<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 June 15, 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 July 13, 2001
---------------                                                 ----------------
Common Stock, $.01
par value per share                                                   15,450,000
                                                                      ----------

================================================================================
<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
               June 15, 2001 and December 29, 2000

              Condensed Consolidated Statements of Operations -                        4
               Twelve Weeks Ended June 15, 2001 and June 16, 2000

              Condensed Consolidated Statements of Operations -                        5
               Twenty-Four Weeks Ended June 15, 2001 and June 16, 2000

              Condensed Consolidated Statements of Cash Flows -                        6
               Twenty-Four Weeks Ended June 15, 2001 and
               June 16, 2000

              Notes to Condensed Consolidated Financial Statements                     7

      Item 2. Management's Discussion and Analysis of Results of                      10
               Operations and Financial Condition

      Item 3. Quantitative and Qualitative Disclosures About Market Risk              19

Part II.      OTHER INFORMATION AND SIGNATURE                                         20
</TABLE>


                                      -2-
<PAGE>

                         PART I.  FINANCIAL INFORMATION


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

<TABLE>
<CAPTION>
                                                                               June 15,         December 29,
                                                                                 2001               2000
                                                                              ----------        ------------
                                                                              (unaudited)
                                    ASSETS
<S>                                                                           <C>              <C>
Property and equipment, net..............................................     $  747,710       $   745,476
Hotel working capital....................................................          7,330            89,650
Due from hotel managers..................................................         11,128            64,611
Due from Marriott Senior Living Services.................................          9,289             6,106
Other assets.............................................................         83,888            76,030
Cash and cash equivalents................................................        201,188            35,534
                                                                              ----------       -----------
                                                                              $1,060,533       $ 1,017,407
                                                                              ==========       ===========

                    LIABILITIES AND SHAREHOLDERS' EQUITY

Debt:
 Mortgage debt...........................................................     $  276,093       $  312,903
 Other debt..............................................................         72,728           26,049
                                                                              ----------       ----------
                                                                                 348,821          338,952
 Hotel working capital notes payable to Host Marriott....................          7,330           89,650
                                                                              ----------       ----------
  Total debt.............................................................        356,151          428,602
Income taxes payable.....................................................         46,860                -
Accounts payable and accrued expenses....................................         12,074           12,518
Lease payable............................................................          9,286           62,005
Deferred income taxes....................................................         63,579           67,866
Other liabilities........................................................         24,889           34,328
                                                                              ----------       ----------
  Total liabilities......................................................        512,839          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..............................................        452,600          447,817
 Retained earnings.......................................................        221,778           90,956
 Treasury stock, 6.7 million shares......................................       (126,906)        (126,906)
                                                                              ----------       ----------
  Total shareholders' equity.............................................        547,694          412,088
                                                                              ----------       ----------
                                                                              $1,060,533       $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 June 15, 2001 and June 16, 2000
               (unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
                                                         2001        2000
                                                       --------   ----------
<S>                                                    <C>        <C>
REVENUES
Hotels
 Rooms...............................................  $124,403   $  713,654
 Food and beverage...................................    14,691      323,711
 Other...............................................     8,537       82,093
                                                       --------   ----------
  Total hotel revenues...............................   147,631    1,119,458
                                                       --------   ----------
Senior living
 Routine.............................................    57,919       54,778
 Ancillary...........................................     5,639        5,429
                                                       --------   ----------
  Total senior living revenues.......................    63,558       60,207
                                                       --------   ----------
Other revenues.......................................         -          808
Equity in earnings (losses) of affiliates............      (586)          34
                                                       --------   ----------
 Total revenues......................................   210,603    1,180,507
                                                       --------   ----------
OPERATING COSTS AND EXPENSES
Hotels
 Property-level operating costs and expenses
  Rooms..............................................    25,783      160,526
  Food and beverage..................................    10,230      229,720
  Other..............................................    47,092      267,921
 Other operating costs and expenses
  Management fees....................................    11,683       73,989
  Lease expense......................................    43,235      365,064
  Depreciation and amortization......................     1,668        1,186
  Other..............................................       815        1,100
                                                       --------   ----------
   Total hotel operating costs and expenses..........   140,506    1,099,506
                                                       --------   ----------
Senior living
 Property-level operating costs and expenses
  Routine............................................    36,729       35,063
  Ancillary..........................................     3,209        3,395
 Other operating costs and expenses
  Depreciation and amortization......................     5,572        5,501
  Management fees....................................     4,172        3,736
  Property taxes and other...........................     2,081        2,232
                                                       --------   ----------
   Total senior living operating costs and expenses..    51,763       49,927
                                                       --------   ----------
Other operating costs and expenses...................        53          847
                                                       --------   ----------
  Total operating costs and expenses.................   192,322    1,150,280
                                                       --------   ----------
OPERATING PROFIT.....................................    18,281       30,227
Gain on sale of full-service hotel leases............     4,146            -
Minority interest expense............................         -         (312)
Corporate expenses...................................    (9,641)      (4,544)
Interest expense.....................................    (6,481)      (7,421)
Interest income......................................     2,020          843
                                                       --------   ----------
INCOME BEFORE INCOME TAXES...........................     8,325       18,793
Provision for income taxes...........................    (1,233)      (7,705)
                                                       --------   ----------
NET INCOME...........................................  $  7,092   $   11,088
                                                       ========   ==========

