CRESTLINE CAPITAL CORP, S-1/A, 1999-06-28

CRESTLINE CAPITAL CORP
S-1/A, 1999-06-28
HOTELS & MOTELS

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As filed with the Securities and Exchange Commission on June 28, 1999

Registration No. 333-79243
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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AMENDMENT NO. 1

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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CRESTLINE CAPITAL CORPORATION
(Exact name of Registrant as specified in its charter)

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Maryland 7011 52-2151967
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)

6600 Rockledge Drive
Bethesda, Maryland 20817
(240) 694-2000
(Address, including zip code, and telephone number of Registrant's principal
executive offices)

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Tracy M.J. Colden
Senior Vice President, General Counsel and Secretary
Crestline Capital Corporation

6600 Rockledge Drive
Bethesda, Maryland 20817
Telephone: (240) 694-2000
Fax: (240) 694-2099
(Name, address, including ZIP code, and telephone number, including area code,
of agent for service)

Copy to:

Scott C. Herlihy
Latham & Watkins
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004

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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If the Registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of the Form, check the following box. [_]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed Proposed
Maximum Maximum
Amount Offering Price Aggregate Amount of
Title of each Class of to be Per Offering Registration
Securities to be Registered Registered Security(1) Price(1) Fee
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<S> <C> <C> <C> <C>
Common stock, par value
$.01 per share........... 1,400,002 $16.4063 $22,968,783 $6,385
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Preferred stock purchase
rights(2)................ 1,400,002 (2) (2) (2)
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</TABLE>
(1)Estimated solely for the purpose of calculating the registration fee.
(2) The preferred stock purchase rights are initially carried and traded with
the common stock. The value of the preferred stock purchase rights, if any,
is reflected in the value of the common stock.

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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.

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<PAGE>

1,400,002 Shares

Crestline Capital Corporation

Common Stock

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This prospectus covers shares of our common stock that may be offered for
sale by the stockholders named in this prospectus or in any prospectus
supplement to this prospectus. Crestline is not offering any of the shares and
we will not receive any of the proceeds from the sale of the shares by the
selling stockholders.

Our common stock is listed on the New York Stock Exchange under the symbol
"CLJ". On June 25, 1999, the reported last sale price of the common stock on
the New York Stock Exchange was $16/11///16/ per share.

Investing in the common stock involves risks. See "Risk Factors" beginning
on page 3.

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The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.

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Prospectus dated June 28, 1999.
<PAGE>

Summary

This summary contains basic information about us and this offering. Because
it is a summary, it does not contain all of the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and the financial statements and
the related notes to those statements included in this prospectus.

The Company

We are a Maryland corporation engaged in the business of leasing, subleasing
and owning hotels, owning senior living communities and the asset management of
hotels and senior living communities. We are one of the largest leasing
companies in the lodging industry, currently leasing 120 full-service hotels
and subleasing 71 limited-service hotels from Host Marriott Corporation and its
subsidiaries. Our hotels are operated under long-term management agreements
that were assigned to us by Host Marriott and its subsidiaries for the term of
the hotel leases. Marriott International, Inc. is our most significant manager,
managing 98 of our full-service hotels and all of our limited-service hotels.
We also own a majority interest in a partnership that owns 11 limited-service
hotels, which are also operated under long-term management agreements with
Marriott International. We are also one of the largest owners of senior living
communities, currently owning 31 senior living communities with over 7,400
units located in 13 states. All of our senior living communities are managed by
Marriott International under long-term operating agreements.

We became a publicly traded company on December 29, 1998 when Host Marriott
completed its plan of reorganizing its business by spinning off approximately
94% of our common stock to the shareholders of Host Marriott as part of a
series of transactions intended to permit Host Marriott to elect to be
considered a real estate investment trust, or "REIT", for federal income tax
purposes. In connection with the spin-off distribution, Host Marriott
shareholders received one share of our common stock for every ten shares of
Host Marriott common stock. Because REITs are not permitted to derive revenues
directly from the operation of hotels, it became necessary for Host Marriott to
lease or sublease its hotels to an unrelated party. Upon completion of the
spin-off distribution, we became the lessor or sublessor of substantially all
of Host Marriott's hotels. A more complete description of our business and
properties is contained below in the section of this prospectus entitled
"Business".

The address of our principal executive office is 6600 Rockledge Drive,
Bethesda, MD 20817, and our telephone number is (240) 694-2000. We maintain a
corporate website at http://www.crestlinecapital.com.

1
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The Offering

Common stock offered.... 1,400,002 shares

Total common stock
outstanding............. 20,580,000 shares, which includes the common stock to
be offered pursuant to this prospectus.

Use of proceeds......... The selling stockholders will receive all of the
proceeds from the sale of the shares. We will not
receive proceeds from the sale of the shares.

Dividend Policy......... We have never paid any dividends and do not
anticipate declaring or paying cash dividends in the
foreseeable future.

NYSE trading symbol..... CLJ

The shares of total common st
ock outstanding after the offering are stated
as of June 11, 1999. Except as noted in the following sentence, the shares of
common stock outstanding exclude:

. 4,000,000 shares of common stock reserved for issuance under our employee
comprehensive stock incentive plan, of which 2,043,000 shares were subject
to outstanding options, 365,000 shares were shares of restricted stock
previously awarded but which remained unvested and 21,604 were subject to
deferred stock incentive shares awarded but which remain unvested; and

. 70,000 shares of common stock reserved for issuance under our non-employee
directors' deferred stock compensation plan, of which 31,500 shares have
been awarded.

The 365,000 shares of restricted stock which have been awarded under our
employee comprehensive stock incentive plan, but which remain unvested, are
currently entitled to receive dividends if declared and may be voted by the
awardees. Therefore, we include those shares in the number of to
tal shares of
common stock outstanding even though the awardees may not sell or otherwise
transfer those shares until they are vested and, if they fail to vest, they
will revert to the status of unissued non-outstanding shares and will be
eligible for re-grant under the comprehensive stock plan.

2
<PAGE>

RISK FACTORS

An investment in our common stock involves risks. You should carefully
consider and evaluate all of the information in this prospectus, including the
risk factors listed below before deciding to purchase shares of common stock.

We depend on Marriott International, Inc.

Marriott International, Inc. currently manages under long-term management
agreements most of the hotels that we lease, sublease or own. Marriott
International also currently manages all of our senior living communities.
Therefore, our revenue and profitability depends upon how well Marriott
International manages our hotels and senior living communities. Some of the
factors that may affect Marriott International's performance and, therefore,
our operating results, include:

. the strength of the general economy,

. the conditions in the specific markets in which we have hotels or senior
living communities, such as whether there is an oversupply of hotel
rooms or senior living residences in the market or less demand for such
products,

. how attractive our hotels and senior living communities are to
consumers,

. how well Marriott International manages our properties and whether our
properties meet consumer demand,

. how our properties compete against other hotels or senior living
communities,

. the rates charged at our properties, and

. whether general economic factors such as inflation or market conditions
cause either (1) an increase in operating costs that we are not able to
pass on fully to guests in our hotels or residents in our communities,
or (2) a reduction in the operating margins at our hotels.

Our hotels may compete with other hotels operated or franchised by Marriott
International.

Marriott International currently operates or franchises approximately 1,700
hotel properties. We lease, sublease or own controlling interests in
approximately 190 of these hotels. Marriott International also operates
approximately 110 senior living communities, including our 31 senior living
communities. Some of the hotels or senior living communities that Marriott
International operates for us may compete for business with the hotels or
senior living communities that Marriott International operates for other
parties. It is possible that Marriott International could take certain actions
in its capacity as the manager of competing hotels or senior living communities
that would not be in our best interest or that might adversely affect our
hotels or senior living communities.

The terms of our hotel leases and subleases may not necessarily reflect fair
market value or terms.

We currently lease 120 full-service hotels and sublease 71 limited-service
hotels from Host Marriott. We negotiated the terms of the leases and subleases
for these properties with Host Marriott at a time when we were a wholly owned
subsidiary of Host Marriott. Therefore, these leases and subleases may not
necessarily reflect the terms that we would have received had we negotiated on
an arms-length basis with an unrelated third party. Additionally, the payments
we are required to make under the hotel leases and subleases were negotiated
based upon historical and projected operating and financial performance of the
particular hotels. We cannot be sure, however, that in the future our hotels
will meet the operating and financial performance projected at the time of
these negotiations. If our hotels fail to meet such projected operating and
financial performance, it could have a material adverse effect on our financial
condition and results of operations.

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We can only continue to generate hotel revenues if our hotel leases and
subleases remain in effect.

On a pro forma basis assuming that our hotel leases and subleases were in
effect during the entire 1998 fiscal year, approximately 37% of our operating
profit before depreciation and amortization for such period consisted of
operating profit from our leased or subleased hotels. Our hotel leases
generally have terms ranging from 7-10 years and our subleases have terms
ranging from 11-13 years. The leases do not provide us with any renewal rights.
Additionally, under the leases and subleases, there are circumstances under
which Host Marriott would be permitted to terminate one or all of the leases or
subleases. Some of these circumstances are outside of our control. In most
instances, if Host Marriott were to terminate a lease or sublease, we would
receive a termination fee. However, if Host Marriott were to terminate a
substantial number of our leases and subleases, this could materially and
adversely affect our financial condition and results of operations.

It is important that potential investors understand the terms of leases and
subleases and, specifically, the circumstances under which Host Marriott could
terminate one or more of our leases and subleases. Therefore, we encourage you
to read the summary terms of our leases and subleases provided elsewhere in
this prospectus.

Host Marriott is not required to lease to us any hotels that it may acquire in
the future.

We have no binding agreement with Host Marriott to lease any hotels that it
may acquire in the future. Therefore, we cannot be sure that Host Marriott will
lease any more hotels to us. Our failure to lease more hotels from Host
Marriott in the future could adversely affect our ability to expand our hotel
leasing business.

We are only able to terminate our hotel leases, hotel subleases or management
agreements under limited circumstances.

We are only able to terminate our hotel leases, hotel subleases or
management agreements for our hotels or senior living communities under the
circumstances specifically set forth in those agreements. As a result, we may
be forced to pay rent on an underperforming hotel or get a reduced return on a
senior living community until the lease and/or management agreement relating to
such property expires. Potential investors should be aware that a substantial
amount of our operating expenses will consist of lease payments to Host
Marriott, hotel management and franchise fees payable to Marriott International
and other managers of our hotels and management fees payable to Marriott
International in connection with its management of our senior living
communities. Potential investors should also be aware that under the terms of
our hotel leases, hotel subleases and our hotel management agreements, we are
required to pay all operating expenses of the hotels, including all personnel
costs, utility costs and general repair and maintenance. However, these
expenses exclude: capital expenditures, furniture, fixtures and equipment
reserve funding (except for hotels which we sublease), property and casualty
insurance, real estate taxes and other assessments, and ground lease payments
which are paid by Host Marriott.

Our ability to obtain financing secured by our hotel leases and subleases is
limited.

The terms of our hotel leases and subleases with Host Marriott do not permit
us to obtain financing secured by our leasehold interest in our hotels without
Host Marriott's consent. Host Marriott may withhold such consent at its sole
discretion. Even if Host Marriott were to consent to such financing, a number
of the hotels that we lease from Host Marriott have pre-existing mortgage debt
that prohibits any additional secured financing. Our rights in these hotels
under the applicable lease or sublease are expressly subordinate to existing
mortgage debt, including any refinancing of such mortgage debt. If Host
Marriott defaults under the mortgage debt, the third party lender has the right
to terminate the applicable hotel lease or sublease of such property. However,
if we are not in default under the applicable hotel lease or sublease, we would
be entitled to receive a termination fee from Host Marriott if the lease or
sublease were terminated by the third party lender.

4
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Our substantial debt could adversely affect our financial health.

We have a significant amount of indebtedness. At March 26, 1999, we had
total debt of approximately $212 million, excluding hotel working capital notes
payable to Host Marriott of $94 million, and shareholders' equity of
approximately $463 million. Therefore, our debt-to-equity ratio at such date
was .5x.

Our substantial debt, together with our obligations to Host Marriott under
the hotel leases and subleases and our obligations to Marriott International
and other parties under the management agreements for our hotels and senior
living communities, could have important consequences to us, and, therefore, to
you. For example, it could:

. make it more difficult for us to satisfy our obligations with respect to
our debts;

. increase our vulnerability to general adverse economic and industry
conditions;

. limit our ability to fund future working capital, capital expenditures
and other general corporate requirements;

. require us to dedicate a substantial portion of our cash flow from
operations to payments on our debt, thereby reducing the availability of
our cash flow to fund working capital, capital expenditures and other
general corporate purposes;

. limit our flexibility in planning for, or reacting to, changes in our
business and the industries in which we operate;

. place us at a competitive disadvantage compared to our competitors that
have less debt; and

. limit, along with the financial and other restrictive covenants in our
debt, among other things, our ability to borrow additional funds.
Failing to comply with those covenants could result in an event of
default which, if not cured or waived, could have a material adverse
effect on us.

We have guaranteed our subsidiaries' obligations under the hotel leases and
subleases

All of our hotel leases and subleases have been entered into by our
subsidiaries. We and certain other of our subsidiaries have entered into
limited guarantee agreements of the obligations of our subsidiaries under the
hotel leases and subleases. For purposes of these guarantee agreements, we have
grouped our 120 leased full- service hotels into four separate "pools". The
cumulative limit of our guarantee of the leases in any single pool of full
service hotels at any time will be the greater of:

(1) 10% of the aggregate rents paid to Host Marriott in the immediately
preceding fiscal year under all hotel leases in the pool, or

(2) 10% of the aggregate rents paid to Host Marriott under all hotel
leases in the pool in 1999.

Under these guarantee and pooling arrangements, we are required to apply excess
cash flow from profitable hotel leases in a particular pool to meet rent
shortfalls on other hotel leases in the same hotel pool, subject to specified
limits. However, under our guarantee we do receive credit to the extent rent
payments have exceeded owner's distributions in any fiscal year.

We also guarantee the payment of rent with respect to the subleases of our
71 limited-service hotels by our subsidiaries up to a maximum of $30 million by
virtue of intercompany notes totaling $30 million held by these subsidiaries
that are payable by Crestline upon demand.

Our agreements restrict our ability to sell or otherwise transfer our hotel
leasehold interests and our senior living communities.

Our hotel lease and sublease agreements with Host Marriott and our
management agreements with Marriott International and other managers of our
hotels and senior living communities impose conditions and restrictions on our
ability to sell, lease or otherwise transfer any of our hotels, hotel leasehold
interests or senior living communities. Where any such condition or restriction
exists, we may be unable to consummate a sale, lease or other transfer of a
hotel, hotel leasehold interest or a senior living community which we believe
is in our best interest if any of these parties declined to consent to a
transaction or declines to modify or waive the relevant conditions and
restrictions.

5
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We have agreed to restrictions on our business and future opportunities.

We have entered into non-competition agreements with Marriott International
and Host Marriott pursuant to which we have agreed to limit our business
activities. In general, these non-competition agreements restrict our ability
during the prescribed periods of time (1) to compete with Marriott
International's hotel and senior living management business, (2) to operate or
manage senior living communities and (3) to own or acquire full service hotels
that are not leased from Host Marriott. Even so, notwithstanding these non-
competition agreements, we are not prohibited from leasing hotel properties or
contracting with third parties to manage leased hotel properties, although we
are limited in our ability to lease hotel properties operated under a common
name. However, these non-competition agreements do not restrict our ability to
own or lease senior living communities or limited-service hotels.

These non-competition agreements represent significant limitations on our
business and future growth opportunities and we encourage potential investors
to carefully read the summary of these agreements contained elsewhere in this
prospectus.

The lodging and senior living industries are competitive.

The lodging industry is highly competitive and our hotels generally operate
in geographical markets that contain numerous competitors. It is also possible
that our hotels in any particular market may be required to compete against
newly built properties or existing properties that have been enhanced.
Additionally, the prospects for the lodging industry as a whole may be
adversely affected in the future by factors which are beyond our control,
including (1) national and regional economic conditions, (2) changes in travel
patterns, (3) taxes and governmental regulations which could influence or
determine wages, prices, interest rates, construction procedures and costs, and
(4) the availability of credit. For our hotels to remain profitable, we are
dependent upon such factors as the strength of the economy, the management
abilities of our managers such as Marriott International, the desirability of
particular hotel locations, and other factors relating to the operation of our
hotels. The success of our hotels will be dependent, in large part, on our
ability to compete in such areas as access, location, quality of
accommodations, room rate structure, the quality and scope of food and beverage
facilities and other services and amenities.

The long-term care industry, including the senior living segment, is also
highly competitive. Our senior living communities compete with numerous other
companies providing long-term care alternatives to the elderly such as home
healthcare agencies, facility-based service programs, retirement communities,
convalescent centers, nursing home operators and other assisted living
companies. Some of our present and potential competitors are significantly
larger than we are and have, or may obtain, greater financial resources than we
have. Additionally, the regulatory and other barriers to entry into the senior
living industry are not substantial. Therefore, we can't be sure that we will
not encounter increased competition in the future that could limit our ability
to attract residents or expand our senior living business in the future.

The assisted living segment of the senior living industry may be becoming
overbuilt.

We believe that many assisted living geographic markets have become
overbuilt or may be on the verge of becoming overbuilt. Approximately 20% of
our senior living units are assisted living units. Overbuilding in the assisted
living market could cause our assisted living units to experience decreased
occupancy, depressed margins and lower operating results.

We may be unable to sell properties when appropriate because real estate
investments are not liquid.

Real estate investments generally cannot be sold quickly. This may limit our
ability to sell and purchase hotels and senior living communities promptly in
response to changes in economic or other competitive conditions. This could
make it difficult for us to sell any of our hotels or senior living communities
even if we concluded that a sale is in our best interest.

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The seasonality of the hotel industry may affect our ability to make timely
rent payments under our leases and subleases.

The lodging industry is seasonal in nature. This seasonality may, from time
to time, affect our ability to make timely rent payments under the hotel
leases. Our failure to pay rent payments timely under the hotel leases is an
event of default, which could allow Host Marriott to terminate the applicable
lease or exercise any other remedy available to it as a result of any such
default. The hotel leases for our full service hotels also contain cross
default provisions with respect to defaults by us or our subsidiaries under
other agreements relating to such hotels, including (1) the applicable hotel
management agreement with Marriott International, (2) our limited guarantee of
the hotel leases, (3) the non-competition agreement with Host Marriott, and (4)
other related agreements between us or our subsidiaries on the one hand and
Host Marriott on the other.

We will be adversely affected if Marriott International's personnel costs
increases.

Marriott International competes with various competitors in the lodging and
senior living industries to attract and retain qualified and skilled personnel
to operate the hotels and senior living communities managed by it. A shortage
of such personnel or general inflationary pressure may require Marriott
International to enhance its wage and benefits package to compete effectively
for personnel necessary to operate our hotels and senior living communities. If
this were to occur, our net income attributable to such hotels and senior
living communities may be adversely affected.

Environmental problems are possible and can be costly.

Under various federal, state and local laws, ordinances and regulations,
owners or operators of real estate may be required to investigate and clean up
certain hazardous substances released at a property, and may be held liable to
a governmental entity or to third parties for property damage or personal
injuries and for investigation and cleanup costs incurred by the parties in
connection with any contamination. In addition, some environmental laws create
a lien on a contaminated site in favor of the government for damages and costs
it incurred in connection with the contamination. The presence of contamination
or the failure to remediate contamination may adversely affect the owner's
ability to sell or lease real estate or to borrow using the real estate as
collateral. We cannot be sure that (1) a prior owner, operator or occupant,
such as a tenant, did not create a material environmental condition not known
to us, (2) a material environmental condition with respect to any hotel or
senior living community leased or owned by us does not exist or (3) future uses
or conditions, including, without limitation changes and applicable
environmental laws and regulations will not result in the imposition of
environmental liability.

Additionally, we can't be sure that all potential environmental liabilities
that could result from our interests in our hotels and senior living
communities have been identified or properly quantified or that no property
owner, operator or past or current guest or occupant has created an
environmental condition of which we are not aware. Moreover, we cannot assure
you that (1) future laws, ordinances, or regulations will not impose any
material environmental liability on us, or (2) the current environmental
condition of the leased hotels or the senior living communities will not be
affected by the condition of land or operations in the vicinity of our hotels
or senior living communities, such as the presence of underground storage
tanks, or by third parties unrelated to us.

As the owner of our senior living communities and some hotels, we may be
fully liable for any environmental liabilities arising in connection with such
properties. Under the hotel leases and subleases, we may be indemnified against
environmental liabilities arising in connection with our leased or subleased
hotels by the owners or lessors, respectively, of those hotels.

Our senior living communities are subject to government regulation.

Our senior living communities' healthcare/nursing facilities are highly
regulated. Some of our senior living communities include skilled nursing
facilities that are subject to federal, state and local laws that require us to

7
<PAGE>

obtain an operating license and certificates of need for such senior living
communities. These laws also regulate how Marriott International operates the
facility, including how they deliver medical care, the adequacy of the medical
care they provide and their distribution of pharmaceuticals, as well as matters
such as rate setting and Medicare/Medicaid reimbursements. These facilities
also are subject to periodic inspection by governmental and other authorities
to assure continued compliance with various standards. If Marriott
International or any other party that we retain in the future to operate our
senior living communities fails to comply with these various standards, we
could fail to obtain or maintain any required regulatory approval or licenses,
and such senior living community could be prevented from offering services.
Such failures could also (1) adversely affect such operator's ability to
receive reimbursement for services and could cause government agencies to deny
such operator its claims for reimbursement of costs, (2) cause governmental
authorities to temporarily suspend the admission of new patients at the senior
living community at issue or suspend or decertify such operator's or our
eligibility to participate in federal healthcare programs, including Medicaid
or Medicare and (3) result in the revocation of our license to operate a
facility or require closure of such a facility. Historically, Medicare/Medicaid
reimbursements have accounted for approximately 12% of our total senior living
community revenues. Under our operating agreements, losses we suffer as a
result of the failure of Marriott International or another operator to comply
with applicable regulatory requirements would be indemnified against only to
the extent caused by such person's willful failure, gross negligence or
material breach of the management agreement.

Unlike skilled nursing facilities, assisted living communities are not
currently regulated at the federal level, except under laws generally applying
to businesses, such as work place safety and income tax requirements. Even so,
assisted living communities are increasingly becoming subject to more stringent
regulation and licensing by state and local health and social service agencies
and other regulatory authorities. Like skilled nursing facilities, assisted
living communities are subject to periodic inspection by government
authorities. In most states, both assisted living communities and skilled
nursing facilities are subject to state or local building code, fire code and
food service licensure or certification requirements. If Marriott
International, or any other manager of our senior living communities that we
may retain in the future, fails to operate the communities such that they meet
applicable regulatory requirements, we may be subject to the imposition of
fines or a license that is subject to conditions or certain provisions. It is
also possible that, as a result of such a failure, an applicable license
relating to a particular senior living community could be suspended or revoked
or that the operator of the senior living community or we could be subject to
additional sanctions, including delays in obtaining permission to expand a
senior living community. Therefore, if Marriott International or any such other
manager fails to comply with applicable regulatory requirements, it could have
a material adverse effect on our financial condition and results of operations.
Under our operating agreements, any losses we suffer as a result of the failure
of Marriott International or another operator to comply with applicable
regulatory requirements would be indemnified against only to the extent caused
by such person's willful failure, gross negligence or material breach of the
management agreement.

As the operator of our senior living communities, Marriott International is
also subject to federal and state anti-remuneration laws and regulations such
as the Federal Health Care Programs anti-kickback law, which govern certain
financial arrangements among healthcare providers and others who may be in a
position to refer or recommend patients to such providers. These laws prohibit,
among other things the offer, payment, solicitation or receipt of any form of
remuneration in return for the referral of Federal Health Care Program patients
or the purchasing, leasing, ordering, or arranging for any goods, facilities,
services or items for which payment can be made under a Federal Health Care
Program, such as Medicare or Medicaid. If Marriott International were to
violate the Federal anti-kickback law, they or we could lose their or our
eligibility to participate in a Federal Health Care Program or it could result
in civil or criminal penalties on Marriott International, our senior living
communities or other entities. The Federal government, private insurers and
various state enforcement agencies are devoting increased resources to
enforcing compliance with these laws.

Furthermore, some states restrict certain business corporations from
providing or holding themselves out as a provider of medical care. These laws
vary from state to state and are often vague and have seldom been interpreted
by the courts or regulatory agencies. We cannot assure you that these federal
and state laws will ultimately be interpreted in a manner that is consistent
with our practices.

8
<PAGE>

By owning facilities that provide personal and healthcare services, we are
exposed to certain risks of liability.

In recent years, participants in the long-term care industry have become
subject to an increasing number of lawsuits that allege malpractice or related
legal theories. Many of these lawsuits involve large claims and have caused the
participants being sued to incur significant costs. Additionally, residents in
our senior living communities generally enjoy a greater degree of independence
in their daily lives than do residents of more institutional long-term care
facilities. As a result, however, our residents are subject to certain risks
that would be reduced in more institutionalized settings and could serve as the
basis for lawsuits against us. We currently maintain liability insurance
intended to cover such claims which we believe is adequate based on the nature
of the risks and industry standards in our historical experience with such
claims.

We also carry comprehensive general liability insurance covering the hotels
that we own, lease or sublease and also maintain policy specifications and
insured limits that are required under our hotel leases and subleases. Even so,
we cannot be sure that we will not be subject to claims that exceed our
insurance limits or to claims that are not covered by insurance. If there is a
large claim or significant number of small claims which are not covered by our
insurance or which are in excess of our insurance coverage, it could adversely
affect our financial condition or results of operations.

Provisions of our charter and by-laws may inhibit changes in control that could
be beneficial to our stockholders.

Certain provisions of our charter and by-laws may delay or prevent a change
of control or other transaction that could provide our stockholders with a
premium over the then-prevailing market price for their shares of our common
stock or which might otherwise be in their best interest. For example, these
provisions could make it more difficult for our stockholders to change a
majority of our board of directors, to compel the corporation to adopt actions
opposed by the directors, or that would otherwise affect corporate actions.

Additionally, our shareholder rights agreement provides, among other things,
that, upon the occurrence of certain events, our stockholders will be entitled
to purchase shares of stock subject to the ownership limit. These purchase
rights would cause substantial dilution to a person or group that acquires or
attempts to acquire 20% or more of our common stock on terms not approved by
our board of directors and, as a result, could delay or prevent a change in
control or other transaction that could provide our stockholders with a premium
over the then-prevailing market price of their shares, which might otherwise be
in their best interest.

Additionally, as a Maryland corporation, we are subject to the Maryland
General Corporation Law, which includes several provisions that may have the
affect of delaying or preventing the change in control.

There are restrictions on the ownership or transfer of our stock.

In order for Host Marriott to qualify as a real estate investment trust
under the Internal Revenue Code of 1986, as amended, it cannot own, either
directly or indirectly, 10% or more of Crestline. In calculating this
percentage, Host Marriott would be attributed ownership of any of our stock
held by one or more actual or constructive owners of 10% or more of Host
Marriott. This restriction provides that no person or persons acting as a group
may own, or be deemed to own by virtue of certain attribution rules under the
Internal Revenue Code, more than (1) 9.8% of the lesser of the number or value
of our issued and outstanding shares of common stock or (2) 9.8% of the lesser
of the number or value of our issued and outstanding shares of preferred stock
of any class or series. The ownership attribution rules under the Internal
Revenue Code are complex and may cause our common stock owned actually or
constructively by a group of related individuals and/or entities to be owned
constructively by one individual entity. As a result, the acquisition by an
individual or entity of less than 9.8% of our common stock, or the acquisition
or ownership of an interest in an entity that owns, actually or

9
<PAGE>

constructively, our common stock, could nevertheless cause that individual or
entity, or another individual or entity, to own constructively in excess of
9.8% of our outstanding common stock and thus subject such common stock to the
restrictions on transfer and ownership contained in our charter.

These restrictions could result in an automatic transfer of shares owned in
excess of 9.8% of our outstanding common stock to a charitable trust. These
restrictions are important to us and our stockholders and potential investors
should review the summary of such restrictions contained in the "Description of
Capital Stock" section of this prospectus.

Proposed legislation could result in termination of our hotel leases.

Proposed legislation titled the Real Estate Investment Trust Modernization
Act of 1999 has been introduced in both the House of Representatives and the
Senate. The bill's central feature would allow a REIT to own up to 100% of the
stock of taxable REIT subsidiaries. If the bill becomes law, Host Marriott
could establish taxable REIT subsidiaries which could directly lease the hotels
which we currently lease from Host Marriott and Host Marriott could terminate
the hotel leases by paying the fair market value of the remaining terms of the
leases. We cannot be certain whether or not this bill or provisions similar to
those contained in this bill will become law. If this bill were to become law
in its current form, it could have an adverse effect on our operations.

We depend on key personnel.

We depend on the efforts of our executive officers, most of whom previously
served as officers of Host Marriott. While we believe that we could find
replacements for these key personnel, the loss of their services could have an
adverse effect on our operations.

The Year 2000 problem may adversely impact our business and financial
condition.

The "Year 2000" problem has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to
refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results. Our potential Year 2000
problems include issues relating to our in-house hardware and software computer
systems, as well as issues relating to third parties with whom we have a
material relationship or whose systems are material to the operations of our
hotel or senior living properties, such as Marriott International.

In-House Systems. We have invested in the implementation and maintenance of
accounting and reporting systems and equipment that are intended to enable us
to provide adequately for our information and reporting needs and which are
also Year 2000 compliant. Substantially all of our in-house systems have
already been certified as Year 2000 compliant through testing and other
mechanisms.

10
<PAGE>

We cannot assure you that Year 2000 remediation by us or third parties will
be properly and timely completed, and failure to do so could have a material
adverse effect on us, our business and our financial condition since we are
responsible for interfacing with third parties in addressing Year 2000 issues
at the hotels owned, leased or subleased by us and the senior living
communities owned by us. We cannot predict the actual effects to us of the Year
2000 problem, which depends on numerous uncertainties such as: (1) whether
significant third parties properly and timely address the Year 2000 issue; and
(2) whether broad-based or systemic economic failures may occur. We are also
unable to predict the severity and duration of any such failures, which could
include disruptions in passenger transportation or transportation systems
generally, loss of utility and/or telecommunications in financial transactions
or payment processing systems such as credit cards.

11
<PAGE>

FORWARD-LOOKING STATEMENTS

In addition to historical information, this prospectus contains "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements include information relating to
our intent, belief or current expectations, primarily with respect to, but not
limited to:

. economic outlook;

. capital expenditures;

. cost reduction;

. cash flow;

. operating performance; or

. related industry developments including trends affecting our business,
financial condition and results of operations

We intend to identify forward-looking statements in this prospectus by using
words or phrases such as "anticipate", "believe", "estimate", "expect",
"intend", "may be", "objective", "plan", "predict", "project" and "will be" and
similar words or phrases (or the negative thereof).

The forward-looking information involves important risks and uncertainties
that could cause our actual results, performance or achievements to differ
materially from our anticipated results, performance or achievements expressed
or implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to:

. national and local economic and business conditions or governmental
regulations that will affect, among other things, demand for products
and services at our hotels and senior living communities, the wages or
other costs to operate or maintain our hotels and senior living
communities, the level of rates and occupancy that we can achieve by
such properties, the price we must pay to acquire or lease new hotels or
senior living communities and the availability and terms of financing;

. our ability to maintain our hotel and senior living communities in a
first-class manner, including meeting capital expenditure requirements;

. our ability to compete effectively in areas such as access, location,
quality of properties and rate structures;

. governmental actions and initiatives including tax law changes that may
eliminate the need for a lease structure by lodging and senior living
REITs;

. changes to the public pay systems for medical care and the need for
compliance with environmental, licensure and safety requirement;

. the effect on us and our operations of the year 2000 issue; and

. other factors discussed under "Risk Factors".

Although we believe the expectations reflected in our forward-looking
statements are based upon reasonable assumptions, we can give no assurance that
we will attain such expectations or that any deviations will not be material.
Except as otherwise required by the federal securities laws, we disclaim any
obligation or undertaking to disseminate to you any updates or revisions to any
forward-looking statement contained in this prospectus to reflect any change in
our expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.

12
<PAGE>

USE OF PROCEEDS

The selling stockholders will receive all of the proceeds from the sale of
the shares, net any underwriting fees, discounts or commissions, and transfer
taxes, if any. We will not receive proceeds from the sale of the shares.

PRICE RANGE OF OUR COMMON STOCK

The common stock is listed on the New York Stock Exchange and is traded
under the symbol "CLJ". Following our spin-off from Host Marriott, we became a
publicly traded company. The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per share of the common stock as
reported on the New York Stock Exchange Composite Tape. As of June 11, 1999,
there were approximately 62,000 holders of common stock.

<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
1998
4th Quarter (December 30, 1998 through January 1, 1999)*..... $16 1/16 $14 1/2
1999
1st Quarter.................................................. 15 9 3/16
2nd Quarter ................................................. 17 3/8 13
</TABLE>
- --------
* Represents first trading day and fiscal year end.

DIVIDEND POLICY

We have never paid any dividends and do not anticipate declaring or paying
cash dividends in the foreseeable future. Any determination to pay dividends in
the future will be at the discretion of our Board of Directors and will depend
upon results of operations, financial condition, capital expenditures, working
capital requirements, any contractual restrictions and other factors deemed
relevant by our Board of Directors. We intend to retain future earnings, if
any, to reinvest in our business and repay indebtedness. Our existing credit
facility contains covenants prohibiting our declaring or payment of cash
dividends.

13
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

Selected historical financial data

In the following table, we present selected historical consolidated
financial data for Crestline since our inception as a subsidiary of Host
Marriott on June 21, 1997 as well as historical financial data for our
predecessor business, which was owned by Marriott International for the period
from April 1, 1996 through June 20, 1997 and Forum Group, Inc. for the periods
prior to April 1, 1996. The predecessor business consisted of the senior living
operations acquired from Marriott International through the purchase of the
stock of Forum Group.

The financial data for the interim periods for the twelve weeks ended March
26, 1999 and March 27, 1998 and for the fiscal year ended January 1, 1999 and
the period from June 21, 1997 through January 2, 1998 were derived from our
consolidated financial statements included elsewhere in this prospectus.

Since our hotel leases and subleases did not commence until January 1, 1999,
our selected consolidated financial data for periods prior to January 1, 1999
do not include historical financial data for our leased and subleased hotels.

You should read the following data in conjunction with our consolidated
financial statements and the notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the other
financial information included elsewhere in this prospectus.

<TABLE>
<CAPTION>
Crestline Marriott International Forum Group
----------------------------------------------- ---------------------- ------------------
Period from Twenty-four Forty Week
Twelve Weeks June 21, 1997 Week Period Period Year Ended
Ended through Ended Ended March 31,
March 26, March 27, Fiscal Year January 2, June 20, January 3,
1999 1998 1998 1998 1997 1997 1996 1995
--------- --------- ----------- ------------- ----------- ---------- -------- --------
(unaudited) (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data(1):
Revenues................ $962,348 $ 55,054 $241,277 $110,969 $95,403 $150,782 $179,926 $142,527
Operating costs and
expenses............... 940,967 45,025 204,058 94,998 77,428 115,441 141,173 111,165
Operating profit........ 21,381 10,029 37,219 15,971 17,975 35,341 38,753 31,362
Corporate expenses...... 3,962 754 6,360 2,304 4,519 6,380 915 431
Interest expense........ 5,106 6,519 22,861 13,396 9,141 14,283 29,119 23,018
Interest income......... 1,072 322 2,028 336 598 1,111 2,321 1,743
Net income(2)........... 7,897 1,816 5,915 358 2,628 9,334 5,717 6,714
Earnings per share(3)... .35 .08 .27 .02 -- -- -- --

Other Data:
Depreciation and
amortization........... 5,285 4,793 22,115 10,635 6,698 8,494 10,172 8,360
Cash from (used in)
operations............. 20,763 881 28,987 25,376 (479) 26,870 26,327 21,518
Cash used in investing
activities............. (20,888) (1,996) (30,098) (33,412) (16,407) (159,586) (43,253) (34,269)
Cash provided by (used
in) financing
activities............. (5,853) (543) 50,246 25,680 12,673 132,650 5,896 24,184

Balance Sheet Data:
Total assets............ $953,779 $689,356 $858,753 $663,502 $ -- $565,094 $417,436 $379,127
Total debt(4)........... 211,849 322,726 213,076 349,934 -- 244,318 325,756 267,228
Total shareholders'
equity................. 463,070 283,964 459,254 227,064 -- 284,665 49,496 60,636
</TABLE>
- --------
(1) The selected financial data for the twelve weeks ended March 26, 1999
reflect the operations of the hotel leases and subleases which commenced on
January 1, 1999.
(2) Net income for the fiscal years ended March 31, 1996 and 1995 includes
$2,078,000 and $253,000, respectively, from an extraordinary loss on the
extinguishment of debt. Net income for the fiscal year ended March 31, 1996
includes a $666,000 gain from the cumulative effect of an accounting
change.

