<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 8, 2000              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 13, 2000
---------------------                                 -------------------
Common Stock, $.01
par value per share                                            15,380,000
                                                               ----------

================================================================================
<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 8, 2000 and December 31, 1999

                  Condensed Consolidated Statements of Operations -              4
                    Twelve Weeks Ended September 8, 2000 and
                    September 10, 1999

                  Condensed Consolidated Statements of Operations -              5
                    Thirty-six Weeks Ended September 8, 2000 and
                    September 10, 1999

                  Condensed Consolidated Statements of Cash Flows -              6
                    Thirty-six Weeks Ended September 8, 2000 and
                    September 10, 1999

                  Notes to Condensed Consolidated Financial Statements           7

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

         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 8,       December 31,
                                                                           2000                1999
                                                                       -----------        ---------------
                                                                       (unaudited)
                                                ASSETS
<S>                                                                    <C>                <C>
Property and equipment, net..........................................  $   732,456        $   745,615
Hotel working capital................................................       89,650             89,650
Due from hotel managers..............................................       49,876             42,259
Due from Marriott Senior Living Services.............................        6,274              5,729
Other assets.........................................................       74,718             44,841
Cash and cash equivalents............................................       33,143             36,774
                                                                       -----------        -----------
                                                                       $   986,117        $   964,868
                                                                       ===========        ===========


                                    LIABILITIES AND SHAREHOLDERS' EQUITY

Debt:
   Mortgage debt.....................................................  $   289,118        $   279,271
   Other debt........................................................       26,581             26,946
                                                                       -----------        -----------
                                                                           315,699            306,217
   Hotel working capital notes payable to Host Marriott..............       89,650             89,650
                                                                       -----------        -----------
     Total debt......................................................      405,349            395,867
Accounts payable and accrued expenses................................       11,473             16,912
Lease payable to Host Marriott.......................................       66,366             61,315
Deferred income taxes................................................       66,526             63,940
Other liabilities....................................................       33,423             26,086
                                                                       -----------        -----------
     Total liabilities...............................................      583,137            564,120
                                                                       -----------        -----------
Shareholders' equity:
   Common stock, 75 million shares authorized, 22.1 million and 22.3
     million shares issued and outstanding, respectively, $.01 par
     value...........................................................          221                223
   Additional paid-in capital........................................      447,377            451,639
   Retained earnings.................................................       75,810             46,158
   Treasury stock, 6.4 million and 5.1 million shares, respectively..     (120,428)           (97,272)
                                                                       -----------        -----------
     Total shareholders' equity......................................      402,980            400,748
                                                                       -----------        -----------
                                                                       $   986,117        $   964,868
                                                                       ===========        ===========
</TABLE>

           See Notes to Condensed Consolidated Financial Statements.

                                      -3-
<PAGE>

                CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                   Twelve Weeks Ended September 8, 2000 and
                       September 10, 1999 (unaudited, in
                       thousands, except per share data)