BASIC EARNINGS PER COMMON SHARE......................  $    .46   $      .67
                                                       ========   ==========

DILUTED EARNINGS PER COMMON SHARE....................  $    .44   $      .65
                                                       ========   ==========
</TABLE>

           See Notes to Condensed Consolidated Financial Statements.

                                      -4-
<PAGE>

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
            Twenty-four Weeks Ended June 15, 2001 and June 16, 2000
                (unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
<S>                                                    <C>        <C>
                                                         2001        2000
                                                       --------   ----------
REVENUES
Hotels
 Rooms...............................................  $242,970   $1,320,231
 Food and beverage...................................    28,177      588,293
 Other...............................................    17,497      151,972
                                                       --------   ----------
  Total hotel revenues...............................   288,644    2,060,496
                                                       --------   ----------
Senior living
 Routine.............................................   115,715      109,002
 Ancillary...........................................    10,690       10,985
                                                       --------   ----------
  Total senior living revenues.......................   126,405      119,987
                                                       --------   ----------
Other revenues.......................................         -        2,241
Equity in earnings (losses) of affiliates............      (394)         253
                                                       --------   ----------
 Total revenues......................................   414,655    2,182,977
                                                       --------   ----------
OPERATING COSTS AND EXPENSES
Hotels
 Property-level operating costs and expenses
  Rooms..............................................    51,172      302,465
  Food and beverage..................................    20,514      422,675
  Other..............................................    93,477      503,813
 Other operating costs and expenses
  Management fees....................................    23,626      134,335
  Lease expense......................................    82,488      657,140
  Depreciation and amortization......................     3,239        2,194
  Other..............................................     1,773        1,264
                                                       --------   ----------
   Total hotel operating costs and expenses..........   276,289    2,023,886
                                                       --------   ----------
Senior living
 Property-level operating costs and expenses
  Routine............................................    73,542       69,796
  Ancillary..........................................     6,064        6,729
 Other operating costs and expenses
  Depreciation and amortization......................    11,090       10,902
  Management fees....................................     8,229        7,402
  Property taxes and other...........................     4,034        4,409
                                                       --------   ----------
   Total senior living operating costs and expenses..   102,959       99,238
                                                       --------   ----------
Other operating costs and expenses...................       149        1,868
                                                       --------   ----------
  Total operating costs and expenses.................   379,397    2,124,992
                                                       --------   ----------
OPERATING PROFIT.....................................    35,258       57,985
Gain on sale of full-service hotel leases............   204,459            -
Minority interest expense............................         -         (587)
Corporate expenses...................................   (13,254)      (8,405)
Interest expense.....................................   (13,467)     (14,673)
Interest income......................................     5,041        1,455
                                                       --------   ----------
INCOME BEFORE INCOME TAXES...........................   218,037       35,775
Provision for income taxes...........................   (87,215)     (14,668)
                                                       --------   ----------
NET INCOME...........................................  $130,822   $   21,107
                                                       ========   ==========

BASIC EARNINGS PER COMMON SHARE......................  $   8.49   $     1.26
                                                       ========   ==========

DILUTED EARNINGS PER COMMON SHARE....................  $   8.10   $     1.23
                                                       ========   ==========
</TABLE>

           See Notes to Condensed Consolidated Financial Statements.