14
<PAGE>

(3) Earnings per share reflects historical net income divided by the weighted
average shares outstanding. For the periods presented prior to the spin-off
distribution, our weighted average shares outstanding is based on Host
Marriott's weighted average shares outstanding adjusted for the one-for-ten
distribution ratio.
(4) Debt excludes $94,444,000 and $95,114,000 of hotel working capital notes
payable to Host Marriott as of March 26, 1999 and January 1, 1999,
respectively.

15
<PAGE>

CAPITALIZATION

In the following table we set forth our capitalization as of March 26, 1999,
and pro forma capitalization as of March 26, 1999, after giving effect to the
transactions described in the "Pro Forma Financial Statements". Our
capitalization should be read in conjunction with our consolidated financial
statements and the notes thereto, the "Pro Forma Financial Statements" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", each contained elsewhere in this prospectus.

<TABLE>
<CAPTION>
As of March 26, 1999
-----------------------
Historical Pro Forma(1)
---------- ------------
(in thousands)
<S> <C> <C>
Debt(2):
Mortgage debt......................................... $182,090 $ 246,568
Other debt............................................ 29,759 29,759
-------- ---------
Total Debt............................................ 211,849 276,327
Shareholders' equity.................................... 463,070 463,070
-------- ---------
Total capitalization.................................... $674,919 $ 739,397
======== =========
</TABLE>
- --------
(1) The pro forma debt as of March 26, 1999 includes approximately $54 million
of debt consolidated in connection with our second quarter 1999 purchase of
a 77% limited partnership interest in a partnership that owns eleven
limited-service hotels as well as a $10 million draw on our revolving
credit facility to partially finance the acquisition. See the section "Pro
Forma Financial Information" below.
(2) Amount excludes approximately $94 million due to Host Marriott to pay for
hotel working capital purchased from Host Marriott.

16
<PAGE>

PRO FORMA FINANCIAL INFORMATION

Our unaudited pro forma condensed consolidated statement of operations for
fiscal year 1998 reflects the following transactions, as if such transactions
had been completed at the beginning of the fiscal year:

. 1998 acquisition of one senior living community;

. 1998 prepayment of $26 million of debt;

. 1998 repayment and forgiveness of $92 million of unsecured debt and a
$15 million intercompany note treated as a capital contribution from
Host Marriott;

. 1998 and 1999 acquisition of minority interests in our consolidated
subsidiaries;

. 1998 spin-off distribution of Crestline by Host Marriott and the
concurrent lease of 120 full-service hotels and sublease of 71 limited-
service hotels;

. The asset management fee charged to Host Marriott;

. Adjustment to corporate expenses as if we were operated on a stand-alone
basis; and

. Second quarter 1999 acquisition of a 77% limited partnership interest in
a partnership that owns eleven limited-service hotels.

Our unaudited pro forma condensed consolidated statement of operations for
the twelve weeks ended March 26, 1999 reflects the acquisition of the 77%
limited partnership interest in the partnership that owns eleven limited-
service hotels as if the transaction had been completed at the beginning of the
period presented. Our unaudited pro forma condensed consolidated balance sheet
as of March 26, 1999 reflects the acquisition of the 77% limited partnership
interest in this partnership as if the transactions had been completed on March
26, 1999.

In the second quarter of 1999, we acquired a 74% limited partnership
interest in the Marriott Residence Inn USA Limited Partnership from a private
investor for $34.4 million in cash and the consolidation of $54.5 million of
debt for a total consideration of $89 million. The purchase was partially
financed through a $10 million draw on our revolving credit facility. In a
separate transaction, we purchased an additional 3% limited partnership
interest in the partnership in the second quarter of 1999 for $1.6 million in
cash increasing our ownership to a 77% limited partnership interest in the
partnership. This partnership owns eleven Residence Inn limited-service hotels
that are managed by Marriott International.

On December 29, 1998, we were spun-off from Host Marriott as part of a
series of transactions pursuant to which Host Marriott elected to be considered
a REIT for federal income tax purposes. Upon completion of the spin-off
distribution, we entered into agreements to lease or sublease 120 full-service
hotels and 71 limited-service hotels from Host Marriott and agreements to
provide asset management services to Host Marriott for its hotel portfolio for
an annual fee of $4.5 million.

During 1998, we acquired one senior living community, the Gables at
Winchester, for $21 million. Also during 1998, Host Marriott prepaid
approximately $26 million of our mortgage debt and repaid $92 million of our
unsecured debt to Marriott International. We treated Host Marriott's prepayment
of the mortgage debt as a capital contribution. Host Marriott's repayment of
our $92 million unsecured debt was repaid in exchange for a $92 million note
due to Host Marriott with similar terms. Our $92 million note and an additional
$15 million intercompany note were later forgiven by Host Marriott and treated
as a capital contribution.

The unaudited pro forma financial statements present our financial positions
and results of operations as if the transactions discussed above were
completed. These presentations do not purport to represent what our results of
operations would actually have been if these transactions had in fact occurred
on such date or at the beginning of such period or to project our results of
operations for any future date or period.

The unaudited pro forma financial statements are based upon certain
assumptions, as set forth in the notes to the unaudited pro forma financial
statements, that we believe are reasonable under the circumstances and should
be read in conjunction with our consolidated financial statements and notes
thereto included elsewhere in this prospectus.

17
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of March 26, 1999
(in thousands)

<TABLE>
<CAPTION>
(A)
Hotel
Historical Acquisition Pro Forma
---------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Property and equipment, net................. $669,820 $88,344 $ 758,164
Hotel working capital....................... 94,444 -- 94,444
Due from hotel managers..................... 80,418 1,906 82,324
Due from Marriott Senior Living Services,
net........................................ 13,174 -- 13,174
Other assets................................ 35,122 2,151 37,273
Cash and cash equivalents................... 60,801 (35,965) 43,296
10,000
8,460
-------- ------- ----------
$953,779 $74,896 $1,028,675
======== ======= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Mortgage debt............................. $182,090 $54,478 $ 246,568
10,000
Other debt................................ 29,759 -- 29,759
-------- ------- ----------
211,849 64,478 276,327
Hotel working capital notes payable to
Host Marriott............................ 94,444 -- 94,444
-------- ------- ----------
Total debt................................ 306,293 64,478 370,771
Accounts payable and accrued expenses....... 13,277 1,557 14,834
Other liabilities........................... 21,312 8,861 30,173
Due to Host Marriott........................ 88,011 -- 88,011
Deferred income taxes....................... 61,816 -- 61,816
-------- ------- ----------
Total liabilities......................... 490,709 74,896 565,605
-------- ------- ----------
Shareholders' equity:
Common stock.............................. 223 -- 223
Additional paid-in capital................ 453,071 -- 453,071
Retained earnings......................... 14,170 -- 14,170
Treasury stock............................ (4,394) -- (4,394)
-------- ------- ----------
Total shareholders' equity................ 463,070 -- 463,070
-------- ------- ----------
$953,779 $74,896 $1,028,675
======== ======= ==========
</TABLE>

See Notes to Unaudited Pro Forma Financial Statements

18
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

Twelve Weeks Ended March 26, 1999
(in thousands, except per share data)

<TABLE>
<CAPTION>
(C)
Pro
Historical Hotel Acquisition Forma
---------- ----------------- --------
<S> <C> <C> <C>
REVENUES
Hotels
Room.................................. $582,896 $ 9,288 $592,184
Food and beverage..................... 256,450 -- 256,450
Other................................. 64,638 455 65,093
-------- ------- --------
Total hotels........................ 903,984 9,743 913,727
-------- ------- --------
Senior living communities
Routine............................... 51,505 -- 51,505
Ancillary............................. 5,448 -- 5,448
-------- ------- --------
Total senior living communities..... 56,953 -- 56,953
-------- ------- --------
Asset management........................ 1,188 -- 1,188
Equity in earnings of affiliates........ 223 -- 223
-------- ------- --------
Total revenue....................... 962,348 9,743 972,091
-------- ------- --------
OPERATING COSTS AND EXPENSES
Hotels
Property-level costs and expenses
Rooms................................. 132,583 1,950 134,533
Food and beverage..................... 187,971 -- 187,971
Other department and costs and
deductions........................... 227,690 2,742 230,432
Management fees........................ 58,305 798 59,103
Lease expense.......................... 286,670 -- 286,670
Other operating costs and expenses..... -- 1,256 1,256
-------- ------- --------
Total hotels........................ 893,219 6,746 899,965
-------- ------- --------
Senior living communities
Property-level costs and expenses
Routine............................... 32,402 -- 32,402
Ancillary............................. 4,107 -- 4,107
Other operating costs and expenses..... 10,172 -- 10,172
-------- ------- --------
Total senior living communities..... 46,681 -- 46,681
-------- ------- --------
Asset management........................ 1,067 -- 1,067
-------- ------- --------
Total operating costs and expenses.. 940,967 6,746 947,713
-------- ------- --------
Operating profit........................ 21,381 2,997 24,378
Corporate expenses...................... (3,962) (256) (4,218)
Interest expense........................ (5,106) (1,192) (6,477)
(179)
Interest income......................... 1,072 96 868
(300)
-------- ------- --------
Income before income taxes.............. 13,385 1,166 14,551
Provision for income taxes.............. (5,488) (478) (5,966)
-------- ------- --------
Net income.............................. $ 7,897 $ 688 $ 8,585
======== ======= ========
Earnings per share...................... $ .35 $ .39
======== ========
</TABLE>

See Notes to Unaudited Pro Forma Financial Statements

19
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

UNAUDITED PRO FORMA STATEMENT OF OPERATIONS

Fiscal Year Ended January 1, 1999
(in thousands, except per share data)

<TABLE>
<CAPTION>
(B) (C) (D) (E) (F) (G)
Asset
Senior Living Manage- Debt
Hotel Leases Hotel Community ment Corporate Refinancing/ Pro
Historical and Subleases Acquisition Acquisition Fees Expenses Repayment Forma
---------- ------------- ----------- ------------- ------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES
Hotels
Room................... $ -- $2,584,921 $38,767 $-- $ -- $ -- $ -- $2,623,688
Food and beverage...... -- 1,202,560 -- -- -- -- -- 1,202,560
Other.................. -- 265,610 1,997 -- -- -- -- 267,607
-------- ---------- ------- ---- ------ -------- ------- ----------
Total hotels........... -- 4,053,091 40,764 -- -- -- -- 4,093,855
-------- ---------- ------- ---- ------ -------- ------- ----------
Senior living
communities
Routine................ 213,378 -- -- 166 -- -- -- 213,544
Ancillary.............. 27,899 -- -- 2 -- -- -- 27,901
-------- ---------- ------- ---- ------ -------- ------- ----------
Total senior living
communities........... 241,277 -- -- 168 -- -- -- 241,445
-------- ---------- ------- ---- ------ -------- ------- ----------
Asset management........ -- -- -- -- 4,500 -- -- 4,500
-------- ---------- ------- ---- ------ -------- ------- ----------
Total revenue.......... 241,277 4,053,091 40,764 168 4,500 -- -- 4,339,800
-------- ---------- ------- ---- ------ -------- ------- ----------
OPERATING COSTS AND
EXPENSES
Hotels
Property-level costs
and expenses
Rooms.................. -- 1,035,922 8,021 -- -- -- -- 1,043,943
Food and beverage...... -- 1,088,769 -- -- -- -- -- 1,088,769
Other department and
costs and deductions.. -- 336,810 11,489 -- -- -- -- 348,299
Management fees........ -- 261,416 3,448 -- -- -- -- 264,864
Lease expense.......... -- 1,285,310 -- -- -- -- -- 1,285,310
Other operating costs
and expenses.......... -- -- 5,729 -- -- -- -- 5,729
-------- ---------- ------- ---- ------ -------- ------- ----------
Total hotels........... -- 4,008,227 28,687 -- -- -- -- 4,036,914
-------- ---------- ------- ---- ------ -------- ------- ----------
Senior living
communities
Property-level costs
and expenses
Routine................ 138,099 -- -- 82 -- -- -- 138,181
Ancillary.............. 21,317 -- -- 1 -- -- -- 21,318
Other operating costs
and expenses.......... 44,642 -- -- 50 -- -- -- 44,692
-------- ---------- ------- ---- ------ -------- ------- ----------
Total senior living
communities........... 204,058 -- -- 133 -- -- -- 204,191
-------- ---------- ------- ---- ------ -------- ------- ----------
Asset management........ -- -- -- -- 4,500 -- -- 4,500
-------- ---------- ------- ---- ------ -------- ------- ----------
Total operating costs
and expenses.......... 204,058 4,008,227 28,687 133 4,500 -- -- 4,245,605
-------- ---------- ------- ---- ------ -------- ------- ----------
Operating profit........ 37,219 44,864 12,077 35 -- -- -- 94,195
Corporate expenses...... (6,360) -- (894) -- -- (11,016) -- (18,270)
Interest expense........ (22,861) (4,864) (5,697) -- -- -- 4,789 (29,408)
(775)
Interest income......... 2,028 567 265 6 -- -- -- 1,568
(1,298)
-------- ---------- ------- ---- ------ -------- ------- ----------
Income (loss) before
income taxes........... 10,026 40,567 3,678 41 -- (11,016) 4,789 48,085
Benefit (provision) for
income taxes........... (4,111) (16,632) (1,508) (17) -- 4,517 (1,963) (19,714)
-------- ---------- ------- ---- ------ -------- ------- ----------
Net income (loss)....... $ 5,915 $ 23,935 $ 2,170 $ 24 $ -- $ (6,499) $ 2,826 $ 28,371
======== ========== ======= ==== ====== ======== ======= ==========
Earnings per share...... $ .27 $ 1.29
======== ==========
</TABLE>

See Notes to Unaudited Pro Forma Financial Statements

20
<PAGE>

NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS

A. Represents the adjustments to record our acquisition of a 77% limited
partnership interest in a partnership that owns eleven limited-service hotels
in the second quarter of 1999.

B. Represents the adjustments to record the historical hotel revenues and
hotel operating costs and expenses and pro forma lease expense associated with
our leasing of 120 full-service hotels and 71 limited-service hotels from Host
Marriott and the interest expense on the $94 million of hotel working capital
notes from Host Marriott.

C. Represents the adjustment to record the incremental operating results
related to our acquisition of the 77% limited partnership interest in a
partnership that owns eleven limited-service hotels in the second quarter of
1999 as follows:

--historical hotel revenues and operating costs and expenses including the
depreciation expense reflecting our basis in the assets;

--the historical interest expense on the assumed mortgage;

--interest expense on the $10 million draw on the revolving credit
facility; and

--reduction in interest income earned on the cash proceeds used to acquire
the partnership.

D. Represents the adjustment to record the historical revenues and operating
costs and expenses related to our acquisition of one senior living community in
1998.

E. Represents our asset management fees charged to Host Marriott associated
with asset management agreements entered into with Host Marriott for an annual
fee of $4.5 million.

F. Represents the adjustment to record additional corporate expenses we
would have expected to incur assuming we were operated on a stand-alone basis
for the entire fiscal year 1998 and the elimination of minority interest
expense included in corporate expenses related to the purchase of minority
interests in our consolidated subsidiaries in 1998 and 1999. The adjustment for
fiscal year 1998 includes the following (in thousands):

<TABLE>
<S> <C>
Payroll costs..................................................... $ 4,747
Rent and insurance................................................ 815
Other general and administrative.................................. 5,454
-------
$11,016
=======
</TABLE>

G. Represents the adjustments to eliminate interest expense on $133 million
of debt either repaid or forgiven by Host Marriott during 1998.

21
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial
condition and results of operations in conjunction with "Selected Consolidated
Financial Data" and the financial statements and related notes included
elsewhere in this prospectus.

Lack of comparability following our spin-off distribution from Host Marriott

Below we discuss the historical first quarter of 1999 compared to the
historical first quarter of 1998, the historical fiscal year 1998 and the
period from June 21, 1997 through January 2, 1998 operating results which,
except for the first quarter of 1999, represent only the ownership of our
senior living communities. However, we do not believe that the historical
results of operations are comparable to the results of operations following the
distribution because on December 31, 1998, we entered into hotel lease and
sublease agreements which would have represented a significant amount of our
operating results in fiscal year 1998, assuming that the leases and subleases
were in effect for the entire period. Accordingly, we have included a
comparison of our pro forma results of operations for the first quarter of 1999
compared to the first quarter of 1998 and for the fiscal year 1998 compared to
fiscal year 1997 following the historical analysis.

Historical first quarter 1999 compared to historical first quarter 1998

Revenues. Our revenues represent gross revenues from leased and subleased
hotels for 1999 and owned senior living communities and asset management fees.
Our revenues increased by $907 million to $962 million for the first quarter of
1999.

Hotel revenues were $904 million for the first quarter of 1999. Since the
hotel leases and subleases did not commence until January 1, 1999, there were
no hotel revenues in the first quarter of 1998. Room revenue per available
room, or REVPAR, for the leased full-service hotels was $117.06 for the first
quarter of 1999. REVPAR for our subleased Courtyard by Marriott and Residence
Inn properties were $73.08 and $81.84, respectively.

Senior living revenues increased by $1.9 million, or 3.5%, to $57 million in
the first quarter of 1999. The average per diem increased 5.2% to $92.30, while
average occupancy decreased over one percentage point to 90.3% due mostly to
the impact of the fill-up period for the expansion added in 1999. On a
comparable basis, excluding communities which added units during 1998 or 1999,
the average occupancy increased slightly to 91.7%. The revenue growth is due to
the addition of senior living community in January 1998, the addition of 285
expansion units in 1998 and 1999 and the growth in the average per diem. These
factors driving revenue growth were partially offset by a significant decrease
in ancillary revenues due to a reduction in therapy services in response to a
change in the Medicare billing process.

Operating Costs and Expenses. Hotel operating costs and expenses principally
consist of hotel-property level operating costs and expenses plus management
fees and lease expenses. Senior living community operating costs and expenses
consist of property-level expenses plus management fees, depreciation, property
taxes, ground rent, insurance and certain other costs. Asset management
operating costs and expenses principally consist of salary and related costs.
Total operating costs and expenses increased $896 million to $941 million in
the first quarter of 1999.

Overall hotel operating costs and expenses were $893 million for the first
quarter of 1999.

Overall senior living operating costs and expenses increased $1.7 million,
or 3.7%, to $47 million for the first quarter of 1999. Senior living community
property-level operating costs and expenses increased $1.0 million, or 2.9%, to
$37 million, while other operating costs and expenses increased $0.6 million,
or 6.8%, to $10.2 million for the first quarter of 1999. The property-level
operating costs and expenses have been adversely

22
<PAGE>

impacted by the low national unemployment as the communities experienced a
significant increase in labor costs particularly in their nursing departments.
Other operating costs and expenses were impacted in the first quarter of 1999
by the payment of central administrative fees to Marriott International in 1999
of $0.6 million that were waived for the first year of operations.

Operating Profit. Our operating profit was $21.4 for the first quarter of
1999 compared to $10.0 million for the first quarter of 1998.

Hotel operating profit was $10.8 million for the first quarter of 1999.

Senior living community operating profit increased $0.2 million, or 2.4%, to
$10.3 million in the first quarter of 1999. The increase in operating profit is
primarily due to increases in residency fees due to the increase in the average
per diem, offset by lower operating profit for the communities with newly
opened expansions due to fill-up period, increased healthcare expenses and the
central administrative service fees beginning in the third quarter of 1998. The
Forum at Tucson, Park Summit and Lexington at Country Place senior living
communities performed particularly well. Our independent living components
posted strong results while the assisted living and healthcare components did
not show significant gains due mostly to the over-supply in the assisted living
market.

Corporate Expenses. Corporate expenses were $4.0 million for the first
quarter of 1999 compared to $0.8 million for the first quarter of 1998.

Interest Expense. Interest expense was $5.1 million for the first quarter of
1999 compared to $6.5 million for the first quarter of 1998.

Interest Income. Interest income was $1.1 million for the first quarter of
1999 compared to $0.3 million for the first quarter of 1998.

Net Income. Net income was $7.9 million for the first quarter of 1999
compared to $1.8 million for the first quarter of 1998.

Fiscal year 1998 (historical)

Revenues. Our revenues represent property routine services and ancillary
revenues. Routine service revenues are generated from (1) monthly charges for
independent and assisted living apartments and special care center rooms and
(2) daily charges for healthcare beds which are recognized monthly based on the
terms of the residents' agreements. Ancillary service revenues are generated on
a "fee for service" basis for supplementary items requested by residents and
are recognized as the services are provided.

Our senior living communities generated total revenues of $241.3 million for
1998. During 1998, the average occupancy of our senior living communities was
92.2% and the average daily rate for 1998 was $88.44. Overall occupancies were
lower than the historical occupancies due to the significant number of
expansion units added during the year, the overall disruption to the senior
living communities as a result of the construction and the time required to
fill the expansion units.

Operating Costs and Expenses. Our operating costs and expenses principally
consist of property-level expenses, depreciation and amortization, management
fees, property taxes, insurance and certain other costs. Our operating costs
and expenses were $204.1 million (84.6% of revenues) for 1998. The low national
unemployment in 1998 adversely impacted our property-level operating costs and
expenses as the senior living communities experienced a significant increase in
labor costs particularly in their nursing and food service departments.

Operating Profit. Our operating profit was $37.2 million (15.4% of
revenues).

Corporate Expenses. Our corporate expenses were $6.4 million (2.7% of
revenues).

Interest Expense. Our interest expense was $22.9 million.

23
<PAGE>

Interest Income. Our interest income was $2.0 million, primarily reflecting
interest earned on cash and certain escrow accounts.

Net Income. Our net income was $5.9 million.

Period from June 21, 1997 through January 2, 1998 (historical)

Revenues. The 1997 third quarter acquisition of 29 senior living communities
generated total revenues of $111.0 million. During the period from June 21,
1997 through January 2, 1998, average occupancy of the senior living
communities was 91.7% and the average daily rate was $83.88. Overall
occupancies were lower than the historical occupancies due to (1) the
significant number of expansion units added during the year, (2) the overall
disruption to the senior living communities as a result of the construction and
(3) the time required to fill the expansion units.

Operating Costs and Expenses. Our operating costs and expenses were $95
million (85.6% of revenues).

Operating Profit. Our operating profit was $16.0 million (14.4% of
revenues).

Corporate Expenses. Our corporate expenses were $2.3 million (2.1% of
revenues).

Interest Expense. Our interest expense was $13.4 million.

Net Income. Our net income was $0.4 million.

Pro forma results of operations

Our management believes that a discussion of our pro forma results of
operations is more meaningful and relevant in understanding our present and
ongoing operations than is a discussion of our historical results of operations
because of the significant changes that occurred as a result of the spin-off
distribution and related transactions. We have prepared the pro forma
discussion below as if the spin-off distribution and related transactions,
including the hotel leases and subleases, occurred at the beginning of the
period. See the consolidated financial statements included elsewhere in this
prospectus for a discussion of the spin-off distribution and related
transactions.

Our unaudited pro forma condensed consolidated statements of operations
assume that the following transactions which actually occurred throughout 1999,
1998 and 1997 had been completed at the beginning of each period:

. 1997 acquisition of Forum Group and one additional senior living
community;

. 1998 acquisition of one senior living community;

. 1998 retirement of $26 million of debt;

. 1998 repayment and forgiveness of $92 million of unsecured debt and a
$15 million intercompany note treated as a capital contribution by Host
Marriott;

. 1998 and 1999 acquisition of minority interests in our consolidated
subsidiaries;

. 1998 spin-off of Crestline by Host Marriott and the concurrent lease of
120 full-service hotels and sublease of 71 limited-service hotels;

. the asset management fee charged to Host Marriott;

. adjustment to corporate expenses as if we were operated on a stand-alone
basis; and

. second quarter 1999 acquisition of a 77% limited partnership interest in
a partnership that owns eleven limited-service hotels.

24
<PAGE>

partnership interest in the partnership in the second quarter of 1999 for $1.6
million in cash increasing our ownership to a 77% limited partnership interest
in the partnership.

In 1997, Host Marriott acquired 29 senior living communities from Marriott
International and concurrently contributed all of the acquired senior living
assets and liabilities to us. In addition, during 1997, we acquired 49% of the
remaining 50% interest in Leisure Park Venture Limited Partnership which owns a
418-unit retirement community in New Jersey for approximately $23 million. This
amount included the assumption of $15 million in debt, increasing our ownership
to 99% of the partnership. In the first quarter of 1999, we acquired the
remaining one percent interest.

In 1998, we acquired one senior living community for $21 million. Also,
during 1998, Host Marriott prepaid approximately $26 million of our mortgage
debt and repaid $92 million of unsecured debt to Marriott International. We
treated Host Marriott's prepayment of the mortgage debt as a capital
contribution. Host Marriott's repayment of our $92 million unsecured debt was
repaid in exchange for a $92 million note due to Host Marriott with similar
terms. The $92 million note and an additional $15 million intercompany note
were later forgiven by Host Marriott and treated as a capital contribution.

Although we believe these presentations are helpful to understand our
financial condition and results of operations we cannot assure you what our
results of operations would actually have been if the transactions described
above had in fact occurred on such date or at the beginning of such period nor
can we project our results of operations for any future date or period.

We have based the unaudited pro forma financial statements upon certain
assumptions that we believe are reasonable under the circumstances. You should
read the unaudited pro forma financial statements in conjunction with our
consolidated financial statements and notes thereto included elsewhere in this
prospectus.

Pro Forma first quarter 1999 compared to pro forma first quarter 1998

In the following table we present the results of operations for the first
quarters 1999 and 1998 on the pro forma basis discussed above.
<TABLE>
<CAPTION>
First Quarter
----------------------------------
1999 1998
---------------- ----------------
(unaudited, in thousands, except
per share amounts)
<S> <C> <C>
Hotel revenues......................... $ 913,727 $ 875,577
Senior living community revenues....... 56,953 55,222
Asset management revenues.............. 1,188 1,038
Equity in earnings of affiliates....... 223 --
---------------- ----------------
Total revenues....................... 972,091 931,837
---------------- ----------------
Hotel operating costs and expenses..... 899,965 864,071
Senior living community operating costs
and expenses.......................... 46,681 45,155
Asset management operating costs and
expenses.............................. 1,067 1,038
---------------- ----------------
Total operating costs and expenses... 947,713 910,264
---------------- ----------------
Operating profit before corporate
expenses and interest................. 24,378 21,573
Corporate expenses..................... (4,218) (4,230)
Interest expense....................... (6,477) (6,822)
Interest income........................ 868 224
---------------- ----------------
Income before taxes.................... 14,551 10,745
Provision for income taxes............. (5,966) (4,405)
---------------- ----------------
Net income............................. $ 8,585 $ 6,340
================ ================
Earnings per share..................... $ .39 $ .29
================ ================
</TABLE>

Revenues. Our revenues primarily represent gross revenues from owned, leased
and subleased hotels and owned senior living communities and asset management
fees. Our revenues increased by $40.3 million, or 4.3%, to $972 million for the
first quarter of 1999 from $932 million for 1998.

25
<PAGE>

Hotel revenues increased $38.2 million or 4.4%, to $914 million in the first
quarter of 1999. Improved results for our leased full-service hotels were
driven by strong increases in room revenue per available room, or REVPAR, of
4.3% to $117.06 for the first quarter of 1999. Average room rates increased
2.9%, while average occupancy increased one percentage point to 78.1% for the
full-service properties. REVPAR for our subleased Courtyard by Marriott hotel
properties increased 2.1% to $73.08 due to an increase in average room rates of
nearly .6% and an increase in average occupancy of over one percentage point to
79.1%. REVPAR for our subleased Residence Inn properties decreased 4.2% to
$81.84 due to a decrease in average room rates of 2.4% and a decrease in
occupancy of one and one half percentage points to 81.2% reflecting the
additional supply that has entered into the market. REVPAR for our owned
Residence Inn properties increased by 0.4%. to $79.80 due to an increase in
average occupancy of over one percentage point to 83.6%, while average room
rates decreased 1.2%.

Our senior living community revenues increased by $1.7 million, or 3.1%, to
$57 million in the first quarter of 1999. The average per diem increased 5.2%
to $92.30, while average occupancy decreased over one percentage point to 90.3%
due mostly to the impact of the fill-up period for the expansion added in 1999.
On a comparable basis, excluding communities which added units during 1998 or
1999, the average occupancy increased slightly to 91.7%. The revenue growth is
due to the addition of 285 expansion units in 1998 and 1999 and the growth in
the average per diem. These factors driving revenue growth were partially
offset by a significant decrease in ancillary revenues due to a reduction in
therapy services in response to a change in the Medicare billing process.

Operating Costs and Expenses. Hotel operating costs and expenses for our
leased and subleased hotels principally consist of hotel property-level
operating costs and expenses plus management fees and lease expenses. Hotel
operating costs and expenses for our owned hotels principally consist of hotel
property-level operating costs and expenses plus management fees, depreciation,
property taxes, ground rent, insurance and certain other costs. Senior living
community operating costs and expenses consist of property-level expenses plus
management fees, depreciation, property taxes, ground rent, insurance and
certain other costs. Asset management operating costs and expenses principally
consist of salary and related costs and expenses. Total operating costs and
expenses increased $37.4 million, or 4.1%, to $948 million for the first
quarter of 1999.

Overall hotel operating costs and expenses increased $35.9 million, or 4.2%,
to $900 million in the first quarter of 1999. Hotel property-level operating
costs and expenses increased $20.9 million, or 3.9% to $553 million. Hotel
management fees increased $2.5 million, or 4.4%, to $59.1 million, while lease
expense increased $12.5 million, or 4.6%, to $287 million.

Overall senior living operating costs and expenses increased $1.5 million,
or 3.4%, to $47 million for the first quarter of 1999. Senior living community
property-level operating costs and expenses increased $0.9 million, or 2.6%, to
$37 million, while other operating costs and expenses increased $0.6 million,
or 6.2%, to $10.2 million for the first quarter of 1999. The property-level
operating costs and expenses have been adversely impacted by the low national
unemployment as the communities experienced a significant increase in labor
costs particularly in their nursing departments. Other operating costs and
expenses were impacted in the first quarter of 1999 by the payment of central
administrative fees to Marriott International in 1999 of $0.6 million that were
waived for the first year of operations.

Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, our total operating profit increased $2.8
million, or 13.0%, to $24.4 million for the first quarter of 1999.

Hotel operating profit increased $2.3 million, or 19.6%, to $13.8 million
for the first quarter of 1999. Specifically, the New York, Los Angeles and
Washington, D.C. markets, as well as the Ritz-Carlton brand hotels reported
significant improvements for 1999.

Senior living community operating profit increased $0.2 million, or 2%, to
$10.3 million in the first quarter of 1999. The increase in operating profit is
primarily due to increases in residency fees due to the increase in the average
per diem, offset by lower operating profit for the communities with newly
opened

26
<PAGE>

expansions due to fill-up period, increased healthcare expenses and the central
administrative service fees beginning in the third quarter of 1998. The Forum
at Tucson, Park Summit and Lexington at Country Place senior living communities
performed particularly well. Our independent living components posted strong
results while the assisted living and healthcare components did not show
significant gains due mostly to the over-supply in the assisted living market.

Corporate Expenses. Corporate expenses remained unchanged at $4.2 million,
or 0.4% of total revenues, for the first quarter of 1999.

Interest Expense. Interest expenses decreased slightly to $6.5 million in
the first quarter of 1999. Interest expenses includes $1.1 million in both the
first quarters of 1999 and 1998, respectively, related to interest on the hotel
working capital notes payable to Host Marriott.

Interest Income. Interest income increased $0.6 million to $0.9 million for
the first quarter of 1999 due to higher cash balances in 1999.

Net Income. Net income for the first quarter of 1999 was $8.6 million, or
$.39 per share, compared to $6.3 million, or $.29 per share, for the first
quarter of 1998.

Pro forma 1998 compared to pro forma 1997

In the following table we present the results of operations for fiscal years
1998 and 1997 on the pro forma basis discussed above.

<TABLE>
<CAPTION>
1998 1997
---------------- ----------------
(unaudited, in thousands, except
per share amounts)
<S> <C> <C>
Hotel revenues......................... $ 4,093,855 $ 3,783,217
Senior living community revenues....... 241,445 222,789
Asset management revenues.............. 4,500 4,500
---------------- ----------------
Total revenues..................... 4,339,800 4,010,506
---------------- ----------------
Hotel operating costs and lease
expenses.............................. 4,036,914 3,731,237
Senior living community operating costs
and expenses.......................... 204,191 189,467
Asset management operating costs and
expenses.............................. 4,500 4,500
---------------- ----------------
Total operating costs and
expenses.......................... 4,245,605 3,925,204
---------------- ----------------
Operating profit before corporate
expenses and interest................. 94,195 85,302
Corporate expenses..................... (18,270) (17,432)
Interest expense....................... (29,408) (29,367)
Interest income........................ 1,568 511
---------------- ----------------
Income before income taxes............. 48,085 39,014
Provision for income taxes............. (19,714) (15,996)
---------------- ----------------
Net income............................. $ 28,371 $ 23,018
================ ================
Earnings per share..................... $ 1.29 $ 1.05
================ ================
</TABLE>

Revenues. Our revenues primarily represent gross revenues from owned, leased
and subleased hotels and owned senior living communities and asset management
fees. Our revenues increased by $329 million, or 8.2%, to $4,340 million for
1998 from $4,011 million for 1997.

Hotel revenues increased $311 million, or 8.2%, to $4,094 million in 1998.
Our improved results for leased full-service hotels were driven by strong
increases in REVPAR of 7.5% to $111.29 for 1998. Average room rates increased
7.6%, while average occupancy decreased slightly to 77.5% for the full-service
properties. REVPAR for our subleased Courtyard by Marriott hotel properties
increased 6.8% to $73.04 due to an increase in average room rates of nearly
7.6%, while average occupancy decreased over one half of a percentage point

27
<PAGE>

to 80.5%. REVPAR for our subleased Residence Inn properties increased 3.1% to
$85.86 due to an increase in average room rates of 2.2% and an increase in
occupancy of almost one percentage point to 84.1%. REVPAR for our owned
Residence Inn properties increased 2.4% to $82.48 due to an increase in average
room rates of 4.0%, while average occupancy decreased over one percentage point
to 85.1%.

Senior living community revenues increased by $18.7 million, or 8.4%, to
$241.4 million. For 1998, the average daily rate increased 5.3% to $88.44,
while average occupancy decreased slightly to 92.2%. The significant revenue
growth is partially due to the addition of 445 expansion units in 1997 and
1998, partially offset by the competitive pressures on our assisted living
components which experienced a one-half percentage point decrease in occupancy.

Overall hotel operating costs and expenses increased $306 million, or 8.2%,
to $4,037 million. Hotel property-level operating costs and expenses increased
$189 million, or 8.2% to $2,481 million. Hotel management fees increased $18.0
million, or 7.3%, to $265 million, while lease expense increased $99 million,
or 8.3%, to $1,285 million.

Overall senior living operating costs and expenses increased $14.7 million,
or 7.8%, to $204.2 million for 1998. Senior living community property-level
operating costs and expenses increased $13.7 million, or 9.4%, to $159.5
million, while other operating costs and expenses increased $1.1 million to
$44.7 million for 1998. The low national unemployment in 1998 adversely
impacted property-level operating costs and expenses as the senior living
communities experienced a significant increase in labor costs particularly in
their nursing and food service departments. Other operating costs and expenses
were impacted in 1998 by the payment of central administrative fees to Marriott
International in 1998 that were waived for the first year of operations.

Operating Profit. As a result of the changes in revenues and operating costs
and expenses discussed above, our operating profit increased $8.9 million, or
10.4%, to $94.2 million for 1998.

Hotel operating profit increased $5.0 million, or 9.5%, to $56.9 million for
1998 from $52.0 million for 1997. Our leased full-service hotels recorded
significant improvements in operating results. Specifically, hotels in New York
City, Boston, Toronto and Atlanta reported significant improvements for 1998.
Properties in Florida reported some temporary declines in operating results due
to exceptionally poor weather in 1998.

Senior living community operating profit increased $3.9 million, or 11.8%,
to $37.3 million. The senior living communities' increase in operating profit
is primarily due to increases in residency fees and charges in the independent
living, assisted living and healthcare revenue components, the favorable impact
of new expansion units, offset by increased healthcare expenses and food
service cost and the central administrative service fees beginning in the third
quarter of 1998. The Park Summit, the Forum at Deer Creek, Leisure Park and the
Forum at Memorial Woods senior living communities performed particularly well.

Corporate Expenses. Corporate expenses increased $0.8 million to $18.3
million for 1998. As a percentage of total revenues, corporate expenses
remained unchanged at 0.4% for 1998 and 1997.