<TABLE>
<CAPTION>
                                                                                           2000         1999
                                                                                           ----         ----
<S>                                                                                     <C>          <C>
REVENUES
Hotels
     Rooms..........................................................................    $  682,336   $  605,013
     Food and beverage..............................................................       256,893      240,200
     Other..........................................................................        71,652       66,525
                                                                                        ----------   ----------
         Total hotel revenues.......................................................     1,010,881      911,738
                                                                                        ----------   ----------
Senior living
     Routine........................................................................        55,444       51,550
     Ancillary......................................................................         5,130        4,906
                                                                                        ----------   ----------
         Total senior living revenues...............................................        60,574       56,456
                                                                                        ----------   ----------
Other revenues......................................................................           808        1,051
Equity in earnings of affiliates....................................................           131          160
                                                                                        ----------   ----------
     Total revenues.................................................................     1,072,394      969,405
                                                                                        ----------   ----------
OPERATING COSTS AND EXPENSES
Hotels
     Property-level operating costs and expenses
         Rooms......................................................................       164,745      152,693
         Food and beverage..........................................................       207,047      191,401
         Other......................................................................       271,845      244,333
     Other operating costs and expenses
         Management fees............................................................        59,616       51,098
         Lease expense..............................................................       290,985      253,592
         Depreciation and amortization..............................................         1,342          454
         Other......................................................................           879            -
                                                                                        ----------   ----------
              Total hotel operating costs and expenses..............................       996,459      893,571
                                                                                        ----------   ----------
Senior living
     Property-level operating costs and expenses
         Routine....................................................................        35,955       33,981
         Ancillary..................................................................         3,253        3,300
     Other operating costs and expenses
         Depreciation and amortization..............................................         5,689        4,456
         Management fees............................................................         3,603        3,200
         Property taxes and other...................................................         2,245        2,510
                                                                                        ----------   ----------
              Total senior living operating costs and expenses......................        50,745       47,447
                                                                                        ----------   ----------
Other operating costs and expenses..................................................           878          435
                                                                                        ----------   ----------
         Total operating costs and expenses.........................................     1,048,082      941,453
                                                                                        ----------   ----------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
     EXPENSES AND INTEREST..........................................................        24,312       27,952
Minority interest expense...........................................................          (363)        (676)
Corporate expenses..................................................................        (3,391)      (3,350)
Interest expense....................................................................        (7,965)      (6,775)
Interest income.....................................................................         1,461          394
                                                                                        ----------   ----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...................................        14,054       17,545
Provision for income taxes..........................................................        (5,762)      (7,088)
                                                                                        ----------   ----------
INCOME BEFORE EXTRAORDINARY ITEM....................................................         8,292       10,457
Gain on early extinguishment of debt, net of taxes..................................           253            -
                                                                                        ----------   ----------
NET INCOME..........................................................................    $    8,545   $   10,457
                                                                                        ==========   ==========
BASIC EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item....................................................    $      .52   $      .52
                                                                                        ==========   ==========
Net Income..........................................................................    $      .54   $      .52
                                                                                        ==========   ==========
DILUTED EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item....................................................    $      .51   $      .51
                                                                                        ==========   ==========
Net Income..........................................................................    $      .52   $      .51
                                                                                        ==========   ==========
</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 8, 2000 and
                       September 10, 1999 (unaudited, in
                       thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                           2000          1999
                                                                                           ----          ----
<S>                                                                                    <C>           <C>
REVENUES
Hotels
     Rooms..........................................................................   $ 2,002,567   $ 1,851,711
     Food and beverage..............................................................       845,186       793,623
     Other..........................................................................       223,624       204,057
                                                                                       -----------   -----------
         Total hotel revenues.......................................................     3,071,377     2,849,391
                                                                                       -----------   -----------
Senior living
     Routine........................................................................       164,446       153,830
     Ancillary......................................................................        16,115        16,200
                                                                                       -----------   -----------
         Total senior living revenues...............................................       180,561       170,030
                                                                                       -----------   -----------
Other revenues......................................................................         3,049         3,247
Equity in earnings of affiliates....................................................           384           743
                                                                                       -----------   -----------
     Total revenues.................................................................     3,255,371     3,023,411
                                                                                       -----------   -----------
OPERATING COSTS AND EXPENSES
Hotels
     Property-level operating costs and expenses
         Rooms......................................................................       467,210       435,009
         Food and beverage..........................................................       629,722       591,669
         Other......................................................................       775,658       726,427
     Other operating costs and expenses
         Management fees............................................................       193,951       172,149
         Lease expense..............................................................       948,125       873,531
         Depreciation and amortization..............................................         3,536         1,271
         Other......................................................................         2,143             -
                                                                                       -----------   -----------
              Total hotel operating costs and expenses..............................     3,020,345     2,800,056
                                                                                       -----------   -----------
Senior living
     Property-level operating costs and expenses
         Routine....................................................................       105,751        99,251
         Ancillary..................................................................         9,982        10,900
     Other operating costs and expenses
         Depreciation and amortization..............................................        16,591        14,739
         Management fees............................................................        11,005        10,137
         Property taxes and other...................................................         6,654         6,114
                                                                                       -----------   -----------
              Total senior living operating costs and expenses......................       149,983       141,141
                                                                                       -----------   -----------
Other operating costs and expenses..................................................         2,746         2,114
                                                                                       -----------   -----------
         Total operating costs and expenses.........................................     3,173,074     2,943,311
                                                                                       -----------   -----------
OPERATING PROFIT BEFORE MINORITY INTEREST, CORPORATE
     EXPENSES AND INTEREST..........................................................        82,297        80,100
Minority interest expense...........................................................          (950)       (1,154)
Corporate expenses..................................................................       (11,796)      (12,042)
Interest expense....................................................................       (22,638)      (18,416)
Interest income.....................................................................         2,916         1,797
                                                                                       -----------   -----------
INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM...................................        49,829        50,285
Provision for income taxes..........................................................       (20,430)      (20,511)
                                                                                       -----------   -----------
INCOME BEFORE EXTRAORDINARY ITEM....................................................        29,399        29,774
Gain on early extinguishment of debt, net of taxes..................................           253             -
                                                                                       -----------   -----------
NET INCOME..........................................................................   $    29,652   $    29,774
                                                                                       ===========   ===========

BASIC EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item....................................................   $      1.79   $      1.40
                                                                                       ===========   ===========
Net Income..........................................................................   $      1.80   $      1.40
                                                                                       ===========   ===========
DILUTED EARNINGS PER COMMON SHARE:
Income Before Extraordinary Item....................................................   $      1.74   $      1.38
                                                                                       ===========   ===========
Net Income..........................................................................   $      1.75   $      1.38
                                                                                       ===========   ===========
</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 8, 2000 and September 10, 1999
                           (unaudited, in thousands)


<TABLE>
<CAPTION>
                                                                           2000                1999
                                                                           ----                ----
<S>                                                                    <C>                <C>
OPERATING ACTIVITIES
Net income...........................................................  $    29,652        $    29,744
Adjustments to reconcile net income to cash from operations:
     Gain on early extinguishment of debt, net of taxes..............         (253)                 -
     Depreciation and amortization...................................       20,705             16,524
     Amortization of debt premiums and deferred financing costs......          (27)              (673)
     Income taxes....................................................        3,057              8,476
     Other...........................................................        1,339              1,324
     Change in other operating accounts..............................       (4,352)            18,127
                                                                       -----------        -----------
Cash from operations.................................................       50,121             73,552
                                                                       -----------        -----------
INVESTING ACTIVITIES
   Acquisitions, net of cash acquired................................      (15,723)           (30,486)
   Hotel lease security deposits.....................................      (12,829)                 -
   Expansions of senior living communities...........................       (3,204)           (18,451)
   Purchase of minority interests in senior living partnership.......            -             (7,010)
   Other capital expenditures........................................       (8,515)            (6,562)
   Dispositions......................................................        6,206                  -
   Other.............................................................       (1,854)            (3,331)
                                                                       -----------        -----------
Cash used in investing activities....................................      (35,919)           (65,840)
                                                                       -----------        -----------
FINANCING ACTIVITIES
   Repurchases of common stock.......................................      (25,195)           (45,583)
   Draws on line of credit...........................................       30,000             20,000
   Repayments of line of credit......................................      (65,000)                 -
   Repayments of other debt..........................................      (47,087)            (4,994)
   Issuances of debt.................................................       92,370                  -
   Other.............................................................       (2,921)            (2,716)
                                                                       -----------        -----------
Cash used in financing activities....................................      (17,833)           (33,293)
                                                                       -----------        -----------
Decrease in cash and cash equivalents................................       (3,631)           (25,581)
Cash and cash equivalents, beginning of period.......................       36,774             66,779
                                                                       -----------        -----------
Cash and cash equivalents, end of period.............................  $    33,143        $    41,198
                                                                       ===========        ===========

SUPPLEMENTAL INFORMATION - NON-CASH ACTIVITY
   Assumption of mortgage debt.......................................            -             54,478
   Sale of common stock to executives through loans..................            -              2,645
</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 31, 1999.