                                      -5-
<PAGE>

                 CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
            Twenty-four weeks ended June 15, 2001 and June 16, 2000
                           (unaudited, in thousands)
<TABLE>
<CAPTION>
                                                                         2001       2000
                                                                         ----       ----
<S>                                                                    <C>        <C>
OPERATING ACTIVITIES
Net income....................................................         $130,822   $ 21,107
Adjustments to reconcile net income to cash from operations:
  Depreciation and amortization...............................           14,637     13,480
  Amortization of debt premiums and deferred financing costs..              567       (238)
  Non-cash restructuring charge...............................            3,614          -
  Income taxes................................................           43,675     (1,802)
  Other.......................................................            1,210      1,164
  Change in other operating accounts..........................           (5,419)     5,055
                                                                       --------   --------
Cash from operations..........................................          189,106     38,766
                                                                       --------   --------
INVESTING ACTIVITIES
 Acquisitions.................................................          (18,555)   (14,427)
 Hotel lease security deposits................................           (8,346)   (10,172)
 Expansions of senior living communities......................             (842)    (3,204)
 Other capital expenditures...................................           (3,672)    (4,489)
 Dispositions.................................................                -      6,206
 Other........................................................           (1,871)    (2,967)
                                                                       --------   --------
Cash used in investing activities.............................          (33,286)   (29,053)
                                                                       --------   --------
FINANCING ACTIVITIES
 Repurchases of common stock..................................             (953)   (19,115)
 Issuance of debt.............................................           47,000          -
 Draws on line of credit......................................                -     25,000
 Repayments of line of credit.................................          (35,000)    (5,000)
 Repayments of other debt.....................................           (1,767)    (2,365)
 Other........................................................              554       (281)
                                                                       --------   --------
Cash from (used in) used in financing activities..............            9,834     (1,761)
                                                                       --------   --------
Increase in cash and cash equivalents.........................          165,654      7,952
Cash and cash equivalents, beginning of period................           35,534     36,774
                                                                       --------   --------
Cash and cash equivalents, end of period......................         $201,188   $ 44,726
                                                                       ========   ========
</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 June 15, 2001 and the results of
     operations and cash flows for the twelve and twenty-four weeks ended June
     15, 2001 and June 16, 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 five 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  Twenty-four Weeks Ended
                                                                        ------------------  -----------------------
                                                                        June 15,  June 16,   June 15,     June 16,
                                                                          2001      2000       2001         2000
                                                                        --------  --------  ----------   ----------
                                                                                      (in thousands)
<S>                                                                     <C>       <C>       <C>          <C>
     Weighted average number of common shares outstanding.....            15,422    16,522      15,411       16,747
     Assuming distribution of common shares granted under
       the comprehensive stock plan, less shares assumed
       purchased at average market price.......................              771       440         747          452
                                                                        --------  --------  ----------   ----------
     Shares utilized for the calculation of diluted earnings
       per share...............................................           16,193    16,962      16,158       17,199
                                                                        ========  ========  ==========   ==========
</TABLE>

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 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

                                      -7-
<PAGE>

     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 June 15, 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...................       $   30,241          $ 97,649     $10,824        $ 8,917     $ 63,558     $   (586)    $  210,603
Operating profit...........            1,041             2,649       3,120            315       11,795         (639)        18,281
Interest expense...........              (24)              (87)     (1,043)             -       (5,030)        (297)        (6,481)
Interest income............            1,729                 9          67             37          178            -          2,020
Gain on sale and other.....            4,146                 -           -              -            -       (9,641)        (5,495)
Income (loss) before
 income taxes..............            6,892             2,571       2,144            352        6,943      (10,577)         8,325
Depreciation and
 amortization..............                -                 6       1,239            424        5,425          300          7,394

<CAPTION>
                                                                Twelve Weeks Ended June 16, 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...................       $1,025,582          $ 77,075     $ 9,199        $ 7,602     $ 60,207     $    842     $1,180,507
Operating profit (loss)....           15,347             2,060       2,790           (245)      10,280           (5)        30,227
Interest expense...........             (980)              (95)     (1,066)             -       (5,280)           -         (7,421)
Interest income............              532                 7          94              3          108           99            843
Other......................                -                 -        (312)             -            -       (4,544)        (4,856)
Income (loss) before
 income taxes..............           14,899             1,972       1,506           (242)       5,108       (4,450)        18,793
Depreciation and
 amortization..............                -                 -         791            395        5,501          193          6,880

<CAPTION>
                                                         Twenty-four Weeks Ended June 15, 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          $190,118     $20,832        $18,708     $126,405     $   (394)    $  414,655
Operating profit...........            1,295             4,999       5,593            468       23,446         (543)        35,258
Interest expense...........              (47)             (174)     (2,090)             -      (10,859)        (297)       (13,467)
Interest income............            4,229                18         147             66          402          179          5,041
Gain on sale and other.....          204,459                 -           -              -            -      (13,254)       191,205
Income (loss) before
 income taxes..............          209,936             4,843       3,650            534       12,989      (13,915)       218,037
Depreciation and
 amortization..............                -                12       2,349            879       10,943          454         14,637