Interest Expense. Interest expense increased slightly to $29.4 million in
1998.

Interest Income. Interest income increased $1.1 million to $1.6 million for
1998.

Net Income. Net income for 1998 was $28.4 million, or $1.29 per share,
compared to $23.0 million, or $1.05 per share, for 1997.

28
<PAGE>

Liquidity and capital resources

In 1997, Host Marriott acquired all of the outstanding common stock of Forum
Group from Marriott Senior Living Services, Inc., a subsidiary of Marriott
International for approximately $460 million, including approximately $270
million in assumed debt. Immediately following the acquisition, Host Marriott
contributed all of the Forum Group assets and liabilities, consisting primarily
of 29 senior living communities, to us. In 1997, we also acquired from Marriott
International 49% of the remaining 50% interest in a partnership which owns the
418-unit Leisure Park senior living community for approximately $23 million,
including approximately $15 million in assumed debt. In the first quarter of
1999, we acquired the remaining one percent interest.

During the first quarter of 1998, we acquired the Gables at Winchester, a
125-unit senior living community, in suburban Boston for $21 million and
concurrently entered into a long-term operating agreement with Marriott Senior
Living Services to operate the property. Also in the first quarter of 1998, we
entered into conditional purchase agreements to acquire two Marriott Brighton
Gardens assisted living communities from the Summit Companies of Denver,
Colorado. After the anticipated completion of construction in the second
quarter of 1999, we may acquire these two 160-unit properties located in Denver
and Colorado Springs, Colorado, for $35 million, if they achieve certain
operating performance criteria. We anticipate that, if we acquire these
properties, both of these communities will be operated by Marriott Senior
Living Services under long-term operating agreements. If we decide not to
exercise our options to purchase either of the two properties, we may have to
pay a termination fee of $1 million for each property.

In 1999, we have added 211 units at four senior living communities at a cost
of approximately $19 million and we intend to add another 28 units in late 1999
for approximately $4 million. These additions will be the final phase of a
four-year $88 million expansion program that will have ultimately resulted in
the addition of 861 units to 21 of our senior living communities. The expansion
plan has been funded through a combination of operating cash flow and
contributions by Host Marriott.

During fiscal year 1998, we acquired additional limited partnership
interests at a cost of $10 million in Forum Retirement Partners, LP, a
partnership that owns nine senior living communities, increasing our ownership
percentage to 93%. In March 1999, we acquired the remaining limited partnership
interests for $6 million. Also, in the first quarter of 1998, we acquired the
remaining 41% interest in the partnership that owns the Remington Club II
senior living community for $3 million. The purchases of these minority
interests in 1998 were paid for by Host Marriott and treated as capital
contributions to us. As of the date hereof, wholly owned subsidiaries of ours
own all of our 31 senior living communities.

In the second quarter of 1999, we acquired a 74% limited partnership
interest in the Marriott Residence Inn USA Limited Partnership from a private
investor for $34.4 million in cash and the consolidation of $54.5 million of
debt for a total consideration of $89 million. In a separate transaction, we
purchased an additional 3% limited partnership interest in the partnership in
the second quarter of 1999 for $1.6 million in cash increasing our ownership to
a 77% limited partnership interest in the partnership. The partnership owns 11
Residence Inn properties managed by Marriott International. Host Marriott owns
a 5% general partner interest in the partnership.

Under the terms of our senior living communities' operating agreements, we
are generally required to contribute a specified amount of revenues to a
reserve account for furniture, fixtures, furnishings and equipment or FF&E
which is used to fund certain replacements and renewals to the senior living
communities' property and improvements. The amount we are required to
contribute to the FF&E reserves varies among the individual senior living
community operating agreements, but is generally 2.65% of revenues through
fiscal year 2002, 2.85% of revenues for fiscal years 2003 through 2007, and
3.5% of revenues thereafter. We anticipate contributing approximately $7
million in 1999 to the FF&E reserves. Also, under the senior living
communities' operating agreements we are required to fund separately the cost
of certain capital expenditures and replacements to the senior living
communities which are considered major or non-routine in nature.

As of March 26, 1999, we had cash and cash equivalents of $61 million and
restricted cash of $16 million, which is included in other assets on the
accompanying consolidated financial statements. Our restricted cash

29
<PAGE>

consists of funds transferred into segregated escrow accounts for (1) debt
service, fixed asset, real estate tax and insurance reserves pursuant to our
secured debt agreements for certain of the senior living communities, and (2)
fixed asset reserves established pursuant to our senior living communities'
operating agreements.

Our cash from operations was $20.8 million for the first quarter of 1999.
Cash used in investing activities was $20.9 million in the first quarter of
1999. The cash used in investing activities principally consists of capital
expenditures for renewals and replacements and expansions for our senior
living communities, as well as the purchase of the remaining limited
partnership interest in subsidiaries that own some of our senior living
communities. Cash used in financing activities was $5.9 million for the first
quarter of 1999. Our cash used in financing activities consists primarily of
debt principal repayments and repurchases of our common stock.

Cash from operations was $29 million for 1998 and $25 million for the
period from June 21, 1997 through January 2, 1998. Cash used in investing
activities was $30 million in 1998 and $33 million for the period June 21,
1997 through January 2, 1998. The cash used in investing activities
principally consists of capital expenditures for renewals and replacements and
expansions. Cash provided by financing activities was $50 million for 1998 and
$26 million for the period from June 21, 1997 through January 2, 1998. Our
cash from financing activities consists primarily of contributions from Host
Marriott and issuances of debt related mostly to the expansions, less debt
principal repayments.

In the first quarter of 1999, we announced a plan to repurchase up to 1.5
million shares of our common stock. Over an extended period of time, we intend
to purchase shares through open market or privately negotiated transactions at
prices deemed advantageous to us. These purchases will be subject to market
conditions, applicable legal requirements and other factors, however we have
no commitment or obligation to purchase any particular amount of common stock
and the stock repurchase program could be suspended at any time at our
discretion. Through June 11, 1999, we have purchased approximately 1,465,000
shares of common stock for a total purchase price of $22.1 million.

In addition, we commenced a voluntary program through which shareholders of
record as of March 4, 1999 holding fewer than 100 shares of our common stock,
may sell all of their shares to us. We repurchased approximately 181,000
shares for approximately $2.5 million in the second quarter of 1999.

During the first quarter of 1998, Host Marriott prepaid $26 million in
mortgage debt associated with our senior living communities. This payment was
treated as a capital contribution to us. In the second quarter of 1998, Host
Marriott prepaid $92 million of unsecured debt provided by Marriott
International. The $92 million unsecured note upon repayment by Host Marriott
became payable by us to Host Marriott. During the third quarter of 1998, Host
Marriott forgave the $92 million note as well as a $15 million note due to
Host Marriott, both of which were treated as a capital contribution to us. As
of March 26, 1999, we had $196 million of debt outstanding, excluding the
hotel working capital notes payable to Host Marriott of approximately $94
million and debt premiums of $16 million. Excluding these items, the weighted
average interest rate is 9.6% and the average maturity is thirteen years.
Except for debt incurred under our revolving credit facility which is
described in the next paragraph, as of March 26, 1999, all of our debt is
fixed rate.

On April 15, 1999, Crestline Ventures LLC, an indirect wholly owned
subsidiary of ours, entered into a secured, three-year $100 million revolving
credit facility. We intend to use this credit facility for funding future
investments in the lodging and senior living industries and for general
corporate purposes. The credit facility bears interest at a Eurodollar rate
plus 2.75%. Crestline Ventures will be charged an annual fee of .25% on the
unused portion of the commitment. The credit facility is secured by
substantially all of the assets of Crestline Ventures and its subsidiaries,
consisting of eight senior living communities. We are a guarantor on the
credit facility and so are some of our subsidiaries. In the second quarter of
1999, we made total draws of $20 million on the credit facility.

We expect to have sufficient cash flow from operations to meet our debt
obligations and expansion plans.

At March 26, 1999, our debt included the following: CCC Financing Limited,
L.P., a subsidiary of ours, owns nine senior living communities which are
subject to a mortgage pursuant to a loan agreement between

30
<PAGE>

CCC Financing Limited and Nomura Asset Capital Corporation. The original
principal amount of the loan was approximately $51 million and it matures in
January 2001. In January 2000, the loan may be prepaid without premium or
penalty. The loan bears interest at 9.93%. Consent of Nomura is necessary for
any (1) amendments to the management agreements, (2) replacement of the
manager, (3) sale of a community, (4) other financing or (5) transfer of
partnership interests in CCC Financing Limited. As of March 26, 1999, the
remaining balance of the loan, excluding debt premiums, was $45.3 million.

CCC Financing I Corporation and CCC Ohio Healthcare, Inc. are subsidiaries
of ours which own seven senior living communities and one senior living
community, respectively. Both CCC Financing I and CCC Ohio are subject to a
single loan agreement, dated September 1, 1995, with Nomura in the original
amount of $124.7 million. The loans are supported by two promissory notes for
the amount of $104.4 million and $20.3 million, which mature in September 2020
and September 2018, respectively. In September 2003, the loans may be prepaid
without premium or penalty. Beginning in September 2003, all excess cash flow
from the senior living communities must be applied to reduce the principal
balance of the loans. The loans bear interest at 10.008% through September 2003
and 5% plus the greater of 10.008% or a treasury rate thereafter. The loan
agreement contains cross-default provisions so that a default by one subsidiary
can result in acceleration of the entire amount of the indebtedness. Consent of
Nomura is necessary for any (1) amendments to the management agreements, (2)
replacement of the manager, (3) transfer of a senior living community which
secures the loan, (4) other financing, (5) changes to existing leases,
including ground leases or (6) transfers of CCC Financing I and CCC Ohio stock.
As of March 26, 1999, $120.5 million remains outstanding, excluding debt
premiums.

Our subsidiary Leisure Park Joint Venture Limited Partnership, owns one
senior living community. Leisure Park has outstanding $14.7 million in tax free
bonds held by outside bondholders. The Leisure Park bonds mature in December
2027 and bear interest at 5.875%. In connection with the spin-off distribution,
Host Marriott agreed to remain the guarantor of the Leisure Park bonds.

Hotel Working Capital Notes. Upon the commencement of the hotel leases, we
purchased the working capital of the hotels from Host Marriott with the
purchase price evidenced by notes that bear interest at 5.12%. We are required
to pay interest on each note simultaneously with the rent payment of each hotel
lease. We are required to pay the principal amount of each note upon the
termination of each hotel lease. Upon termination of the hotel lease, we will
sell Host Marriott the existing working capital at its current value and the
notes will be repaid with the proceeds. To the extent the working capital
delivered to Host Marriott is less than the value of the note, we will pay Host
Marriott the difference in cash. However, to the extent the working capital
delivered to Host Marriott exceeds the value of the note, Host Marriott will
pay us the difference in cash. As of March 26, 1999, $94.4 million remains
outstanding on the hotel working capital notes.

EBITDA

Our consolidated earnings before interest expense, taxes, depreciation,
amortization and other non-cash items ("EBITDA") on a historical basis was
$22.7 million for the first quarter of 1999, $14.4 million for the first
quarter of 1998, $55.0 million in fiscal year 1998 and $24.6 million for the
period from June 21, 1997 through January 2, 1998.

The following is a reconciliation of historical EBITDA to Crestline's net
income:

<TABLE>
<CAPTION>
Period from
First Quarter June 21, 1997
---------------- Fiscal through
1999 1998 Year 1998 January 2, 1998
------- ------- --------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
EBITDA........................... $22,722 $14,385 $ 55,002 $ 24,638
Interest expense................. (5,106) (6,519) (22,861) (13,396)
Hotel working capital note
interest expense................ 1,137 -- -- --
Depreciation and amortization.... (5,285) (4,793) (22,115) (10,635)
Income taxes..................... (5,488) (1,262) (4,111) (249)
Other non-cash charges, net...... (83) 5 -- --
------- ------- -------- --------
Net income....................... $ 7,897 $ 1,816 $ 5,915 $ 358
======= ======= ======== ========
</TABLE>

31
<PAGE>

Our interest coverage, defined as EBITDA divided by cash interest expense,
was 5.3 times for the first quarter of 1999, 2.1 times for the first quarter of
1998, 2.3 times for fiscal year 1998 and 1.7 times for the period from June 21,
1997 through January 2, 1998. Interest coverage is calculated as EBITDA divided
by cash interest expenses, which is defined as GAAP interest expense less
amortization of deferred financing costs and debt premiums and the interest on
the hotel working capital notes. The ratio of earnings to fixed charges was 1.1
to 1.0 for the first quarter of 1999, 1.5 to 1.0 for the first quarter of 1998,
1.4 to 1.0 for 1998 and 1.1 to 1.0 for the period from June 21, 1997 through
January 2, 1998.

Our pro forma EBITDA increased $3.6 million, or 16.0%, to $26.1 million in
the first quarter of 1999 as compared to the pro forma results for the first
quarter of 1998. Our pro forma EBITDA increased $8.6 million, or 9.4%, to
$100.1 million in fiscal year 1998 as compared to fiscal year 1997.

The following is a reconciliation of pro forma EBITDA to Crestline's pro
forma net income:

<TABLE>
<CAPTION>
First Quarter Fiscal Year
---------------- ------------------
1999 1998 1998 1997
------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
EBITDA.................................. $26,074 $22,477 $100,055 $ 91,488
Interest expense........................ (6,477) (6,822) (29,408) (29,367)
Hotel working capital note interest
expense................................ 1,137 1,122 4,864 4,864
Depreciation and amortization........... (6,100) (5,808) (26,426) (26,971)
Income taxes............................ (5,966) (4,405) (19,714) (15,996)
Other non-cash charges, net............. (83) (224) (1,000) (1,000)
------- ------- -------- --------
Net income.............................. $ 8,585 $ 6,340 $ 28,371 $ 23,018
======= ======= ======== ========
</TABLE>

Our pro forma interest coverage was 4.6 times for the first quarter of 1999
compared to 3.7 times for the first quarter of 1998. Our pro forma interest
coverage was 3.8 times for fiscal year 1998 compared to 3.6 times for fiscal
year 1997. The pro forma ratio of earnings to fixed charges was 1.1 to 1.0 for
the first quarter of 1999 and 1.1 for the first quarter of 1998. The pro forma
ratio of earnings to fixed charges was 1.1 to 1.0 for fiscal year 1998 and 1.1
to 1.0 for fiscal year 1997.

EBITDA data are presented because those data are used by certain investors
to determine our ability to meet debt service requirements. We consider EBITDA
to be an indicative measure of our operating performance due to the
significance of our long-lived assets and because EBITDA can be used to measure
our ability to service debt, fund capital expenditures and expand our 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 generally accepted accounting
principles. In addition, EBITDA as calculated by us 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.

Inflation

Our hotels and senior living communities are impacted by inflation through
its effect on increasing costs and on the managers' ability to increase rates.
We believe that, unlike other real estate, hotels have the ability to change
room rates on a daily basis, so the impact of higher inflation generally can be
passed on to customers. The rates charged for the delivery of services at our
senior living communities are highly dependent upon local market conditions and
the competitive environment in which the senior living communities operate.
Although resident agreements are generally for one year, and thus may enable us
to seek increases in monthly fees at the time of renewal in response to
inflation or other factors, any such increases would be subject to market and
competitive conditions.

32
<PAGE>

Year 2000 problem

The "Year 2000 Problem" has arisen because many existing computer programs
and chip-based embedded technology systems use only the last two digits to
refer to a year, and therefore do not properly recognize a year that begins
with "20" instead of the familiar "19". If not corrected, many computer
applications could fail or create erroneous results.

Our compliance program includes an assessment of our hardware and software
computer systems and embedded systems, as well as an assessment of the Year
2000 issues relating to third parties with whom we have a material relationship
or whose systems are material to the operations of our hotel or senior living
properties. Our efforts to ensure that our computer systems are Year 2000
compliant have been segregated into two separate phases: in-house systems and
third-party systems.

Third-Party Systems. We rely upon operational and accounting systems
provided by third parties, primarily the managers and operators of our hotel
and senior living properties, to provide the appropriate property-specific
operating systems (including reservation, phone, elevator, security, HVAC,
emergency call and other systems) and to provide us with financial information.
Based on discussions with the third parties that are critical to our business,
including the managers and operators of our hotels and senior living
properties, we believe that these parties are in the process of studying their
systems and the systems of their respective vendors and service providers and,
in many cases, have begun to implement changes, to ensure that they are Year
2000 compliant. To the extent these changes impact leased or subleased hotel
property-level systems, Host Marriott may be required to fund capital
expenditures for upgraded equipment and software. However, to the extent these
changes impact the owned hotel or senior living property-level systems, we may
be required to fund capital expenditures for upgraded equipment and software.
To the extent that these changes relate to a third party managers' centralized
systems (including reservations, accounting, purchasing, inventory, personnel
and other systems), our management agreements generally provide for these costs
to be charged to the properties subject to annual limitations which costs will
be borne by us. We expect that the third party managers will incur Year 2000
costs for our centralized systems in lieu of costs related to system projects
that otherwise would have been pursued and therefore our overall level of
centralized system charges allocated to the properties will not materially
increase as a result of the Year 2000 compliance effort. We believe that this
deferral of certain system projects will not have a material impact on our
respective future results of operations, although it may delay certain
productivity enhancements at our properties. We will continue to monitor the
efforts of these third parties to become Year 2000 compliant and will take
appropriate steps to address any non-compliance issues. We believe that in the
event of material Year 2000 non-compliance caused by a breach of the manager's
duties, we will have the right to seek recourse against the manager under our
third party management agreements. The management agreements, however,
generally do not specifically address the Year 2000 compliance issue.
Therefore, the amount of any recovery in the event of Year 2000 non-compliance
at a property, if any, is not determinable at this time.

We will work with the third parties to ensure that appropriate contingency
plans will be developed. In particular, we have had extensive discussions
regarding the Year 2000 problem with Marriott International, the manager of a
substantial majority of our owned, leased and subleased hotel properties and
all of our senior living communities. Due to the significance of Marriott
International to our business, based on the information from Marriott
International in those discussions, a detailed description of Marriott
International's state of readiness follows.

33
<PAGE>

Marriott International has adopted an eight-step process toward Year 2000
readiness, consisting of the following:

(1) Awareness: fostering understanding of, and commitment to, the problem
and its potential risks;

(2) Inventory: identifying and locating systems and technology components
that may be affected;

(3) Assessment: reviewing these components for Year 2000 compliance, and
assessing the scope of Year 2000 issues;

(4) Planning: defining the technical solutions and labor and work plans
necessary for each affected system;

(5) Remediation/Replacement: completing the programming to renovate or
replace the problem software or hardware;

(6) Testing and Compliance Validation: conducting testing, followed by
independent validation by a separate internal verification team;

(7) Implementation: placing the corrected systems and technology back into
the business environment; and

(8) Quality Assurance: utilizing an internal audit team to review and test
significant projects for adherence to quality standards and program
methodology.

Marriott International has grouped its systems and technology into three
categories for purposes of Year 2000 compliance:

(1) Information resource applications and technology ("IT Applications")--
enterprise-wide systems supported by Marriott International's
centralized information technology organization ("IR");

(2) Business-initiated systems ("BIS")--systems that have been initiated by
an individual business unit, and that are not supported by Marriott
International's IR organization; and

(3) Building Systems--non-IT equipment at properties that use embedded
computer chips, such as elevators, automated room key systems,
emergency call and HVAC equipment.

Marriott International is prioritizing its efforts based on how severe an
effect noncompliance would have on customer service, core business processes or
revenues, and whether there are viable, non-automated fallback procedures
("System Criticality").

Marriott International measures completion of each phase based on
documentation and quantified results weighted for System Criticality. The
following table reflects the status of Marriott International's Year 2000
readiness process at March 26, 1999.

34
<PAGE>

<TABLE>
<CAPTION>
Step IT Application BIS Building Systems
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Awareness Complete Complete Complete
- -----------------------------------------------------------------------------------------------
Inventory Complete Complete Complete
- -----------------------------------------------------------------------------------------------
Assessment Complete Substantially Substantially complete
complete
- -----------------------------------------------------------------------------------------------
Planning Complete Substantially Substantially complete
complete
- -----------------------------------------------------------------------------------------------
Remediation/ Over 95 percent Substantially Substantially complete;
Replacement complete complete critical systems
targeted for completion
by September 1999
- -----------------------------------------------------------------------------------------------
Testing and Compliance Testing over 95 Testing is in Initial testing is
Validation percent complete; progress.* Compliance approximately 80
Compliance Validation Validation is in percent complete*, for
completed for progress which less than 10
approximately 75 percent require further
percent of key remediation/replacement
systems, with most and re-testing.
remaining work in its Substantial completion
final stage for critical systems
targeted for September
1999; Compliance
Validation is in
progress.
- -----------------------------------------------------------------------------------------------
Implementation Approximately 80 Approximately 40 In progress
percent of percent complete: on
implementation track for completion
projects complete, by the end of the
with rollout to second quarter 1999
business locations
underway
- -----------------------------------------------------------------------------------------------
Quality Assurance In progress for In progress In progress
approximately 80
percent of IT
applications
</TABLE>
* Testing for third party BIS and Building Systems may consist of Marriott
International's receipt and evaluation of vendor compliance documentation and,
where appropriate, further verification by Marriott International of
compliance.

Marriott International's Year 2000 compliance communications with its
significant third party suppliers, vendors and business partners, including its
franchisees are ongoing. Marriott International is focusing its efforts on the
connections most critical to its customer service, core business processes and
revenues, including those third parties that support the most critical
enterprise-wide IT Applications, franchisees generating the most revenues,
suppliers of the most widely used Building Systems and BIS, the top 100
suppliers, by dollar value, of non-IT products, and financial institutions
providing the most critical payment processing functions. Responses have been
received from a majority of the firms in this group. A majority of these
respondents have either given assurances of timely Year 2000 compliance or have
identified the necessary actions to be taken by them or Marriott International
to achieve timely Year 2000 compliance for their products.

Marriott International is also establishing a common approach for testing
and addressing Year 2000 compliance issues for its managed and franchised
properties. This includes guidance for operated properties, and a Year 2000
"Toolkit" for franchisees containing relevant Year 2000 compliance information.
Marriott International is also utilizing a Year 2000 best-practices sharing
system.

We have also held discussions with each of our other hotel managers and
based on those discussions, we are not aware of any significant deficiencies
related to Year 2000 that would be material to us.

35
<PAGE>

Risks. We cannot assure you that Year 2000 remediation by us or third
parties will be properly and timely completed, and failure to do so could have
a material adverse effect on us, our business and our financial condition since
we are responsible for interfacing with third parties in addressing Year 2000
issues at the hotels leased or subleased by us and the senior living
communities owned by us. We cannot predict the actual effects to us of the Year
2000 problem, which depends on numerous uncertainties such as: (1) whether
significant third parties properly and timely address the Year 2000 issue; and
(2) whether broad-based or systemic economic failures may occur. We are also
unable to predict the severity and duration of any such failures, which could
include disruptions in passenger transportation or transportation systems
generally, loss of utility and/or telecommunications in financial transactions
or payment processing systems such as credit cards. Due to the general
uncertainty inherent in the Year 2000 problem and our responsibilities to Host
Marriott and dependence upon third parties, we are unable to determine at this
time whether the consequences of Year 2000 failure will have a material impact
on us. Although our efforts to coordinate with Host Marriott in implementing
their Year 2000 compliance programs are expected to significantly reduce the
level of uncertainty concerning Year 2000 issues and management believes that
the possibility of significant interruptions of normal operations should be
reduced, there is no assurance that this will be the case.

We estimate the capital expenditure costs to be incurred by us to be Year
2000 compliant will be less than $1 million, consisting primarily of
expenditures for our senior living communities.

Impact of financial accounting standards

During 1998, we adopted Statements of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in financial statements. The objective of SFAS No. 130 is to report a measure
of all changes in equity of an enterprise that result from transactions and
other economic events of the period other than transactions with owners.
Comprehensive income is the total of net income and all other nonowner charges
in equity. For all periods presented, we had no items of other comprehensive
income. Consequently, comprehensive income equals net income and we have no
accumulated other comprehensive income for all periods presented.

During 1998, we adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". The adoption of SFAS No. 131 did not have
a material effect on our consolidated financial statements for fiscal year 1998
and for the period from June 21, 1997 (inception) through January 2, 1998,
since we had only one operating segment, the senior living segment. For fiscal
year 1999, we expect to have two operating segments, the senior living and
hotel segments, and therefore will make the required disclosure of SFAS No. 131
in fiscal year 1999.

During 1998, we adopted SFAS No. 132, "Employer's Disclosure About Pensions
and Other Post-retirement Benefits". The adoption of SFAS No. 132 did not have
a material effect on our consolidated financial statements.

We will adopt SFAS No. 133, "Accounting For Derivatives Instruments and
Hedging Activities" in 1999 and do not expect it to have a material effect on
our consolidated financial statements.

On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB No. 94 and APB Opinion No. 16 to Physician Practice
Management Entities with Contractual Management Arrangements." EITF 97-2
addresses the circumstances in which a management entity may include the
revenues and expenses of a managed entity in its financial statements. We
determined that EITF 97-2 requires us to include property-level revenues and
operating expenses of our leased and subleased hotels and owned senior living
communities in our statements of operations. We adopted EITF 97-2 in the fourth
quarter of 1998, with retroactive effect in prior periods to conform to the new
presentation. The adoption of EITF 97-2 increased both revenues and operating
costs and

36
<PAGE>

expenses for fiscal year 1998 and the period from June 21, 1997 (inception)
through January 2, 1998 by $159.4 million and $74.1 million, respectively, and
had no impact on operating profit or net income.

Quantitative and Qualitative Disclosures About Market Risk

We do not have significant market risk with respect to interest rates,
foreign currency exchanges or other market rate or price risks, and we do not
hold any financial instruments for trading purposes. Money borrowed under our
credit facility bears interest at a Eurodollar rate plus 2.75%. As of the date
of this prospectus, we have made a $10 million draw on the credit facility. All
of our other debt is fixed rate.

In conjunction with the acquisition of the Forum Group on June 21, 1997, we
recorded the debt assumed at its fair value, which exceeded the face value by
approximately $19 million. We are amortizing this adjustment to interest
expense over the remaining life of the related debt. As of March 26, 1999, we
have $196 million of debt outstanding, excluding hotel working capital notes
payable to Host Marriott of approximately $94 million and debt premiums of $16
million. Excluding these items, the weighted average interest rate of our debt
is 9.6% and the average maturity is thirteen years.

37
<PAGE>

BUSINESS

General

We are engaged in the business of leasing, subleasing and owning hotels,
owning senior living communities and the asset management of hotels and senior
living communities. We are one of the largest leasing companies in the lodging
industry and currently lease 120 full-service hotels and sublease 71 limited-
service hotels from Host Marriott. Our leased and subleased hotels are operated
by third parties under long-term management agreements that were assigned to us
by Host Marriott for the term of the hotel leases. We also own a majority
interest in a partnership that owns eleven limited-service hotels, which are
also operated under long-term management agreements with Marriott
International. Marriott International is our most significant manager, managing
98 of our 120 full-service and all of our limited-service hotels. We are also
one of the largest owners of senior living communities and currently own 31
senior living communities with over 7,400 units located in 13 states. All of
our senior living communities are managed by Marriott International under long-
term operating agreements.

We were formed under the name CCC Merger Corporation, a Maryland
corporation, in November 1998 as a wholly owned subsidiary of Host Marriott
Corporation, then a Delaware corporation, in connection with Host Marriott's
efforts to convert its business operations to qualify as a REIT for federal
income tax purposes. CCC Merger Corporation was merged with Crestline Capital
Corporation, formerly known as HMC Senior Communities, Inc., a Delaware
corporation and wholly owned subsidiary of Host Marriott, pursuant to which CCC
Merger Corporation, as the surviving corporation, changed its name to Crestline
Capital Corporation. We became a publicly traded company on December 29, 1998
when Host Marriott completed its plan of reorganizing its business by spinning
off approximately 94% of our common stock to the shareholders of Host Marriott
as part of a series of transactions intended to permit Host Marriott to elect
to be considered a REIT. In connection with the spin-off distribution,
shareholders of Host Marriott received one share of our common stock for every
ten shares of Host Marriott stock. Because REITs are not permitted to derive
revenues directly from the operation of hotels, it became necessary for Host
Marriott to lease or sublease its hotels to an unrelated party. By completing
the spin-off distribution, we became the lessor or sublessor of substantially
all of Host Marriott's hotels.

Business

Lodging and asset management services. We lease 120 full-service hotels and
sublease 71 limited-service hotels from Host Marriott. We also own a
controlling interest in a partnership that owns 11 limited-service hotels. We
account for these properties as owned for accounting purposes. Our full-service
hotel portfolio is managed by Marriott International and other lodging managers
under, among others, the "Marriott", "Ritz-Carlton", "Four Seasons", "Hyatt"
and "Swissotel" brand names. Our limited-service hotels are managed by Marriott
International under the "Courtyard by Marriott" and "Residence Inn" brand
names. We also provide asset management services to Host Marriott for the
hotels that they own and have leased to us.

The full-service hotels that we lease are in the upscale and luxury segments
of the full-service sector of the lodging industry. Within the upscale and
luxury segment, our hotels have outperformed the other upscale and luxury full-
service hotels, which we refer to in the prospectus as our competitive set.
Based on data provided by Smith Travel Research, the upscale and luxury
segments achieved an average occupancy of 71.2% and a room revenue per
available room ("REVPAR") increase of 5.3% for 1998. This compares to our full-
service hotel lease portfolio which achieved an average occupancy of 77.5% and
a REVPAR increase of 7.5% in 1998. We believe this is due to the quality and
positioning of the hotel properties, as well as the strength of the brand names
and management companies in the portfolio.

We believe that potential competitors of ours face significant obstacles,
particularly in urban and airport locations, that have limited supply increases
in the upscale and luxury segments of the full-service industry sector to an
average of approximately 1% from 1993 through 1998. These obstacles have
included: (1) the

38
<PAGE>

affordability, availability and location of quality land; (2) the lead time for
the development of a comparable hotel which can now range from three to five
years or more from conception to completion of construction; (3) the limited
availability of financing for new hotel construction; and (4) the availability
for purchase of existing comparable hotels at prices that reflect a discount to
their replacement cost.

We do not believe, however, that the limited-service sector of the lodging
industry has the same new supply limitations that exist in the full-service
sector. For 1998, room supply within the moderate-price and extended-stay
segments of the limited-service industry sector exceeded room demand. We
believe that this trend will have an effect on the feasibility of additional
new limited-service construction starts. We also believe that the supply/demand
imbalances in specific markets may create acquisition and leasing opportunities
for us.

Under our hotel leases, we participate directly in the results of the
operations of the leased hotels; therefore, trends in the hotel industry are
likely to directly affect our economic performance. Under our leases, we are
obligated to pay to the lessor rent based upon the greater of a fixed dollar
amount of rent or fixed percentages of various categories of revenues derived
from the operation of the leased hotels. We in turn have contracted with a
third party manager to operate the hotels on our behalf. The third party
manager is typically, but not in all cases, Marriott International. Under these
management agreements, we typically pay the manager a base management fee equal
to a fixed percentage of hotel revenues, plus in many cases an incentive
management fee based upon the operating profit of the hotel above certain
specified levels. Under these management agreements, we receive all revenues
from the operations of the hotels, and we are typically responsible for all
expenses of operation of the hotels, including costs incurred by the managers.
Thus, we receive the operating profit from our leased and subleased hotels
after we pay the managers their management fees and the lessors their rent
(which is not based upon operating profit, but rather upon fixed percentages of
revenues). Therefore, we derive the benefit of and bear the risks associated
with the operating profits from the hotels. To the extent that operating
profits after the payment of management fees exceeds the rent due under the
leases, we will profit. The rate of profitability will increase to the extent
that operating profits grow faster than the rents payable under the leases.
Conversely, we will incur a loss to the extent that operating profit after
payment of management fees is less than the rent due under the leases. Our
profitability will decline to the extent that operating profits grow slower
than the rents payable under the leases. However, successful hotel performance
does allow the managers to share in the growth of the profits of the hotels in
the form of higher incentive management fees. In particular, Marriott
International receives approximately 50% of its management fee income from our
leased hotels in the form of incentive management fees. We view this as a
positive because it helps to strengthen the alignment of the managers'
interests with our interests. Our asset management team will continue to work
with the managers to improve the operating profit of the leased hotels to
attempt to increase operating profit for us.

Senior living. We own a portfolio of 31 senior living communities with over
7,400 units located in 13 states. We acquired these assets in 1997 and 1998.
They are managed by Marriott Senior Living Services, Inc., a subsidiary of
Marriott International, under long-term operating agreements. This portfolio is
positioned in the quality tier segment of the senior living industry which
focuses on the private pay customer who is targeted demographically as a senior
who is 75 years or older with annual income of $25,000 or greater. Our senior
living communities generally offer the residents the full continuum of care:
independent living; assisted living; special care centers; and healthcare
units. We believe that few competitors offer this continuum which allows
residents to age in place over time.

The senior living industry encompasses the independent living, assisted
living (including special care) and healthcare segments. In general, residents
in independent living units participate in a community's dining plan and other
social functions and may utilize other services such as housekeeping, laundry
or transportation. In general, these residents do not need assistance with
activities of daily living such as eating, bathing, grooming, dressing or
medicine reminders. Assisted living residents typically require some assistance
with some or all of these activities. Certain assisted living communities have
special care centers that provide personal assistance

39
<PAGE>

with Alzheimer's disease or other forms of dementia. Residents who develop
further physical or cognitive frailties that require more intensive medical
attention often reside in healthcare units. In general, there are few obstacles
for entry by potential competitors in the independent and assisted living
segments of the senior living industry.

Pursuant to the terms of a non-competition agreement entered into with
Marriott International in connection with our acquisition of Forum Group in
1997, as subsequently amended and restated in connection with the distribution
of our common stock by Host Marriott to its shareholders, we generally are
precluded from operating or managing (but not owning or leasing) senior living
communities until June 21, 2010.

Business strategy

Our primary business strategy is to take advantage of opportunities to
enhance the profitability of our three strategic business units: lodging;
senior living; and asset management.

Lodging. The United States lodging industry generally consists of two broad
sectors: full-service hotels and limited-service hotels. Full-service hotels
generally offer restaurant and lounge facilities and meeting spaces, as well as
a wide range of services, typically including bell service and room service.
Limited-service hotels generally offer accommodations with limited or no
services and amenities. Based on the number of hotels we lease or sublease from
Host Marriott, we are one of the largest leasing companies in the lodging
industry. We intend to expand our full-service hotel lease portfolio through
additional lease transactions with Host Marriott that may arise from Host
Marriott's growth through acquisition. Since 1994, Host Marriott has acquired
or purchased controlling interests in over 100 full-service hotels for an
aggregate price of over $6 billion. Host Marriott believes that its acquisition
opportunities remain significant with both Marriott and non-Marriott brand name
opportunities. Even so, we have no binding agreement with Host Marriott that
would require Host Marriott to lease to us any additional hotels that it
acquires in the future.

We may also pursue the acquisition and/or leasing of limited-service hotels
from Host Marriott and its affiliates, which currently hold interests in
partnerships owning 120 Courtyard by Marriott and 50 Residence Inn hotels. In
the second quarter of 1999, we acquired a 74% limited partnership interest in
the Marriott Residence Inn USA Limited Partnership from a private investor for
$34.4 million in cash and the consolidation of $54.5 million of debt for a
total consideration of $89 million. In a separate transaction, we purchased an
additional 3% limited partnership interest in the partnership in the second
quarter of 1999 for $1.6 million in cash increasing our ownership to a 77%
limited partnership interest in the partnership. The partnership owns 11
Residence Inn properties managed by Marriott International. Host Marriott owns
a 5% general partner interest in the partnership. We also expect to pursue the
acquisition and/or leasing of other limited-service hotels as the effects of
overbuilding in this sector may create opportunities in markets with strong
long-term fundamentals.

We also plan to seek strategic relationships with hotel REITs other than
Host Marriott, including Hospitality Properties Trust, the owner of the 71
limited-service hotels subleased from Host Marriott. Current federal income tax
law does not allow REITs to derive revenues directly from the operations of
hotels. As a result, hotel REITs generally enter into leases with lessees who
agree to pay a base rent plus a percentage rent based on increases in revenues
of a hotel. Therefore, we believe that there will be leasing opportunities with
some hotel REITs other than Host Marriott that have been unable to pursue
acquisition opportunities because certain hotel management companies have been
unwilling to enter into such leases. We intend to pursue these leasing
opportunities for both full-service and limited-service hotels.

In addition, many hotel REITs have established related-party hotel leasing
companies that are generally small and privately held. We believe that some of
these REITs, in an effort to reduce conflicts of interest, may seek to
establish independent leasing relationships which could create an opportunity
for us to act as a consolidator of these leasing companies.

