to $11.3 million in the third quarter of 2001. Year-to-date
operating profit increased $4.2 million, or 13.6%, to $34.8 million in 2001. The
significant increase in operating profit is due primarily to cost controls
implemented by the Company's operator resulting in an increase in property-level
profit margins of over one percentage point as well as the impact of a 5.9%
increase in average daily rates.

     Other. Other operating profit was a loss of $84,000 in the third quarter of
2001 compared to a profit of $61,000 in the third quarter of 2000. Year-to-date
other operating profit was a loss of $627,000 in 2001 compared to a profit of
$687,000 in 2000. The significant decrease from the prior year is attributable
to the full-service hotel asset management contract with Host Marriott that was
terminated in connection with the sale of the full-service hotel leases in 2001
as well as the equity in losses of an entity that owns a hotel that opened in
2001.

Gain on Sale of Full-Service Hotel Leases

     On January 10, 2001, the Company completed a purchase and sale transaction
with Host Marriott whereby all but one of the Company's subsidiaries owning the
full-service hotel leasehold interests were transferred to Host Marriott for
cash consideration totaling $201 million. The effective date of the transaction
was January 1, 2001. The remaining full-service hotel lease was sold in the
second quarter of 2001 for $4 million. The Company recorded a gain on the
transaction of $204 million, net of transaction costs, in 2001.

Minority Interest

     In the third quarter of 2000 and in year-to-date 2000, minority interest
expense was $363,000 and $950,000, respectively. As a result of the acquisition
of the remaining minority interest in the Company's portfolio of ten owned
Residence Inns in the first quarter of 2001, the Company did not recognize any
minority interest expense in 2001.

                                      -15-

<PAGE>

Corporate Expenses

     Corporate expenses increased $4.3 million to $7.7 million for the third
quarter of 2001 and increased $9.2 million to $21.0 million year-to-date. The
significant increase in corporate expenses is attributable to three
non-recurring charges, as described below.

     In the second quarter of 2001, the Company restructured its corporate
operations due to the sale of the full-service hotel leases in the first quarter
of 2001. As a result, the Company recorded a corporate restructuring charge in
the second quarter of 2001 for the severance of certain corporate employees of
approximately $6.1 million, including a $3.6 million non-cash charge for the
acceleration of the vesting of stock options and stock awards. The Company
expects an annual reduction in expenses of approximately $3 million due to the
restructuring.

     In the third quarter of 2001, the Company purchased stock options from two
former executives. In accordance with APB 25 and FIN 44, the Company recorded a
charge for this purchase of $3.0 million.

     In the third quarter of 2001, the Company recorded a $1.5 million charge
for terminated merger costs with a third party.

Interest Expense

     Interest expense decreased $619,000 in the third quarter of 2001 and $1.8
million year-to-date. The decrease in interest expense is due to the repayment
of the full-service hotel working capital notes and the Company's line of
credit, partially offset by additional mortgage debt obtained in the third
quarter of 2000 on certain senior living communities. Interest expense includes
$86,000 and $1.1 million in the third quarter of 2001 and 2000, respectively,
and $307,000 and $3.2 million in year-to-date third quarter, respectively,
related to interest on the hotel working capital notes payable to Host Marriott.

Interest Income

     Interest income increased $1.2 million to $2.7 million for the third
quarter of 2001 and increased $4.8 million to $7.7 million year-to-date. The
significant increase in interest income is due primarily to the additional
interest earned on the cash proceeds from the sale of the full-service hotel
leases.

Income Before Extraordinary Item

     Income before extraordinary item for the third quarter of 2001 was $2.0
million, or $.13 per diluted share, compared to $8.3 million, or $.51 per
diluted share, for the third quarter of 2000. Year-to-date income before
extraordinary item was $132.9 million, or $8.22 per diluted share, in 2001
compared to $29.4 million, or $1.74 per diluted share, in 2000. The significant
increase in diluted earnings per share in 2001 was due primarily to the gain on
the sale of the full-service hotel leases discussed above. The diluted earnings
per common share for the third quarter and year-to-date 2001 excluding the gain
on the sale of the full-service hotel leases and the non-recurring corporate
charges, net of taxes, was $.29 and $1.02, respectively.