      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 8, 2000 and the results
      of operations and cash flows for the twelve and thirty-six weeks ended
      September 8, 2000 and September 10, 1999. Interim results are not
      necessarily indicative of fiscal year performance because of the impact of
      seasonal and short-term variations.

      Approximately one-fourth of the Company's leased full-service hotels have
      managers that have 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 reflect only eight months of operations. For these
      properties, the Company records two months of operations in the first
      quarter, three months of operations in each of the second and third
      quarters and four months of operations in the fourth quarter.

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 8,   September 10,    September 8,  September 10,
                                                                        2000            1999             2000          1999
                                                                    -------------   -------------   -------------  -------------
                                                                                           (in thousands)
      <S>                                                           <C>             <C>             <C>            <C>
      Weighted average number of common shares
         outstanding............................................         15,907          20,175         16,467         21,255
      Assuming distribution of common shares granted under
         the comprehensive stock plan, less shares assumed
         purchased at average market price......................            486             469            472            308
                                                                         ------          ------         ------         ------
      Shares utilized for the calculation of diluted earnings
         per share..............................................         16,393          20,644         16,939         21,563
                                                                         ======          ======         ======         ======
</TABLE>

3.    The Company operates in five business segments: hotel management, hotel
      ownership, full-service hotel leasing, 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, Courtyard by Marriott, Residence Inn,
      Crowne Plaza and Holiday Inn brand names. The Company's owned limited-
      service hotels are operated under the Residence Inn brand name. The
      Company's leased full-service hotels are operated under the Marriott,
      Ritz-Carlton, Four Seasons, Hyatt, Hilton and Swissotel brands. The
      Company's leased and subleased limited-service hotels are

                                      -7-
<PAGE>

      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 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................    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 and extraordinary
      item...........................    7,884             2,954           1,892         154         4,410   (3,240)        14,054
     Depreciation and amortization...        -                 -             885         456         5,689      195          7,225

<CAPTION>
                                                                  Twelve Weeks Ended September 10, 1999
                                      ----------------------------------------------------------------------------------------------
                                      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....................... $829,458       $  72,214         $ 10,066    $      -      $56,456    $1,211       $ 969,405
       Operating profit...............   12,819           1,809            3,539           -        9,009       776          27,952
       Interest expense...............   (1,033)            (95)          (1,039)          -       (4,600)       (8)         (6,775)
       Interest income................        -               -              128           -          155       111             394
       Other..........................        -               -             (676)          -            -    (3,350)         (4,026)
       Income (loss) before income
        taxes.........................   11,786           1,714            1,952           -        4,564    (2,471)         17,545
       Depreciation and amortization..        -               -              454           -        4,456       108           5,018

<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...............      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 and extraordinary
        item..........................      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

<CAPTION>
                                                                  Thirty-six Weeks Ended September 10, 1999
                                      ----------------------------------------------------------------------------------------------
                                      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.......................  $2,616,737      $ 212,869        $ 19,785    $      -     $170,030 $  3,990     $3,023,411
       Operating profit...............      37,242          5,468           6,625           -       28,889    1,876         80,100
       Interest expense...............      (3,140)          (323)         (2,091)          -      (12,807)     (55)       (18,416)
       Interest income................           -              -             212           -          608      977          1,797
       Other..........................           -              -          (1,154)          -            -  (12,042)       (13,196)
       Income (loss) before income
        taxes.........................      34,102          5,145           3,592           -       16,690   (9,244)        50,285
       Depreciation and amortization..           -              -           1,271           -       14,739      514         16,524
</TABLE>

4.    In February 2000, the Company sold one of its Residence Inns for a net
      sales price of $6.2 million, which approximated its carrying value.

                                      -8-
<PAGE>

5.    In March 2000, the Company purchased the hotel management business of
      Stormont Trice Management Corporation for $9.7 million plus a contingent
      purchase price of up to an additional $4.5 million if certain performance
      criteria are met. Pursuant to the acquisition, the existing management
      contracts for nine hotels and four conference centers and lease agreements
      for two hotels were assigned to the Company.

6.    In March 2000, the Company purchased the hotel management business of the
      Durbin Companies for $4.4 million, plus a contingent purchase price of
      $500,000 if one of the leases is renewed under certain conditions.
      Pursuant to the acquisition, the existing management contracts for ten
      hotels and lease agreements for two hotels were assigned to the Company.

7.    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 these
      contracts when 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 $88,000 and $393,000 of fee
      revenue in the third quarter and year- to-date third quarter,
      respectively. SAB No. 101 does not have an impact on the full year revenue
      recognition.

8.    Through the third quarter of 2000, the Company repurchased approximately
      1.3 million shares of its common stock for $23.2 million. Since the
      inception of the Company's stock repurchase program in 1999, the Company
      has repurchased approximately 6.4 million shares of its common stock for
      $120 million. As of September 8, 2000, the Company has Board of Director
      authorization to repurchase approximately 2.1 million additional shares of
      its common stock.

9.    On June 9, 2000, the Company entered into an agreement with Hospitality
      Properties Trust, Inc. ("HPT") to lease 19 limited-service hotels under
      long-term lease agreements. HPT acquired the hotels from Marriott
      International, Inc. ("Marriott International"). Marriott International
      will continue to manage the hotels under long-term management agreements
      with the Company. The hotels are operated under the Courtyard by Marriott,
      Residence Inn by Marriott, Springhill Suites by Marriott and TownePlace
      Suites by Marriott brand names. Two of the hotels in the portfolio are
      under construction and are expected to open in the fourth quarter of 2000.
      Under the terms of the lease agreement, the Company made a $9.6 million
      security deposit, which is included in other assets on the accompanying
      condensed consolidated balance sheet, and will make an additional $6.0
      million security deposit for the remaining two hotels at the inception of
      those leases.