40
<PAGE>

We also intend to explore the feasibility of other lodging-related business
opportunities, including managing hotels for third party hotel owners, after
October 8, 2000, when the restrictions under our hotel non-competition
agreement with Marriott International expire.

Senior living. With our portfolio of senior living communities, we were
ranked as the eighth largest owner of senior living communities by The American
Senior Housing Association in 1998. The portfolio encompasses the full
continuum of care by offering a combination of independent living, assisted
living, special care centers and healthcare accommodations, which make up 55%,
20%, 3% and 22%, respectively, of units in our senior living communities.
During 1998, the portfolio achieved an average occupancy of approximately 92.2%
and an average daily rate of over $88.

In 1999, we have added 211 units at four senior living communities at a cost
of approximately $19 million and we intend to add another 28 units to one
senior living community in late 1999 for approximately $4 million. These
additions will be the final phase of a four-year $88 million expansion program
that will have ultimately resulted in the addition of 861 units to 21 of our
senior living communities. Upon the completion of the expansion program, the
total number of units at our senior living communities is expected to be almost
7,500 units. Our objective in completing the expansion program has been to
further solidify the competitive position of our senior living communities
through the provision of a continuum of housing accommodations on one campus.
These expansions have typically involved the addition of assisted living units
to a community which offered only independent living units or to a community
which offered only independent living and healthcare units. We believe that our
portfolio will continue to enjoy a competitive advantage as the result of its
emphasis on the provision of multiple levels of care.

We expect to continue selectively and opportunistically pursuing the
acquisition of upscale senior living communities and to engage premier
operators to manage these communities. We expect to continue to pursue
primarily assets that offer at least two levels of care and which are located
in established neighborhoods where land for development is scarce and where
community groups and local authorities are less likely to encourage the
development of additional senior living communities.

As with hotels, REITs are not permitted to derive revenues directly from the
operation of senior living communities. Therefore, we will attempt to establish
lease relationships with REITs in the senior living market similar to our role
in the hotel market since the business fundamentals for establishing leasing
arrangements with senior living REITs are similar to those of hotel REITs. We
believe that there will be leasing opportunities with senior living REITs and
operators that will seek to align themselves with a company that understands
both the senior living and leasing business. Accordingly, we will seek to
establish relationships with such REITs and operators.

Asset management. In connection with our spin-off from Host Marriott, we
entered into contracts with Host Marriott and its affiliates for a term of two
years with a one-year automatic renewal to provide asset management services to
Host Marriott and its affiliates for its hotel portfolio. Our asset management
team, consisting of approximately 30 employees, has developed significant
expertise in enhancing the value of lodging and senior living real estate and
is experienced in managing one of the largest and highest quality hotel and
senior living community portfolios in the lodging and senior living industries.

The asset management function encompasses overseeing the life cycle of a
lodging property or senior living community. A key element to the function is
the development of a strategic plan and identifying specific objectives
designed to achieve that plan. Our asset management is responsible for
developing the strategic objectives for a property consistent with the owner's
goals and then performing activities which focus on the achievement of those
objectives. A strategic plan may differ from property to property; however, the
general objectives associated with the asset management function include:

. maximizing the cash return on investment through cost reduction and
revenue enhancement opportunities;

. enhancing, preserving and maximizing the long-term value and life of the
assets; and

. ensuring optimal positioning of each property.

41
<PAGE>

The asset management group functions as the intermediary between Host
Marriott, as owner, and us, as lessee, and the managers of the lodging
properties and senior living communities. The managers are typically
responsible for the day-to-day operations of the properties. The asset
management group oversees the managers' activities to ensure that the
objectives of the owner and the lessee receive the appropriate level of
priority and attention. The broad spectrum of services that our asset
management team performs includes, among others:

. monitoring property/brand performance;

. reviewing operating results, budgets and forecasts;

. reviewing, approving and overseeing capital expenditure projects;

. analyzing competitive supply conditions in each market;

. pursuing expansion and repositioning opportunities;

. assessing return on investment expenditure opportunities;

. addressing regulatory, property tax, lender and ground lessor issues;

. performing property inspections and ensuring that the property is
maintained; and

. performing due diligence in connection with an acquisition or
disposition;

We intend to utilize the asset management team's industry expertise to
expand our customer base to include new third-party asset management contracts
with entities such as hotel REITs, pension funds, life insurance companies,
opportunity funds and offshore owners. In addition, our asset management team
may expand the range of services we provide to include feasibility analyses,
valuations, acquisition/disposition due diligence and similar services. The
method of charging for these services will be determined on a case-by-case
basis. Potential alternatives include a fixed fee, a fixed fee coupled with a
performance or incentive fee, a fee based on hourly rates, or a fee determined
based on a percentage of revenues generated by a property. Even so, we do not
expect the asset management business to contribute a significant amount to our
operating results in the near future. We do not have employment agreements with
any of the employees in our asset management group.

Hotel lodging industry

The lodging industry posted strong gains in 1998 as higher average daily
rates drove strong increases in REVPAR. Over the last five years, the lodging
industry has benefited significantly from a favorable supply/demand imbalance,
driven in part by low construction levels combined with high gross domestic
product growth. Recently, however, supply has begun to moderately outpace
demand, causing slight declines in occupancy rates in the upscale and luxury
segments of the full-service sector in which we operate. According to Smith
Travel Research, supply in our competitive set increased 1.2% in 1998 while
demand in the competitive set decreased 0.2% for 1998. At the same time,
occupancy declined one percentage point in the competitive set compared to
1997.

These declines in occupancy, however, were more than offset by increases in
average daily rates which generated higher REVPAR. According to Smith Travel
Research, average daily rate and REVPAR for our competitive set increased 6.8%
and 5.3%, respectively, in 1998. The current amount of excess supply in the
lodging industry is relatively moderate and much less severe than that
experienced in the lodging industry beginning in 1989, in part because of the
greater financial discipline and lending practices imposed by financial
institutions and public markets today relative to those during the late 1980s.

Within the upscale and luxury segments, our leased hotels have outperformed
the overall full-service sector. The attractive locations of our hotels, the
limited availability of new building sites for new construction of competing
full-service hotels, and the lack of availability of financing for new full-
service hotels has allowed us to maintain REVPAR and average daily rate
premiums over the competitive set in these service segments.
Average daily rates for our leased full-service hotels increased 7.6% for 1998.
The increase in average daily rate helped generate a strong increase in full-
service hotel REVPAR of 7.5% in 1998.

42
<PAGE>

We believe that the current environment of excess supply will most likely
continue over the next twelve to eighteen months, although any excess supply is
expected to be moderate given the fact that demand is expected to grow at the
same 1% to 2% rate as projected GDP and new construction has been significantly
limited by capital constraints. Given the relatively long lead time to develop
urban, convention and resort hotels, we believe that growth in room supply in
upscale and luxury full-service segments in which we operate will remain
moderate through the year 2000. However, there can be no assurance that growth
in supply will remain moderate or that REVPAR and operating profits will
continue to improve.

Hotel properties

Our full-service hotel lease portfolio represents quality properties in the
upscale and luxury segments of the full-service industry sector. Our full-
service hotel properties are operated under, among others, the "Marriott",
"Ritz-Carlton", "Four Seasons", "Hyatt" and "Swissotel" brand names. In
addition, the limited-service hotels subleased from Host Marriott are operated
under the "Courtyard by Marriott" (moderate-price) and "Residence Inn"
(extended-stay) brand names. Our owned limited-service hotels are operated
under the "Residence Inn" brand name.

In the following tables we set forth information for the first quarters of
1999 and 1998 with respect to our owned, leased and subleased hotels:
<TABLE>
<CAPTION>
First Quarter 1999
----------------------------------------------------------
Number Number Hotel Average
of Hotels of Rooms Revenues Occupancy Daily Rate REVPAR(1)
--------- -------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leased and Subleased
Hotels
Full-service.......... 120 56,230 $836,049 78.1% $149.92 $117.06
Limited-service
(Moderate-price)..... 53 7,606 52,031 79.1% 92.42 73.08
Limited-service
(Extended-stay)...... 18 2,178 15,904 81.2% 100.77 81.84
--- ------ --------
191 66,014 903,984
Owned Hotels
Limited-service
(Extended-stay)...... 11 1,294 9,743 83.6% 95.40 79.80
--- ------ --------
202 67,308 $913,727
=== ====== ========
<CAPTION>
First Quarter 1998
----------------------------------------------------------
Number Number Hotel Average
of Hotels of Rooms Revenues Occupancy Daily Rate REVPAR(1)
--------- -------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leased and Subleased
Hotels
Full-service.......... 120 56,230 $798,594 77.1% $145.63 $112.27
Limited-service
(Moderate-price)..... 53 7,606 51,025 78.0% 91.83 71.58
Limited-service
(Extended-stay)...... 18 2,178 16,443 82.7% 103.29 85.42
--- ------ --------
191 66,014 866,062
Owned Hotels
Limited-service
(Extended-stay)...... 11 1,294 9,515 82.4% 96.52 79.51
--- ------ --------
202 67,308 $875,577
=== ====== ========
</TABLE>

43
<PAGE>

In the following tables we set forth information for fiscal years 1998 and
1997 with respect to the operations of our owned, leased and subleased hotels:

<TABLE>
<CAPTION>
Fiscal Year 1998
------------------------------------------------------------
Number Number Hotel Average
of Hotels of Rooms Revenues Occupancy Daily Rate REVPAR(1)
--------- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leased and Subleased
Hotels
Full-service.......... 120 56,230 $3,756,589 77.5% $143.59 $111.29
Limited-service
(Moderate-price)..... 53 7,606 224,727 80.5% 90.71 73.04
Limited-service
(Extended-stay)...... 18 2,178 71,775 84.1% 102.15 85.86
--- ------ ----------
191 66,014 4,053,091
Owned Hotels
Limited-service
(Extended-stay)...... 11 1,294 40,764 85.1% 96.87 82.48
--- ------ ----------
202 67,308 $4,093,855
=== ====== ==========
<CAPTION>
Fiscal Year 1997
------------------------------------------------------------
Number Number Hotel Average
of Hotels of Rooms Revenues Occupancy Daily Rate REVPAR(1)
--------- -------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Leased and Subleased
Hotels
Full-service.......... 120 56,230 $3,461,732 77.6% $133.39 $103.52
Limited-service
(Moderate-price)..... 53 7,606 211,889 81.1% 84.30 68.38
Limited-service
(Extended-stay)...... 18 2,178 69,720 83.3% 99.96 83.27
--- ------ ----------
191 66,014 3,743,341
Owned Hotels
Limited-service
(Extended-stay)...... 11 1,294 39,876 86.4% 93.15 80.51
--- ------ ----------
202 67,308 $3,783,217
=== ====== ==========
</TABLE>
- --------
(1) REVPAR measures daily room revenues generated on a per room basis. REVPAR
does not include food and beverage or other ancillary revenues generated by
the property. REVPAR represents the combination of the average daily room
rate charged and the average daily occupancy achieved.

Full-service. Our full-service hotels average nearly 500 rooms. Twelve of
our hotels have more than 750 rooms. Hotel properties typically include meeting
and banquet facilities, a variety of restaurants and lounges, swimming pools,
gift shops and parking facilities. Our full-service hotels primarily serve
business and pleasure travelers and group meetings at locations in downtown and
suburban areas, near airports and at resort convention locations throughout the
United States. The properties are generally well situated in locations where
there are significant obstacles for potential competitors, including downtown
areas of major metropolitan cities, at airports and at resort/convention
locations where there are limited or no development sites. Marriott
International or its affiliates serve as the manager for 98 of the 120 full-
service hotels we lease and all but twelve are part of Marriott International's
full-service hotel system.

In the chart below we set forth certain performance information for our 120
leased full-service hotels:

<TABLE>
<CAPTION>
First Quarter Fiscal Year
---------------- ----------------
1999 1998 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Number of properties........................ 120 120 120 120
Number of rooms............................. 56,230 56,230 56,230 56,230
Average daily rate.......................... $149.92 $145.63 $143.59 $133.39
Occupancy percentage........................ 78.1% 77.1% 77.5% 77.6%
REVPAR...................................... $117.06 $112.27 $111.29 $103.52
REVPAR % change............................. 4.3% -- 7.5% --
</TABLE>

44
<PAGE>

Revenues in 1998 for nearly all of the full-service hotels leased by us from
Host Marriott were improved or comparable to 1997. This improvement was
achieved through steady increases in customer demand, as well as yield
management techniques applied by the manager to maximize REVPAR on a property-
by-property basis. REVPAR for our full-service hotel properties increased 7.5%
for fiscal year 1998 as average room rates increased 7.6%, although average
occupancy decreased slightly. Overall, this resulted in strong revenue growth.
Revenues expanded at an 8.5% rate for the hotels and house profit margins
increased by almost one percentage point. "House profit" refers to property
level revenues minus property level expenses, such as salaries, and utilities,
but excluding real estate taxes, insurance, depreciation, lease expense and
management fees. In the first quarter of 1999, REVPAR increased 4.3% to $117.06
as average room rates increased 2.9% while average occupancy increased one
percentage point to 78.1%. We believe that the full-service hotels leased by us
from Host Marriott have outperformed the industry's average REVPAR growth
rates. The relatively high occupancy rates of the hotels allowed the managers
of the hotels to increase average room rates by selectively raising room rates.

We will continue to work with the hotel managers to focus on cost control in
an attempt to ensure that increases in hotel revenues serve to maximize house
and operating profit. While control of fixed costs serves to improve profit
margins as hotel revenues increase, it also results in more hotel properties
reaching financial performance levels that allow the managers to share in the
growth of profits in the form of incentive management fees. We believe this is
a positive development as it strengthens the alignment of our interests, as
lessee, and the managers' interests.

In the following table we present certain information for our full-service
hotels by geographic region for fiscal year 1998:
<TABLE>
<CAPTION>
Average
Number of Number of Average Average Daily
Geographic Region Hotels Guest Rooms Occupancy Rate REVPAR
----------------- --------- ----------- --------- ------------- -------
<S> <C> <C> <C> <C> <C>
Atlanta................... 11 486 72.2% $142.95 $103.19
Florida................... 12 504 78.6% 136.19 107.10
Mid-Atlantic.............. 17 364 76.2% 125.48 95.04
Midwest................... 15 365 75.0% 126.26 94.73
New York.................. 12 631 84.1% 188.60 158.67
Northeast................. 10 381 78.1% 136.20 106.36
South Central............. 18 497 77.0% 123.04 94.68
Western................... 25 514 77.2% 150.47 116.17
Average all regions....... 15 469 77.5% 143.59 111.29
</TABLE>

Limited-service--Courtyard by Marriott Hotels. Our subleased Courtyard by
Marriott hotels are moderate-priced, limited-service hotels aimed at individual
business and pleasure travelers, as well as families. Courtyard by Marriott
hotels typically have approximately 150 rooms at locations in suburban areas or
near airports throughout the United States. The Courtyard by Marriott hotels
include well-landscaped grounds, a courtyard with a pool and socializing areas.
Each of our Courtyard by Marriott hotel features meeting rooms and a restaurant
and lounge with approximately 80 seats.

In the table below we set forth comparable performance information for the
Courtyard by Marriott hotels subleased by us.

<TABLE>
<CAPTION>
First Quarter Fiscal Year
-------------- --------------
1999 1998 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of properties............................ 53 53 53 53
Number of rooms................................. 7,606 7,606 7,606 7,606
Average daily rate.............................. $92.42 $91.83 $90.71 $84.30
Occupancy percentage............................ 79.1% 78.0% 80.5% 81.1%
REVPAR.......................................... $73.08 $71.58 $73.04 $68.38
REVPAR % change................................. 2.1% -- 6.8% --
</TABLE>

45
<PAGE>

Our subleased Courtyard by Marriott hotels benefited in 1998 from REVPAR
growth of 6.8% due to increases in room rates of nearly 7.6%, although
occupancy decreased by over one half of a percentage point. Our Courtyard by
Marriott hotels were generally fully occupied during the business week and
enjoyed high occupancies during the weekends. Revenues in 1998 increased over
6% while house profit margins remained flat from the prior year. In the first
quarter of 1999, REVPAR increased 2.1% to $73.08 due to an increase in average
room rates of .6% and an increase in average occupancy of over one percentage
point to 79.1%.

In the following table, we present information for our subleased Courtyard
by Marriott properties by geographic region for fiscal year 1998:

<TABLE>
<CAPTION>
Average
Number of Number of Average Average
Geographic Region Hotels Guest Rooms Occupancy Daily Rate REVPAR
----------------- --------- ----------- --------- ---------- ------
<S> <C> <C> <C> <C> <C>
Southeast..................... 9 143 79.1% $80.41 $63.57
Mid-Atlantic.................. 11 144 80.7% 93.98 75.39
Mid-west...................... 6 142 79.0% 81.19 64.11
Northeast..................... 15 142 81.4% 96.74 78.74
South Central................. 3 153 76.3% 79.94 60.98
Western....................... 9 144 82.8% 97.06 80.35
Average all regions........... 9 144 80.5% 90.71 73.04
</TABLE>

Limited-service--Residence Inns. Our owned and subleased Residence Inns are
extended-stay, limited-service hotels which cater primarily to business and
family travelers who stay more than five consecutive nights. Residence Inns
typically have 80 to 130 studio and two-story penthouse suites. Residence Inns
generally are located in suburban settings throughout the United States and
feature a series of residential style buildings with landscaped walkways,
courtyards and recreational areas. Residence Inns do not have restaurants, but
offer complimentary continental breakfast. In addition, most Residence Inns
provide a complimentary evening hospitality hour. Each suite contains a fully
equipped kitchen, and many suites have woodburning fireplaces.

In the table below, we set forth information for the Residence Inns
subleased by us from Host Marriott:

<TABLE>
<CAPTION>
First Quarter Fiscal Year
----------------- ---------------
1999 1998 1998 1997
------- ------- ------- ------
<S> <C> <C> <C> <C>
Number of properties........................ 18 18 18 18
Number of rooms............................. 2,178 2,178 2,178 2,178
Average daily rate.......................... $100.77 $103.29 $102.15 $99.96
Occupancy percentage........................ 81.2% 82.7% 84.1% 83.3%
REVPAR...................................... $ 81.84 85.42 $ 85.86 $83.27
REVPAR % change............................. (4.2)% -- 3.1% --
</TABLE>

For 1998, REVPAR increased 3.1% for our subleased Residence Inns, due to an
increase in room rates of 2.2% and an increase in occupancy of almost one
percentage point. At an average occupancy rate of 84.1% for 1998, these
properties were near full occupancy during the business week and enjoyed high
occupancies during the weekends. Revenues in 1998 increased almost 3% and
house profit remained relatively flat, which resulted in a two percentage
point decrease in the house profit margin from the prior year reflecting the
additional supply that has entered the market. REVPAR in the first quarter of
1999 for our subleased Residence Inns decreased 4.2% to $81.84 due to a
decrease in average room rates of 2.4% and a decrease in average occupancy of
one and one-half percentage points to 81.2% again reflecting the increased
competition in the extended-stay sector.

46
<PAGE>

In the following table, we present certain information for our subleased
Residence Inns by geographic region for fiscal year 1998:

<TABLE>
<CAPTION>
Average
Number of Number of Average Average
Geographic Region Hotels Guest Rooms Occupancy Daily Rate REVPAR
----------------- --------- ----------- --------- ---------- ------
<S> <C> <C> <C> <C> <C>
Southeast..................... 2 107 80.4% $ 93.80 $75.43
Mid-Atlantic.................. 2 112 81.6% 97.76 79.75
Midwest....................... 3 153 84.0% 118.30 99.36
Northeast..................... 3 110 88.1% 99.11 87.32
South Central................. 3 119 85.3% 89.21 76.13
Western....................... 5 119 83.2% 103.99 86.48
Average all regions........... 3 121 84.1% 102.15 85.86
</TABLE>

In the table below, we set forth information for the Residence Inns owned by
us:

<TABLE>
<CAPTION>
First Quarter Fiscal Year
-------------- --------------
1999 1999 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Number of properties............................ 11 11 11 11
Number of rooms................................. 1,294 1,294 1,294 1,294
Average daily rate.............................. $95.40 $96.52 $96.87 $93.15
Occupancy percentage............................ 83.6% 82.4% 85.1% 86.4%
REVPAR.......................................... $79.80 $79.51 $82.48 $80.51
REVPAR % change................................. 0.4% -- 2.4% --
</TABLE>

For 1998, REVPAR increased 2.4% for our owned Residence Inns, due to an
increase in room rates of 4.0%, while average occupancy decreased over one
percentage point to 85.1%. In the first quarter of 1999, REVPAR for the owned
Residence Inns experienced a slight increase of .4% to $79.80. The increase in
REVPAR is due to an increase in average occupancy of over one percentage point
to 83.6%, while the average rate decreased 1.2% due to competitive pressures in
the extended-stay segment.

Our hotel properties

In the following table we set forth, as of the date of this prospectus, the
location and number of rooms relating to each of the hotels we own, lease or
sublease. All of our full-service hotel properties are operated under either
"Marriott" or "Ritz-Carlton" brand names by Marriott International, unless
otherwise indicated. All of the limited-service hotel properties are operated
under either the "Courtyard by Marriott" or "Residence Inn" brand names by
Marriott International.

<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
Leased Full-Service:
Alabama
Grand Hotel Resort and Golf Club........................................ 306
Arizona
Mountain Shadows Resort................................................. 337
Scottsdale Suites....................................................... 251
The Ritz-Carlton, Phoenix(1)............................................ 281
California
Coronado Island Resort.................................................. 300
Cost Mesa Suites........................................................ 253
Desert Springs Resort and Spa........................................... 884
</TABLE>

47
<PAGE>

<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
Fullerton............................................................... 224
Hyatt Regency, Burlingame(3)............................................ 793
Manhattan Beach(2)...................................................... 380
Marina Beach............................................................ 368
Newport Beach........................................................... 570
Newport Beach Suites.................................................... 250
Ontario Airport(2)...................................................... 299
San Diego Marriott Hotel and Marina..................................... 1,355
San Francisco Airport................................................... 684
San Francisco Fisherman's Wharf(2)...................................... 285
San Francisco........................................................... 1,498
San Ramon............................................................... 368
Santa Clara............................................................. 754
The Ritz-Carlton, Marina del Rey(1)..................................... 306
The Ritz-Carlton, San Francisco(1)...................................... 336
Torrance................................................................ 487
Colorado
Denver Southeast........................................................ 595
Denver Tech Center...................................................... 625
Denver West............................................................. 307
Vail Mountain Resort.................................................... 349
Connecticut
Hartford/Farmington..................................................... 380
Hartford/Rocky Hill..................................................... 251
Florida
Biscayne Bay Hotel and Marina........................................... 605
Fort Lauderdale Marina.................................................. 580
Jacksonville(2)......................................................... 256
Miami Airport........................................................... 782
Orlando World Center.................................................... 1,503
Palm Beach Gardens(2)................................................... 279
Singer Island (Holiday Inn)(3).......................................... 222
Tampa Airport........................................................... 295
Tampa Westshore......................................................... 309
The Ritz-Carlton, Amelia Island(1)...................................... 449
The Ritz-Carlton, Naples(1)............................................. 463
Georgia
Atlanta Marriott Marquis................................................ 1,671
Atlanta Midtown Suites.................................................. 254
Atlanta Norcross........................................................ 222
Atlanta Northwest....................................................... 400
Atlanta Perimeter Center................................................ 400
Grand Hyatt, Atlanta(3)................................................. 439
JW Marriott at Lenox.................................................... 371
The Four Seasons, Atlanta(3)............................................ 246
The Ritz-Carlton, Atlanta(1)............................................ 447
The Ritz-Carlton, Buckhead(1)........................................... 553
Swissotel, Atlanta(3)................................................... 348
</TABLE>

48
<PAGE>

<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
Illinois
Chicago/Deerfield Suites................................................ 248
Chicago/Downers Grove Suites............................................ 254
Chicago/Downtown Courtyard.............................................. 334
Chicago O'Hare.......................................................... 681
Chicago O'Hare Suites................................................... 256
Swissotel, Chicago(3)................................................... 630
Indiana
South Bend.............................................................. 300
Louisiana
New Orleans............................................................. 1,290
Maryland
Bethesda................................................................ 407
Gaithersburg/Washingtonian Center....................................... 284
Massachusetts
Boston/Newton........................................................... 430
Hyatt Regency, Cambridge(3)............................................. 469
Swissotel, Boston(3).................................................... 498
The Ritz-Carlton, Boston(1)............................................. 275
Michigan
Detroit Livonia......................................................... 224
Detroit Romulus......................................................... 245
Detroit Southfield...................................................... 226
The Ritz-Carlton, Dearborn(1)........................................... 308
Minnesota
Minneapolis City Center................................................. 583
Missouri
Kansas City Airport..................................................... 382
New Hampshire
Nashua.................................................................. 251
New Jersey
Hanover................................................................. 353
Newark Airport.......................................................... 590
Park Ridge.............................................................. 289
Saddle Brook............................................................ 222
New Mexico
Albuquerque............................................................. 411
New York
New York Marriott Financial Center...................................... 504
New York Marriott Marquis............................................... 1,911
New York World Trade Center............................................. 820
The Drake (Swissotel), New York(3)...................................... 494
North Carolina
Charlotte Executive Park(2)............................................. 298
Greensboro-High Point Airport........................................... 299
Raleigh Crabtree Valley................................................. 375
Research Triangle Park.................................................. 224
Ohio
Dayton.................................................................. 399
</TABLE>

49
<PAGE>

<TABLE>
<CAPTION>
Location Rooms
- -------- ------
<S> <C>
Oklahoma
Oklahoma City.......................................................... 354
Oklahoma City Waterford(2)............................................. 197
Oregon
Portland............................................................... 503
Pennsylvania
The Four Seasons, Philadelphia(3)...................................... 365
Philadelphia........................................................... 1,200
Philadelphia Airport................................................... 419
Pittsburgh City Center(2).............................................. 400
Tennessee
Memphis................................................................ 404
Texas
Dallas/Fort Worth...................................................... 492
Dallas Quorum.......................................................... 547
El Paso................................................................ 296
Houston Airport........................................................ 566
Houston Medical Center................................................. 386
JW Marriott Houston.................................................... 503
Plaza San Antonio(2)................................................... 252
San Antonio Rivercenter................................................ 999
San Antonio Riverwalk.................................................. 500
Utah
Salt Lake City......................................................... 510
Virginia
Fairview Park.......................................................... 395
Hyatt Regency, Reston(3)............................................... 514
Key Bridge............................................................. 588
Norfolk Waterside(2)................................................... 404
Pentagon City Residence Inn............................................ 300
The Ritz-Carlton, Tysons Corner(1)..................................... 397
Washington Dulles Airport.............................................. 370
Washington Dulles Suites............................................... 254
Westfields............................................................. 335
Williamsburg........................................................... 295
Washington
Seattle SeaTac Airport................................................. 459
Washington, D.C.
Washington Metro Center................................................ 456
Canada
Calgary................................................................ 380
Toronto Airport........................................................ 423
Toronto Eaton Centre................................................... 459
Toronto Delta Meadowvale(3)............................................ 374
------
Total.................................................................... 56,230
======
</TABLE>

50
<PAGE>

<TABLE>
<CAPTION>
Location Rooms
- -------- -----

<S> <C>
Subleased Limited-service--Courtyard by Marriott

Arizona
Phoenix Camelback....................................................... 155
Scottsdale Mayo Clinic.................................................. 100
California
Camarillo............................................................... 130
Fountain Valley......................................................... 150
Los Angeles Airport..................................................... 146
Laguna Hills............................................................ 137
San Jose Airport........................................................ 151
Torrance South Bay...................................................... 151
Delaware
Wilmington/Newark....................................................... 152
Florida
Boca Raton.............................................................. 152
Jacksonville Mayo Clinic................................................ 146
Miami Lakes............................................................. 151
Georgia
Atlanta Airport North................................................... 152
Atlanta Cumberland...................................................... 182
Atlanta Jimmy Carter Blvd. ............................................. 121
Atlanta Midtown......................................................... 168
Macon................................................................... 108
Illinois
Chicago Arlington Heights North......................................... 152
Indiana
Indianapolis Carmel..................................................... 149
Iowa
Quad Cities............................................................. 113
Maryland
Columbia................................................................ 152
Greenbelt............................................................... 152
Massachusetts
Boston Danvers.......................................................... 121
Boston Foxborough....................................................... 149
Boston Lowell........................................................... 121
Boston Milford.......................................................... 151
Boston Norwood.......................................................... 148
Boston Stoughton........................................................ 152
Boston Woburn........................................................... 125
Michigan
Auburn Hills............................................................ 148
Minnesota
Eden Prairie............................................................ 149
Missouri
Kansas City Airport..................................................... 149
Kansas City South....................................................... 149
</TABLE>

51
<PAGE>

<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
New Jersey
Hanover................................................................. 149
Mahwah.................................................................. 146
Tinton Falls............................................................ 121
New York
Fishkill................................................................ 152
Syracuse................................................................ 149
North Carolina
Charlotte Research Park................................................. 152
Fayetteville............................................................ 108
Raleigh Durham Airport.................................................. 151
Pennsylvania
Philadelphia Airport.................................................... 152
Pittsburgh Airport...................................................... 148
Willow Grove............................................................ 149
Rhode Island
Newport................................................................. 148
South Carolina
Spartanburg............................................................. 113
Tennessee
Chattanooga............................................................. 114
Texas
Dallas Northpark........................................................ 160
Virginia
Arlington/Rosslyn....................................................... 162
Dulles Airport.......................................................... 149
Williamsburg............................................................ 151
Washington
Bellevue................................................................ 152
Wisconsin
Brookfield.............................................................. 148
-----
Total..................................................................... 7,606
=====

Subleased Limited-service--Residence Inns

Arizona
Flagstaff............................................................... 102
Scottsdale.............................................................. 122
Tempe................................................................... 126
California
Fountain Valley......................................................... 122
Rancho Bernardo......................................................... 123
Georgia
Atlanta Alpharetta...................................................... 103
Illinois
Chicago Downtown........................................................ 221
Maryland
Annapolis............................................................... 102
Massachusetts
Westborough............................................................. 109
</TABLE>

52
<PAGE>

<TABLE>
<CAPTION>
Location Rooms
- -------- -----
<S> <C>
Michigan
Warren.................................................................. 133
New Mexico
Albuquerque............................................................. 112
New York
Syracuse................................................................ 102
North Carolina
Durham.................................................................. 122
Ohio
Columbus Dublin......................................................... 106
Pennsylvania
Willow Grove............................................................ 118
Tennessee
Nashville Brentwood..................................................... 110
Texas
Dallas Northpark........................................................ 103
Dallas Market Center.................................................... 142
-----
Total..................................................................... 2,178
=====

Owned Limited-service--Residence Inns

Alabama
Montgomery(4)(5)........................................................ 94
California
Bakersfield(4)(5)....................................................... 114
Concord-Pleasant Hill(4)(5)............................................. 126
San Ramon(4)(5)......................................................... 106
Connecticut
Meriden(4)(5)(6)........................................................ 106
Georgia
Atlanta Airport-Haperville(4)(5)........................................ 126
Massachusetts
Boston Tewksbury(4)(5).................................................. 130
North Carolina
Raleigh(4)(5)........................................................... 144
Ohio
Cincinnati-Blue Ash(4)(5)............................................... 118
Texas
Dallas-Las Colinas(4)(5)................................................ 120
Houston-Clear Lake(4)(5)................................................ 110
-----
Total..................................................................... 1,294
=====
</TABLE>
- --------
(1) Property is operated as a Ritz-Carlton. The Ritz-Carlton Hotel Company,
L.L.C. manages the property and is wholly owned by Marriott International.
(2) Property is operated as a Marriott franchised property and is not managed
by Marriott International.
(3) Property is not operated under a Marriott brand name and is not managed by
Marriott International.
(4) Property is encumbered by secured debt.
(5) We acquired a 77% controlling interest in the partnership that owns the
hotel property. We account for these properties as owned for accounting
purposes.
(6) The land on which the hotel is built is leased by us under a long-term
ground lease agreement.

53
<PAGE>

Senior living industry

We believe that the senior living industry is supported by strong long-term
fundamentals. That is to say the aging of the American population should
increase demand for senior living housing and services across the full
continuum of care. The U.S. Bureau of Census estimates that the number of
seniors 85 years and older will increase by approximately 100% from 3.0 million
in 1990 to 6.0 million in 2010. The traditional alternative of family-based
care also is disappearing as the prevalence of dual income families and
increased geographic mobility has reduced the potential role of family
caregivers. In addition, the affordability of senior housing has improved as
seniors are becoming increasingly affluent with the number of wealthy senior
households (households over age 65 with net worth above $500,000) increasing at
a rate of 14% per annum from 1983 to 1992. Finally, a supply/demand imbalance
is being created as the supply of skilled nursing beds per thousand persons age
85 and older has declined from 690 per thousand in 1976 to an estimated 350 per
thousand in the year 2000.

We believe, however, that many senior living markets, and in particular the
assisted living markets, have become or are on the verge of becoming overbuilt.
The rapid development of assisted living may cause some supply/demand
imbalances which we believe could create acquisition and/or leasing
opportunities in markets that possess strong long-term fundamentals. However,
overbuilding in markets in which our assisted living components are located
could cause our assisted living components to experience decreased occupancy,
depressed operating margins and lower operating results.

Senior living communities

As of the date hereof, our senior living communities portfolio consists of
31 upscale properties with over 7,400 units. Our senior living communities
constitute high quality assets in the senior living industry and offer a
combination of independent living, assisted living, special care and healthcare
components that differ mostly by the level of senior care services provided.

Our senior living communities provide a residential atmosphere in a campus
environment that offer residents an array of services and accommodations with
amenities such as dining facilities, lounges, and game and craft rooms. The
residents are provided with meals, housekeeping, security and transportation
and each unit is equipped with a 24 hour emergency call system. Each resident
enters into a residency agreement that may be terminated by the resident on
short notice.

Approximately 55% of our senior living units constitute independent living
facilities. These units generally consist of large apartments or villas that
vary in size from studios to two-bedrooms which are designed to offer the
resident a residential and independent environment.

Approximately 20% of our senior living units constitute assisted living
facilities. These units offer the residents a smaller apartment designed to
provide a supportive environment that encourages independent living. In our
assisted living facilities we provide the residents with assistance with
activities of daily living such as eating, bathing, grooming, dressing or
medicine reminders.

Approximately 3% of our senior living units constitute special care center
facilities. These communities provide personal assistance with Alzheimer's
disease or other forms of dementia. We provide residents in our special care
centers with private rooms in a facility designed to meet the special needs of
Alzheimer's disease.

Approximately 22% of our senior living units constitute facilities offering
healthcare services. These communities are designed for residents who develop
further physical or cognitive frailties. Our healthcare facilities offer
residents private or semi-private rooms with a skilled nursing staff on-site.
Our healthcare beds are licensed by their respective states and are generally
operated as skilled nursing facilities. All of our healthcare facilities also
provide ancillary healthcare services such as physical, occupational and speech
and learning therapy at an additional cost to the residents.

54
<PAGE>

In most cases, each resident of the independent living component of a senior
living community is entitled to priority admission in the assisted living,
special care or healthcare component. The average age of the senior living
communities is 14 years.

<TABLE>
<CAPTION>
Period from June 21, 1997
Fiscal Year 1998 through January 2, 1998
(31 Properties) (30 Properties)
-------------------------- --------------------------
Average Average Average Average
Units Daily Rate Occupancy Units Daily Rate Occupancy
----- ---------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Independent living........ 4,012 $ 77.15 94.8% 3,855 $ 73.98 94.0%
Assisted living........... 1,430 83.86 87.1 1,393 80.53 87.2
Special care.............. 178 128.38 84.8 178 71.96 53.4
Healthcare................ 1,634 116.80 91.4 1,627 109.97 92.1
----- ------- ---- ----- ------- ----
Combined.................. 7,254 $ 88.44 92.2% 7,053 $ 83.88 91.7%
===== ======= ==== ===== ======= ====

<CAPTION>
First Quarter
-----------------------------------------------------
1999 1998
-------------------------- --------------------------
Average Average Average Average
Units Daily Rate Occupancy Units Daily Rate Occupancy
----- ---------- --------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Independent living........ 4,114 $ 81.07 93.7% 3,949 $ 77.61 94.1%
Assisted living........... 1,539 90.08 81.7 1,424 83.50 85.9
Special care.............. 178 124.12 86.4 178 120.35 77.4
Healthcare................ 1,634 118.98 89.9 1,627 113.24 92.6
----- ------- ---- ----- ------- ----
Combined.................. 7,465 $ 92.30 90.3% 7,178 $ 87.77 91.7%
===== ======= ==== ===== ======= ====
</TABLE>

During 1998, the average occupancy at our senior living communities was
approximately 92.2% and the average daily rate was $88.44. In the first quarter
of 1999, the average per diem increased 5.2% to $92.30, while average occupancy
decreased over one percentage point to 90.3% due mostly to the impact of the
fill-up period for the expansions added in late 1998 and early 1999. On a
comparable basis, excluding communities which added units during 1998 or 1999,
the average occupancy increased slightly to 91.7%.