EBITDA

     The Company's earnings before interest expense, taxes, depreciation and
amortization and other non-cash items ("EBITDA") decreased $10.6 million, or
38%, to $17.6 million in the third quarter of 2001 as compared to the third
quarter of 2000. EBITDA decreased $26.8 million, or 30%, to $63.6 million
year-to-date.

                                      -16-

<PAGE>

         The following is a summary of EBITDA by segment and a reconciliation of
EBITDA to the Company's income before extraordinary item:

<TABLE>
<CAPTION>
                                                               Twelve Weeks Ended         Thirty-six Weeks Ended
                                                           --------------------------   ---------------------------
                                                           September 7,  September 8,   September 7,   September 8,
                                                               2001          2000          2001           2000
                                                             --------      --------      ---------      ---------
                                                                               (in thousands)
         <S>                                               <C>           <C>            <C>            <C>
         Full-service hotel leases .......................   $     --      $  7,249      $   1,248      $  32,744
         Limited-service hotel leases and subleases ......        597         2,805          5,433          6,406
         Hotel ownership, net of minority distributions ..      4,774         3,604         12,751          9,869
         Hotel management ................................         12           520          1,401          1,206
         Senior living communities .......................     16,963        15,481         51,542         47,169
         Corporate and other, net of interest income .....     (4,776)       (1,507)        (8,806)        (6,987)
                                                             --------      --------      ---------      ---------
             EBITDA ......................................   $ 17,570      $ 28,152      $  63,569      $  90,407
                                                             ========      ========      =========      =========

         EBITDA ..........................................   $ 17,570      $ 28,152      $  63,569      $  90,407
         Interest expense ................................     (7,346)       (7,965)       (20,813)       (22,638)
         Hotel working capital note interest expense......         86         1,074            307          3,223
         Depreciation and amortization ...................     (6,645)       (7,225)       (21,282)       (20,705)
         Income taxes ....................................     (1,362)       (5,762)       (88,577)       (20,430)
         Gain on sale of full-service hotel leases .......         --            --        204,459             --
         Non-cash corporate restructuring charge .........         --            --         (3,602)            --
         Other non-cash charges, net .....................       (260)           18         (1,196)          (458)
                                                             --------      --------      ---------      ---------
             Income before extraordinary item ............   $  2,043      $  8,292      $ 132,865      $  29,399
                                                             ========      ========      =========      =========
</TABLE>

         The Company's interest coverage was 2.5 times for the third quarter of
2001 compared to 4.2 times for the third quarter of 2000. Year-to-date interest
coverage was 3.2 times in 2001 compared to 4.7 times in 2000. Interest coverage
is calculated as EBITDA divided by cash interest expense, which is defined as
GAAP interest expense less amortization of deferred financing costs,
amortization of debt premiums and the interest on the hotel working capital
notes. The ratio of earnings to fixed charges was 1.1 to 1.0 for the third
quarter of 2001 and 1.1 to 1.0 for the third quarter of 2000. The year-to-date
ratio of earnings to fixed charges was 2.8 to 1.0 in 2001 and 1.1 to 1.0 in
2000.

         EBITDA data is presented because such data is used by certain investors
to determine the Company's ability to meet debt service requirements and is used
in the Company's line of credit as part of the tests determining its ability to
incur debt and meet certain covenants. The Company considers EBITDA to be an
indicative measure of the Company's operating performance due to the
significance of the Company's long-lived assets and because EBITDA can be used
to measure the Company's ability to service debt, fund capital expenditures and
expand its business; however, such information should not be considered as an
alternative to net income, operating profit, cash flows from operations, or any
other operating or liquidity performance measure prescribed by GAAP. In
addition, EBITDA as calculated by the Company may not be comparable to similarly
titled measures reported by other companies. Cash expenditures for various
long-term assets, interest expense and income taxes have been, and will be,
incurred which are not reflected in the EBITDA presentation.