10.   On June 23, 2000, the Company completed a shareholder-approved 1-for-100
      reverse stock split immediately followed by a 100-for-1 forward stock
      split of the Company's common stock. Registered shareholders whose shares
      of common stock were converted into less than one share of common stock
      are entitled to receive cash payments equal to the fair market value of
      these fractional interests. The fair market value was determined to be
      $19.1375 calculated using the average closing price of the Company's
      common stock on the New York Stock Exchange for the ten trading days
      immediately before and including June 23, 2000. In connection with the
      reverse stock split, 292,000 shares of the Company's common stock were
      retired in exchange for the right to receive $5.6 million in cash.
      Transmittal letters were delivered to the registered shareholders with
      instructions on how to surrender stock certificates for cash payment.
      Through September 8, 2000, $2.0 million has been paid to the former
      shareholders that have surrendered their stock certificates for cash
      payment.

                                      -9-
<PAGE>

11.   In July 2000, the Company entered into five loan agreements totaling $92.4
      million secured by mortgages on eight senior living communities. The non-
      recourse loans bear interest at the 30-day Eurodollar rate plus 275 basis
      points. The loans mature in July 2005 and there is no principal
      amortization during the term of the loans. The proceeds of the financing
      were used to repay the existing loan secured by the communities with a
      principal balance of $43.5 million, which bore interest at 9.93% and had a
      scheduled maturity of January 1, 2001. In connection with the prepayment
      of the existing loan, the Company recognized an extraordinary gain on the
      early extinguishment of debt of $428,000 before taxes in the third quarter
      of 2000. The remaining proceeds of the financing were used to repay a
      portion of the outstanding borrowings under the Company's line of credit.

12.   On August 18, 2000, the Company entered into an agreement with CNL
      Hospitality Corporation ("CNL") to lease nine limited-service hotels under
      long-term lease agreements. CNL acquired the hotels from Marriott
      International. Marriott International will continue to manage the hotels
      under long-term management agreements with the Company. The hotels are
      managed under the Courtyard by Marriott, Residence Inn by Marriott,
      Springhill Suites by Marriott and TownePlace Suites by Marriott brand
      names. Four of the hotels in the portfolio are under construction and are
      expected to open in the fourth quarter of 2000. Under the terms of the
      lease agreement, the Company made a $2.6 million security deposit, which
      is included in other assets on the accompanying condensed consolidated
      balance sheet, and will make an additional $2.4 million security deposit
      for the remaining four hotels at the inception of those leases.

                                      -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; (vi) governmental actions and initiatives including the REIT
Modernization Act; and (vii) 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. Overall revenues increased by $103
million, or 10.6%, to almost $1.1 billion for the third quarter of 2000 from
less than $1.0 billion for the third quarter of 1999. Year-to-date revenues
increased by $232 million, or 7.7%, to nearly $3.3 billion in 2000. The increase
in revenues is due primarily to the leased hotel full-service hotel REVPAR
growth, the incremental revenues from the acquisition of a controlling interest
in a portfolio of Residence Inns in the second quarter of 1999, the acquisition
of a hotel management portfolio in the first quarter of 2000, and the addition
of two limited-service hotel lease portfolios in the second and third quarters
of 2000.

         Revenues by segment were as follows:

<TABLE>
<CAPTION>
                                                        Twelve Weeks Ended          Thirty-six Weeks Ended
                                                   ----------------------------   ----------------------------
                                                   September 8,   September 10,   September 8,   September 10,
                                                       2000             1999          2000              1999
                                                       ----             ----          ----              ----
                                                                          (in thousands)
<S>                                                <C>             <C>            <C>              <C>
         Full-Service Hotel Leasing..............  $   898,954     $   829,458    $ 2,779,902      $ 2,616,737
         Limited-Service Hotel Leasing...........       93,157          72,214        239,011          212,869
         Hotel Ownership.........................        9,757          10,066         27,960           19,785
         Hotel Management........................        9,013               -         24,504                -
         Senior Living...........................       60,574          56,456        180,561          170,030
         Other...................................          939           1,211          3,433            3,990
                                                   -----------     -----------    -----------      -----------
                                                   $ 1,072,394     $   969,405    $ 3,255,371      $ 3,023,411
                                                   ===========     ===========    ===========      ===========
</TABLE>

                                      -11-
<PAGE>

         Full-Service Hotel Leasing. Leased full-service hotel revenues
increased $69.5 million, or 8.4%, to $899 million in the third quarter of 2000.
Year-to-date full-service leased hotel revenues increased $163 million, or 6.2%,
to almost $2.8 billion in 2000. Improved results for the Company's leased full-
service hotels were driven by increases in comparable REVPAR of 8.7% for the
third quarter of 2000 and 6.0% year- to-date. Comparable average room rates
increased 7.6% for the quarter and 6.2% year-to-date, while comparable average
occupancy increased almost one percentage point for the third quarter and
remained relatively unchanged year-to-date.