<CAPTION>
                                                         Twenty-four Weeks Ended June 16, 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...................       $1,880,948          $145,854     $18,203        $15,491     $119,987     $  2,494     $2,182,977
Operating profit...........           27,456             3,790       5,339             25       20,749          626         57,985
Interest expense...........           (1,960)             (189)     (2,138)             -      (10,386)           -        (14,673)
Interest income............              849                 9         162              3          227          205          1,455
Other......................                -                 -        (587)             -            -       (8,405)        (8,992)
Income (loss) before
 income taxes..............           26,345             3,610       2,776             28       10,590       (7,574)        35,775
Depreciation and
 amortization..............                -                 -       1,650            545       10,902          383         13,480
</TABLE>

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

                                      -8-
<PAGE>

     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 Company recognized a pre-
     tax gain on the transaction of $200 million in the first quarter of 2001,
     net of transaction costs. The effective date of the transaction was January
     1, 2001. The remaining lease was sold in the second quarter of 2001 and the
     Company recognized an additional pre-tax gain of $4 million, 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 June 15, 2001, the restructuring accrual was $2.1 million
     which reflects $454,000 of cash payments.

7.   During the second quarter, the Company entered into an agreement to sell
     its ten Residence Inn hotels in Residence Inn USA to Apple Hospitality Two,
     Inc. (the "Buyer") for total consideration of $119 million, including
     approximately $54 million of debt that will be assumed by the Buyer. The
     transaction is expected to close in the third quarter of 2001 and is
     subject to customary closing conditions. The Buyer made a $47 million loan
     to the Company during the second quarter. The loan bears interest at 12%
     and is due upon the earlier of the closing of the transaction or August 31,
     2001.

                                      -9-
<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 $970
million, or 82%, to almost $211 million for the second quarter of 2001 from $1.2
billion for the second quarter of 2000.  Year-to-date revenues decreased by $1.8
billion, or 81%, to almost $415 million in 2001. The significant decrease in
revenues is attributable primarily to the sale of all but one of the full-
service hotel leases effective January 1, 2001.  The remaining lease was sold in
the second quarter of 2001.

     Revenues by segment were as follows:

<TABLE>
<CAPTION>
                                       Twelve Weeks Ended           Twenty-Four Weeks Ended
                                       ------------------           -----------------------
                                       June 15,   June 16,          June 15,       June 16,
                                         2001      2000               2001           2000
                                         ----      ----               ----           ----
                                                        (in thousands)
<S>                                  <C>          <C>               <C>          <C>
Full-service hotel leasing.....      $   30,241   $ 1,025,582       $   58,986   $ 1,880,948
Limited-service hotel leasing..          97,649        77,075          190,118       145,854
Hotel ownership................          10,824         9,199           20,832        18,203
Hotel management...............           8,917         7,602           18,708        15,491
Senior living..................          63,558        60,207          126,405       119,987
Other..........................            (586)          842             (394)        2,494
                                     ----------   -----------       ----------   -----------
                                     $  210,603   $ 1,180,507       $  414,655   $ 2,182,977
                                     ==========   ===========       ==========   ===========
</TABLE>

                                      -10-
<PAGE>

     Full-Service Hotel Leasing.  Full-service hotel leasing revenues were $30.2
million in the second quarter of 2001 compared to $1.0 billion in 2000.  Year-
to-date full-service hotel lease revenues were $59 million in 2001 compared to
$1.9 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 $20.6 million, or 27%, to $97.6 million in the second quarter of 2001.
Year-to-date revenues increased $44.3 million, or 30%, to $190 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 3.8% for the
quarter and 0.3% year-to-date.  REVPAR for the Company's subleased Courtyard by
Marriott hotel properties decreased 1.6% for the second quarter and increased
1.9% year-to-date.  The decrease in REVPAR for the quarter was driven by a
significant decrease in average occupancy of almost six percentage points
partially offset by a 5.6% increase in average room rates.  The increase in
REVPAR year-to-date is due mostly to a 6.4% increase in average room rates
partially offset by a decrease in average occupancy of over three percentage
points.  REVPAR for the Company's subleased Residence Inn properties decreased
7.6% for the quarter and 3.5% year-to-date.  Average occupancy decreased
significantly by almost eight percentage points for the quarter and almost six
percentage points year-to-date while average room rates increased 1.5% for the
quarter and 3.3% year-to-date.  The table below sets forth information for the
Company's leased limited-service hotels:

<TABLE>
<CAPTION>
                                                 Twelve Weeks Ended           Twenty-Four Weeks Ended
                                                 ------------------           -----------------------
                                                 June 15,   June 16,          June 15,       June 16,
                                                   2001      2000               2001           2000
                                                   ----      ----               ----           ----
<S>                                              <C>        <C>               <C>            <C>
Subleased Courtyard (53 Properties)
Room rate....................................    $106.21    $ 100.56          $105.29        $ 98.99
Occupancy....................................       77.7%       83.4%            76.4%          79.8%
REVPAR.......................................    $ 82.51    $  83.89          $ 80.49        $ 78.97

Subleased Residence Inns (18 Properties)
Room rate....................................    $107.22    $ 105.63          $107.17        $103.77
Occupancy....................................       79.5%       87.4%            78.8%          84.4%
REVPAR.......................................    $ 85.27    $  92.33          $ 84.50        $ 87.59

Leased Limited-Service Hotels (29 Properties)
Room rate....................................    $ 97.16           -          $ 99.59        $     -
Occupancy....................................       69.7%          -             70.5%             -
REVPAR.......................................    $ 67.71           -          $ 70.17        $     -
</TABLE>

     Hotel Ownership.  Revenue for the Company's owned hotels increased $1.6
million, or 18%, to $10.8 million in the second quarter of 2001.  Year-to-date
revenues increased $2.6 million, or 14%, to $20.8 million in 2001.  The increase
in revenues is due primarily to the addition of one hotel that opened in
December 2000 partially offset by the sale of one hotel in February 2000.
Comparable hotel revenue increased 0.9% for the quarter and 2.6% year-to-date.
Comparable REVPAR for the Company's owned Residence Inns increased 0.9% for the
quarter as a result of an increase in the comparable average room rate of 4.3%
despite a decrease in comparable average occupancy of almost three percentage
points.  Year-to-date comparable REVPAR increased 2.8% as a result of an
increase in average daily rates of 5.4% although average occupancy decreased
over two percentage points.  The table below sets forth information for the
Company's owned hotels.

                                      -11-
<PAGE>

<TABLE>
<CAPTION>


                                                   Twelve Weeks Ended    Twenty-Four Weeks Ended
                                                   ------------------    -----------------------
                                                   June 15,   June 16,   June 15,     June 16,
                                                     2001       2000       2001         2000
                                                     ----       ----       ----         ----
<S>                                                <C>         <C>       <C>          <C>
Comparable Owned Residence Inns (10 Properties)
Room rate........................................   $108.53    $104.06    $108.36      $102.85
Occupancy........................................      84.6%      87.5%      83.6%        85.7%
REVPAR...........................................   $ 91.82    $ 91.04    $ 90.60      $ 88.17
</TABLE>

     Hotel Management.  Revenue for the Company's managed hotels increased $1.3
million, or 17%, to $8.9 million in the second quarter of 2001.  Year-to-date
revenues increased $3.2 million, or 21%, to $18.7 million in 2001.  The Company
entered into the hotel management business in March 2000 with the acquisition of
two hotel management portfolios.  The significant increase in year-to-date
revenues is attributable to the incremental impact of a full period of revenues
from the hotels in those two hotel management portfolios, as well as the net
increase in management contracts from the prior year.  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    Twenty-Four Weeks Ended
                                                   ------------------    -----------------------
                                                   June 15,   June 16,   June 15,     June 16,
                                                     2001       2000       2001         2000
                                                     ----       ----       ----         ----
<S>                                                <C>        <C>        <C>          <C>
Full-Service Hotels
Room rate........................................   $117.22    $117.29    $119.23      $118.00
Occupancy........................................      72.4%      74.0%      72.1%        70.3%
REVPAR...........................................   $ 84.84    $ 86.75    $ 85.94      $ 82.91
Limited-Service Hotels
Room rate........................................   $ 78.04    $ 77.73    $ 78.68      $ 77.64
Occupancy........................................      74.4%      79.2%      72.7%        76.8%
REVPAR...........................................   $ 58.02    $ 61.55    $ 57.23      $ 59.66
</TABLE>

     Senior Living.  Senior living community revenues increased by $3.4 million,
or 5.6%, to $63.6 million in the second quarter of 2001.  Year-to-date revenues
increased by $6.4 million, or 5.3%, to $126 million.  For the second quarter,
the average daily rate increased 5.9%, while average occupancy decreased
slightly.  The year-to-date average daily rate increased by 6.1%, while average
occupancy remained unchanged.  The table below sets forth information for the
Company's senior living communities.