                                      -17-

<PAGE>

CASH FLOWS AND FINANCIAL CONDITION

         The Company's principal sources of liquidity are cash on hand, cash
flow from operations and borrowings under the Company's line of credit. As of
September 7, 2001, the Company had cash and cash equivalents of $214 million and
restricted cash of $11.8 million, which is included in other assets in the
accompanying condensed consolidated financial statements. The Company's
restricted cash consists of funds transferred into segregated escrow accounts
for (i) debt service, fixed asset, real estate tax and insurance reserves
pursuant to the Company's secured debt agreements for certain of the senior
living communities and owned hotels, and (ii) fixed asset reserves pursuant to
the Company's senior living and owned hotel management agreements. As of
September 7, 2001, there were no amounts outstanding under the Company's $100
million line of credit.

         Cash Flows. Cash from operations was $204 million for the thirty-six
weeks ended September 7, 2001 compared to $50.1 million for the thirty-six weeks
ended September 8, 2000. The cash from operations consists primarily of the cash
from the proceeds from the sale of the full-service hotel leases, net of a
portion of the income taxes paid to date on the gain, as well as cash flow
generated by the Company's business segments. Cash used in investing activities
was $35.9 million in the thirty-six weeks ended September 7, 2001. The cash used
in investing activities principally consists of the acquisition of the remaining
minority interests in a portfolio of hotels, funding lease deposits and capital
expenditures for renewals and replacements and expansions for the Company's
owned hotels and senior living communities. Cash from financing activities was
$9.9 million for the thirty-six weeks ended September 7, 2001. The Company's
cash from financing activities consists primarily of proceeds from a loan
entered into in connection with the sale agreement of the Company's owned
Residence Inns, partially offset by repayments of the Company's line of credit
and debt principal repayments.

         Operating Activities. On November 13, 2000, the Company entered into an
agreement with a subsidiary of Host Marriott for the purchase and sale of the
Company's subsidiaries owning the leasehold interests in the full-service hotels
leased from Host Marriott. The purchase and sale transaction generally
transferred ownership of the Company's subsidiaries owning the full-service
hotel leasehold interests to a subsidiary of Host Marriott for a total
consideration of $205 million in cash. On January 10, 2001, upon the receipt of
all required consents, the purchase and sale transaction was completed for $201
million, which reflected the deferral of the sale of one of the leases for $4
million. The effective date of the transaction was January 1, 2001. The
remaining lease was sold in the second quarter of 2001. The Company recognized a
pre-tax gain on the transaction of $204 million in 2001, net of transaction
costs. The Company anticipates paying approximately $82 million in income taxes
on the lease sale proceeds. For the thirty-six weeks ended September 7, 2001,
the Company paid approximately $41 million in income taxes on the sale proceeds.

         Investing Activities. On March 23, 2001, the Company acquired the
remaining 18% limited partnership interest in Marriott Residence Inn USA Limited
Partnership ("Residence Inn USA") for $11.4 million. Residence Inn USA owns ten
Residence Inn hotels that are managed by Marriott International under a
long-term management agreement. The purchase price of the limited partnership
interests approximated fair value, and accordingly, no portion of the purchase
price has been expensed.

         On September 28, 2001, the Company sold its ten Residence Inn hotels in
Residence Inn USA to Apply Hospitality Two, Inc. ("Apple") for total
consideration of $119 million, including approximately $53 million of debt
assumed by Apple.

         In 2000, the Company entered into separate long-term lease agreements
with Hospitality Properties Trust to lease 19 limited-service hotels and CNL
Hospitality Corporation to lease nine limited-service hotels.