         Limited-Service Hotel Leasing. Leased limited-service revenues
increased $20.9 million, or 29%, to $93.2 million in the third quarter. Year-to-
date limited-service hotel revenues increased $26.1 million, or 12.3%, to $239
million. The significant increase in limited-service hotel revenues is due
primarily to the incremental revenues from the addition of two limited-service
hotel lease portfolios in the second and third quarters of 2000. REVPAR for the
Company's subleased Courtyard by Marriott hotel properties increased 7.1% for
the third quarter and 5.0% year-to-date. The increases in REVPAR were driven by
an increase in average room rates of 5.4% and an increase in average occupancy
of over one percentage point for the quarter and an increase in average room
rates of 5.7% year-to-date despite a slight decrease in average occupancy.
REVPAR for the Company's subleased Residence Inn properties increased 5.5% for
the quarter and 4.3% year-to-date. Average room rates increased 4.2% for the
quarter and 2.9% year-to-date and average occupancy increased one percentage
point for the quarter and increased over one percentage point year-to-date. The
table below sets forth information for the Company's full-service and limited-
service leased hotels:

<TABLE>
<CAPTION>
                                                                Twelve Weeks Ended          Thirty-six Weeks Ended
                                                         ------------------------------  ----------------------------
                                                           September 8,   September 10,    September 8, September 10,
                                                              2000              1999          2000            1999
                                                              ----              ----          ----            ----
<S>                                                        <C>             <C>              <C>          <C>
Comparable Leased Full-Service Hotels (116 Properties)
Room rate.............................................      $   148.90      $  138.34        $  155.58    $  146.56
Occupancy.............................................            79.6%          78.8%            79.1%        79.2%
REVPAR................................................      $   118.48      $  108.95        $  123.03    $  116.05

Subleased Courtyard (53 Properties)
Room rate.............................................      $    99.74      $   94.67        $   99.25    $   93.86
Occupancy.............................................            84.3%          83.0%            81.3%        81.8%
REVPAR................................................      $    84.12      $   78.54        $   80.68    $   76.81

Subleased Residence Inns (18 Properties)
Room rate.............................................      $   105.08      $  100.83        $  104.21    $  101.25
Occupancy.............................................            86.1%          85.1%            85.0%        83.9%
REVPAR................................................      $    90.48      $   85.77        $   88.55    $   84.92

Leased Limited-Service Hotels (22 Properties)
Room rate.............................................      $    93.01                       $   92.98
Occupancy.............................................            72.6%                           72.5%
REVPAR................................................      $    67.55                       $   67.44
</TABLE>

         Hotel Ownership. Revenue for the Company's owned hotels decreased $0.3
million, or 3.1%, to $9.8 million in the third quarter of 2000, due primarily to
the sale of one of the Residence Inns in the first quarter of 2000. Comparable
revenues for the Company's owned hotels increased 4.8% in the third quarter of
2000. Year-to-date revenues were $28.0 million in 2000. Comparable REVPAR for
the Company's owned Residence Inns increased 4.6% for the quarter as a result of
an increase in the comparable average room rate of 2.9% and an increase in
comparable average occupancy of one and one-half percentage point. The table
below sets forth information for the Company's owned hotels:

                                      -12-
<PAGE>

<TABLE>
<CAPTION>
                                                        Twelve Weeks Ended           Thirty-six Weeks Ended
                                                   ----------------------------   ------------------------------
                                                   September 8, September 10,     September 8,  September 10,
                                                        2000            1999            2000           1999
                                                        ----            ----            ----           ----
<S>                                                <C>            <C>             <C>            <C>
Comparable Owned Residence Inns (10 Properties)
Room rate........................................  $   106.01     $ 103.05        $ 103.94       $  100.86
Occupancy........................................        90.8%        89.3%           87.4%           87.6%
REVPAR...........................................  $    96.26     $  92.05        $  90.87       $   88.36
</TABLE>


         Hotel Management. The Company's managed hotels contributed $9.0 million
of revenues in the third quarter of 2000 and $24.5 million year-to-date. REVPAR
for the Company's managed full-service hotels was $73.63 in the third quarter
due to an average room rate of $108.28 and an average occupancy of 68.0%. Year-
to-date REVPAR for the Company's managed full-service hotels was $83.83 due to
an average room rate of $117.47 and an average occupancy of 71.4%. REVPAR for
the managed limited-service hotels was $60.66 in the third quarter as a result
of an average room rate of $77.03 and an average occupancy of 78.8%. Year-to-
date REVPAR for the managed limited-service hotels was $62.28 due to an average
room rate of $77.41 and an average occupancy of 80.4%.

         Senior Living. Senior living community revenues increased by $4.1
million, or 7.3%, to $60.6 million in the third quarter of 2000. Year-to-date
revenues increased by $10.5 million, or 6.2%, to $181 million. The revenue
growth is primarily due to the fill-up of 241 expansion units added in 1999 and
the growth in the average daily rate. For the third quarter, the average daily
rate increased 5.2%, while average occupancy increased over two percentage
points. The year-to-date average daily rate increased by 4.0%, while average
occupancy increased almost two percentage points. The improvement in overall
average occupancy is directly attributable to the fill-up of the expansions
added in 1999. Year-to-date average occupancy on a comparable basis, excluding
communities which added expansion units during 1999, increased less than one
percentage point over the prior year. The table below sets forth information for
the Company's senior living communities:

<TABLE>
<CAPTION>
                                                                         Twelve Weeks Ended
                                                 -----------------------------------------------------------------------
                                                       September 8, 2000                      September 10, 1999
                                                 -----------------------------       -----------------------------------
                                                            Average                                Average
                                                 Units    Daily Rate     Occupancy      Units    Daily Rate    Occupancy
                                                 -----    ----------     ---------      -----    ----------    ---------
<S>                                             <C>       <C>            <C>            <C>      <C>           <C>
Independent Living..........................    3,980     $   82.93          94.3%      4,079     $   79.75         93.5%
Assisted Living.............................    1,623         93.82          87.7       1,524         90.12         81.1
Special Care................................      256        124.60          91.0         228        123.54         79.7
Healthcare..................................    1,638        131.38          89.3       1,638        122.33         88.3
                                               ------     ---------     ---------     -------     ---------     --------
   Combined.................................    7,497     $   96.90          91.7%      7,469     $   92.09         89.4%
                                               ======     =========     =========     =======     =========     ========