We are an active owner of our senior living communities portfolio. We focus
on maximizing profitability throughout our portfolio. Our asset management
department works closely with Marriott International to identify and evaluate
opportunities to increase profitability by making selective investments where
favorable incremental returns are expected, including the expansion of certain
properties, or implementing new cost control programs. Aggregate completed
renovation expenditures for the senior living communities totaled approximately
$7 million in 1998 and $3 million for the period from June 21, 1997 through
January 2, 1998.

In the following table we set forth information, as of the date hereof,
relating to each of the senior living communities. We hold the fee interest in
each of the senior living communities, except as otherwise indicated. All of
the properties are operated by Marriott Senior Living Services, a subsidiary of
Marriott International.

<TABLE>
<CAPTION>
Location Units
-------- -----
<S> <C>
Arizona
The Forum at Desert Harbor(1).......................................... 290
The Forum at Pueblo Norte(3)........................................... 296
The Forum at Tucson(1)................................................. 327
California
The Remington Club I(3)................................................ 205
The Remington Club II(3)............................................... 200
</TABLE>

55
<PAGE>

<TABLE>
<CAPTION>
Location Units
-------- -----
<S> <C>
Delaware
Forwood Manor(3)....................................................... 243
Foulk Manor North(1)................................................... 159
Foulk Manor South(1)................................................... 108
Millcroft(1)........................................................... 198
Shipley Manor(1)....................................................... 159
Florida
Coral Oaks(3).......................................................... 317
The Forum at Deer Creek(1)............................................. 292
Fountainview(3)........................................................ 337
Park Summit(1)......................................................... 281
Springwood Court....................................................... 85
Tiffany House.......................................................... 109
Indiana
The Forum at the Crossing(3)........................................... 221
Kansas
The Forum at Overland Park(1).......................................... 205
Kentucky
The Forum at Brookside(1).............................................. 324
The Lafayette at Country Place(2)...................................... 149
The Lexington at Country Place(2)...................................... 133
Massachusetts
Gables at Winchester(3)................................................ 125
New Jersey
Leisure Park........................................................... 418
New Mexico
The Montebello on Academy(1)........................................... 209
Ohio
The Forum at Knightsbridge(1)(2)....................................... 315
South Carolina
Myrtle Beach Manor(1).................................................. 164
Texas
The Forum at Lincoln Heights(1)........................................ 241
The Forum at Memorial Woods(1)......................................... 427
The Montevista at Coronado(1).......................................... 251
The Forum at Park Lane(1).............................................. 317
The Forum at the Woodlands............................................. 356
-----
Total................................................................ 7,461
=====
</TABLE>
- --------
(1) Property is encumbered by secured debt.
(2) The land on which the community is built is leased by us under a long-term
ground lease agreement.
(3) Property is encumbered by our revolving credit facility entered into on
April 15, 1999.

In the first quarter of 1998, we entered into conditional purchase
agreements for two communities located in Colorado with Summit Companies of
Denver, Colorado. After the anticipated completion of construction in the
second quarter of 1999, we may acquire these two communities located in Denver
and Colorado Springs, Colorado, for approximately $35 million, if the
communities achieve certain operating performance criteria. Both communities
will be managed by Marriott Senior Living Services under long-term operating
agreements. If we decide not to exercise our options to purchase either of the
two properties, we may have to pay a termination fee of $1 million for each
property.

56
<PAGE>

Marketing

As of the date hereof, 108 of our 120 leased full-service hotels are managed
or franchised by Marriott International under the brand names "Marriott" or
"Ritz-Carlton" hotels. All 71 of our subleased Courtyard by Marriott and
Residence Inn hotels and our eleven owned Residence Inn hotels are also managed
by Marriott International. We believe that these Marriott International-managed
and franchised hotels will continue to enjoy competitive advantages arising
from their participation in the Marriott International hotel system. Marriott
International's nationwide marketing programs and reservation systems as well
as the advantage of the strong customer preference for "Marriott" brands should
also help these properties to maintain or increase their premium over
competitors in both occupancy and room rates. Repeat guest business in the
Marriott hotel system is enhanced by the Marriott Rewards program, which
expanded the previous Marriott Honored Guest Awards program. Marriott Rewards
membership includes more than 10 million members.

The Marriott reservation system provides Marriott reservation agents
complete descriptions of the rooms available for sale and up-to-date rate
information from the hotels. The reservation system also features connectivity
to airline reservation systems, providing travel agents with access to
available rooms inventory for all Marriott and Ritz-Carlton brand name hotels.
In addition, software at Marriott's centralized reservations centers enables
agents to immediately identify the nearest Marriott or Ritz-Carlton brand hotel
with available rooms when a caller's first choice is fully occupied.

Competition

Lodging. The lodging industry is generally highly competitive, but the
degree of competition varies from location to location and over time the
success of a hotel will be dependent, in large part, upon its ability to
compete in such areas as access, location, quality of accommodations, room
rates, structure, the quality and scope of food and beverage facilities and
other service amenities. Our leased hotels compete with several other major
lodging brands in each segment in which they operate. Competition in the
industry is based primarily on the level of service, quality of accommodations,
convenience of locations and room rates. Further, competing properties may be
built or existing projects enhanced. The lodging industry as a whole, including
our hotels, may be adversely affected in the future by factors which are beyond
our control, including (1) national and regional economic conditions, (2)
changes in travel patterns, (3) taxes and government regulations which could
influence or determine wages, prices, interest rates, construction procedures
and costs and (4) the availability of credit. Although the competitive position
of each of our hotel properties differs from market to market, we believe that
our leased properties will compare favorably to their competitive set in the
markets in which they operate on the basis of these factors. In the following
table we present key participants in segments of the lodging industry in which
we compete:

<TABLE>
<CAPTION>
Segment Representative Participants
------- ---------------------------
<C> <S>
Luxury Full-Service......... Ritz-Carlton; Four Seasons

Upscale Full-Service........ Marriott Hotels, Resorts and Suites; Crowne
Plaza; Doubletree; Hyatt; Hilton; Radisson;
Renaissance; Sheraton; Swissotel; Westin;
Wyndham

Moderate-priced............. Courtyard by Marriott; Hampton Inn and Suites;
Hilton Inn; Holiday Inn; Ramada Inn; Sheraton
Four Points; Wyndham Garden

Extended-stay............... Residence Inn; AmeriSuites; Hawthorne Suites;
Homewood Suites; Summerfield Suites
</TABLE>

Senior living. Our senior living communities compete with facilities of
varying similarity in the respective geographical market areas in which the
senior living communities are located. Competing facilities are generally
operated on a regional and local basis by religious groups and other nonprofit
organizations, as well as by public and private operators. There are a limited
number of operators on a national basis. The independent living components of
the senior living communities face competition from various types of
residential opportunities available to the elderly. However, the number of
communities that offer on-premises

57
<PAGE>

healthcare services is limited. The assisted living and healthcare components
of the senior living communities compete with other assisted living and
healthcare communities.

Significant competitive factors for attracting residents to the independent
living components of the senior living communities include price, physical
appearance and amenities and services offered. Additional competitive factors
for attracting residents to the assisted living and healthcare components of
the senior living communities include quality of care, reputation, physician
and nursing services available and family preferences. We believe that our
senior living communities rate high in each of these categories, except that
our senior living communities are generally more expensive than competing
communities.

Some of our present and potential competitors are significantly larger than
we are and have, or may obtain, greater financial resources than we possess or
may acquire in the future. Consequently, we cannot assure you that we will not
encounter increased competition that could limit our ability to attract
residents or expand our senior living care business in the future. We believe
that many assisted living markets have become or are on the verge of becoming
overbuilt. Approximately 20% of our senior living units are assisted living
units. Overbuilding in the assisted living market could cause our assisted
living units to experience decreased occupancy, depressed margins and lower
operating results.

Other investments

In connection with our spin-off from Host Marriott, we acquired a 25%
interest in Swissotel Management (USA) LLC, a management company that manages
five hotels in the United States, from Host Marriott for $4.5 million. Also, in
connection with the spin-off, we acquired a 5% interest in a joint venture with
Host Marriott that owns a $129 million first mortgage secured by eight hotel
properties owned by Host Marriott for $6.4 million. We also own a 3% general
partner interest in a partnership which owns one senior living community.

Relationship with Host Marriott

Hotel leases. In connection with our spin-off from Host Marriott, our
wholly-owned subsidiaries entered into leases with Host Marriott on December
31, 1998 for 121 full-service hotels. In the first quarter of 1999, Host
Marriott sold one of the leased full-service hotels, and Host Marriott and we
agreed to terminate the lease reducing the number of hotels leased from Host
Marriott to 120 full-service hotels. Each hotel lease has a fixed term
generally ranging from seven to ten years. We are required to pay the greater
of (1) a minimum rent specified in each hotel lease, or (2) a percentage rent
based upon a specified percentage of aggregate revenues from the hotel,
including room revenues, food and beverage revenues, and other revenues, in
excess of specified thresholds. The amount of minimum rent will be increased
each year based upon any increases in the consumer price index during the
previous twelve months. Percentage rent thresholds will be increased each year
based on a blend of any increases in CPI and the Employment Cost Index during
the previous twelve months. The hotel leases will generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures.

We are responsible for paying substantially all of the expenses of operating
the hotels, including all personnel costs, utility costs, and general repair
and maintenance of the hotels. In addition, we are responsible for all fees
payable to the hotel manager, including base and incentive management fees,
chain services payments and franchise or system fees. Host Marriott is
responsible for paying real estate and personal property taxes, property
casualty insurance, ground lease rent, maintaining a reserve fund for FF&E
replacements and capital expenditures.

In the event that Host Marriott wishes to dispose of a hotel free and clear
of the hotel lease, Host Marriott may terminate the lease but it would have to
pay us a termination fee equal to the fair market value of our leasehold
interest in the remaining term of the hotel lease using a discount rate of 12%.
Alternatively, Host Marriott would be entitled to (1) substitute a comparable
hotel for any hotel that is sold, with the terms of the lease agreed to by us,
or (2) sell the hotel subject to the hotel lease, subject to our approval under
certain

58
<PAGE>

circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve leases without having to
pay a termination fee. Conversely, we may terminate up to twelve full-service
leases without penalty upon 180 days notice to Host Marriott.

In the event that changes in the federal income tax laws allow Host Marriott
or its subsidiaries to directly operate the hotels without jeopardizing its
REIT status, Host Marriott may terminate all of the hotel leases upon payment
of the termination fee. The payment of the termination fee will be payable in
cash or, subject to certain conditions, shares of Host Marriott common stock at
the election of Host Marriott.

If a hotel is partially or totally destroyed and is no longer suitable for
use as a hotel, the hotel lease of such hotel will automatically terminate. The
insurance proceeds shall be retained by Host Marriott, except to the extent of
any personal property owned by the us and proceeds from business interruption
insurance. In this event, no termination fee shall be owed to us. If a hotel is
partially destroyed but is still suitable for use as a hotel, and if Host
Marriott agrees to release the insurance proceeds and to fund any shortfall in
the insurance proceeds, we will apply the insurance proceeds to restore the
hotel to its preexisting condition. If Host Marriott elects not to fund such
shortfall, we may terminate the hotel lease and Host Marriott will pay us a
termination fee equal to our operating profit for the immediately preceding
fiscal year.

A hotel lease may be terminated without penalty by Host Marriott upon the
occurrence of events of default, including among other things: (1) our failure
to pay rent within ten days after the due date; (2) our failure to properly
maintain the hotel; (3) acceleration of maturity of our indebtedness with a
principal amount in excess of $1,000,000; (4) our failure to maintain (a) a
minimum net worth at least equal to the maximum liability under the guaranty
agreements from time to time, less amounts held in cash collateral accounts,
and (b) debt service coverage ratio of at least 1.4 to 1.0; (5) the filing of
any petition for relief, bankruptcy or liquidation by or against us or our
subsidiary which is the lessee under the lease; (6) the occurrence of a change
of control of us or our subsidiary which is the lessee under the lease; (7) our
default in payment or performance of certain covenants under any other hotel
lease in the same pool of hotels; or (8) our default under the assignment of
the management agreement, the guarantees, the non-competition agreement or
certain other related agreements between us and Host Marriott.

Our rights under the hotel leases are subordinate to qualifying mortgage
debt and any refinancing thereof. A default under the loan documents may result
in the termination of the hotel lease by the lender. The lender will not be
required to provide a non-disturbance agreement to us. Host Marriott will be
obligated to compensate us if a hotel lease is terminated because of a non-
monetary default under the terms of a loan that occurs because of an action or
omission by Host Marriott or a monetary default where there is not an uncured
monetary event of default of ours. In addition, if any loan is not refinanced
in a timely manner, and the loan amortization schedule is converted to a cash
flow sweep structure, we have the right to terminate the hotel lease after a
twelve-month cure period and Host Marriott will owe a termination fee.

In connection with the hotel leases, we entered into guaranty and pooling
agreements with Host Marriott by which we and some of our subsidiaries
guarantee the hotel lease obligations. The hotel leases were placed into four
different pools. The parent subsidiary of each pool has an unlimited guarantee
obligation with respect to the hotel leases in its respective pool. However,
for each pool, the cumulative limit of the Crestline guaranty obligation will
be the greater of ten percent of the aggregate rent payable for the immediately
preceding fiscal year under all hotel leases in the pool or ten percent of the
aggregate rent payable under all hotel leases in the pool for 1999. In the
event that our obligation under a guaranty agreement for a pool is reduced to
zero, we can terminate our guaranty and pooling agreement for that pool and
Host Marriott can terminate the hotel leases in the pool without penalty.

Upon the commencement of the hotel leases, we purchased the working capital
of the hotels from Host Marriott for approximately $95 million with the
purchase price evidenced by notes that bear interest at 5.12%. Interest on each
note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, we will sell Host

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Marriott the existing working capital at its current value. To the extent the
working capital delivered to Host Marriott is less than the value of the note,
we will pay Host Marriott the difference in cash. However, to the extent the
working capital delivered to Host Marriott exceeds the value of the note, Host
Marriott will pay us the difference in cash.

FF&E leases. In connection with our spin-off from Host Marriott, if the
average tax basis of a hotel's FF&E and other personal property exceeded 15% of
the aggregate average tax basis of the hotel's real and personal property, some
of our subsidiaries and affiliates of Host Marriott entered into lease
agreements for the excess FF&E. The terms of the FF&E leases generally range
from two to three years and rent under the FF&E leases is a fixed amount. We
will have the option at the expiration of the FF&E lease term to either (1)
renew the FF&E leases for consecutive one year renewal terms at a fair market
rental rate, or (2) purchase the excess FF&E for a price equal to its fair
market value. If we do not exercise our right to purchase or the renewal
option, we are required to pay a termination fee equal to approximately one
month's rent.

We have the option to terminate any FF&E lease at any time and purchase the
excess FF&E by paying an amount equal to the greater of the fair market value
of the excess FF&E or the stipulated loss value as set forth in the FF&E lease.
Upon the exercise of such early termination option, affiliates of Host Marriott
will transfer the excess FF&E to us on an "as is, where is" basis.

In the event that any item of excess FF&E becomes lost, stolen, damaged or
destroyed for any reason whatsoever, we are obligated to either (1) replace
such equipment or (2) pay affiliates of Host Marriott the stipulated loss value
of such equipment. We are responsible for maintaining casualty insurance on the
excess FF&E during the lease term.

Host Marriott or its affiliates may terminate an FF&E lease, repossess the
excess FF&E and seek liquidated damages equal to the stipulated loss value of
the excess FF&E if, among other things, any of the following events of default
occur: (1) we fail to pay rent or any other amount payable under the FF&E lease
within ten days after the due date; (2) there is a filing of any petition for
relief, bankruptcy or liquidation by or against us or our subsidiary which is
the lessee under the FF&E lease; (3) an event of default occurs under the hotel
lease where the excess FF&E is located; (4) an event of default occurs under
any lease to which we are a party or a guarantor which results in the exercise
of possessory remedies or legal proceedings by us, provided that the aggregate
future payments under such lease exceed certain thresholds; (5) there is an
acceleration of maturity of any indebtedness of ours with a principal amount in
excess of certain thresholds; (6) we fail to maintain required insurance
coverages; or (7) we fail to perform the other covenants of the FF&E leases.

Our rights under the FF&E leases are subordinate to qualifying mortgage debt
on the applicable hotel and any refinancing thereof. A default under the
mortgage debt may result in a termination of the FF&E lease and a loss of our
right to possession of the excess FF&E.

Limited-service hotel subleases. Host Marriott leases 71 limited-service
hotels under the "Residence Inn" and "Courtyard by Marriott" brands from
Hospitality Properties Trust. These leases have initial terms expiring through
2012 for the Courtyard properties and 2010 for the Residence Inn properties,
and are renewable at the option of Host Marriott. In connection with our spin-
off from Host Marriott, subsidiaries of ours entered into sublease agreements
with Host Marriott for these limited-service hotels. The terms of the subleases
will expire simultaneously with the expiration of the initial term of these
leases. If Host Marriott elects to renew these leases, we can elect to also
renew the subleases for the corresponding renewal term.

Each sublease provides that generally all of the terms in the leases will
apply to the subleases. The leases require the lessee to pay rent equal to (1)
a fixed minimum rent, less the cost of any repairs, maintenance, renovations or
replacements of the hotel, (2) plus an additional rent based upon a specified
percentage of gross revenues to the extent they exceed gross revenues from a
base year. In addition, the leases require the lessee to pay all repair and
maintenance costs, impositions, utility charges, insurance premiums and all
fees payable under the hotel management agreements. Pursuant to the subleases,
our subsidiaries are required to pay rent to

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Host Marriott equal to the minimum rent due under the Hospitality Properties
Trust leases and an additional rent based on a percentage of revenues. To the
extent the reserves for FF&E replacements are insufficient to meet the hotel's
capital expenditure requirements, Hospitality Properties Trust is required to
fund the shortfall.

The rent payable under the subleases is guaranteed by us up to a maximum of
$30 million. Our wholly-owned subsidiaries that are party to the subleases were
capitalized with $30 million in notes from us payable upon demand.

In the event that changes in the federal income tax laws allow Host Marriott
or its subsidiaries to directly operate the hotels without jeopardizing its
REIT status, Host Marriott may terminate all of the subleases upon payment of
the termination fee equal to the fair market value of our leasehold interests
in the remaining term of the subleases using a discount rate of five percent.

The subleases may be terminated without penalty by the lessor if, among
other things, any of the following events of default occur: (1) we fail to pay
rent or any other amount payable under the lease when due and such failure
shall continue for ten days after notice thereof; (2) an event of default
occurs and is continuing under any other lease from Hospitality Properties
Trust; (3) there is a filing of any petition for relief, bankruptcy or
liquidation by the lessee; (4) an event of default by the lessee occurs under
the applicable management agreement and it continues beyond the expiration of
any applicable cure period.

Our rights under the subleases are subject and subordinate to mortgage debt.

For the purposes of governing certain of the ongoing relationships between
Host Marriott and us after our spin-off distribution and to provide mechanisms
for an orderly transition, we entered into various agreements with Host
Marriott in addition to the hotel leases, as described below.

Distribution agreement. We entered into a distribution agreement with Host
Marriott, which provides for, among other things:

. the spin-off distribution;

. the division between Host Marriott and us of certain assets and
liabilities;

. the contribution to us of Host Marriott's 3% general partnership
interest in a partnership, which owns a senior living community;

. the transfer to us of the 25% interest in Swissotel Management (USA)
LLC;

. a guarantee by Host Marriott on certain company debt obligations; and

. certain other agreements governing the relationship between Host
Marriott and us following the spin-off distribution.

We also granted Host Marriott a contingent right for a period of ten years
to purchase our interest in Swissotel Management (USA) LLC at fair market value
in the event the tax laws are changed so that Host Marriott could own such
interest without jeopardizing its status as a REIT.

Subject to certain exceptions, the distribution agreement also provides for,
among other things, the assumption of liabilities and cross-indemnities
designed to allocate to us, effective as of our spin-off from Host Marriott,
financial responsibilities for liabilities which were originally those of Host
Marriott and its subsidiaries arising out of, or in connection with, the
business of our senior living communities.

Asset management agreements. In connection with our spin-off from Host
Marriott, we entered into asset management agreements with Host Marriott and
its affiliates for a term of two years (with a one-year automatic renewal) to
provide asset management services to Host Marriott and its affiliates for its
hotel portfolio. We will be paid an aggregate annual fee of $4.5 million for
services rendered under these contracts. These services will include:

. monitoring property/brand performance;

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. pursuing expansion and repositioning opportunities;

. overseeing capital expenditure budgets and forecasts;

. assessing return on investment expenditure opportunities; and

. analyzing competitive supply conditions in each market.

Tax sharing agreement. We entered into a tax sharing agreement with Host
Marriott which defines each party's rights and obligations with respect to
deficiencies and refunds of federal, state and other income or franchise taxes
relating to our business for taxable years prior to the spin-off distribution
and with respect to certain of our tax attributes after the spin-off.
Generally, Host Marriott will be responsible for filing consolidated returns
and paying taxes for periods prior to the spin-off distribu
tion, and we will be
responsible for filing returns and paying taxes for subsequent periods.

Corporate transitional services agreement. We entered into a transitional
services agreement with Host Marriott, pursuant to which Host Marriott and we
will provide certain limited services to each other for a fee. Among other
things, Host Marriott will provide centralized administrative and computer
systems services to us for a period of time. Such services will be provided, as
needed, at cost (including a reasonable overhead allocation) on a time and
materials basis. The charges associated with such services are not expected to
be material.

Host Marriott non-competition agreement. We entered into a non-competition
agreement with Host Marriott that limits the respective parties' future
business opportunities. We are generally precluded until the earlier of
December 31, 2008 or the date when we no longer lease at least 25% of the
original hotels leased from Host Marriott at the time of the spin-off
dist
ribution, from owning or acquiring any full-service hotels not leased from
Host Marriott. We are also subject to restrictions relating to leasing,
operating and managing full-service hotels under our agreement with Host
Marriott.

Employee benefits and other employment matters allocation agreement. We
entered into an employee benefits agreement with Host Marriott which will
govern the allocation of responsibilities relating to various compensation,
benefits and labor matters.

Relationship with Marriott International

Marriott International and its wholly-owned subsidiary, Ritz-Carlton Hotel
Company, LLC, serve as the manager for 98 of our 120 full-service hotels and
all of our subleased and owned limited-service hotels. In connection with
entering into the hotel lease and subleases, we entered into agreements with
Host Marriott and Marriott International whereby the existing hotel management
agreements with Marriott International were assigned to us for the term of the
corresponding hotel lease
s or subleases. Ten of our remaining full-service
hotels are managed under franchise agreements with Marriott International. In
addition, Marriott International manages all 31 of our senior living
communities under long-term operating agreements.

Lessees and sublessees. Marriott International has a noneconomic membership
interest with certain limited voting rights in our subsidiaries that are
lessees under the leases or subleases for the hotels where it is the manager.
The operating agreements for such lessees provide that we have full control
over the management of the business of the lessee, except with respect to
certain decisions which will require the consent of both members. These
decisions include among other things: (1) dissolving, liquidating,
consolidating, merging, selling or leasing all or substantially all of the
assets of the lessee; (2) engaging in any other business or acquiring any
assets or incurring any liabilities not reasonably related to the conduct of
the lessee's business; or
(3) instituting voluntary bankruptcy or similar
proceedings or consenting to involuntary bankruptcy or similar proceedings.
Upon any termination of the applicable management agreement, these special
voting rights of Marriott International (or its subsidiary) will cease.

Full-service hotel management agreements. The managers have sole
responsibility and exclusive authority for all activities necessary for the
day-to-day operation of the hotels, including establishment of all

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room rates, the processing of reservations, procurement of inventories,
supplies and services, periodic inspection and consultation visits to the
hotels by the managers' technical and operational experts, and promotion and
publicity of the hotels. The manager will receive compensation from us in the
form of a base management fee and an incentive management fee, which are
normally calculated as percentages of revenues and operating profits,
respectively.

The managers generally provide all managerial and other employees for the
hotels; review the operation and maintenance of the hotels; prepare reports,
budgets and projections; provide other administrative and accounting support
services, such as planning and policy services, financial planning, divisional
financial services, risk planning services, product planning and development,
employee planning, corporate executive management, legislative and governmental
representation and certain in-house legal services; and protect the "Marriott"
trademark and other tradenames and service marks. The manager also will provide
a national reservations system.

We are responsible for providing funds to meet the cash needs for the
operations of the hotels if at any time the funds available from operations are
insufficient to meet the financial requirements of the hotels. Certain of the
hotel management agreements provide that if the management agreement is
terminated prior to its full term due to casualty, condemnation or the sale of
the hotel, the manager will receive a termination fee as specified in the
specific management agreement. Substantially all of the hotel management
agreements may be terminated based upon a failure to meet certain financial
performance criteria, subject to the manager's right to prevent such
termination by making certain payments to us based upon the shortfall in such
criteria.

Events of default under the hotel management agreements include, among
others, the following: (1) the failure of either party to make payments
pursuant to the management agreement within ten days after written notice of
such nonpayment has been made, (2) the failure of either party to perform, keep
or fulfill any material representation, warranty or covenant in the management
agreement, which failure shall not have been cured within 30 days after written
notice of the breach or default, unless the breach or default is not
attributable to a failure to pay any sums due under the agreement, is curable,
and the defaulting party proceeds diligently to cure such default, (3) if
either party files a voluntary petition in bankruptcy or insolvency or a
petition for reorganization under any bankruptcy law or admits that it is
unable to pay its debts as they become due, (4) if either party consents to an
involuntary petition in bankruptcy or fails to vacate, within 90 days from the
date of entry thereof, any order approving an involuntary petition by such
party; or (5) if an order, judgment or decree by any court of competent
jurisdiction, on the application of a creditor, adjudicating either party as
bankrupt or insolvent or approving a petition seeking reorganization or
appointing a receiver, trustee or liquidator of all or a substantial part of
such party's assets is entered, and such order, judgment or decree continues
unstayed and in effect for any period of 90 days.

The management agreements provide that if Host Marriott does not elect to
terminate the hotel lease upon a "change in control" as defined in the
management agreements, Marriott International may require Host Marriott to
exercise their termination rights if, as a result of such change in control, we
are in control of or controlled by persons who are convicted felons or who are
engaged in operating a branded hotel chain having 5,000 or more guest rooms in
competition with Marriott International (or affiliated with persons who are so
engaged).

Limited-service hotel management agreements for subleased hotels. We are
obligated to perform all of the obligations of Host Marriott under the
management agreement during the term of the lease, including the payment of
fees due under the management agreement, other than obligations including,
without limitation, payment of property taxes, property casualty insurance and
ground lease rent, maintaining a reserve fund for FF&E replacements, and
capital expenditures, for which the Host Marriott retains responsibility.
Although we have assumed certain obligations of Host Marriott under the
management agreements, Host Marriott has not been released from its obligations
and, if we fail to perform any such obligations, the manager will be entitled
to seek performance by or damages from Host Marriott. Our obligation to pay the
fees due under the

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management agreements, however, could adversely affect our ability to pay rent,
even though such amounts are otherwise due and owed to Host Marriott. Other
provisions of the management agreements for the limited-service hotels
subleased by us from Host Marriott are substantially the same as for the full-
service hotels.

Limited-service hotel management agreements for owned hotels. Our owned
limited-service hotels are also operated by Marriott International under the
"Residence Inn" brand name under a single long-term management agreement with
an initial term expiring December 30, 2011. Marriott International has the
option to extend the agreement on one or more of the hotels for up to five 10-
year terms. Marriott International earns a base management fee equal to 2% of
the hotel revenues, which is subordinate to qualifying debt service payments
and maintenance of certain minimum cash flows of the partnership that owns the
hotels. Marriott International is also entitled to an incentive management fee
equal to 20% of the hotel operating profits, in excess of an owner's priority.
The incentive management fee is payable out of 50% of cash from operations of
the partnership that owns the hotels remaining after the payment of debt
service and the maintenance of minimum cash flows of the partnership. The
management agreement also provides for a Residence Inn system fee equal to 4%
of room revenues. In addition, Marriott International is reimbursed for the
allocation of some of these costs and expenses incurred in providing certain
services know as chain services that are provided on a central or regional
basis to all Residence Inn hotels operated by Marriott International.

The management agreement requires the owner to maintain a property
improvement fund which require contributions equal to 5% of revenues.

Events of default under the management agreement include, among others, the
following: (1) the failure of either party to make payments pursuant to the
management agreement within ten days after written notice of such nonpayment
has been provided, (2) the failure of either party to perform, keep or fulfill
any material representation, warranty or covenant in the management agreement,
which failure shall not have been cured within 30 days after written notice of
the breach or default, unless the breach or default is not attributable to a
failure to pay any sums due under the agreement, is curable, and the defaulting
party proceeds diligently to cure such default, (3) the entry by a court of
competent jurisdiction of a final, non-appealable judgment finding the manager
liable for fraud, gross negligence or willful and wanton misconduct in its
dealings with us, (4) if either party applied for, consents to, or admits to
the material allegations of a petition in bankruptcy or insolvency, a petition
for reorganization, or an appointment of a receiver, and (5) if any court
enters a final order, judgment or decree against either party, without the
application, approval or consent of such party, that approves a petition
seeking reorganization, liquidation or similar relief, and such order continues
unstayed and in effect for 60 days.

If we receive and wish to accept a written bona fide offer to purchase or
lease any one or more of our owned Residence Inns, the manager may elect to (1)
purchase or lease the hotel or hotels at the same price or rental and upon the
same terms and conditions as that expressed in the offer, or (2) consent to the
sale or lease to the prospective purchaser and agree to enter into a new
management agreement with the purchaser or tenant. The new management agreement
would be on essentially the same terms and conditions as the management
agreement in effect between us and the manager, provided that the prospective
purchaser or tenant need not enter into a new management agreement if the
prospective purchaser or tenant (a) is a competitor of manager, (b) is of known
bad moral character, or (c) fails to maintain a financial condition adequate to
discharge its obligations under the management agreement. In the event that
fewer than all of the hotels are sold, the management fees under the current
management agreement will be recalculated with respect to the remaining hotels.

We may terminate the management agreement if the sum of the operating profit
for all of the hotels during any 2 consecutive fiscal years does not equal or
exceed stated goals set forth in the agreement. The manager may avoid
termination of the management agreement by advancing to us the amount of any
deficiency. The amount of any deficiency advanced by the manager may be
recovered, without interest, in subsequent fiscal years, in the same manner and
with the same priority it may receive as contingent management fees above its
base management fee based upon the performance of the hotels.

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Operating agreements for senior living communities. Under each of the
operating agreements, Marriott Senior Living Services provides complete
management services to us in connection with its management of such senior
living communities. Generally, each of the operating agreements has an initial
term of 30 years with one five-year renewal option. Marriott Senior Living
Services has the sole responsibility and exclusive authority for all activities
for the day-to-day operation and management of our senior living communities,
including obtaining all licenses necessary for the operation, establishing
resident care and healthcare policies and procedures, carrying out and
supervising all necessary repairs and maintenance, and establishing prices,
rates and charges for services provided. Marriott Senior Living Services
recruits, employs, supervises, directs and discharges all of the employees, and
provides all managerial and other employees for our senior living communities.
In addition, Marriott Senior Living Services has exclusive supervision and
control in all matters relating to the management and operation of our senior
living communities. In return for these services, Marriott Senior Living
Services receives compensation from us in the form of (1) a non-cumulative base
fee calculated as a percentage of revenue and (2) an incentive fee calculated
as 20% of operating profit in excess of the owner's priority.

We are required to maintain certain working capital for each of our senior
living communities, and from time to time advance, at the request of Marriott
Senior Living Services, any additional funds necessary to maintain working
capital at levels generally consistent with the Marriott Senior Living Services
community system standard.

Events of default under the operating agreements include, among others, the
following: (1) the failure of either party to make prompt payments pursuant to
the operating agreement, (2) if either party commences any proceeding under any
bankruptcy, reorganization, readjustment of debt, dissolution or liquidation
law or statute or an assignment for the benefit of creditors or application for
the appointment of a trustee or receiver for a substantial part of the assets,
(3) if either party consents to an involuntary petition in bankruptcy or fails
to vacate, within 90 days from the date of entry thereof, any order approving
an involuntary petition by such party; or (4) if an order, judgment or decree
by any court of competent jurisdiction, on the application of a creditor,
adjudicating either party as bankrupt or insolvent or approving a petition
seeking reorganization or appointing a receiver, trustee, or liquidator of all
or a substantial part of such party's assets is entered, and such order,
judgment or decree continues unstayed and in effect for any period of 90 days.

Upon the occurrence of an event of default, the non-defaulting party shall
have the right to terminate the operating agreement with 30 days' notice, if
such default is a material breach by the defaulting party of its obligations
under the operating agreement. Marriott Senior Living Services also is entitled
to terminate the operating agreement if we fail to approve certain repairs
which arise out of legal requirements.

Pooling agreements. Of our senior living communities, 29 are subject to
pooling agreements between us and Marriott Senior Living Services. The pooling
agreements aggregate our senior living communities into five distinct "pools".
For the limited purposes of calculating certain fees and exercising certain
termination and manager replacement rights under the operating and related
agreements, such fees and rights should be considered and determined in the
aggregate rather than on a community-by-community basis. Generally, the method
of selecting which of our senior living communities would go into which of the
five "pools" was based on whether the communities were encumbered by mortgage
indebtedness.

Non-competition agreement with Marriott International regarding the
hotels. We are bound by a non-competition agreement with Marriott International
pursuant to which we are generally prohibited prior to October 8, 2000, subject
to limited exceptions, from entering into or acquiring any business that
competes with the hotel management business (i.e., managing, operating or
franchising full-service and limited-service hotels) of Marriott International.
Certain activities are permitted, however, including: (1) the operation of an
unlimited number of limited-service hotel properties as long as we do not
operate more than ten such properties under a common name; (2) contracting with
a third party manager for operation of an unlimited number of limited-service
hotel properties, so long as the number of properties under such third party
management is not more

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than the greater of (a) ten such properties operated under a common name or (b)
25% of the system operated by such third party manager under a common name; (3)
contracting with a third party manager for operation for an unlimited number of
full-service hotels having the same brand name as one of Host Marriott's
hotels, so long as the number of properties under such third party management
is not more than the greater of (a) five such properties operated under a
common name or (b) 12.5% of the system operated by such third party under a
common name; and (iv) franchising of an unlimited number of limited-service
hotel properties so long as we are not franchisor for more than ten such
properties under a common name.

Non-competition agreement with Marriott International regarding our senior
living communities. We are bound by a non-competition agreement with Marriott
International relating to our senior living communities. This agreement, in
general, provides that we limit our activities in the senior living area to
owning, having equity interests in or lending money or otherwise financing
senior living communities. Under the agreement, we are prohibited, subject to
limited exceptions, from competing with Marriott International in the
continental United States by (1) financing, conducting, participating or
engaging in the business of operating, managing or franchising senior living
communities or (2) providing operational or managerial services relating
thereto with respect to health care, therapy, home health care, assisted
living, nursing and related medical, residential, supportive and personal care
services. In addition, we are prohibited from entering into a transaction or a
series of transactions whereby ten or more of our senior living communities or
a controlling interest therein would be transferred to another party unless
such party agreed to be bound by the non-competition agreement. We will be
bound by this non-competition agreement until June 17, 2010.

Staffing and labor costs

Marriott International and our other hotel managers compete with various
other lodging companies in attracting and retaining qualified and skilled
personnel to operate the hotels managed by them. Marriott International also
competes with various health care services providers, including other care
providers for the elderly, in attracting and retaining qualified personnel for
the senior living communities. A shortage of such personnel or general
inflationary pressure may require Marriott International or our other hotel
managers to enhance its wage and benefits package to compete effectively for
personnel necessary to operate the hotels and the senior living communities,
which could adversely affect our net income attributable to the hotels and the
senior living communities.