<TABLE>
<CAPTION>

                                                                 Twelve Weeks Ended
                                          -----------------------------------------------------------
                                                     June 15, 2001                    June 16, 2000
                                          ------------------------------------ ----------------------
                                                       Average                  Average
                                          Units       Daily Rate    Occupancy  Daily Rate   Occupancy
                                          -----       ----------    ---------   ----------  ---------
<S>                                      <C>          <C>           <C>         <C>         <C>
Independent Living................        3,980        $ 85.21        92.6%     $ 82.24       94.2%
Assisted Living...................        1,623          97.94        88.4        92.66       87.0
Special Care......................          256         128.06        91.2       123.86       83.2
Healthcare........................        1,638         141.73        89.6       129.82       89.7
                                          -----        -------        ----      -------      -----
 Combined.........................        7,497        $101.56        91.0%     $ 95.89      $91.3%
                                          =====        =======        ====      =======      =====

                                                                 Twelve-Fouir Weeks Ended
                                          -----------------------------------------------------------
                                                     June 15, 2001                    June 16, 2000
                                          ------------------------------------ ----------------------
                                                       Average                  Average
                                          Units       Daily Rate    Occupancy  Daily Rate   Occupancy
                                          -----       ----------    ---------   ----------  ---------
Independent Living................        3,980        $ 85.71        93.1%     $ 82.27       94.4%
Assisted Living...................        1,623          98.51        88.0        92.76       87.2
Special Care......................          256         127.65        91.6       124.13       80.0
Healthcare........................        1,638         139.30        89.5       128.25       89.6
                                          -----        -------        ----      -------      -----
 Combined.........................        7,497        $101.36        91.1%     $ 95.55      $91.1%
                                          =====        =======        ====      =======      =====
</TABLE>

                                      -12-
<PAGE>

     Other.  Other revenues totaled a net loss of $586,000 in the second quarter
of 2001 compared to $842,000 in the second quarter of 2000.  Year-to-date other
revenues totaled a net loss of $394,000 in 2001 compared to $2.5 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 $11.9 million, or 40%, to $18.3
million for the second quarter of 2001 and $22.7 million, or 39%, to $35.3
million year-to-date.  Operating profit by segment was as follows:

<TABLE>
<CAPTION>

                                          Twelve Weeks Ended   Twenty-Four Weeks Ended
                                         -------------------   -----------------------
                                         June 15,   June 16,     June 15,      June 16,
                                           2001       2000         2001          2000
                                           ----       ----         ----          ----
                                                        (in thousands)
<S>                                      <C>        <C>          <C>          <C>
Full-service hotel leasing...........     $ 1,041    $15,347      $ 1,295     $  27,456
Limited-service hotel leasing........       2,649      2,060        4,999         3,790
Hotel ownership......................       3,120      2,790        5,593         5,339
Hotel management.....................         315       (245)         468            25
Senior living........................      11,795     10,280       23,446        20,749
Other................................        (639)        (5)        (543)          626
                                          -------    -------      -------     ---------
                                          $18,281    $30,227      $35,258     $  57,985
                                          =======    =======      =======     =========
</TABLE>

     Full-Service Hotel Leasing.  Operating profit for the Company's full-
service hotel leases was  $1.0 million in the second quarter of 2001 compared to
$15.3 million in the prior year.  Year-to-date full-service hotel operating
profit was $1.3 million in 2001 compared to $27.5 million in 2000.  The
significant decrease in operating profit is due to the sale of all but one of
the full-service hotel leases in the first quarter of 2001. The remaining lease
was sold in the second quarter of 2001.

     Limited-Service Hotel Leasing.  Operating profit for the Company's limited-
service hotel leases increased by $589,000, or 29%, to $2.6 million in the
second quarter of 2001.  Year-to-date operating profit increased $1.2 million,
or 32%, to $5.0 million in 2001.  The significant increase in operating profit
is attributable to the acquisition of two limited-service hotel lease portfolios
in the second half of 2000 and the first quarter of 2001.  Excluding the impact
of the two new limited-service hotel lease portfolios, comparable operating
profit decreased by 2.1% in the second quarter of 2001 and increased 4.8% year-
to-date.

     Hotel Ownership.  Operating profit for the Company's owned hotels increased
by $330,000, or 12%, to $3.1 million in the second quarter of 2001 and increased
$254,000, or 4.8%, to $5.6 million year-to-date. The increase in operating
profit is due to the addition of the Baltimore Inner Harbor Courtyard which
opened in December 2000. Comparable operating profit remained unchanged for the
quarter and increased 1.6% year-to-date due mostly to additional depreciation
expense from the purchase of additional minority interests in 2001.