<CAPTION>
                                                                        Thirty-six Weeks Ended
                                                 -----------------------------------------------------------------------
                                                       September 8, 2000                     September 10, 1999
                                                 ----------------------------        -----------------------------------
                                                            Average                                 Average
                                                 Units    Daily Rate     Occupancy      Units    Daily Rate    Occupancy
                                                 -----    ----------     ---------      -----    ----------    ---------
<S>                                             <C>       <C>            <C>            <C>      <C>            <C>
Independent Living..........................    3,980     $   82.49          94.4%      4,079     $   80.06         93.9%
Assisted Living.............................    1,623         93.12          86.7       1,524         90.50         80.2
Special Care................................      256        124.30          83.7         228        122.73         82.4
Healthcare..................................    1,638        129.29          89.5       1,638        122.08         88.8
                                               ------     ---------     ---------     -------     ---------     --------
   Combined.................................    7,497     $   96.00          91.3%      7,469     $   92.33         89.6%
                                               ======     =========     =========     =======     =========     ========
</TABLE>

                                      -13-
<PAGE>

Operating Profit

         The Company's operating profit decreased $3.6 million, or 13.0%, to
$24.3 million for the third quarter of 2000 and increased $2.2 million, or 2.7%,
to $82.3 million year-to-date. Operating profit by segment was as follows:

<TABLE>
<CAPTION>
                                                          Twelve Weeks Ended        Thirty-six Weeks Ended
                                                     ----------------------------------------------------------
                                                     September 8, September 10,   September 8, September 10,
                                                         2000          1999          2000           1999
                                                        ------        ------        ------         ------
                                                                       (in thousands)
<S>                                                  <C>          <C>             <C>          <C>
Full-Service Hotel Leasing.......................    $  8,219     $ 12,819        $ 35,675     $  37,242
Limited-Service Hotel Leasing....................       2,898        1,809           6,688         5,468
Hotel Ownership..................................       3,186        3,539           8,525         6,625
Hotel Management.................................         119            -             144             -
Senior Living....................................       9,829        9,009          30,578        28,889
Other............................................          61          776             687         1,876
                                                     --------     --------        --------     ---------
                                                     $ 24,312     $ 27,952        $ 82,297     $  80,100
                                                     ========     ========        ========     =========
</TABLE>


         Full-Service Hotel Leasing. Operating profit for the Company's leased
hotels decreased $4.6 million, or 36% to $8.2 million for the quarter and
decreased $1.6 million, or 4.2%, to $35.7 million year-to- date. Operating
profit for the third quarter was impacted by the unusually high full-service
REVPAR growth of 8.7% which pressured the Company's full-service hotel leasing
operating profit as the Company's percentage lease expense increased
significantly over the prior year.

         Limited-Service Hotel Leasing. Operating profit for the Company's
leased limited-service hotels increased $1.1 million, or 60%, to $2.9 million in
the third quarter. Year-to-date operating profit for the leased limited-service
hotels increased $1.2 million, or 22%, to $6.7 million.

         Hotel Ownership. Operating profit for the Company's owned Residence
Inns acquired in the second quarter of 1999 decreased $0.4 million, or 10.0%, to
$3.2 million due to the sale of one hotel in the first quarter of 2000. On a
comparable basis, operating profit remained unchanged from the prior year. Year-
to- date operating profit for owned hotels was $8.5 million.

         Hotel Management. The Company's managed hotels contributed $119,000 and
$144,000 of operating profit in the third quarter and year-to-date,
respectively, since their acquisition during the first quarter of 2000. The
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, the amortization expense of the acquisition cost of the management
business, and the costs incurred in establishing the infrastructure of the hotel
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 these contracts when
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 $88,000 and $393,000 of fee revenue in the third quarter
and year-to-date third quarter, respectively. SAB No. 101 does not have an
impact on the full year operating profit. In addition, the Company recorded
amortization expense of $456,000 in the third quarter and $1,001,000 year-to-
date representing the amortization of the acquisition cost of the hotel
management contracts and leases.

                                      -14-
<PAGE>

         Senior Living. Senior living community operating profit increased $0.8
million, or 9.1%, to $9.8 million in the third quarter of 2000 and $1.7 million,
or 5.8%, to $30.6 million year-to-date. The increase in operating profit is
primarily due to increases in residency fees due to the increase in the average
daily rate, as well as the fill-up of expansions opened in 1999.

Corporate Expenses

         Corporate expenses remained unchanged at $3.4 million for the third
quarter of 2000 and decreased $0.2 million to $11.8 million year-to-date.

Interest Expense

         Interest expense increased $1.2 million to $8.0 million in the third
quarter of 2000 and $4.2 million to $22.6 million year-to-date. The increase in
interest expense is primarily attributable to the additional interest expense on
the mortgage debt assumed from the acquisition of a controlling interest in a
portfolio of Residence Inns, interest expense on the Company's line of credit,
and interest expense on the incremental debt from the refinancing of the
mortgage debt on certain of the senior living communities. Interest expense
includes $1.1 million in both the third quarters of 2000 and 1999, respectively,
and $3.2 million and $3.5 million in the year-to-date third quarter 2000 and
1999, respectively, related to interest on the hotel working capital notes
payable to Host Marriott.

Interest Income

         Interest income increased $1.1 million to $1.5 million for the third
quarter of 2000 and increased $1.1 million to $2.9 million year-to-date.

Income Before Extraordinary Item

         Income before extraordinary item for the third quarter of 2000 was $8.3
million, or $.51 per diluted share, compared to $10.5 million, or $.51 per
diluted share, for the third quarter of 1999. Year-to-date income before
extraordinary item was $29.4 million, or $1.74 per diluted share, compared to
$29.8 million, or $1.38 per diluted share in 1999. Although the third quarter
income before extraordinary item decreased from the prior year, the diluted
earnings before extraordinary item per share did not change due to the reduction
of the Company's common stock outstanding as a result of the stock repurchases
during 1999 and 2000. The 26% year-to-date increase in diluted earnings before
extraordinary item per share was due to the growth in operating profit discussed
above as well as a reduction of the Company's common stock outstanding due to
the stock repurchases during 1999 and 2000.