Regulation of the healthcare industry

Our senior living communities provide services which are part of the long-
term care segment of the healthcare industry. The healthcare industry is highly
regulated. Operators of skilled nursing facilities, including some of the
healthcare facilities operated as a part of our senior living communities, are
subject to federal, state and local laws relating to the delivery and adequacy
of medical care, fraud and abuse, distribution of pharmaceuticals, equipment,
personnel, operating policies, fire prevention, rate-setting and reimbursement,
and compliance with safety codes and environmental laws. Such facilities also
are subject to periodic inspection by governmental and other authorities to
assure continued compliance with various standards, the continued licensing of
the facility under state law, certification under the Medicare, Medicaid or
other federal healthcare programs and the ability to participate in other third
party payment programs. Many states have adopted Certificate of Need or similar
laws which generally require that the appropriate state agency approve certain
acquisitions of such facilities and reimbursement, and determine that need
exists for certain bed additions, new services and capital expenditures or
other changes prior to beds and/or new services being added or capital
expenditures being undertaken. The failure of an operator of a senior living
community to comply with applicable governmental or other regulatory
authorities' regulations and standards could result in our inability to obtain
or maintain any required regulatory approvals or licenses. Such inability on
our part could prevent us, through Marriott International or other operators,
from offering services or adversely affect our operator's, and hence our,
ability to receive reimbursement for services and could result in the denial of
reimbursement, temporary suspension of admission of new patients, suspension or
decertification from Medicaid, Medicare or other Federal Health Care Programs,
fines, restrictions on the ability to acquire new facilities or expand existing

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facilities and, in extreme cases, revocation of the facility's license or
closure of a facility. In 1998, Medicare/Medicaid reimbursements have accounted
for approximately 12% of our total senior living community revenues.

Our senior living communities also contain units offering assisted living
services. Although not currently regulated at the federal level (except under
laws of general applicability to businesses, such as work place safety and
income tax requirements), assisted living communities are increasingly becoming
subject to more stringent regulation and licensing by state and local health
and social service agencies and other regulatory authorities. In general, these
requirements address, among other things: personnel education, training and
records; community services, including administration of medication, assistance
with self-administration of medication and limited nursing services; monitoring
of wellness; physical plant inspections; furnishing of resident units; food and
housekeeping services; emergency evacuation plans; and resident rights and
responsibilities, including in certain states the right to receive certain
healthcare services from providers of a resident's choice. In several states,
assisted living facilities also require a Certificate of Need before the
facility can be opened, expand or reduce its resident capacity or make other
significant capital expenditures. Like skilled nursing facilities, assisted
living communities are subject to periodic inspection by government
authorities. In most states, assisted living communities, as well as skilled
nursing facilities, also are subject to state or local building code, fire code
and food service licensure or certification requirements. Any failure by the
managers of the senior living communities to meet applicable regulatory
requirements may result in the imposition on us of fines, imposition on us of a
provisional or conditional license or suspension or revocation of our licenses
or other sanctions or adverse consequences, including delays in expanding a
community. Any failure by the managers of our senior living communities to
comply with such requirements could have a material adverse effect on our
financial condition and results of operations.

Operators of the senior living communities such as ours also are subject to
federal and state anti-remuneration laws and regulations, such as the Federal
Health Care Programs anti-kickback law, which govern certain financial
arrangements among healthcare providers (including physicians, hospitals and
our nursing facilities) and others (including our assisted living communities)
who may be in a position to refer or recommend patients to such providers.
These laws prohibit, among other things, the offer, payment, solicitation or
receipt of any form of remuneration in return for the referral of Federal
Health Care Program patients or the purchasing, leasing, ordering or arranging
for any goods, facilities, services or items for which payment can be made
under a Federal Health Care Program (such as Medicare or Medicaid). A violation
of the federal anti-kickback law relating to one of our senior living
communities could result in the loss of its eligibility to participate in a
Federal Health Care Program or in civil or criminal penalties. The federal
government, private insurers and various state enforcement agencies have
increased their scrutiny of providers, other entities, business practices and
claims in an effort to identify and prosecute fraudulent and abusive practices.
In addition, the federal government has issued fraud alerts concerning nursing
services, double billing, home health services and the provision of medical
supplies to nursing facilities. Since some of these services may be furnished
in or by some of our senior living communities, and since many of our senior
living communities' residents will be eligible for healthcare coverage under a
Federal Health Care Program, these areas may come under closer scrutiny by the
government. Furthermore, some states restrict certain business corporations
from providing, or holding themselves out as a provider of, medical care.
Possible sanctions for violation of any of these restrictions or prohibitions
include loss of licensure or eligibility to participate in reimbursement
programs and civil and criminal penalties. State laws vary from state to state,
are often vague and have seldom been interpreted by the courts or regulatory
agencies. We cannot assure you that these federal and state laws will
ultimately be interpreted in a manner consistent with our practices.

The Balanced Budget Act of 1997 switches Medicare's retrospective cost-based
reimbursement to a prospective payment system (PPS). The current retrospective
cost-based reimbursement system allows providers to be reimbursed for
reasonable costs, up to certain limits, incurred in providing services. Under
PPS, providers will be paid based on a fixed Federal payment rate. The
implementation of PPS will begin for senior living communities with cost
reporting periods beginning after July 1, 1998 and will be phased in over a
four-year period. We do not believe the implementation of PPS will have a
material impact on our operating results.

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<PAGE>

Environmental matters

Under various federal, state and local laws, ordinances and regulations,
owners or operators of real estate may be required to investigate and clean up
certain hazardous substances released at a property, and may be held liable to
a governmental entity or to third parties for property damage or personal
injuries and for investigation and clean-up costs incurred by the parties in
connection with any contamination. In addition, some environmental laws create
a lien on a contaminated site in favor of the government for damages and costs
it incurs in connection with the contamination. The presence of contamination
or the failure to remediate contamination may adversely affect the owner's
ability to sell or lease real estate or to borrow using the real estate as
collateral. We cannot assure you that (1) a prior owner, operator or occupant,
such as a tenant, did not create a material environmental condition not known
to us, (2) a material environmental condition with respect to any hotel or
community does not exist or (3) future uses or conditions (including, without
limitation, changes in applicable environmental laws and regulations) will not
result in the imposition of environmental liability. However, under the terms
of our management agreements, the managers of our properties must indemnify us
for any such liability arising from the placing, discharge, leakage, use or
storage of hazardous materials in violation of the applicable environmental
laws, on the site or hotel by the manager's employees, representatives and
agents during the term of the management agreement.

We cannot assure you that all potential environmental liabilities have been
identified or properly quantified or that no prior owner, operator or past or
current guest or occupant has created an environmental condition not known to
us. Moreover, no assurances can be given that (1) future laws, ordinances, or
regulations will not impose any material environmental liability or (2) the
current environmental condition of the hotels or the senior living communities
will not be affected by the condition of land or operations in the vicinity of
the hotels or the senior living communities (such as the presence of
underground storage tanks) or by third parties unrelated to us.

Employees

We have approximately 80 corporate employees. Our workforce is not unionized
nor is it covered by any collective bargaining agreements. We believe our
relations with our employees are good.

Corporate offices

Our corporate offices are located at 6600 Rockledge Drive, Bethesda, MD
20817.

Legal proceedings

We are involved in various lawsuits and claims arising in the normal course
of business. In the opinion of our management, although the outcomes of these
suits and claims are uncertain, in the aggregate they should not have a
material adverse effect on our business, financial condition and results of
operations.

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<PAGE>

MANAGEMENT

Directors and executive officers

The following table sets forth certain information as of June 11, 1999 with
respect to our directors and executive officers:

<TABLE>
<CAPTION>
Name Age Position(s) With the Company
---- --- ----------------------------
<S> <C> <C>
Bruce D. Wardinski(1)... 39 Chairman of the Board, President and Chief Executive Officer
James L. Francis........ 37 Executive Vice President, Chief Financial Officer and Treasurer
Steven J. Fairbanks..... 35 Executive Vice President, Lodging and Senior Living Investments
Bruce F. Stemerman...... 43 Executive Vice President, Asset Manag
ement
Tracy M.J. Colden....... 37 Senior Vice President, General Counsel and Secretary
Larry K. Harvey......... 34 Senior Vice President and Corporate Controller
Adam M. Aron(2)(3)...... 44 Director
Louise M.
Cromwell(2)(4)......... 54 Director
Kelvin L. Davis(1)(4)... 35 Director
John W. Marriott
III(1)................. 38 Director
John B. Morse,
Jr.(3)(4).............. 52 Director
Christopher J.
Nassetta(1)............ 36 Director
Michael A.
Wildish(2)(3).......... 39 Director
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Nominating and Corporate Governance Committee
(3) Member of Compensation Policy Committee
(4) Member of Audit Committee

Executive officers are appointed by, and serve at the discretion of, the
Board of Directors. The following is a biographical summary of the experience
of the directors and executive officers of Crestline:

Bruce D. Wardinski. Mr. Wardi
nski is Chairman of the Board, President and
Chief Executive Officer of Crestline. Mr. Wardinski has been a director of
Crestline since September 17, 1998. Prior to joining Crestline, Mr. Wardinski
was an employee of Host Marriott Corporation. At Host Marriott, he was
appointed Senior Director of Project Finance in June 1993, Vice President of
Project Finance in June 1994 and Senior Vice President of International
Development in October 1995. In June 1996, Mr. Wardinski was elected Senior
Vice President and Treasurer of Host Marriott. Mr. Wardinski also currently
serves on the board of directors of Fairfax Opportunities Unlimited, a not-for-
profit advocacy group representing people with disabilities.

James L. Francis. Mr. Francis is Executive Vice President, Chief Financial
Officer and Treasurer of Crestline. Prior to joining Crestline, Mr. Francis was
an employee of Host Marriott Corporation. He joined Host Marriott in July 1997
as Vice President of Finance and became Assistant Treasurer of Host M
arriott in
February 1998. He was Vice President and Division Controller, Courtyard by
Marriott/Fairfield Inn at Marriott International from 1993 to 1994, served as
Brand Executive, Courtyard by Marriott at Marriott International from 1994 to
1995, served as Vice President of Finance, Lodging-Reengineering Team Leader of
Marriott International from 1995 to 1997 and was promoted to Vice President of
Finance, Lodging-Asset Management and Owner Relations of Marriott International
in 1997 prior to his joining Host Marriott in that year.

Steven J. Fairbanks. Mr. Fairbanks is Executive Vice President, Lodging and
Senior Living Investments of Crestline. Prior to joining Crestline, Mr.
Fairbanks was an employee of Host Marriott Corporation. He joined Host Marriott
in 1996 as Vice President--Acquisitions. In 1997, he was elected Senior Vice
President--Acquisitions of Host Marriott. Prior to joining Host Marriott, he
served as Vice President of Capital Management and Development Corporation from
1992 until 199
6.

69
<PAGE>

Bruce F. Stemerman. Mr. Stemerman is Executive Vice President, Asset
Management of Crestline. Prior to joining Crestline, Mr. Stemerman was an
employee of Host Marriott Corporation. He joined Host Marriott in 1989 as
Director, Partnership Services. He was promoted to Vice President--Lodging
Partnerships of Host Marriott in 1994 and became Senior Vice President--Asset
Management of Host Marriott in 1996.

Tracy M.J. Colden. Ms. Colden is Senior Vice President, General Counsel and
Corporate Secretary of Crestline. Prior to joining Crestline, Ms. Colden was an
employee of Host Marriott Corporation. She joined Host Marriott as an Attorney
in 1996. She was promoted to Senior Attorney of Host Marriott in June 1996 and
became Assistant General Counsel of Host Marriott in June 1997. Prior to
joining Host Marriott, Ms. Colden was an attorney with the law firm of Hogan &
Hartson L.L.P.

Larry K. Harvey. Mr. Harvey is Senior Vice President and Corporate
Controller of Crestline. Prior to joining Crestline, Mr. Harvey was an employee
of Host Marriott Corporation. He joined Host Marriott in 1994 as Senior
Manager--Corporate Accounting. In 1995, Mr. Harvey was promoted to Director--
Corporate Accounting of Host Marriott. He was promoted to Senior Director--
Corporate Accounting of Host Marriott in 1997 and Vice President--Corporate
Accounting of Host Marriott in 1998. Prior to joining Host Marriott, Mr. Harvey
was with the public accounting firm of PricewaterhouseCoopers LLP.

Adam M. Aron. Mr. Aron has been a director of Crestline since December 29,
1998. Mr. Aron has held the position of Chairman of the Board and Chief
Executive Officer of Vail Resorts, Inc. since July 1996. Prior to joining Vail
Resorts, Inc., Mr. Aron served as President and Chief Executive Officer of
Norwegian Cruise Line Ltd. from 1993 until 1996. He has previously served as
Senior Vice President--Marketing of United Airlines from 1990 to 1993. Mr. Aron
also currently serves on the board of directors of each of Sunterra Corporation
and Florsheim Group, Inc.

Louise M. Cromwell. Ms. Cromwell has been a director of Crestline since
December 29, 1998. Ms. Cromwell has served as Senior Counsel in the Real Estate
Practice Group of the law firm of Shaw, Pittman, Potts & Trowbridge since
January 1998. From April 1984 to December 1997, Ms. Cromwell was a Partner at
Shaw, Pittman. She currently acts as General Counsel of Federal City Council.
Ms. Cromwell also currently serves on the board of directors of The Economic
Club of Washington.

Kelvin L. Davis. Mr. Davis has been a director of Crestline since December
29, 1998. Mr. Davis has served as President and Chief Operating Officer of
Colony Capital, Inc., an international real estate investment firm, since
August 1997, and has served in various other capacities with Colony since its
formation in 1991. Mr. Davis also currently serves on the board of directors of
each of Franchise Finance Corporation of America and Harveys Casino Resorts, a
private hotel and gaming company.

John W. Marriott III. Mr. Marriott has been a director of Crestline since
December 29, 1998. Mr. Marriott currently is an employee of Marriott
International, Inc., where he became Senior Vice President of Marriott
International's Mid-Atlantic Region in June 1996. Since 1993, Mr. Marriott has
held several positions including Director of Finance in Marriott
International's Treasury Department, Director of Finance in Host Marriott's
Finance and Development Department and Vice President, Lodging Development for
The Ritz-Carlton Hotel Company, L.L.C. He has also held positions as Director
of Corporate Planning, Finance, Director of Marketing for a hotel and General
Manager. Mr. Marriott also currently serves on the board of directors of
Sodexho Marriott Services, Inc.

John B. Morse, Jr. Mr. Morse has been a director of Crestline since December
29, 1998. Mr. Morse has held the position of Vice President, Finance, and Chief
Financial Officer of The Washington Post Company since 1989. Mr. Morse also
currently serves as President of Washington Post Telecommunications, Inc. and
Washington Post Productions, Inc., subsidiaries of The Washington Post Company.

Christopher J. Nassetta. Mr. Nassetta has been a director of Crestline since
September 17, 1998. Mr. Nassetta joined Host Marriott in October 1995 as
Executive Vice President and was elected Chief Operating

70
<PAGE>

Officer of Host Marriott in 1997. Prior to joining Host Marriott, Mr. Nassetta
served as President of Bailey Realty Corporation from 1991 until 1995. Mr.
Nassetta also currently serves on the board of directors of each of Prime Group
Realty Trust and American Skiing Company.

Michael A. Wildish. Mr. Wildish has been a director of Crestline since
December 29, 1998. Mr. Wildish has been a Managing Director in the investment
firm of Donaldson, Lufkin & Jenrette since 1997. Prior to joining Donaldson,
Lufkin & Jenrette, Mr. Wildish worked in the investment firm of Lazard Freres &
Co. LLC, where he served as a General Partner from 1996 to 1997 and Vice
President from 1992 to 1995.

The Board of Directors and committees

The Board of Directors is divided into three classes, each consisting of
approximately one-third of the total number of directors. There are currently
eight directors. Class I directors, consisting of Bruce D. Wardinski, John W.
Marriott III and Louise M. Cromwell, will hold office until the 1999 annual
meeting of stockholders; Class II directors, consisting of Adam M. Aron,
Christopher J. Nassetta and Michael A. Wildish, will hold office until the 2000
annual meeting of stockholders; and Class III directors, consisting of Kelvin
L. Davis and John B. Morse, will hold office until the 2001 annual meeting of
stockholders.

The Board of Directors has the following committees:

Executive Committee. The Executive Committee possesses and may exercise all
of the authority and powers of the Board of Directors in the management of our
business and affairs, except those reserved to the Board of Directors by the
Maryland General Corporation Law, our bylaws or the Executive Committee
charter. The Executive Committee consists of four members: Messrs. Davis,
Marriott, Nassetta and Wardinski. Mr. Wardinski is Chairman of the Executive
Committee.

Audit Committee. The Audit Committee recommends to the Board of Directors
appointment of independent auditors; approves the scope of audits and other
services to be performed by the independent and internal auditors; considers
whether the performance of any professional service by the auditors other than
services provided in connection with the audit function could impair the
independence of the outside auditors; and reviews the results of internal and
external audits, the accounting principles applied in financial reporting and
financing and operational controls. The Audit Committee consists of three
members: Messrs. Davis and Morse and Ms. Cromwell. Mr. Morse is the Chairman of
the Audit Committee.

Compensation Policy Committee. The Compensation Policy Committee's functions
include recommendations on policies and procedures relating to senior officers'
compensation and various stock plans, and approval of individual salary
adjustments and stock awards in those areas. The Compensation Policy Committee
consists of three members: Messrs. Aron, Morse and Wildish. Mr. Wildish is the
Chairman of the Compensation Policy Committee.

Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee considers candidates for election as directors and is
responsible for keeping abreast of, and making recommendations with regard to,
corporate governance. In addition, the Nominating and Corporate Governance
Committee advises the Board of Directors on a range of matters affecting the
Board of Directors and its committees, including qualification of director
candidates, compensation of directors, selection of committee chairs, committee
assignments and related matters. The Nominating and Corporate Governance
Committee consists of three members: Messrs. Aron and Wildish and Ms. Cromwell.
Ms. Cromwell is the Chairperson of the Nominating and Corporate Governance
Committee.

Compensation of directors

Directors who are also officers of Crestline will receive no additional
compensation for their services as directors. Directors who are not officers of
Crestline and who are elected by the holders of common stock will receive an
annual retainer fee of $15,000 and 2,000 shares of common stock, as well as an
attendance fee of

71
<PAGE>

$1,250 for each stockholders' meeting, meeting of the Board of Directors and
meeting of a committee of the Board of Directors, regardless of the number of
meetings held on a given day. The chair of each committee of the Board of
Directors will receive an additional annual retainer fee of $1,000. Any
individual director receiving these fees may elect to defer payment of all such
fees or any portion thereof pursuant to our Executive Deferred Compensation
Plan and/or our Non-Employee Directors' Deferred Stock Compensation Plan. The
Non-Employee Directors' Deferred Stock Compensation Plan provides for each non-
employee director to elect to receive the annual director stock grant of 2,000
shares of common stock paid in lump sum immediately or in annual installments
beginning at such time as such individual is no longer a member of the Board of
Directors. This annual director stock grant of 2,000 will be effective
following each annual meeting of stockholders commencing with the 1999 Annual
Meeting. Additionally, under the Non-Employee Directors' Deferred Stock
Compensation Plan, each director who was not an officer of Crestline received a
one-time immediately distributable grant of 2,500 shares of common stock
effective as of January 21, 1999. Directors are also reimbursed for travel
expenses and other out-of-pocket costs incurred while attending meetings or
visiting our hotel properties or senior living communities.

We established the Non-Employee Directors' Deferred Stock Compensation Plan
for purposes of attracting and retaining qualified non-employee directors. We
have reserved 70,000 shares of common stock for issuance under the plan. Under
the terms of the plan, as amended, a non-employee director may elect to defer
payment of all or a portion of his or her other director's fees from us until
such individual is no longer a member of the Board of Directors.

Executive compensation

On January 21, 1999, the Compensation Policy Committee approved the
compensation for our directors and executive officers. As a result of these
actions, annual base salaries for certain executive officers are as follows:
Mr. Wardinski--$530,000; Mr. Francis--$330,000; Mr. Fairbanks--$200,000; Mr.
Stemerman--$200,000; Ms. Colden--$160,000; and Mr. Harvey--$160,000. These
executive officers are also eligible to receive bonuses under our performance-
based annual incentive bonus program of up to $556,500; $297,000; $150,000;
$150,000; $96,000 and $96,000, respectively. Each of these executive officers
received restricted stock awards that vest over a five-year period under our
1998 Comprehensive Stock Incentive Plan of 120,000 shares; 60,000 shares;
30,000 shares; 30,000 shares; 25,000 shares and 25,000 shares, respectively.
Each of these executive officers received stock option awards to purchase
shares of common stock, that vest over three years and have an exercise price
of $9.91 per share, in the amount of 500,000 shares; 250,000 shares; 125,000
shares; 125,000 shares; 75,000 shares and 75,000 shares, respectively. In
addition, Messrs. Francis, Fairbanks and Stemerman, Ms. Colden and Mr. Harvey
also received special awards, relating to their work in connection with the
spin-off of and services to us, of stock options to purchase shares of common
stock, that vest over three years and have an exercise price of $9.91 per
share, in the amount of 22,736 shares; 1,570 shares; 21,684 shares; 2,137
shares; and 7,381 shares, respectively. In addition, Mr. Wardinski and Mr.
Francis received stock options to purchase shares of common stock, that vest
over three years and have an exercise price of $14.86 per share, in the amount
of 250,000 shares and 125,000 shares, respectively.

Limitation on liability and indemnification matters

Limitation of liability and indemnification. Maryland law permits a Maryland
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its stockholders for money
damages except for liability resulting from (1) actual receipt of an improper
benefit or profit in money, property or services, (2) acts committed in bad
faith or active and deliberate dishonesty established by a final judgment as
being material to the cause of action, or (3) in the case of any criminal
proceeding, acts or omissions that the person had reasonable cause to believe
were unlawful. Our charter contains such a provision which eliminates such
liability to the maximum extent permitted by Maryland law.

In accordance with the Maryland General Corporation Law ("MGCL"), our
charter and bylaws obligate us, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable

72
<PAGE>

expenses in advance of final disposition of a proceeding to (a) any present or
former director or officer who is made party to the proceeding by reason of his
service in that capacity or (b) any individual who, while a director or officer
of Crestline and at our request, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other
enterprise as a director, officer, partner or trustee of such corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise
and who is made a party to the proceeding by reason of his service in that
capacity, against any claim or liability to which he may become subject by
reason of such status. The MGCL permits a corporation to indemnify its
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceedings to which they may be made a party by reason of their
service in those or other capacities unless it is established that (1) the act
or omission of the director or officer was material to the matter giving rise
to the proceedings and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty, (2) the director or officer actually received
an improper personal benefit in money, property or services or (3) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful. However, under the MGCL, a
Maryland corporation may not indemnify for an adverse judgment in a suit by or
in the right of the corporation. In accordance with the MGCL, our bylaws
require it, as a condition to advancing expenses, to obtain (1) a written
affirmation by the director or officer of his good faith belief that he has met
the standard of conduct necessary for indemnification by us as authorized by
our bylaws and (2) a written statement by or on his behalf to repay the amount
paid or reimbursed by us if it shall ultimately be determined that the standard
of conduct was not met.

Under the registration rights agreement described on page 86, we have agreed
to indemnify the selling stockholders and a limited number of others including
any underwriters, and controlling persons of the selling stockholders or
underwriters and their respective directors, officers, partners, employees, and
affiliates. We will indemnify these persons against any losses in connection
with a claim that arises out of or is based upon any untrue statement or
omission or alleged untrue statement or omission of a material fact contained
in this prospectus or the registration statement filed with the Securities and
Exchange Commission in connection with this offer, but only to the extent such
person furnished the untrue statement or omitted the material facts and we
relied upon the person for the information. However, we are not obligated to
indemnify a person who furnished the untrue statement assuming we relied upon
the person for the information.

Under the registration rights agreement, the selling stockholders have
agreed to indemnify us, any underwriter, any person that controls us or any
underwriter and our respective directors, officers, partners, employees, and
affiliates. They will indemnify us against any losses in connection with a
claim that arises out of or is based upon any untrue statement or omission or
alleged untrue statement or omission of a material fact contained in this
prospectus or the registration statement filed with the Securities and Exchange
Commission in connection with this offer, but only to the extent we furnished
the untrue statement or omitted the material facts. The liability of each
selling stockholder is limited to the amount of the total proceeds that each
such stockholder received in connection with this offer.

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<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth the number of shares of common stock
beneficially owned by (1) each person serving as one of our executive officers
or directors, (2) all directors, director nominees and executive officers as a
group and (3) persons or entities owning 5% or more of the outstanding shares
of common stock, as of March 1, 1999.

<TABLE>
<CAPTION>
Name and Address of Beneficial Owner(1) Number of Percent of
- --------------------------------------- Shares Shares(2)
--------- ----------
<S> <C> <C>
Directors:
Bruce D. Wardinski.................................. 161,295(3)(4) *
Adam M. Aron........................................ 2,501 *
Louise M. Cromwell.................................. 4,600 *
Kelvin L. Davis..................................... 7,501 *
John W. Marriott III................................ 332,276(5) 1.5
John B. Morse, Jr................................... 2,501 *
Christopher J. Nassetta............................. 38,120 *
Michael A. Wildish.................................. 4,001 *
Executive Officers:
James L. Francis.................................... 74,450(3)(4) *
Steven J. Fairbanks................................. 32,287(3)(4) *
Bruce F. Stemerman.................................. 63,050(3)(4) *
Tracy M.J. Colden................................... 26,402(3)(4) *
Larry K. Harvey..................................... 30,553(3)(4) *
All Directors and Executive Officers as a Group
(13 persons)......................................... 779,537 3.5
Other 5% Beneficial Owners:
J.W. Marriott, Jr................................... 1,246,860(6) 5.6
Blackstone Entities................................. 1,362,236(7) 6.1
Southeastern Asset Management, Inc.................. 4,024,920(8) 18.0
</TABLE>
- --------
*Less than 1%
(1) Unless otherwise indicated, the address of each beneficial owner is 10400
Fernwood Road, Bethesda, Maryland 20817.
(2) For purposes of computing the percentage of outstanding shares held by each
person, all shares of common stock that such person has the right to
acquire within 60 days pursuant to the exercise of stock options are deemed
to be outstanding, but are not deemed to be outstanding for the purposes of
computing the ownership percentage of any other person.
(3) As of March 1, 1999, there were 22,313,667 shares of common stock
outstanding. For purposes of this table, a person is deemed to have
"beneficial ownership" of the number of shares of common stock that such
person would have had the right to acquire within 60 days of March 1, 1999
upon exercise of options to purchase shares of common stock granted
pursuant to our 1998 Comprehensive Stock Incentive Plan. The following
number of shares can be acquired by the named persons through the exercise
of stock options exercisable within 60 days of March 1, 1999: Mr.
Wardinski, 23,547; Mr. Francis, 11,337; Mr. Fairbanks, 1,244; Mr. Stemerman
31,165; Ms. Colden, 1,232; and Mr. Harvey, 5,336.
(4) Includes shares of restricted stock issued pursuant to our 1998
Comprehensive Stock Incentive Plan to Messrs. Wardinski, Francis, Fairbanks
and Stemerman, Ms. Colden and Mr. Harvey in the amounts of 120,000 shares;
60,000 shares; 30,000 shares; 30,000 shares; 25,000 shares; and 25,000
shares, respectively.
(5) Includes 1,440 shares held by Mr. Marriott as trustee for three trusts for
the benefit of his children; 1,914 shares owned by three trusts for the
benefit of his children in which his wife serves as co-trustee; 315 shares
owned by his wife; 36,542 shares owned by two trusts for Mr. Marriott's
benefit in which his father, J.W. Marriott, Jr., is a trustee; and 270,759
shares held by JWM Family Enterprises LP of which Mr. Marriott is President
and CEO of the corporate general partner.

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<PAGE>

(6) J.W. Marriott, Jr. and Richard E. Marriott have reported and filed jointly
a Schedule 13G under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), with the Securities and Exchange Commission in relation to
us. Includes: (1) 488,130 shares for which J.W. Marriott, Jr., has the sole
powers to vote, or to direct the vote, and to dispose, or direct the
disposition of; and (2) 758,730 shares for which J.W. Marriott, Jr. shares
the powers to vote, or to direct the vote, and to dispose, or direct the
disposition of (including 402,677 shares also beneficially owned by Richard
E. Marriott). Does not include (a) shares held by the adult children of
J.W. Marriott, Jr. as trustees for trusts established for grandchildren of
J.W. Marriott, Jr. and Richard E. Marriott; (b) shares owned directly or
indirectly by certain members of the Marriott family; or (c) shares held by
a charitable trust of which his mother is trustee and he and Richard E.
Marriott are remaindermen; J.W. Marriott, Jr. disclaims beneficial
ownership of all such shares.

(7) Represents shares of common stock held by Blackstone Real Estate Partners
II L.P., a Delaware limited partnership ("BRE II"); Blackstone Real Estate
Holdings II L.P., a Delaware limited partnership ("BREH II"); Blackstone
Real Estate Partners II.TE.1 L.P., a Delaware limited partnership ("BRE II
TE 1"); Blackstone Real Estate Partners II.TE.2 L.P., a Delaware limited
partnership ("BRE II TE 2"); Blackstone Real Estate Partners II.TE.3 L.P.,
a Delaware limited partnership ("BRE II TE 3"); Blackstone Real Estate
Partners II.TE.4 L.P., a Delaware limited partnership ("BRE II TE 4");
Blackstone Real Estate Partners II.TE.5 L.P., a Delaware limited
partnership ("BRE II TE 5"); Blackstone Real Estate Partners I L.P., a
Delaware limited partnership ("BRE I"); Blackstone Real Estate Partners Two
L.P., a Delaware limited partnership ("BRE Two"); Blackstone Real Estate
Partners Three L.P., a Delaware limited partnership ("BRE Three");
Blackstone Real Estate Partners IV L.P., a Delaware limited partnership
("BRE IV"); Blackstone RE Capital Partners L.P., a Delaware limited
partnership ("BRECP"); Blackstone RE Capital Partners II L.P., a Delaware
limited partnership ("BRECP II"); Blackstone RE Offshore Capital Partners
L.P., a Delaware limited partnership ("BOC"); Blackstone Real Estate
Holdings L.P., a Delaware limited partnership ("BREH"); CR/RE L.L.C., a
Delaware limited liability company ("CRRE"); BRE Logan Hotel Inc., a
Delaware corporation ("Logan"); BRE/Cambridge L.L.C., a Delaware limited
liability company ("Cambridge"). Such shares may be deemed to be
beneficially held by the general partner of BRE I, BRE Two, BRE Three, BRE
IV, BRECP, BRECP II, and BOC, Blackstone Real Estate Associates L.P., a
Delaware Limited partnership ("BREA"); the general partner of BRE II, BRE
II TE 1, BRE II TE 2, BRE II TE 3, BRE II TE 4, and BRE II TE 5, Blackstone
Real Estate Associates II L.P., a Delaware Limited partnership ("BREA II");
the general partner of BREH II and BREA II, Blackstone Real Estate
Management Associates II L.P., a Delaware limited partnership ("BREMA II");
the general partner of BREH and BREA, BREA L.L.C., a Delaware limited
liability company ("BREA LLC"); the general partner of BREMA II, BREA II
L.L.C., a Delaware limited liability company ("BREA II LLC"); Peter G.
Peterson ("Peterson") and Stephen A. Schwarzman ("Schwarzman"), who are the
founding members of BREA LLC and BREA II LLC; John Ceriale, a member with
sole beneficial ownership of CRRE; and John G. Schreiber, a limited partner
in BREA and BREA II (collectively all such persons and entities, the
"Blackstone Entities"). The Blackstone Entities may be deemed to
beneficially own in the aggregate 1,362,236 shares of common stock. The
principal business address for each of the non-individual Blackstone
Entities and Messrs. Peterson, Schwarzman and Ceriale is 345 Park Avenue,
31st Floor, New York, New York 10154. The principal business address for
Mr. Schreiber is Schreiber Investments, 1115 East Illinois Road, Lake
Forest, Illinois 60045. The Blackstone Entities have reported information
regarding their ownership of common stock in a Schedule 13G under the
Exchange Act filed with the Commission. For more information on the shares
held by the Blackstone Entities, see the Selling stockholders table on page
85.
(8) Represents shares of common stock that are held by Southeastern Asset
Management, Inc. ("SAM"). SAM reported in a Schedule 13G under the Exchange
Act, filed with the Commission, sole dispositive power over 2,395,620
shares of common stock, shared dispositive power over 1,623,400 shares of
common stock and 5,900 shares held with no dispositive power. Of these
shares, SAM has reported sole voting power over 1,987,660 shares, shared
voting power over 1,623,400 and no power to vote 413,860 shares. The
principal business address of SAM is 6410 Poplar Avenue, Suite 900,
Memphis, Tennessee 38119.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Relationship with Host Marriott. As previously noted, various of our
subsidiaries have entered into leases for 120 full-service hotels owned by Host
Marriott subsidiaries and subleases for 71 limited-service hotels leased by
Host Marriott subsidiaries. Host Marriott and we are parties to a
noncompetition agreement pursuant to which we have agreed not to engage in
certain businesses including, generally, owning or acquiring any full-service
hotels not leased from Host Marriott until the earlier of December 31, 2008 or
the date when we no longer lease at least 25% of the original hotels leased
from Host Marriott at the time of our spin-off from Host Marriott.

In addition to entering into the hotel leases and subleases and the
noncompetition agreement, for purposes of governing certain ongoing
relationships between Host Marriott and us after the spin-off distribution and
to provide for an orderly transition, Host Marriott and we have entered into:
(1) a distribution agreement, providing for, among other things, the spin-off
distribution, the division between Host Marriott and us of certain assets and
liabilities and certain other agreements governing the relationship between
Host Marriott and us following the spin-off distribution; (2) a tax sharing
agreement, pursuant to which we have agreed with Host Marriott to allocate tax
liabilities related to periods prior to the date of the spin-off distribution;
(3) an employee benefits and other employment matters allocation agreement,
providing for certain compensation, benefit and labor matters; (4) asset
management agreements, pursuant to which we provide to Host Marriott and a non-
controlled subsidiary of Host Marriott asset management services related to
their rights and responsibilities as owner of the hotels pursuant to which we
will be paid an aggregate annual fee of $4.5 million per year; (5) guaranty
agreements, pursuant to which we have guaranteed certain lease obligations of
our subsidiaries under the hotel leases with Host Marriott; (6) pooling
agreements, pursuant to which all leased full service hotels are separated into
four identified "pools" of hotels for purposes of calculating the amount of
each of the guaranties; and (7) a corporate transitional services agreement,
pursuant to which Host Marriott and we provide certain limited administrative
services to each other for a fee. The terms of the foregoing agreements were
negotiated by us with Host Marriott, but because we were a wholly owned
subsidiary of Host Marriott at that time, such negotiation may not necessarily
have been on an arms-length basis and, accordingly, may not necessarily reflect
fair market terms.

Mr. Christopher J. Nassetta, one of our directors, is also an Executive Vice
President and the Chief Operating Officer of Host Marriott.

Relationship with Marriott International. Under long-term management
agreements, Marriott International or its subsidiaries currently serve as the
manager for 98 of the 120 full-service hotels and all of the limited-service
hotels currently owned, leased and subleased by our subsidiaries. For the
hotels where it is the manager, Marriott International has a noneconomic
membership interest with certain limited voting rights in our subsidiaries that
are leased under the hotel leases. Ten of our remaining full-service hotels are
managed under franchise agreements with Marriott International. In addition,
Marriott International is the manager for all 31 of the senior living
communities owned by us.

As part of the foregoing relationships between Marriott International and
us, our subsidiaries and we are either parties to or, in some instances, have
been assigned and have assumed obligations under, many different agreements
with Marriott International and its subsidiaries, including: (1) hotel
management agreements and senior living community management agreements,
providing for hotels leased, subleased or owned by our subsidiaries to be
managed by subsidiaries of Marriott International; (2) franchise agreements
with subsidiaries of Marriott International, which allow us or managers of
certain hotels leased by us which are not managed by Marriott International to
use the "Marriott" brand name, associated trademarks, reservation systems and
other related items in connection with the operation of the hotels; (3) an
indemnity agreement, providing generally for Host Marriott and us to indemnify
Marriott International and Marriott International to indemnify Host Marriott
and us against certain liabilities relating to our senior living communities
including environmental liabilities; (4) a tax matters agreement, concerning
certain tax matters relating to our senior living communities business,
pursuant to which Host Marriott and we will indemnify Marriott International
and Marriott International will indemnify Host Marriott and us from and against
tax liabilities relating to the business of the

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senior living communities; (5) a noncompetition agreement, pursuant to which
Host Marriott and we agree, with certain limited exceptions, not to enter into
or acquire any business that competes with the hotel management business (i.e.,
managing, operating or franchising full-service and limited-service hotels) of
Marriott International; and (6) a noncompetition agreement, pursuant to which
Host Marriott and we agree not to compete with Marriott International in the
business of managing or franchising senior living communities in the
continental United States by (a) financing or engaging in the business of
operating, managing or franchising senior living communities or (b) providing
operational or managerial services with respect thereto. The terms of the
noncompetition agreement listed in item (5) above were negotiated between Host
Marriott and Marriott International when they were affiliates, such
negotiations may not necessarily have been on an arms-length basis and,
accordingly, may not necessarily reflect fair market terms.