                                      -18-

<PAGE>

All of the hotels are managed by Marriott International under long-term
management agreements with the Company. As of December 29, 2000, six of the
hotels were under construction and opened in the first quarter of 2001. Under
the terms of the lease agreements, the Company made $8.3 million in security
deposits in the first quarter of 2001.

         In the first quarter of 2001, the Company entered into a joint venture
agreement to develop and own a Staybridge Suites by Holiday Inn in Stratford,
Connecticut. The Company's total equity contribution is expected to be
approximately $3 million for a 51% interest in the joint venture. The hotel is
expected to open in early 2002, and the Company will manage the hotel under a
long-term management agreement.

         Also in the first quarter of 2001, the Company purchased a hotel in
downtown Birmingham, Alabama for $3.2 million. The Company intends to renovate
the hotel and convert it into a Courtyard by Marriott. The total cost of the
project including the initial purchase price is expected to be approximately
$15.6 million. The hotel is expected to reopen in 2002.

         On August 9, 2001, the Company entered into an agreement to sell its
portfolio of 31 senior living communities to Senior Housing Properties Trust, a
real estate investment trust based in Newton, Massachusetts. Total consideration
for the transaction is $600 million, including approximately $235 million of
existing debt. The transaction is expected to close in the first quarter of 2002
and is subject to a successful vote by at least two thirds of the Company's
shareholders, arranging additional debt financing of $150 million to $175
million, obtaining certain consents, and customary closing conditions.

         Financing Activities. During the first quarter of 2001, the Company
repaid its outstanding balance under its line of credit totaling $35 million
with the proceeds from the sale of its full-service hotel leases, as well as
operating cash flow.

         In connection with the sale of the Company's ten Residence Inns, Apple
made a $47 million loan to the Company during the second quarter. The loan bore
interest at 12% and was repaid on September 28, 2001.

                                      -19-

<PAGE>

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

         The Company does not have significant market risk with respect to
foreign currency exchanges or other market rate or price risks, and the Company
does not hold any financial instruments for trading purposes. However, the
Company does have certain debt obligations that are sensitive to changes in
interest rates. The fair values and future maturities associated with these
financial instruments have not changed materially from the amounts reported in
the Company's annual report on Form 10-K for the fiscal year ended December 29,
2000. However, the interest rates for the Company's variable rate debt have
decreased from the amounts reported in the Company's annual report on Form 10-K
due to a decline in the LIBOR rates. The interest rate at September 7, 2001 for
the Company's variable rate mortgage rate debt was 6.33%. The Company's line of
credit, which is also a variable rate debt, had no balance outstanding as of
September 7, 2001.

                                      -20-

<PAGE>

                           PART II. OTHER INFORMATION

Item 1.  Legal Proceedings

         The Company is from time to time the subject of, or involved in,
judicial proceedings. Management believes that any liability or loss resulting
from such matters will not have a material adverse effect on the financial
position or results of operations of the Company.

Item 2.  Changes in Securities and Use of Proceeds

         None.

Item 3.  Defaults Upon Senior Securities

         None.

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

         None.

Item 5.  Other Information

         None.

Item 6.  Exhibits and Reports on Form 8_K

a.       Exhibits:

         None.

b.       Reports on Form 8_K:

          .  August 9, 2001 - Report announcing that the Company has entered
             into an agreement to sell its portfolio of 31 senior living
             communities.

          .  September 28, 2001 - Report announcing that the Company closed on
             the sale of its ten Residence Inn hotels.

                                      -21-

<PAGE>

                                    SIGNATURE

Pursuant to the requirements 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.

                                  CRESTLINE CAPITAL CORPORATION

October 22, 2001                        By: /s/ Larry K. Harvey
----------------                            ----------------------------------
Date                                    Larry K. Harvey
                                        Senior Vice President, Treasurer and
                                        Controller (Chief Accounting Officer)

                                      -22-