EBITDA

         The Company's earnings before interest expense, taxes, depreciation and
amortization and other non- cash items ("EBITDA") decreased $0.5 million, or
1.6%, to $28.2 million in the third quarter of 2000 as compared to the third
quarter of 1999. EBITDA increased $8.2 million, or 10%, to $90.4 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      Thirty-six Weeks Ended
                                                         ------------------------------------------------------
                                                         September 8,  September 10, September 8, September 10,
                                                               2000         1999         2000           1999
                                                            ---------    ----------   ----------      ----------
                                                                             (in thousands)
<S>                                                      <C>             <C>          <C>             <C>
      Full-service hotel leases.....................     $   7,249       $  11,786    $  32,744       $  34,102
      Limited-service hotel leases and subleases....         2,805           1,714        6,406           5,145
      Hotel ownership, net of minority distributions         3,604           3,500        9,869           6,915
      Hotel management (1)..........................           520               -        1,206               -
      Senior living communities.....................        15,481          13,538       47,169          43,628
      Corporate and other, net of interest income...        (1,507)         (1,910)      (6,987)         (7,620)
                                                         ---------       ---------    ---------       ---------
           EBITDA...................................     $  28,152       $  28,628    $  90,407       $  82,170
                                                         =========       =========    =========       =========

     EBITDA........................................      $  28,152       $  28,628    $  90,407       $  82,170
     Interest expense..............................         (7,965)         (6,775)     (22,638)        (18,416)
     Hotel working capital note interest expense...          1,074           1,128        3,223           3,463
     Depreciation and amortization.................         (7,225)         (5,018)     (20,705)        (16,524)
     Income taxes..................................         (5,762)         (7,088)     (20,430)        (20,511)
     Other non-cash charges, net...................             18            (418)        (458)           (408)
                                                         ---------       ---------    ---------       ---------
          Income before extraordinary item.........      $   8,292       $  10,457    $  29,399       $  29,774
                                                         =========       =========    =========       =========
</TABLE>

____________
(1)  In accordance with SAB No. 101, the Company does not recognize certain
     contingent management fees until specified thresholds for annual operating
     profit have been attained. If the Company were to accrue these contingent
     revenues, the Company would have recorded an additional $88,000 and
     $393,000 of hotel management EBITDA in the third quarter and year- to-date
     third quarter, respectively.

          The Company's interest coverage was 4.2 times for the third quarter of
2000 compared to 5.0 times for the third quarter of 1999. Year-to-date interest
coverage was 4.7 times in 2000 compared to 5.3 times in 1999. 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 both the third
quarter of 2000 and 1999, respectively. The year-to-date ratio of earnings to
fixed charges was 1.1 to 1.0 in both 2000 and 1999, respectively.

          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.

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 8, 2000, the Company had cash and cash equivalents of $33.1 million
and restricted cash of $19.0 million, which is included in other assets in the

                                      -16-
<PAGE>

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 8, 2000, the outstanding balance under the Company's $100 million line
of credit was $10 million.

          Cash from operations was $50.1 million for the thirty-six weeks ended
September 8, 2000 compared to $73.6 million for the thirty-six weeks ended
September 10, 1999. Comparisons to the prior year are significantly impacted by
the timing of the cash flow of the leases with Host Marriott as a result of the
inception of the leases at the beginning of fiscal year 1999. In 1999, the lease
payable to Host Marriott exceeded the rent receivable from the hotel managers by
$23.5 million at September 10, 1999, while there were no receivables or payables
at January 1, 1999 resulting in a $23.5 million increase to cash from operations
in 1999. In 2000, the lease payable to Host Marriott exceeded the rent
receivable from hotel managers by $16.5 million at September 8, 2000 while the
lease payable to Host Marriott exceeded the rent receivable from hotel managers
by $19.1 million at December 31, 1999 resulting in a $2.6 million net decrease
to cash from operations in 2000.

          Cash used in investing activities was $35.9 million for the thirty-six
weeks ended September 8, 2000. The cash used in investing activities principally
consists of the acquisition of the management businesses of two hotel management
companies, funding of lease deposits, expansions for one of its senior living
communities and capital expenditures for renewals and replacements for its owned
hotels and senior living communities, partially offset by the sale proceeds of
one of its owned hotels. Cash used in financing activities was $17.8 million for
the thirty-six weeks ended September 8, 2000. The Company's cash used in
financing activities consists primarily of repurchases of the Company's common
stock , net repayments of the Company's line of credit and debt principal
repayments, partially offset by the additional debt proceeds from the
refinancing of a portfolio of senior living communities.

Investing Activities

          In February 2000, the Company sold one of its Residence Inns for a net
sales price of $6.2 million.

          In February 2000, the Company entered into an agreement to acquire the
205-room Courtyard by Marriott in the Inner Harbor of Baltimore, Maryland for
$21 million upon the completion of construction. The hotel is scheduled to open
in November 2000. The Company will also manage the hotel pursuant to a franchise
agreement with Marriott International.

          In March 2000, the Company purchased the hotel management business of
Stormont Trice Management Corporation ("Stormont Trice") for $9.7 million plus a
contingent purchase price of up to an additional $4.5 million if certain
performance criteria are met. Pursuant to the acquisition, the existing
management contracts for nine hotels and four conference centers (including the
Portsmouth Renaissance Hotel and Waterfront Conference Center and Baltimore
Inner Harbor Courtyard currently under construction) and lease agreements for
two hotels were assigned to the Company. The hotels are generally managed under
franchise agreements that were assigned to the Company and are operated under
the Marriott, Renaissance, Hyatt, Courtyard by Marriott and Residence Inn brand
names.