Mr. John W. Marriott III, one of our directors, is also a Senior Vice
President of Marriott International's Mid-Atlantic Region. Mr. J.W. Marriott,
Jr., who is deemed to beneficially own more than 5% of the outstanding common
stock, is Chairman of the Board and Chief Executive Officer of Marriott
International.

Other Transactions and Relationships. Louise M. Cromwell, one of our
directors, is Senior Counsel in the Real Estate Practice Group of the law firm
of Shaw, Pittman, Potts & Trowbridge in Washington, D.C. Shaw, Pittman provides
certain real estate-related and employee benefit-related legal services to us.

Michael A. Wildish, one of our directors, is a Managing Director in the
investment firm of Donaldson, Lufkin & Jenrette ("DLJ"). DLJ provides certain
investment banking services to us.

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DESCRIPTION OF CAPITAL STOCK

The following summary describes the material terms of our capital stock.
However, you should refer to the actual terms of the capital stock contained in
our articles of incorporation and bylaws. Copies of the charter and bylaws are
included as exhibits to the registration statement of which this prospectus is
a part.

General

Our authorized capital stock consists of 75,000,000 shares of common stock,
par value $.01 per share, and 10,000,000 shares of preferred stock, par value
$.01 per share. The Board of Directors is authorized, without a vote of
stockholders, to classify or reclassify any unissued shares of capital stock
and to establish the preferences and rights of any preferred or other class or
series of stock to be issued. As of June 11, 1999, we had outstanding
approximately 20,580,000 shares of common stock and no outstanding shares of
preferred stock. All of the shares of common stock outstanding are validly
issued, fully paid and non-assessable.

Common stock

Subject to the provisions of our charter regarding restrictions on the
transfer of shares of capital stock, each outstanding share of common stock
entitles the holder to one vote on all matters submitted to a vote of
stockholders, including the election of directors. Except as provided with
respect to any other class or series of shares of capital stock, the holders of
common stock possess the exclusive voting power. There is no cumulative voting
in the election of directors, which means that the holders of a majority of the
outstanding common stock can elect all of the directors then standing for
election.

Subject to the preferential rights of any other classes or series of capital
stock and to the provisions of our charter regarding restrictions on transfers
of shares of capital stock, holders of common stock are entitled to receive
distributions if, as and when authorized and declared by the Board of
Directors, out of assets legally available for that purpose. They also are
entitled to share ratably in our assets legally available for distribution to
our stockholders in the event of liquidation, dissolution or winding-up after
payment of, or adequate provision for, all of our known debts and liabilities.

Holders of shares of common stock have no preferences, conversion, sinking
fund, redemption rights or preemptive rights to subscribe for any of our
securities. Subject to the provisions of our charter regarding restrictions on
transfer of shares of capital stock, shares of common stock have equal
distribution, liquidation and other rights.

Our charter authorizes the Board of Directors to reclassify any unissued
shares of common stock into other classes or series of stock, including
preferred stock, and to establish the number of shares in each class or series
and to set the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption for each such class or
series.

Preferred stock

Our charter authorizes the Board of Directors to issue 10,000,000 shares of
preferred stock and to classify or reclassify any unissued preferred shares
into one or more classes or series of stock, including common stock. Prior to
issuance of shares of any class or series of stock other than common stock, the
Board of Directors is required, under the MGCL, to set, subject to the
provisions of our charter regarding the restriction on transfer of shares of
capital stock, the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such class or
series. Thus, the Board of Directors could authorize the issuance of preferred
stock or other stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of us
that might involve a premium price for holders of shares of common stock or
otherwise be in their best interest. As of the date hereof, no shares other
than common stock are outstanding, but we may

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issue preferred stock or other stock in the future. Although the Board of
Directors has no intention at the present time of doing so (other than in
connection with our Stockholders Rights Plan), it could authorize us to issue a
class or series of shares that could, depending upon the terms of such class or
series, delay, defer or prevent a transaction or a change in control of us that
might involve a premium price for holders of shares of common stock or
otherwise be in their best interest.

Power to issue additional common stock and preferred stock

We believe that the power of the Board of Directors to issue additional
authorized but unissued shares of common stock or preferred stock and to
classify or reclassify unissued common stock or preferred stock and thereafter
to cause us to issue such classified or reclassified shares of stock in one or
more classes or series will provide us with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional classes or series, as well as the
common stock, will be available for issuance without further action by our
stockholders, unless such action is required by applicable law or the rules of
any stock exchange or automated quotation system on which our securities may be
listed or traded.

Certain anti-takeover provisions

Our charter and the bylaws contain, among other things, certain provisions
described below that may reduce the likelihood of a change in the Board of
Directors or voting control of us without the consent of the Board of
Directors. These provisions, together with certain provisions of Maryland law,
could have the effect of discouraging, delaying or preventing tender offers or
takeover attempts that some or a majority of the stockholders might consider to
be in the stockholders' best interest, including offers or attempts that might
result in a premium over the market price for the common stock.

Classified board; board size fixed within a range. Our charter provides that
the Board of Directors consist of eight members and that it may be increased or
decreased in accordance with the bylaws. However, the total number of directors
may not be fewer than three nor more than thirteen. Pursuant to our bylaws, the
number of directors is fixed by the Board of Directors within the limits set
forth in the charter. Further, our charter provides that the Board of Directors
be divided into three classes of directors, with each class to consist as
nearly as possible of an equal number of directors. At each annual meeting of
stockholders, the class of directors to be elected at such meeting is elected
for a three-year term, and the directors in the other two classes continue in
office. Because stockholders have no right to cumulative voting for the
election of directors, at each annual meeting of stockholders a majority of the
outstanding common stock is able to elect all of the successors to the class of
directors whose term expires at that meeting.

Filling of Board Vacancies; Removal. Vacancies on the Board of Directors may
be filled by the concurring vote of a majority of the remaining directors and,
in the case of a vacancy resulting from the removal of a director by the
stockholders, by the stockholders by a least two-thirds of all the votes
entitled to be cast in the election of directors. Under Maryland law, directors
may fill any vacancy only until the next annual meeting of stockholders. Our
charter provides that, except for any directors who may be elected by holders
of a class or series of stock other than the common stock, directors may be
removed only for cause and only by the affirmative vote of stockholders holding
at least two-thirds of all the votes entitled to be cast for the election of
directors.

Stockholder action by unanimous written consent. Pursuant to the MGCL and
our bylaws, any action required or permitted to be taken by the stockholders
must be effected at a duly called annual or special meeting of such holders,
and may not be effected by any consent in writing by such holders, unless such
consent is unanimous.

Call of special meetings. Our charter provides that special meetings of the
stockholders may be called by the President, the Board of Directors or any
other person specified in our bylaws. Our charter further provides that the
Secretary also is required to call a special meeting of the stockholders on the
written request of

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stockholders entitled to cast a majority of all the votes entitled to be cast
at the meeting. Our bylaws contain similar provisions to our charter regarding
the calling of special stockholder meetings. In addition, our bylaws provide
that special stockholder meetings may be called by the holders of any class or
series of stock having a preference over the common stock as to dividends or
upon liquidation in the manner (if any) specified in articles supplementary
filed as part of our charter.

Advance notice of director nominations and new business. Our bylaws provide
that:

(1) with respect to an annual meeting of stockholders, nominations of
persons for election to the Board of Directors and the proposal of
business to be considered by s
tockholders may be made only:

(a) pursuant to the notice of meeting,

(b) by the Board of Directors, or

(c) by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice procedures set forth in the
bylaws; and

(2) with respect to special meetings of the stockholders, only the business
specified in the notice of meeting may be brought before the meeting of
stockholders and nominations of persons for election to the Board of
Directors may be made only:

(x) pursuant to the notice of the meeting,

(y) by the Board of Directors, or

(z) provided that the Board of Directors has determined that directors
shall be elected at such meeting, by a stockholder who is entitled
to vote at the meeting and has complied with the advance notice
provisions set forth in the Bylaws.

The advance notice provisions contained in the bylaws generally require
nominations and new business p
roposals by stockholders to be delivered to the
Secretary not later than the close of business on the 60th day nor earlier than
the close of business on the 90th day prior to the first anniversary of the
preceding year's annual meeting. Notwithstanding the foregoing, to be timely
for the 1999 annual meeting of stockholders, a stockholder's notice shall be
delivered to the Secretary at our principal executive offices not later than
the close of business on the 60th day prior to such meeting or the tenth day
following the day on which public announcement is first made of the date of the
1999 annual meeting nor earlier than the close of business on the 90th day
before the date of such annual meeting.

Merger, consolidation, share exchange and transfer of assets. Pursuant to
our charter, subject to the terms of any class or series of stock at the time
outstanding, we may merge with or into another entity, may consolidate with one
or more other entities, may participate in a share exchange or may transfer
our
assets within the meaning of the MGCL, but any such merger, consolidation,
share exchange or transfer of assets must be approved (1) by the Board of
Directors in the manner provided in the MGCL and (2) by the stockholders by the
affirmative vote of two-thirds of all votes entitled to be cast thereon to the
extent a stockholder vote is required under the MGCL to effect any such
transaction. In general, such transactions by us must first be approved by a
majority of the entire Board of Directors and thereafter approved by
stockholders by the affirmative vote of two-thirds of all the votes entitled to
be cast on the matter (unless the charter provides for a greater or lesser
stockholder vote but not less than a majority of the number of votes entitled
to be cast on the matter). Under the MGCL, certain mergers may be accomplished
without a vote of stockholders. For example, no stockholder vote is required
for a merger of a subsidiary of a Maryland corporation into its parent,
provided the parent owns at
least 90% of the subsidiary. In addition, a merger
need not be approved by stockholders of a Maryland successor corporation if the
merger does not reclassify or change the outstanding shares or otherwise amend
the charter, and the number of shares to be issued or delivered in the merger
is not more than 20% of the number of its shares of the same class or series
outstanding immediately before the merger becomes effective. A share exchange
need be approved by a Maryland successor only by its Board of Directors.

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Under the MGCL, a "transfer of assets" is defined to mean any sale, lease,
exchange or other transfer of all or substantially all of the assets of the
corporation. However, the approval of stockholders is not required for (1) a
transfer of assets by a corporation in the ordinary course of business actually
conducted by it, (2) a mortgage, pledge or creation of any other security
interest in any or all of the assets of the corporation, whether or not in the
ordinary course of its business, (3) an exchange of shares of stock through
voluntary action under any agreement with the stockholders, or (4) a transfer
of assets to one or more persons if all the equity interests of the person or
persons are owned, directly or indirectly, by the corporation. Pursuant to the
MGCL, our voluntary dissolution also would require the affirmative vote of two-
thirds of all the votes entitled to be cast on the matter.

Amendments to our charter and bylaws. Under the MGCL, in order to amend the
charter, the board of directors first must adopt a resolution setting forth the
proposed amendment and declaring its advisability and direct that the proposed
amendment be submitted to stockholders for their consideration either at an
annual or special meeting of stockholders. Thereafter, the proposed amendment
must be approved by stockholders by the affirmative vote of two-thirds of all
the votes entitled to be cast on the matter, unless a greater or lesser
proportion of votes (but not less than a majority of all votes entitled to be
cast) is specified in the charter. The provisions contained in our charter
relating to restrictions on transferability of shares of capital stock, the
classified board and fixing the size of the board within the range set forth in
the charter, as well as the provisions relating to removal of directors and the
filling of board vacancies may be amended only by a resolution adopted by the
Board of Directors and approved at an annual or special meeting of the
stockholders by the affirmative vote of the holders of not less than two-thirds
of the votes entitled to be cast on the matter. Other amendments to the charter
generally may be effected by requisite action of the Board of Directors and
approval by stockholders by the affirmative vote of not less than a majority of
the votes entitled to be cast on the matter. As permitted under the MGCL, our
bylaws provide that directors have the exclusive right to amend the bylaws.
Amendment of this provision of the charter also would require board action and
approval by stockholders by not less than two-thirds of all votes entitled to
be cast on the matter.

Maryland business combination law. Under the MGCL, unless an exemption is
available, certain "business combinations" (including certain issuances of
equity securities) between a Maryland corporation and any "Interested
Stockholder" or an affiliate of the Interested Stockholder are prohibited for
five years after the most recent date on which the Interested Stockholder
becomes an Interested Stockholder. Thereafter, any such business combination
must be recommended by the Board of Directors and approved by the affirmative
vote of at least (1) 80% of all the votes entitled to be cast by holders of the
outstanding shares of voting stock and (2) two-thirds of the votes entitled to
be cast by holders of voting stock other than voting stock held by the
Interested Stockholder who will (or whose affiliate will) be a party to the
business combination or any affiliate or associate of the Interested
Stockholder, voting together as a single voting group, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in cash
or in the same form as previously paid by the Interested Stockholder for its
shares. A business combination that is approved by the board of directors of a
Maryland corporation at any time before an Interested Stockholder first becomes
an Interested Stockholder is not subject to the special voting requirements.
The Board of Directors has not opted out of the business combination provisions
of the MGCL. Consequently, the five-year prohibition and the super-majority
vote requirements will apply to a business combination involving us and any
Interested Stockholder (except as noted below); however, as permitted by the
MGCL, the Board of Directors may elect to opt out of these provisions in the
future.

In connection with the distribution of common stock by Host Marriott to its
stockholders, the Board of Directors adopted a resolution exempting from the
operation of the "business combination" statute transactions involving Host
Marriott, Marriott International, J.W. Marriott, Jr. and Richard E. Marriott;
provided that any such transaction with Marriott International that is not in
the ordinary course of business or with J.W. Marriott, Jr. or Richard E.
Marriott must be approved by a majority of our directors present at a meeting
at which a quorum is present, including a majority of the disinterested
directors, in addition to any vote of stockholders required by other provisions
of the MGCL.

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Maryland control share acquisition law. Under the MGCL, "control shares"
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares owned by the acquiror, by officers or by directors who
are employees of the corporation. "Control shares" are voting shares which, if
aggregated with all other such shares previously acquired by the acquiror or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by virtue of a revocable proxy), would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power: (1) one-fifth or more but less than one-
third, (2) one-third or more but less than a majority or (3) a majority or more
of all voting power. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisitions of control
shares, subject to certain exceptions. A person who has made or proposes to
make a control share acquisition, upon satisfaction of certain conditions
(including an undertaking to pay expenses), may compel the board of directors
of the corporation to call a special meeting of stockholders to be held within
50 days of demand to consider the voting rights of the shares. If no request
for a meeting is made, the corporation may itself present the question at any
stockholders meeting.

If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may redeem
any or all of the control shares (except those for which voting rights have
previously been approved) for fair value determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved. If
voting rights for control shares are approved at a stockholders meeting and the
acquiror becomes entitled to vote a majority of the shares entitled to vote,
all other stockholders may exercise appraisal rights. The fair value of the
shares as determined for purposes of such appraisal rights may not be less than
the highest price per share paid by the acquiror in the control share
acquisition.

The control share acquisition statute does not apply to (1) shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (2) acquisitions exempted by the charter or bylaws of the
corporation. The Board of Directors has not opted out of the control share
provisions of the MGCL but, as permitted by the MGCL, may elect to opt out of
these provisions in the future.

Stockholder rights plan. The Board of Directors has adopted a stockholder
rights plan pursuant to a rights agreement and declared a dividend of one
preferred stock purchase right for each outstanding share of common stock. All
common stock issued between the date of adoption of the rights agreement and
the date rights certificates are distributed, or the date, if any, on which the
rights are redeemed will have rights attached to them. The rights expire ten
years after adoption of the rights agreement, unless earlier redeemed or
exchanged. Each right, when exercisable, entitles the holder to purchase a
fraction of a share of a series of junior preferred stock. Until a right is
exercised, the holder thereof, as such, has no rights as a stockholder
including, without limitation, the right to vote or to receive dividends.

Under the rights agreement, the rights initially attached to all
certificates representing shares of common stock then outstanding. The rights
will separate from the common stock and a distribution of rights certificates
will occur upon the earlier to occur of (1) ten days following a public
announcement that a person or group of affiliated or associated persons (an
"acquiring person") has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the outstanding shares of common stock or (2) ten
business days (or such later date as the Board of Directors may determine)
following the commencement of a tender offer or exchange offer, the
consummation of which would result in the beneficial ownership by a person of
20% or more of the outstanding shares of common stock. Until the rights
distribution date, the rights are evidenced by the common stock certificates,
and are transferred with, and only with, the common stock certificates.

We expect that, if a person becomes the beneficial owner of 20% or more of
the then outstanding common stock, each holder of a right would, after the end
of a redemption period, have the right to exercise the right by

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purchasing common stock or, in certain circumstances, cash, property or other
of our securities, having a value equal to two times such amount. The
foregoing, however, would not apply to an offer for all outstanding common
stock which the directors by a two-thirds vote determine to be fair to and
otherwise in our best interests and those of our stockholders.

If at any time following the date an acquiring person acquires 20% or more
of the outstanding shares of common stock, (1) we are acquired in a merger or
other business combination transaction in which we are not the surviving
corporation (other than a merger which follows an offer described in the
preceding paragraph), or (2) 50% or more of our assets or earning power is sold
or transferred, each holder of a right would have the right to receive, upon
exercise, common shares of the acquiring company having a value equal to two
times the purchase price of the right, subject to the ownership limit.

We expect that, in general, the Board of Directors may redeem the rights at
a normal price per right at any time until ten days after an acquiring person
has been identified as such. If the decision to redeem the rights occurs after
a person becomes an acquiring person, the decision would require the
concurrence of directors by a two-thirds vote.

The rights will have certain anti-takeover effects. The rights will cause
substantial dilution to a person or group that attempts to acquire us. The
rights, however, will not interfere with any merger or other business
combination approved by the Board of Directors since the Board may, at its
option, at any time prior to any person becoming an acquiring person, redeem
all rights or amend the rights agreement to exempt the person from the rights
agreement.

Restrictions on ownership and transfer

For Host Marriott to qualify as a REIT under the Internal Revenue Code, Host
Marriott cannot own, either directly or by attribution from one or more actual
or constructive owners of 10% or more of Host Marriott, 10% or more of us or
any other tenant of Host Marriott. In order to assist Host Marriott in meeting
this requirement, we have adopted the "Ownership Limit", which provides that no
person or persons acting as a group may own, or be deemed to own by virtue of
certain attribution provisions of the Code, more than (1) 9.8% of the lesser of
the number or value of shares of the common stock outstanding or (2) 9.8% of
the lesser of the number or value of the issued and outstanding preferred
shares of any class or series of capital stock. The ownership attribution rules
under the Code are complex and may cause common stock owned actually or
constructively by a group of related individuals and/or entities to be owned
constructively by one individual or entity. As a result, the acquisition of
less than 9.8% of the common stock, or the acquisition or ownership of an
interest in an entity that owns, actually or constructively, the common stock,
by an individual or entity, could, nevertheless, cause that individual or
entity, or another individual or entity, to own constructively in excess of
9.8% of the outstanding common stock and thus subject such common stock to the
remedies' provisions under the Ownership Limit as described below. The Board of
Directors may grant an exemption from the Ownership Limit with respect to a
person if it determines that such ownership will not cause us or any one of our
subsidiaries that is a tenant of Host Marriott to be considered a "related
party tenant" for purposes of the REIT qualification rules, and Host Marriott
consents thereto. As a condition of a waiver, the Board of Directors and Host
Marriott may require undertakings or representations from the applicant with
respect to such determination. A person who exceeds the Ownership Limit solely
by reason of the receipt of shares of common stock in the spin-off distribution
is excepted from the Ownership Limit to the extent that such person holds such
shares. Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of capital stock that will or may violate the
Ownership Limit is required to give notice immediately to Host Marriott and us
and to provide Host Marriott and us with such other information as Host
Marriott and we may request in order to determine the effect of such transfer
on Host Marriott's status as a REIT.

If any purported transfer of shares of capital stock or any other event
would otherwise result in any person violating the Ownership Limit, then any
such purported transfer will be void and of no force or effect with respect to
the purported transferee as to that number of shares that exceeds the Ownership
Limit (referred to as

83
<PAGE>

"excess shares") and the prohibited transferee shall acquire no right or
interest (or, in the case of any event other than a purported transfer, the
person or entity holding record title to any such shares in excess of the
Ownership Limit shall cease to own any right or interest) in such excess
shares. Any such excess shares described above will be transferred
automatically, by operation of law, to a trust, the beneficiary of which will
be a qualified charitable organization selected by us. Such automatic transfer
shall be deemed to be effective as of the close of business on the Business Day
(as defined in the charter) prior to the date of such violating transfer.
Within 20 days of receiving notice from us of the transfer of shares to the
trust, the trustee of the trust (who shall be designated by us and be
unaffiliated with Host Marriott or us and any prohibited transferee or
prohibited owner) will be required to sell such excess shares to a person or
entity who could own such shares without violating the Ownership Limit, and
distribute to the prohibited transferee an amount equal to the lesser of the
price paid by the prohibited transferee for such excess shares or the sales
proceeds received by the trust for such excess shares. In the case of any
excess shares resulting from any event other than a transfer, or from a
transfer for no consideration (such as a gift), the trustee will be required to
sell such excess shares to a qualified person or entity and distribute to the
prohibited owner an amount equal to the lesser of the fair market value of such
excess shares as of the date of such event or the sales proceeds received by
the trust for such excess shares. In either case, any proceeds in excess of the
amount distributable to the prohibited transferee or prohibited owner, as
applicable, will be distributed to the beneficiary. Prior to a sale of any such
excess shares by the trust, the trustee will be entitled to receive, in trust
for the beneficiary, all dividends and other distributions paid by us with
respect to such excess shares, and also will be entitled to exercise all voting
rights with respect to such excess shares. Subject to Maryland law, effective
as of the date that such shares are transferred to the trust, the trustee shall
have the authority (at the trustee's sole discretion and subject to applicable
law) (1) to rescind as void any vote cast by a prohibited transferee prior to
the discovery by us that such shares have been transferred to the trust and (2)
to recast such vote in accordance with the desires of the trustee acting for
the benefit of the beneficiary. However, if we have already taken irreversible
corporate action, then the trustee shall not have the authority to rescind and
recast such vote. Any dividend or other distribution paid to the prohibited
transferee or prohibited owner (prior to the discovery by us that such shares
had been automatically transferred to a trust as described above) will be
required to be repaid to the trustee upon demand for distribution to the
beneficiary. The charter provides that if the transfer to the trust as
described above is not automatically effective (for any reason) to prevent
violation of the Ownership Limit, the transfer of the excess shares will be
void. In addition, shares of capital stock held in the trust shall be deemed to
have been offered for sale to us, or our designee, at a price per share equal
to the lesser of (a) the price per share in the transaction that resulted in
such transfer to the trust (or, in the case of a devise or gift, the market
value at the time of such devise or gift) and (b) the market value of such
shares on the date we, or our designee, accept such offer. We will have the
right to accept such offer until the trustee has sold the shares held in the
trust. Upon such a sale to us, the interest of the beneficiary in the shares
sold will terminate and the trustee will distribute the net proceeds of the
sale to the prohibited owner.

The Ownership Limit will not apply if (1) Host Marriott no longer qualifies
as a REIT, (2) Host Marriott determines that it is no longer in the best
interests of Host Marriott to attempt to qualify, or continue to qualify, as a
REIT or (3) we determine, and Host Marriott concurs, that Host Marriott derives
less than 1% of its gross income pursuant to the hotel leases. All certificates
representing shares of capital stock shall bear a legend referring to the
restrictions described above. These ownership limitations could have the effect
of delaying, deferring or preventing a takeover or other transaction in which
holders of some, or a majority, of common stock might receive a premium for
their common stock over the then prevailing market price or which such holders
might believe to be otherwise in their best interest.

Transfer agent and registrar

The transfer agent and the registrar for the common stock is The Bank of New
York.

84
<PAGE>

THE SELLING STOCKHOLDERS

The following table provides information regarding the shares held and to be
offered under this prospectus from time to time by each selling stockholder.
Because the selling stockholders may sell all, some or none of their shares
using this prospectus, we cannot estimate the number and percentage of shares
that each selling stockholder will hold after any particular sale. The
percentage of shares held by the selling stockholders after completion of the
offering therefore assumes that all shares are sold.

<TABLE>
<CAPTION>
Percentage of
common stock
Number of shares Number of shares to be owned
held of record to be offered by the selling
Full legal name of the in the name of from time to time stockholder
selling the selling by the selling after completion
stockholder stockholder stockholder of the offering
---------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Blackstone Entities
Blackstone Real Estate
Partners II L.P. ...... 418,308 418,308 0%
Blackstone Real Estate
Holdings II L.P. ...... 117,580 117,580 0
Blackstone Real Estate
Partners II.TE.1
L.P. .................. 351,988 351,988 0
Blackstone Real Estate
Partners II.TE.2
L.P. .................. 15,218 15,218 0
Blackstone Real Estate
Partners II.TE.3
L.P. .................. 72,367 72,367 0
Blackstone Real Estate
Partners II.TE.4
L.P. .................. 14,722 14,722 0
Blackstone Real Estate
Partners II.TE.5
L.P. .................. 30,966 30,966 0
Blackstone Real Estate
Partners I L.P. ....... 137,132 137,132 0
Blackstone Real Estate
Partners Two L.P. ..... 8,992 8,992 0
Blackstone Real Estate
Partners Three L.P. ... 87,229 87,229 0
Blackstone Real Estate
Partners IV L.P. ...... 2,743 2,743 0
Blackstone RE Capital
Partners L.P. ......... 14,300 14,300 0
Blackstone RE Capital
Partners II L.P. ...... 1,570 1,570 0
Blackstone RE Offshore
Capital Partners
L.P. .................. 2,760 2,760 0
Blackstone Real Estate
Holdings L.P. ......... 75,374 75,374 0
CR/RE L.L.C. ........... 1,949 1,949 0
BRE Logan Hotel Inc. ... 851 851 0
BRE/Cambridge L.L.C. ... 8,187 8,187 0
--------- --------- ---
Subtotal.............. 1,362,236 1,362,236 0
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated............. 13,974 13,974 0
Merrill Lynch Mortgage
Capital Inc. ............ 15,071 15,071 0
White Oak Land
Corporation.............. 7,713 7,713 0
David B. Rubinstein....... 1,008 1,008 0
--------- --------- ---
Total................. 1,400,002 1,400,002 0%
========= ========= ===
</TABLE>

The selling stockholders listed above under the heading "Blackstone
Entities" are affiliated entities and therefore, shares held by one entity may
also be deemed to be beneficially owned by certain related entities or persons.
A list of all of these entities, together with abbreviations for their names,
is provided in note 7 to the "Principal Stockholders" table on page 75.

. BRE I, BRE Two, BRE Three, BRE IV, BRECP, BRECP II, BOC, BREH, BRE II,
BREH II, BRE II TE 1, BRE II TE 2, BRE II TE 3, BRE II TE 4, BRE II TE
5, Logan, CRRE and Cambridge are record holders, in the aggregate, of
1,362,236 shares of common stock.

. BRE I, BRE Two, BRE Three, BRE IV, BRECP, BRECP II, BOC and BREH are
members of Cambridge, and thus such entities may be deemed to
beneficially own the shares of common stock beneficially owned by
Cambridge.

85
<PAGE>

. BREA is the general partner of BRE I, BRE Two, BRE Three, BRE IV, BRECP,
BRECP II and BOC, and BREA has the power to vote or direct the vote and
to dispose or direct the disposition of the shares of common stock owned
by those entities, in each case to the extent that BRE I, BRE Two, BRE
Three, BRE IV, BRECP, BRECP II and BOC have that power. Therefore, BREA
may be deemed to beneficially own the shares of common stock
beneficially owned by those entities.

. BREA II is the general partner of BRE II, BRE II TE 1, BRE II TE 2, BRE
II TE 3, BRE II TE 4 and BRE II TE 5, and BREA II has the power to vote
or direct the vote and to dispose or direct the disposition of the
shares of common stock owned by those entities, in each case to the
extent that BRE II, BRE II TE 1, BRE II TE 2, BRE II TE 3, BRE II TE 4
and BRE II TE 5 have that power. Therefore, BREA II may be deemed to
beneficially own the shares of common stock beneficially owned by those
entities.

. Any disposition of an investment, directly or indirectly, by entities to
which either BREA or BREA II serves as general partner requires the
approval of John G. Schreiber, who is a limited partner in BREA and BREA
II. Because Mr. Schreiber has the shared power to dispose or direct the
disposition of the common stock that may be deemed to be beneficially
owned by BREA and BREA II, in each case to the extent that BREA and BREA
II have that power, Mr. Schreiber may be deemed to beneficially own the
shares of Common Stock beneficially owned by BREA and BREA II.

. BREMA II is the general partner of BREA II and BREH II, and BREMA II has
the power to vote or direct the vote and to dispose or direct the
disposition of the common stock that may be deemed to be beneficially
owned by BREA II and BREA II, in each case to the extent that BREA II
and BREH II have that power. Therefore, BREMA II may be deemed to
beneficially own the shares of common stock beneficially owned by those
entities.

. BREA LLC is the general partner of BREA and BREH, and BREA LLC has the
power to vote or direct the vote and to dispose or direct the
disposition of the common stock that may be deemed to be beneficially
owned by BREA and BREH, in each case to the extent that BREA and BREH
have that power. Therefore, BREA LLC may be deemed to beneficially own
the shares of common stock beneficially owned by those entities.

. BREA II LLC is the general partner of BREMA II, and BREA II LLC has the
power to vote or direct the vote and to dispose or direct the
disposition of the common stock that may be deemed to be beneficially
owned by BREA II and BREH II, in each case to the extent that BREMA II
has that power. Therefore, BREA II LLC may be deemed to beneficially own
the shares of common stock beneficially owned by those entities.

. Peter G. Peterson and Stephen A. Schwarzman, who are the founding
members of BREA LLC and BREA II LLC, are able to control BREA LLC, BREA
II LLC and Logan. Messrs. Peterson and Schwarzman have the shared power
to vote or to direct the vote and to dispose or direct the disposition
of the shares of common stock that may be deemed to be beneficially
owned by BREA LLC, BREA II LLC and Logan, in each case to the extent
that BREA LLC, BREA II LLC and Logan have that power. Therefore, each of
Messrs. Peterson and Schwarzman may be deemed to beneficially own the
shares of common stock beneficially owned by those entities.

. John Ceriale is a member with the sole beneficial ownership of CRRE, and
therefore, Mr. Ceriale may be deemed to beneficially own the shares of
common stock beneficially owned by that entity.

Registration rights agreement

Pursuant to a registration rights agreement, we have granted the selling
stockholders registration rights with respect to the shares of the common stock
to which this prospectus relates. Under the registration rights agreement, the
selling stockholders may only offer for sale (1) up to 50% of such shares
beginning July 1, 1999, (2) an additional 25% of the shares beginning October
1, 1999 and (3) the remaining 25% of the shares beginning January 1, 2000. In
addition, we have granted certain piggyback registration rights to the initial

86
<PAGE>

selling stockholders allowing them to participate in registered offerings by us
or other stockholders. We will bear expenses incident to our registration
requirements under the registration rights agreement, except that such expenses
shall not include any underwriting discounts or commissions or transfer taxes,
if any, relating to such shares.

Under the registration rights agreement, we have agreed to indemnify the
selling stockholders and a limited number of others including any underwriters,
and controlling persons of the selling stockholders or underwriters and their
respective directors, officers, partners, employees, and affiliates. We will
indemnify these persons against any losses in connection with a claim that
arises out of or is based upon any untrue statement or omission or alleged
untrue statement or omission of a material fact contained in this prospectus or
the registration statement filed with the Securities and Exchange Commission in
connection with this offer, but only to the extent such person furnished the
untrue statement or omitted the material facts and we relied upon the person
for the information. However, we are not obligated to indemnify a person who
furnished the untrue statement, assuming we relied upon the person for the
information.

Under the registration rights agreement, the selling stockholders have
agreed to indemnify us, any underwriter, any person that controls us or any
underwriter and our respective directors, officers, partners, employees, and
affiliates. They will indemnify us against any losses in connection with a
claim that arises out of or is based upon any untrue statement or omission or
alleged untrue statement or omission of a material fact contained in this
prospectus or the registration statement filed with the Securities and Exchange
Commission in connection with this offer, but only to the extent they furnished
the untrue statement or omitted the material facts. The liability of a selling
stockholder is limited to the amount of the total proceeds that the stockholder
received in connection with this offer.

87
<PAGE>

PLAN OF DISTRIBUTION

We are registering the shares on behalf of the selling stockholders. When we
use the term "selling stockholders" in this prospectus, it includes donees,
pledgees and other transferees who are selling shares received after the date
of this prospectus from a selling stockholder whose name appears in "The
Selling Stockholders".

Selling stockholders may sell shares from time to time in a number of ways,
including:

. in block transactions;

. on the New York Stock Exchange or other national securities exchange on
which the shares are traded;

. in the over-the-counter market;

. in negotiated transactions;

. in underwritten transactions pursuant to the terms of the registration
rights agreement;

. through put or call option transactions relating to the shares;

. through short sales of shares; or

. through a combination of these methods of sale, at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices.

The selling stockholders may sell shares in any manner permitted by law,
including by selling shares directly to purchasers or to or through
underwriters and broker-dealers, which may act as agents or principals. These
underwriters and broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders and/or the
purchasers of shares for whom such underwriters and broker-dealers may act as
agents or to whom they sell as principal, or both. The compensation paid to a
particular underwriter or broker-dealer might be in excess of customary
commissions.

The selling stockholders and any underwriters or broker-dealers who act in
connection with the sale of shares may be deemed to be "underwriters' within
the meaning of Section 2(a)(11) of the Securities Act of 1933. Because selling
stockholders may be deemed to be "underwriters" within the meaning of Section
2(a)(11) of the Securities Act, the selling stockholders will be subject to the
prospectus delivery requirements of the Securities Act. We have informed the
selling stockholders that the anti-manipulation provisions of Regulation M
under the Securities Exchange Act of 1934 may apply to their sales in the
market.

Selling stockholders also may resell all or portion of the shares in open
markets transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of Rule 144.

If we are notified by a selling stockholder that any material arrangement
has been entered into with (1) a broker-dealer for the sale of shares through a
block trade, special offering, exchange distribution or secondary distribution
or a purchase by a broker or dealer or (2) an underwriter in connection with an
underwritten offering of shares on the selling stockholders behalf, we will
file a supplement to this prospectus, if required, under Rule 424(b) under the
Securities Act. The prospectus supplement will disclose:

. the names of the selling stockholder and the participating underwriter(s)
or broker-dealer(s);

. the number of shares involved;

. the price at which the shares were or are to be sold;

. the commissions paid or discounts or concessions allowed to the
underwriter(s) or broker-dealer(s), where applicable; and

. other facts material to the transaction.

88
<PAGE>

We will pay all costs, expenses and fees in connection with the registration
of the shares. The selling stockholders will pay all brokerage commissions and
similar selling expenses, if any, attributable to the sale of shares.

We have agreed to indemnify the selling stockholders and any other person
who sells shares using this prospectus, and any other officer, director or
agent of such a person, against certain civil liabilities, including
liabilities under the Securities Act. Under the terms of the registration
rights agreement, certain initial selling stockholders have agreed to indemnify
us against certain liabilities, including liabilities arising under the
Securities Act.

89
<PAGE>

LEGAL MATTERS

The validity of the common stock being offered hereby will be passed upon
for Crestline by Tracy M.J. Colden, Senior Vice President, General Counsel and
Corporate Secretary of Crestline.

EXPERTS

The financial statements and schedule of Crestline Capital Corporation as of
January 1, 1999 and January 2, 1998, for the fiscal year ended January 1, 1999
and for the period from June 21, 1997 (inception) through January 2, 1998, the
financial statements of Marriott Residence Inn USA Limited Partnership as of
December 31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998 and the financial statements of Forum Group, Inc. and
Subsidiaries, as partitioned for sale to Host Marriott Corporation, as of
January 3, 1997 and for the twenty-four week period ended June 20, 1997 and the
forty-week period ended January 3, 1997 included in this registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities Exchange
Act of 1934 and are required to file annual and quarterly reports, proxy
statements and other information with the SEC. You can inspect and copy reports
and other information filed by us with the SEC at the SEC's Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0300. The SEC also maintains an Internet site at http://www.sec.gov
that contains reports, proxy and information statements regarding issuers,
including us, that file electronically with the SEC.

We have also filed with the SEC a Registration Statement on Form S-1 under
the Securities Act with respect to the shares of common stock offered by this
prospectus. This prospectus does not contain all the information set forth in
the registration statement, certain portions of which are omitted as permitted
by the rules and regulations of the SEC. For further information about us and
the shares offered by this prospectus, you should refer to the registration
statement, including the exhibits and schedules filed with the registration
statement. You may obtain copies of the registration statement (of which this
prospectus is a part), together with such exhibits and schedules, upon payment
of the fee prescribed by the SEC, or you may examine these documents without
charge at the office of the SEC.