     Hotel Management.  Operating profit for the Company's managed hotels
increased by $560,000 to $315,000 in the second quarter of 2001.  Year-to-date
operating profit increased $443,000 to $468,000 in 2001.  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

                                      -13-
<PAGE>

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. If the Company were to accrue these contingent
revenues, the Company would have recorded an additional $168,000 and $238,000 of
fee revenue in the second quarter of 2001 and 2000, respectively, and $434,000
and $305,000 in year-to-date 2001 and 2000, respectively. SAB No. 101 does not
have an impact on the full year operating profit. In addition, the Company
recorded amortization expense of $424,000 and $395,000 in the second quarter
2001 and 2000, respectively, and $879,000 and $545,000 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%, to $11.8 million in the second quarter of 2001.  Year-to-date
operating profit increased $2.7 million, or 13%, to $23.4 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 an
approximately 6% increase in average daily rates.

     Other.  Other operating profit was a loss of $639,000 in the second quarter
of 2001 compared to a loss of $5,000 in the second quarter of 2000.  Year-to-
date other operating profit was a loss of $543,000 in 2001 compared to $626,000
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 Company recorded a gain on the transaction of $200
million, net of transaction costs.  The remaining full-service hotel lease was
sold in the second quarter of 2001 and the Company recorded an additional gain
of $4.1 million, net of transaction costs.

Minority Interest

     In the second quarter of 2000 and in year-to-date 2000, minority interest
expense was $312,000 and $587,000, 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.

Corporate Expenses

     Corporate expenses increased $5.1 million to $9.6 million for the second
quarter of 2001 and increased $4.8 million to $13.3 million year-to-date.

     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.

                                      -14-
<PAGE>

Interest Expense

     Interest expense decreased $940,000 in the second quarter of 2001 and $1.2
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
$111,000 and  $1.1 million in the second quarter of 2001 and 2000, respectively,
and $221,000 and $2.1 million in year-to-date second quarter, respectively,
related to interest on the hotel working capital notes payable to Host Marriott.

Interest Income

     Interest income increased $1.2 million to $2.0 million for the second
quarter of 2001 and increased $3.6 million to $5.0 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.

Net Income

     Net income for the second quarter of 2001 was $7.1 million, or $.44 per
diluted share, compared to $11.1 million, or $.65 per diluted share, for the
second quarter of 2000.  Year-to-date net income was $130.8 million, or $8.10
per diluted share, in 2001 compared to $21.1 million, or $1.23 per diluted
share, in 2000. The significant increase in diluted earnings per share in 2000
was due primarily to the gain on the sale of the full-service hotel leases
discussed above, as well as a reduction of the Company's common stock
outstanding due to the stock repurchases during 2000.  The diluted earnings per
common share for the second quarter and year-to-date 2001 excluding the gain on
the sale of the full-service hotel leases and the corporate restructuring
charge, net of taxes, was $.54 and $.73, respectively.

EBITDA

     The Company's earnings before interest expense, taxes, depreciation and
amortization and other non-cash items ("EBITDA") decreased $10.2 million, or
31%, to $22.3 million in the second quarter of 2001 as compared to the second
quarter of 2000.  EBITDA decreased $16.3 million, or 26%, to $46.0 million year-
to-date.

                                      -15-
<PAGE>

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

<TABLE>
<CAPTION>
                                                             Twelve Weeks Ended    Twenty-Four Weeks Ended
                                                             ------------------    ------------------------
                                                             June 15,   June 16,    June 15,    June 16,
                                                               2001       2000        2001        2000
                                                             --------   --------    --------    --------
                                                                           (in thousands)
<S>                                                         <C>        <C>        <C>         <C>
     Full-service hotel leases...........................   $ 1,018    $14,368    $  1,248    $ 25,495
     Limited-service hotel leases and subleases..........     2,567      1,965       4,836       3,601
     Hotel ownership, net of minority distributions......     4,426      3,209       7,977       6,265
     Hotel management /(1)/..............................       707        266       1,389         686
     Senior living communities...........................    17,395     15,818      34,579      31,688
     Corporate and other, net of interest income.........    (3,791)    (3,138)     (4,030)     (5,480)
                                                            -------    -------    --------    --------
       EBITDA............................................   $22,322    $32,488    $ 45,999    $ 62,255
                                                            =======    =======    ========    ========