         In March 2000, the Company also purchased the hotel management business
of the Durbin Companies ("Durbin") for $4.4 million, plus a contingent purchase
price of $500,000 if one of the leases is renewed under certain conditions.
Pursuant to the acquisition, the existing management contracts for ten

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<PAGE>

hotels and lease agreements for two hotels were assigned to the Company. All of
the hotels are managed under franchise agreements that were assigned to the
Company and are operated under the Marriott, Hilton, Courtyard by Marriott,
Crowne Plaza, Holiday Inn and Ramada brand names.

          On June 2, 2000, the Company entered into a letter of intent to form a
joint venture, Bedrock Partners II, to acquire approximately $235 million of
hotels over the next two to three years. Bedrock II plans to acquire
approximately 15 to 18 primarily mid-priced full-service hotels with significant
turnaround potential, perform extensive renovations and reposition and re-brand
the hotels in the upscale hotel segment. The Company will provide approximately
$7.5 million of the equity for Bedrock II. The Citadel Group Realty Group, LLC
will act as exclusive placement agent for Bedrock II to raise an additional $75
million of private equity and Bedrock II intends to raise additional funds
through debt financing. The Company is expected to manage most or all of the
hotels acquired by Bedrock Partners II under long-term management contracts.

          On June 9, 2000, the Company entered into an agreement with
Hospitality Properties Trust, Inc. ("HPT") to lease 19 limited-service hotels
under long-term lease agreements. HPT acquired the hotels from Marriott
International, Inc. ("Marriott International"). Marriott International will
continue to manage the hotels under long-term management agreements with the
Company. The hotels are operated under the Courtyard by Marriott, Residence Inn
by Marriott, Springhill Suites by Marriott and TownePlace Suites by Marriott
brand names. Two of the hotels in the portfolio are under construction and are
expected to open in the fourth quarter of 2000. Under the terms of the lease
agreement, the Company made a $9.6 million security deposit, which is included
in other assets on the accompanying condensed consolidated balance sheet, and
will make an additional $6.0 million security deposit for the remaining two
hotels at the inception of those leases.

          On August 18, 2000, the Company entered into an agreement with CNL
Hospitality Corporation ("CNL") to lease nine limited-service hotels under long-
term lease agreements. CNL acquired the hotels from Marriott International.
Marriott International will continue to manage the hotels under long-term
management agreements with the Company. The hotels are managed under the
Courtyard by Marriott, Residence Inn by Marriott, Springhill Suites by Marriott
and TownePlace Suites by Marriott brand names. Four of the hotels in the
portfolio are under construction and are expected to open in the fourth quarter
of 2000. Under the terms of the lease agreement, the Company made a $2.6 million
security deposit, which is included in other assets on the accompanying
condensed consolidated balance sheet, and will make an additional $2.4 million
security deposit for the remaining four hotels at the inception of those leases.

          On December 17, 1999, President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effective January 1, 2001, will allow a real estate investment trust ("REIT") to
lease hotels to a "taxable REIT subsidiary" if the hotel is operated and managed
on behalf of such subsidiary by an independent third party. This law will enable
Host Marriott, beginning in 2001, to lease its hotels to a taxable REIT
subsidiary. Under the terms of the Company's full-service hotel leases, Host
Marriott, at its sole discretion, may purchase the Company's full-service hotel
leases for a price equal to the fair value of the Company's interests in the
leases based upon an agreed upon formula in the leases. The Company is currently
in negotiations with Host Marriott for the possible sale of the Company's full-
service hotel leases and anticipates making an announcement in the fourth
quarter on the results of these negotiations.

Financing Activities

          Through the third quarter of 2000, the Company repurchased
approximately 1.3 million shares of its common stock for $23.2 million. Since
the inception of the Company's stock repurchase program in 1999, the Company has
repurchased approximately 6.4 million shares of its common stock for $120
million. As of September 8, 2000, the Company has Board of Director
authorization to repurchase approximately 2.1 million additional shares of its
common stock.

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<PAGE>

          On June 23, 2000, the Company completed a shareholder-approved 1-for-
100 reverse stock split immediately followed by a 100-for-1 forward stock split
of the Company's common stock. Registered shareholders whose shares of common
stock were converted into less than one share of common stock are entitled to
receive cash payments equal to the fair market value of these fractional
interests. The fair market value was determined to be $19.1375 calculated using
the average closing price of the Company's common stock on the New York Stock
Exchange for the ten trading days immediately before and including June 23,
2000. In connection with the reverse stock split, 292,000 shares of the
Company's common stock were retired in exchange for the right to receive $5.6
million in cash. Transmittal letters were delivered to the registered
shareholders with instructions on how to surrender stock certificates for cash
payment. Through September 8, 2000, $2.0 million has been paid to the former
shareholders that have surrendered their stock certificates for cash payment.

          In July 2000, the Company entered into five loan agreements totaling
$92.4 million secured by mortgages on eight senior living communities. The non-
recourse loans bear interest at the 30-day Eurodollar rate plus 275 basis
points. The loans mature in July 2005 and there is no principal amortization
during the term of the loans. The proceeds of the financing were used to repay
the existing loan secured by the communities with a principal balance of $43.5
million, which bore interest at 9.93% and had a scheduled maturity of January 1,
2001. In connection with the prepayment of the existing loan, the Company
recognized an extraordinary gain on the early extinguishment of debt of $428,000
before taxes in the third quarter of 2000. The remaining proceeds of the
financing were used to repay a portion of the outstanding borrowings under the
Company's line of credit.

                                      -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 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 31, 1999.

                                      -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:

                  27.1     Financial data schedule

         b.       Reports on Form 8-K:

         None.



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                                   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 23, 2000            By:/s/ Larry K. Harvey
----------------               ---------------------------------------
Date                           Larry K. Harvey
                               Senior Vice President, Treasurer and Controller
                               (Chief Accounting Officer)

                                      -22-