     EBITDA..............................................   $22,322    $32,488    $ 45,999    $ 62,255
     Interest expense....................................    (6,481)    (7,421)    (13,467)    (14,673)
     Hotel working capital note interest expense.........       111      1,075         221       2,149
     Depreciation and amortization.......................    (7,394)    (6,880)    (14,637)    (13,480)
     Income taxes........................................    (1,233)    (7,705)    (87,215)    (14,668)
     Gain on sale of full-service hotel leases...........     4,146          -     204,459           -
     Non-cash corporate restructuring charge.............    (3,602)         -      (3,602)          -
     Other non-cash charges, net.........................      (777)      (469)       (936)       (476)
                                                            -------    -------    --------    --------
       Net income........................................   $ 7,092    $11,088    $130,822    $ 21,107
                                                            =======    =======    ========    ========
</TABLE>

______________
1)   In accordance with SAB No. 101, the Company does not recognize certain
     contingent management fees until specified thresholds for operating profit
     have been attained.  If the Company were to accrue these contingent
     revenues, the Company would have recorded an additional $168,000 and
     $238,000 in the second quarter of 2001 and 2000, respectively, and $434,000
     and $305,000 year-to-date in 2001 and 2000, respectively, of hotel
     management EBITDA.

     The Company's interest coverage was 3.7 times for the second quarter of
2001 compared to 5.0 times for the second quarter of 2000.  Year-to-date
interest coverage was 3.6 times in 2001 compared to 4.9 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 1.2 to 1.0 for the second
quarter of 2001 and 1.1 to 1.0 for the second quarter of 2000.  The year-to-date
ratio of earnings to fixed charges was 3.5 to 1.0 in 2001 and 1.1 to 1.0 in both
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.

                                      -16-
<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 June
15, 2001, the Company had cash and cash equivalents of $201 million and
restricted cash of $10.9 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 June
15, 2001, there were no amounts outstanding under the Company's $100 million
line of credit.

     Cash Flows.  Cash from operations was $189 million for the twenty-four
weeks ended June 15, 2001 compared to $38.8 million for the twenty-four weeks
ended June 16, 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 on the gain, as well as cash flow generated by
the Company's business segments. Cash used in investing activities was $33.3
million in the twenty-four weeks ended June 15, 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
$9.8 million for the twenty-four weeks ended June 15, 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 reflects the deferral of the sale of one of the leases for $4
million.  The Company recognized a pre-tax gain on the transaction of $200
million in the first quarter of 2001, net of transaction costs.  The effective
date of the transaction was January 1, 2001.  The remaining lease was sold in
the second quarter of 2001 and the Company recognized an additional pre-tax gain
of $4 million on the transaction, net of transaction costs. The Company
anticipates paying approximately $82 million in income taxes on the lease sale
proceeds.  For the twenty-four weeks ended June 15, 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.

     During the second quarter, the Company entered into an agreement to sell
its ten Residence Inn hotels in Residence Inn USA to Apply Hospitality Two, Inc.
(the "Buyer") for total consideration of $119 million, including approximately
$54 million of debt that will be assumed by the Buyer.  The transaction is
expected to close in the third quarter of 2001 and is subject to customary
closing conditions.  The Buyer

                                      -17-
<PAGE>

made a $47 million loan to the Company during the second quarter. The loan bears
interest at 12% and is due upon the earlier of the closing of the transaction or
August 31, 2001.

     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. 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 the fourth quarter of 2001, 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 will 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 the second quarter of 2002.

     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.

                                      -18-
<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 interest rates, 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.

                                      -19-
<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

     The Company held its annual meeting of shareholders on June 29, 2001.  The
shareholders voted on the following proposals:

     .    Approved election of Kelvin L. Davis and John B. Morse, Jr. as
          directors for three-year terms expiring at the 2004 annual meeting by
          a vote of:

                                    For       Withheld
                                    ---       --------
          Kelvin L. Davis       13,033,519    139,110
          John B. Morse         13,087,919     84,710

     .    Approved the appointment of Arthur Andersen LLP as independent
          auditors of the Company to serve for the 2001 fiscal year by a vote of
          13,147,074 for, 16,689 against, and 8,866 abstentions.

Item 5.   Other Information

     None.

Item 6.   Exhibits and Reports on Form 8-K

a.   Exhibits:

     None.

b.   Reports on Form 8-K:

     None.

                                      -20-
<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

July 30, 2001                    By: /s/ Larry K. Harvey
-------------                        -------------------
Date                                 Larry K. Harvey
                                     Senior Vice President, Treasurer and
                                     Controller (Chief Accounting Officer)

                                      -21-