90
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Crestline Capital Corporation and Subsidiaries
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of January 1, 1999 and January 2, 1998.... F-3
Consolidated Statements of Operations for the Fiscal Year Ended January
1, 1999 and the Period from June 21, 1997 (inception) through January 2,
1998.................................................................... F-4
Consolidated Statements of Shareholders' Equity for the Fiscal Year Ended
January 1, 1999 and the Period from June 21, 1997 (inception) through
January 2, 1998......................................................... F-5
Consolidated Statements of Cash Flows for the Fiscal Year Ended January
1, 1999 and the Period from June 21, 1997 (inception) through January 2,
1998.................................................................... F-6
Notes to Consolidated Financial Statements............................... F-7
Condensed Consolidated Balance Sheet as of March 26, 1999 (unaudited).... F-24
Condensed Consolidated Statements of Operations for the Twelve Weeks
Ended March 26, 1999 and March 27, 1998 (unaudited)..................... F-25
Condensed Consolidated Statements of Cash Flows for the Twelve Weeks
Ended March 26, 1999 and March 27, 1998 (unaudited)..................... F-26
Notes to Condensed Consolidated Financial Statements..................... F-27

Forum Group, Inc. and Subsidiaries, as Partitioned for Sale to Host
Marriott Corporation

Report of Independent Public Accountants................................. F-30
Consolidated Balance Sheet as of January 3, 1997......................... F-31
Consolidated Statements of Operations for the Twenty-four Week Period
Ended June 20, 1997 and the Forty-week Period Ended January 3, 1997..... F-32
Consolidated Statements of Cash Flows for the Twenty-four Week Period
Ended June 20, 1997 and the Forty-week Period Ended January 3, 1997..... F-33
Notes to Consolidated Financial Statements............................... F-34

Marriott Residence Inn USA Limited Partnership

Report of Independent Public Accountants................................. F-41
Balance Sheet as of December 31, 1998 and 1997........................... F-42
Statements of Operations for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-43
Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and
1996.................................................................... F-44
Statements of Changes in Partners' Capital............................... F-45
Notes to Financial Statements............................................ F-46
Condensed Balance Sheet as of March 31, 1999 (unaudited)................. F-53
Condensed Statements of Operations for the Three Months Ended March 31,
1999 and 1998 (unaudited)............................................... F-54
Condensed Statements of Cash Flows for the Three Months Ended March 31,
1999 and 1998 (unaudited)............................................... F-55
Notes to Condensed Financial Statements (unaudited)...................... F-56
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Crestline Capital Corporation:

We have audited the accompanying consolidated balance sheets of Crestline
Capital Corporation and subsidiaries (a Delaware Corporation), as of January 1,
1999 and January 2, 1998, and the related consolidated statements of
operations, shareholders' equity and cash flows for the fiscal year ended
January 1, 1999 and for the period from June 21, 1997 (inception) through
January 2, 1998. These consolidated financial statements and the schedule
referred to below are the responsibility of Crestline Capital Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Crestline
Capital Corporation and its subsidiaries as of January 1, 1999 and January 2,
1998 and the results of their operations and their cash flows for the fiscal
year ended January 1, 1999 and the period from June 21, 1997 (inception)
through January 2, 1998, in conformity with generally accepted accounting
principles.

As discussed in Note 1 to the consolidated financial statements, Crestline
Capital Corporation and subsidiaries have given retroactive effect to the
change to include property-level revenues and operating expenses of its senior
living communities in the consolidated statement of operations.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Washington, D.C.
March 5, 1999

F-2
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
January 1, 1999 and January 2, 1998
(in thousands, except share data)

<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Property and equipment, net.................................. $655,745 $633,840
Hotel working capital........................................ 95,114 --
Due from Marriott International, net......................... 8,884 --
Other assets................................................. 32,231 12,018
Cash and cash equivalents.................................... 66,779 17,644
-------- --------
$858,753 $663,502
======== ========

LIABILITIES AND SHAREHOLDERS' EQUITY

Debt:
Mortgage debt.............................................. $183,059 $213,469
Other debt................................................. 30,017 136,465
-------- --------
213,076 349,934
Hotel working capital notes payable to Host Marriott....... 95,114 --
-------- --------
Total debt............................................... 308,190 349,934
Accounts payable and accrued expenses........................ 6,438 5,038
Due to Marriott International, net........................... -- 3,172
Other liabilities............................................ 23,518 17,438
Due to Host Marriott......................................... -- 2,151
Deferred income taxes........................................ 61,353 58,705
-------- --------
Total liabilities........................................ 399,499 436,438
-------- --------
Shareholders' equity:
Common stock, 75 million shares authorized, 21.9 million
shares issued and outstanding, $.01 par value............. 219 --
Additional paid-in capital................................. 452,762 226,706
Retained earnings.......................................... 6,273 358
-------- --------
Total shareholders' equity............................... 459,254 227,064
-------- --------
$858,753 $663,502
======== ========
</TABLE>

See Notes to Consolidated Financial Statements.

F-3
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended January 1, 1999 and
for the period from June 21, 1997 (inception) through January 2, 1998
(in thousands, except per share data)

<TABLE>
<CAPTION>
Period from
June 21, 1997
(inception)
through
1998 January 2, 1998
-------- ---------------
<S> <C> <C>
REVENUES
Routine........................................... $213,378 $98,531
Ancillary......................................... 27,899 12,438
-------- -------
Total revenues.................................. 241,277 110,969
-------- -------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
Routine........................................... 138,099 63,814
Ancillary......................................... 21,317 10,255
Other operating costs and expenses
Depreciation and amortization..................... 22,115 10,635
Management fees paid to Marriott International.... 13,973 6,481
Property taxes and other.......................... 8,554 3,813
-------- -------
Total operating costs and expenses.............. 204,058 94,998
-------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND
INTEREST........................................... 37,219 15,971
Corporate expenses.................................. (6,360) (2,304)
Interest expense.................................... (22,861) (13,396)
Interest income..................................... 2,028 336
-------- -------
INCOME BEFORE INCOME TAXES.......................... 10,026 607
Provision for income taxes.......................... (4,111) (249)
-------- -------
NET INCOME.......................................... $ 5,915 $ 358
======== =======
BASIC EARNINGS PER COMMON SHARE..................... $ .27 $ .02
======== =======
DILUTED EARNINGS PER COMMON SHARE................... $ .27 $ .02
======== =======
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

Fiscal Year Ended January 1, 1999 and
for the period from June 21, 1997 (inception) through January 2, 1998
(in thousands)

<TABLE>
<CAPTION>
Additional
Common Paid-in Retained
Stock Capital Earnings
------ ---------- --------
<S> <C> <C> <C>
Balance, June 21, 1997............................... $-- $ -- $ --
Capital contributions by Host Marriott............. -- 226,706 --
Net income......................................... -- -- 358
---- -------- ------
Balance, January 2, 1998............................. -- 226,706 358
Capital contributions by Host Marriott............. -- 226,275 --
Distribution of the Company........................ 219 (219) --
Net income......................................... -- -- 5,915
---- -------- ------
Balance, January 1, 1999............................. $219 $452,762 $6,273
==== ======== ======
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Year Ended January 1, 1999 and
for the period from June 21, 1997 (inception) through January 2, 1998
(in thousands)

<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
1998 through January 2, 1998
-------- -------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................ $ 5,915 $ 358
Adjustments to reconcile net income to
cash from operations:
Depreciation and amortization........... 22,115 10,635
Amortization of debt premiums........... (1,550) (834)
Income taxes............................ 4,111 249
Change in amounts due to Marriott
International.......................... (10,934) 10,073
Change in amounts due to Host Marriott.. -- 2,151
Other................................... -- (997)
Change in other operating accounts...... 9,330 3,741
-------- --------
Cash from operations...................... 28,987 25,376
-------- --------
INVESTING ACTIVITIES
Acquisitions............................. (11,926) --
Expansions............................... (8,653) (30,782)
Capital expenditures..................... (7,087) (2,563)
Increase in capital improvement reserve.. (2,432) (67)
-------- --------
Cash used in investing activities......... (30,098) (33,412)
-------- --------
FINANCING ACTIVITIES
Contribution of cash from Host Marriott.. 52,250 7,319
Repayments of debt....................... (3,608) (2,142)
Issuances of debt........................ 1,700 20,407
Change in financing reserves............. (96) 96
-------- --------
Cash provided by financing activities..... 50,246 25,680
-------- --------
Increase in cash and cash equivalents..... 49,135 17,644
Cash and cash equivalents, beginning of
period................................... 17,644 --
-------- --------
Cash and cash equivalents, end of period.. $ 66,779 $ 17,644
======== ========
SUPPLEMENTAL INFORMATION--NON-CASH
ACTIVITY:
Contributions from Host Marriott:
Property and equipment.................. $ 20,959 $601,033
Acquisition of minority interests paid
by Host Marriott....................... 12,963 --
Debt assumed............................ -- (331,669)
Debt forgiveness........................ 106,995 --
Debt prepayment paid by Host Marriott... 26,405 --
Other................................... 6,647 (1,641)
Deferred income taxes................... -- (58,435)
Expansion costs paid by Host Marriott... 56 10,099
Notes issued in exchange for purchase of
working capital.......................... 95,114 --
</TABLE>

See Notes to Consolidated Financial Statements.

F-6
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

Basis of Presentation

On December 29, 1998 (the "Distribution Date"), Crestline Capital
Corporation (the "Company," formerly known as HMC Senior Communities, Inc.)
became a publicly traded company when Host Marriott Corporation ("Host
Marriott") completed its plan of reorganizing its business operations by
spinning-off the Company to the shareholders of Host Marriott (the
"Distribution"), as part of a series of transactions pursuant to which Host
Marriott elected to be considered a real estate investment trust ("REIT"), see
Note 2. On December 31, 1998, the Company entered into lease and sublease
agreements to lease substantially all of Host Marriott's hotels with the
existing management agreements of the leased and subleased hotels assigned to
the Company. As of January 1, 1999, the Company leased or subleased 121 full-
service and 71 limited-service hotels and owned 31 senior living communities
(the "Communities").

On June 21, 1997, Host Marriott acquired all of the outstanding stock of
Forum Group Inc. ("Forum") from Marriott Senior Living Services, Inc. ("MSLS"),
a subsidiary of Marriott International, Inc. ("Marriott International") for
$190 million of cash and the assumption of $270 million of debt and
concurrently contributed all of the assets, including 29 of the Communities,
and liabilities of Forum to the Company. In connection with the acquisition,
the Company assigned to Marriott International its interest as manager under
long-term operating agreements (see Note 7). The acquisition of Forum was
accounted for under the purchase method of accounting.

Through the Distribution Date, the Company operated as a wholly owned
subsidiary of Host Marriott utilizing Host Marriott's employees, insurance and
administrative services since the Company had no employees. Periodically,
certain operating expenses, capital expenditures and other cash requirements of
the Company were paid by Host Marriott and charged directly or allocated to the
Company. Certain general and administrative costs of Host Marriott were
allocated to the Company using a variety of methods, principally including Host
Marriott's specific identification of individual cost items and otherwise
through allocations based upon estimated levels of effort devoted by its
general and administrative departments to individual entities or relative
measures of size of the entities based on assets. In the opinion of management,
the methods for allocating corporate, general and administrative expenses and
other direct costs are reasonable.

The consolidated financial statements present the financial position,
results of operations and cash flows of the Company for the fiscal year ended
January 1, 1999 and for the period beginning on June 21, 1997 (the date Host
Marriott acquired the stock of Forum) through January 2, 1998. Host Marriott's
basis in the assets and liabilities of the Company has been carried over to
these financial statements. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in affiliates owned
20 percent or more and over which the Company has the ability to exercise
significant influence, but does not control, are accounted for using the equity
method. Investments in affiliates less than 20 percent owned by the Company,
and for which the Company does not exercise significant influence, are
accounted for using the cost method. To the extent the purchase price of
investments in affiliates exceeds the net book value, the Company amortizes the
difference over 40 years. All material intercompany transactions and balances
have been eliminated.

Fiscal Year

The Company's fiscal year ends on the Friday nearest to December 31.

F-7
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Revenues

Revenues represent community operating revenues consisting of routine and
ancillary revenues. Routine revenues consist of resident fees and health care
service revenues, which are generated primarily from monthly charges for
independent and assisted living apartments and special care center rooms and
daily charges for healthcare beds, and are recognized monthly based on the
terms of the residents' agreements. Advance payments received for services are
deferred until the services are provided. Included in resident fees revenue is
ancillary revenue, which is generated on a "fee for service" basis for
supplemental items requested by residents and is recognized as the services are
provided.

A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursements under these contractual arrangements are subject
to retroactive adjustments based on agency reviews. Revenues from health care
services are recorded net of estimated contractual allowances in the
accompanying consolidated financial statements. Management believes that
reserves recorded are adequate to cover any retroactive adjustments arising
from such reviews.

Revenues include amounts estimated by management to be reimbursable through
Medicare, Medicaid and other third party payor agreements. Medicare and
Medicaid represented 10% and 2%, respectively, of revenues for fiscal year 1998
and 11% and 3%, respectively, of revenues for the period from June 21, 1997
(inception) through January 2, 1998. Reimbursement arrangements are subject to
audit and retroactive adjustment. Provisions are made for potential adjustments
that may result. To the extent those provisions vary from settlements, revenues
are charged or credited when the adjustments become final. In management's
opinion, any adjustments related to current and prior years' operations will be
immaterial to current and future financial statements. Audits under the
reimbursement agreements have been completed through fiscal year 1996 and there
were no material audit adjustments.

Earnings per Common Share

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 common stock outstanding plus other dilutive securities. The weighted
average number of outstanding common shares is based on Host Marriott's
weighted average number of outstanding common shares, adjusted for the one-for-
ten distribution ratio (see Note 2).

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

<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
1998 through January 2, 1998
------ -------------------------
(in thousands)
<S> <C> <C>
Weighted average number of common shares
outstanding.............................. 21,626 21,536
Assuming distribution of common shares
granted under comprehensive stock plan,
less shares assumed purchased at average
market price............................. 30 --
------ ------
Shares utilized for the calculation of
diluted earnings per share............... 21,656 21,536
====== ======
</TABLE>

Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less at
date of purchase are considered cash equivalents. Cash and cash equivalents
include $10,828,000 and $11,289,000 at January 1, 1999 and

F-8
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

January 2, 1998, respectively, of cash related to certain consolidated
partnerships, the use of which is restricted generally for partnership purposes
to the extent it is not distributed to the partners.

Property and Equipment

Property and equipment is recorded at cost. Replacements and improvements
that extend the useful life of property and equipment are capitalized.
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to 10
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.

In cases where management is holding for sale a particular Community, the
Company assesses impairment based on whether the estimated sales price less
cost of disposal of each individual property to be sold is less than the net
book value. A property is considered to be held for sale when a decision is
made to dispose of the Community. Otherwise, impairment is assessed based on
whether it is probable that undiscounted future cash flows from each Community
will be less than its net book value. If a Community is impaired, its basis is
adjusted to its fair value.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant
concentration of credit risk consist principally of cash and cash equivalents.
The Company maintains cash and cash equivalents with various high credit-
quality financial institutions and limits the amount of credit exposure with
any institution.

Senior Living Community Working Capital

Pursuant to the terms of the Company's Operating Agreements (see Note 7),
the Company is required to provide Marriott International with working capital
and supplies to meet the operating needs of the Communities. Marriott
International converts cash advanced by the Company into other forms of working
capital consisting primarily of operating cash, inventories, resident deposits
and trade receivables and payables which are maintained and controlled by
Marriott International. Upon the termination of the Operating Agreements,
Marriott International is required to convert working capital and supplies into
cash and return it to the Company. As a result of these conditions, the
individual components of working capital and supplies controlled by Marriott
International are not reflected in the accompanying consolidated balance
sheets.

Hotel Working Capital

Pursuant to the terms of the Hotel Management Agreements (see Note 6), the
Company is required to provide the hotel manager with the working capital and
supplies to meet the operating needs of the leased and subleased hotels. The
hotel manager converts the cash advanced into other forms of working capital
consisting primarily of operating cash, inventories, trade receivables and
payables which are maintained and controlled by the hotel manager. Upon the
commencement of a typical hotel lease or sublease, the Company typically
purchases from the hotel owner the existing working capital controlled by the
hotel manager evidenced by a note payable to the hotel owner. Upon the
termination of the hotel lease or sublease, the Company is required to sell the
existing working capital to the hotel owner at its current market value. To the
extent the working capital delivered to the hotel owner is less than the value
of the loan, the Company will pay the difference in cash. However, to the
extent the working capital delivered to the hotel owner exceeds the value of
the loan, the hotel owner will pay the Company the difference in cash. If the
hotel management agreement is terminated, the hotel manager is required to
convert working capital and supplies into cash and return it to the Company. As
a result of these conditions, the individual components of working capital and
supplies controlled by the hotel

F-9
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

manager are not reflected in the accompanying consolidated balance sheets.
However, the total amount of working capital purchased from the hotel owner and
advanced to the hotel manager and the corresponding working capital note
payable to the owner is reflected on the accompanying consolidated balance
sheets.

Senior Living Community Deferred Revenue

Monthly fees deferred for the non-refundable portion of the entry fees are
recorded as deferred revenue and included in other liabilities in the
accompanying consolidated balance sheets. These amounts are recognized as
revenue as services are performed over the expected term of the residents'
contracts.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Reclassifications

Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.

New Statements of Financial Accounting Standards

During 1998, the Company adopted Statements of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting and display of comprehensive income and its
components in financial statements. The objective of SFAS No. 130 is to report
a measure of all changes in equity of an enterprise that result from
transactions and other economic events of the period other than transactions
with owners. Comprehensive income is the total of net income and all other
nonowner changes in equity. For all periods presented, the Company had no items
of other comprehensive income. Consequently, comprehensive income equals net
income and the Company has no accumulated other comprehensive income for all
periods presented.

During 1998, the Company adopted SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." The adoption of SFAS No. 131 did not
have a material effect on the Company's consolidated financial statements for
fiscal year 1998 and for the period from June 21, 1997 (inception) through
January 2, 1998, since the Company had only one operating segment, the senior
living ownership segment. For fiscal year 1999, the Company expects to have two
operating segments, the senior living ownership and hotel leasing segments, and
therefore will make the required disclosure of SFAS No. 131 in fiscal year
1999.

During 1998, the Company adopted SFAS No. 132, "Employer's Disclosure About
Pensions and Other Post-retirement Benefits." The adoption of SFAS No. 132 did
not have a material effect on the Company's consolidated financial statements.
The Company will adopt SFAS No. 133, "Accounting For Derivative Instruments and
Hedging Activities" in 1999 and does not expect it to have a material effect on
the Company's consolidated financial statements.

On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2. EITF 97-
2 addresses the circumstances in which a management entity may include the
revenues and expenses of a managed entity in its financial statements. The
Company

F-10
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

determined that EITF 97-2 requires the Company to include property-level
revenues and operating expenses of its leased and subleased hotels and owned
senior living communities in its consolidated statements of operations. The
Company adopted EITF 97-2 in the fourth quarter of 1998, with retroactive
effect in prior periods to conform to the new presentation. The adoption of
EITF 97-2 increased both revenues and operating costs and expenses for fiscal
year 1998 and the period from June 21, 1997 (inception) through January 2, 1998
by $159.4 million and $74.1 million, respectively, and had no impact on
operating profit or net income.

2. The Distribution

On the Distribution Date, Host Marriott completed its plan of reorganizing
its business by spinning-off the Company to the shareholders of Host Marriott
as part of a series of transactions pursuant to which Host Marriott elected to
be considered a REIT. As part of the Distribution, Host Marriott distributed
20.5 million, or 94%, of the outstanding shares of common stock of the Company
to the Host Marriott shareholders. The remaining 1.4 million, or six percent,
of the outstanding shares were used by Host Marriott as part of the
consideration paid on December 30, 1998 for Host Marriott's acquisition of
certain hotel properties from The Blackstone Group and a series of funds
controlled by Blackstone Real Estate Partners (the "Blackstone Acquisition").
The shares were distributed on the basis of one share of the Company's common
stock for every ten shares of Host Marriott common stock.

On December 31, 1998, the Company and Host Marriott entered into agreements
to lease 121 of the full-service hotels owned by Host Marriott and agreements
to sublease 71 limited-service hotels leased by Host Marriott (see Note 5). In
February 1999, Host Marriott sold one of the leased full-service hotels, and
the Company and Host Marriott agreed to terminate the lease reducing the number
of hotels leased from Host Marriott to 120 full-service hotels. Upon the
commencement of the hotel leases and subleases, the Company purchased the
working capital of the hotels from Host Marriott for $95 million with the
purchase price evidenced by notes that bear interest at 5.12%. The existing
management agreements for all of the leased hotels were assigned to the Company
(see Note 6).

In connection with the Blackstone Acquisition, a 25 percent interest in
Swissotel Management (USA) LLC, a management company that manages five hotels
in the United States, was transferred to the Company from Host Marriott for
$4.5 million. Also, in connection with the Distribution, the Company acquired a
five percent interest in a joint venture with Host Marriott that owns a $129
million first mortgage secured by eight hotel properties owned by Host Marriott
for $6.4 million.

In connection with the Distribution, the Company entered into asset
management agreements (the "Asset Management Agreements") with Host Marriott
and its affiliates pursuant to which the Company will provide Host Marriott
management advisory services on the operation of Host Marriott's hotels. The
terms of the Asset Management Agreements are for two years with an automatic
one-year renewal, with the Company receiving a fee of $4.5 million annually for
its services.

As part of the Distribution, the Company and Host Marriott entered into a
non-competition agreement that limits the respective parties' future business
opportunities. The Company is generally precluded until the earlier of December
31, 2008 or the date when the Company no longer leases at least 25% of the
original hotels leased from Host Marriott at the time of the Distribution, from
owning or acquiring any full-service hotels not leased from Host Marriott. The
Company is also subject to certain restrictions relating to leasing, operating
and managing full-service hotels under its agreement with Host Marriott.

For purposes of governing certain of the ongoing relationships between the
Company and Host Marriott, the Company and Host Marriott entered into various
agreements including a distribution agreement, an

F-11
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

employee benefits allocation agreement, a tax sharing agreement and a
transitional services agreement. These agreements provide, among other things,
for the allocation of assets and liabilities between the Company and Host
Marriott, a guarantee by Host Marriott of certain Company debt obligations,
and provide that the Company and Host Marriott will receive from each other
corporate services, such as accounting and computer systems support.

The following summarized unaudited pro forma data for the fiscal years
ended January 1, 1999 and January 2, 1998 assume all of the following
transactions occurred at the beginning of each fiscal year:

. the Distribution and related transactions discussed above including the
lease of 120 full-service hotels and sublease of 71 limited-service
hotels;

. the 1997 acquisition of Forum and one additional senior living community
and the 1998 acquisition of one senior living community;

. the 1998 repayment and forgiveness of certain debt (see Note 9); and

. the 1998 acquisition of minority interests in certain consolidated
subsidiaries.

<TABLE>
<CAPTION>
1998 1997
---------- ----------
(in thousands, except
per share data)
(unaudited)
<S> <C> <C>
Revenues............................................. $4,299,036 $3,970,630
Operating profit before corporate expenses and
interest............................................ 82,118 72,786
Net income........................................... 26,200 20,704
Earnings per common share............................ 1.19 .95
</TABLE>

3. Property and Equipment

Property and equipment consists of the following:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Land and land improvements............................... $113,802 $102,714
Buildings and leasehold improvements..................... 542,201 518,056
Furniture and equipment.................................. 32,492 23,705
-------- --------
688,495 644,475
Less accumulated depreciation and amortization........... (32,750) (10,635)
-------- --------
$655,745 $633,840
======== ========
</TABLE>

In the first quarter of 1998, the Company acquired the Gables at Winchester
in suburban Boston, a 125-unit upscale senior living community, for $21
million and concurrently entered into a long-term operating agreement with
Marriott International to operate the property. Also in the first quarter of
1998, the Company entered into conditional purchase agreements for two
Marriott Brighton Gardens assisted living communities with the Summit
Companies of Denver, Colorado. After the anticipated completion of
construction in the second quarter of 1999, the Company has the option to
acquire these two 160-unit properties located in Denver and Colorado Springs,
Colorado, for approximately $35 million, if they achieve certain operating
performance criteria. Both of these communities will be operated by Marriott
International under long-term operating agreements.

F-12
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

4. Restricted Cash

Restricted cash, which is included in other assets on the accompanying
consolidated balance sheets, consists of the following:

<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Debt service reserves....................................... $ 1,624 $ 1,528
Fixed asset reserves........................................ 6,732 4,300
Real estate tax reserves.................................... 4,032 3,590
Insurance reserves.......................................... 2,503 1,268
------- -------
$14,891 $10,686
======= =======
</TABLE>

The debt service, fixed asset, real estate tax and insurance reserves
consist of cash transferred into segregated escrow accounts out of revenues
generated by the Communities, pursuant to the Company's secured debt
agreements. Funds from these reserves are periodically disbursed by the
collateral agent to pay for debt service, capital expenditures, insurance
premiums and real estate taxes relating to the secured properties. In addition,
the fixed asset reserves also include cash transferred into segregated escrow
accounts pursuant to the Company's Community Operating Agreements to fund
certain capital expenditures at the Communities (see Note 7). In some cases, to
ensure prompt payment, the Company utilizes its unrestricted cash to pay for
capital expenditures, insurance premiums and real estate taxes and is
subsequently reimbursed for such payments out of funds held in the appropriate
escrow account.

5. Leases

The Company is the lessee under capital and operating leases. Future minimum
annual rental commitments for all non-cancelable leases as of January 1, 1999
are as follows:

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ----------
(in thousands)
<S> <C> <C>
1999.................................................... $ 1,295 $ 767,191
2000.................................................... 1,309 765,960
2001.................................................... 1,328 765,403
2002.................................................... 1,347 758,843
2003.................................................... 1,565 758,843
Thereafter.............................................. 12,203 2,998,142
------- ----------
Total minimum lease payments............................ 19,047 $6,814,382
==========
Less amount representing interest....................... (8,379)
-------
Present value of minimum lease payments................. $10,668
=======
</TABLE>

Hotel Leases

In connection with the Distribution, wholly-owned subsidiaries of the
Company entered into leases (the "Hotel Leases") with Host Marriott effective
January 1, 1999 for 121 full-service hotels. Each Hotel Lease has a fixed term
generally ranging from seven to ten years. The Company is required to pay the
greater of (i) a minimum rent specified in each Hotel Lease or (ii) a
percentage rent based upon a specified percentage of aggregate revenues from
the hotel, including room revenues, food and beverage revenues, and other
income, in excess of specified thresholds. The amount of minimum rent will be
increased each year based upon any

F-13
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

increases in CPI during the previous twelve months. Percentage rent thresholds
will be increased each year based on a blend of any increases in CPI and the
Employment Cost Index during the previous twelve months. The Hotel Leases will
generally provide for a rent adjustment in the event of damage, destruction,
partial taking or certain capital expenditures.

The Company is responsible for paying all of the expenses of operating the
hotels, including all personnel costs, utility costs, and general repair and
maintenance of the hotels. In addition, the Company is responsible for all fees
payable to the hotel manager, including base and incentive management fees,
chain services payments and franchise or system fees. Host Marriott is
responsible for real estate and personal property taxes, property casualty
insurance, ground lease rent, maintaining a reserve fund for FF&E replacements
and capital expenditures.

In the event that Host Marriott disposes of a hotel free and clear of the
Hotel Lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the Hotel Lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the Hotel Lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve leases without having to
pay a termination fee. Conversely, the Company may terminate up to twelve full-
service hotel leases without penalty upon 180 days notice to Host Marriott.

Also, in the event that changes in the federal income tax laws allow Host
Marriott or its subsidiaries to directly operate the hotels without
jeopardizing its REIT status, Host Marriott may terminate all of the Hotel
Leases upon payment of the termination fee. The payment of the termination fee
will be payable in cash or, subject to certain conditions, shares of Host
Marriott common stock at the election of Host Marriott.

For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Company's subsidiaries that are party to the Hotel Leases.

As part of the Distribution, the Company and Host Marriott entered into
guaranty and pooling agreements by which the Company and certain of its
subsidiaries guarantee the Hotel Lease obligations. All of the Hotel Leases
were placed into four different pools with all of the Hotel Leases having
similar terms placed into the same pool. The parent subsidiary of each pool
(the "Pool Parent") has a full guarantee obligation of the Hotel Leases in its
respective pool. However, for each pool, the cumulative limit of the Company's
guaranty obligation will be the greater of ten percent of the aggregate rent
payable for the immediately preceding fiscal year under all Hotel Leases in the
pool or ten percent of the aggregate rent payable under all Hotel Leases in the
pool for 1999. In the event that the Company's obligation under a guaranty
agreement for a pool is reduced to zero, the Company can terminate its guaranty
and pooling agreement for that pool and Host Marriott can terminate the Hotel
Leases in the pool without penalty.

FF&E Leases

In connection with the Distribution, if the average tax basis of a hotel's
FF&E and other personal property exceeded 15% of the aggregate average tax
basis of the hotel's real and personal property (the "Excess FF&E"),
subsidiaries of the Company and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the FF&E Leases
is a fixed amount. The Company will have the option at the expiration of the
FF&E Lease term to either (i) renew the FF&E Leases for consecutive one-year
renewal terms at a fair market rental rate, or (ii) purchase the Excess FF&E
for a price equal to its fair market value. If the Company does not

F-14
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

exercise its purchase or renewal option, the Company is required to pay a
termination fee equal to approximately one month's rent.

Limited-Service Hotel Subleases

Host Marriott leases 71 limited-service hotels under the "Residence Inn" and
"Courtyard by Marriott" brands (the "HPT Leases") from Hospitality Properties
Trust, Inc. ("HPT"). The HPT Leases have initial terms expiring through 2012
for the Courtyard properties and 2010 for the Residence Inn properties, and are
renewable at the option of Host Marriott. In connection with the Distribution,
subsidiaries of the Company entered into sublease agreements with Host Marriott
for these limited-service hotels (the "Subleases"). The terms of the Subleases
will expire simultaneously with the expiration of the initial term of the HPT
Leases. If Host Marriott elects to renew the HPT Leases, the Company can elect
to also renew the Subleases for the corresponding renewal term.

Each Sublease provides that generally all of the terms in the HPT Leases
will apply to the Subleases. The HPT Leases require the lessee to pay rent
equal to (i) a fixed minimum rent, less the cost of any repairs, maintenance,
renovations or replacements of the hotel, (ii) plus an additional rent based
upon a specified percentage of revenues to the extent they exceed revenues from
a base year. In addition, the HPT Leases require the lessee to pay all repair
and maintenance costs, impositions, utility charges, insurance premiums and all
fees payable under the hotel management agreements. Pursuant to the Subleases,
subsidiaries of the Company are required to pay rent to Host Marriott equal to
the minimum rent due under the HPT Leases and an additional rent based on a
percentage of revenues. To the extent the reserves for FF&E replacements are
insufficient to meet the hotel's capital expenditure requirements, HPT is
required to fund the shortfall.

The rent payable under the Subleases is guaranteed by the Company up to a
maximum of $30 million. The Company's wholly owned subsidiaries that are party
to the Subleases were capitalized with $30 million in notes from the Company
payable upon demand.

In the event that changes in the federal income tax laws allow Host Marriott
or its subsidiaries to directly operate the hotels without jeopardizing its
REIT status, Host Marriott may terminate all of the Subleases upon payment of
the termination fee equal to the fair market value of the Company's leasehold
interests in the remaining term of the Subleases using a discount rate of five
percent.

Senior Living Leases

The Company leases two communities under capital leases expiring in 2016.
Upon the expiration of the lease or anytime prior to lease expiration, the
Company has the first right of refusal (the "Option") to submit a counter offer
to any acceptable bona fide offer from a third party within 30 days of notice
from the lessor. If the Company fails to exercise its Option, then the lessor
may proceed with the sale of the leased property and all assets therein.

The Company also has one long-term operating ground lease which expires in
2013. The operating lease includes three renewal options exercisable in five-
year increments through the year 2028.

Rent expense for fiscal year 1998 and the period from June 21, 1997
(inception) through January 2, 1998 was $279,000 and $141,000, respectively.

6. Hotel Management Agreements

All of the Company's leased and subleased hotels are operated by independent
hotel management companies under long-term hotel management agreements (the
"Hotel Management Agreements") between Host Marriott and independent hotel
management companies.

F-15
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Assignment of Hotel Management Agreements

The existing Hotel Management Agreements were assigned to the Company upon
the execution of the Hotel Leases for the term of each corresponding Hotel
Lease. The Company is obligated to perform all of the obligations of Host
Marriott under the Hotel Management Agreements including payment of fees due
under the Hotel Management Agreements other than certain obligations including
payment of property taxes, property casualty insurance and ground rent,
maintaining a reserve fund for FF&E replacements and capital expenditures, for
which Host Marriott retains responsibility.

Marriott International Hotel Management Agreements

Marriott International manages 89 of the 121 leased full-service hotels and
all of the 71 subleased limited-service hotels under long-term Hotel Management
Agreements assigned to the Company, generally for an initial term of 15 to 20
years with renewal terms at the option of Marriott International of up to an
additional 16 to 30 years. The Hotel Agreements generally provide for payment
of base management fees equal to one to four percent of revenues and incentive
management fees generally equal to 20% to 50% of Operating Profit (as defined
in the Hotel Management Agreements) over a priority return (as defined) to the
Company, with total incentive management fees not to exceed 20% of cumulative
Operating Profit, or 20% of current year Operating Profit.

Pursuant to the terms of the Hotel Management Agreements, Marriott
International is required to furnish the hotels with certain services ("Chain
Services") which are generally provided on a central or regional basis to all
hotels in the Marriott International hotel system. Chain Services include
central training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.

Ritz-Carlton Hotel Management Agreements

The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages ten of the leased hotels under long-term Hotel
Management Agreements assigned to the Company. These agreements have an initial
term of 15 to 25 years with renewal terms at the option of Ritz-Carlton of up
to an additional 10 to 40 years. Base Management fees vary from two to four
percent of revenues and incentive management fees are generally equal to 20% of
available cash flow or operating profit, as defined in the agreements.

Other Hotel Management Agreements

The Company's remaining 22 leased hotels are managed by other independent
hotel management companies. Four of the leased hotels are managed by the
Swissotel Management (USA) LLC, four are managed by Hyatt Corporation, and two
are managed by Four Seasons Hotel Limited. The remaining twelve hotels are
managed by other independent hotel management companies under the "Marriott"
and other brands pursuant to franchise agreements. The managers of the hotels
provide similar services as Marriott International under its Hotel Management
Agreements and receive base management fees, generally calculated as a
percentage of revenues, and in most cases, incentive management fees, which are
generally calculated as a percentage of operating profits.

The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with

F-16
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

respect to a single lodging facility is cross-collateralized or cross-defaulted
to any other agreement and a single agreement may be canceled under certain
conditions, although such cancellation will not trigger the cancellation of any
other agreement.

Franchise Agreements

Ten of the Company's leased hotels are managed under franchise agreements
between Host Marriott and Marriott International for terms ranging from 15 to
30 years. In connection with the assignment of the corresponding Hotel
Management Agreement, the Company assumed the franchise agreements for these
ten hotels and will be the franchisee for the term of the corresponding Hotel
Lease. Pursuant to the franchise agreements, the Company generally pays a
franchise fee based on a percentage of room revenues and food and beverage
revenues as well as certain other fees for advertising and reservations.
Franchise fees for room revenues vary from four to six percent, while fees for
food and beverage revenues vary from two to three percent of revenues.

7. Senior Living Operating Agreements

The Communities are subject to operating agreements (the "Operating
Agreements") which provide for Marriott International to operate the
Communities, generally for an initial term of 25 to 30 years with renewal terms
subject to certain performance criteria at the option of Marriott International
of up to an additional five to ten years. The Operating Agreements provide for
payment of base management fees generally equal to five to eight percent of
revenues and incentive management fees generally equal to zero to 20% of
Operating Profit (as defined in the Operating Agreements) over a priority
return ("Owner's Priority") to the Company. In the event of early termination
of the Operating Agreements, Marriott International will receive additional
fees based on the unexpired term and expected future base and incentive
management fees. The Company has the option to terminate certain, but not all,
management agreements if specified performance thresholds are not satisfied. No
Operating Agreement with respect to a single Community is cross-collateralized
or cross-defaulted to any other Operating Agreement, and any single Operating
Agreement may be terminated following a default by the Company or Marriott
International, although such termination will not trigger the cancellation of
any other Operating Agreement.

Most of the Communities are also subject to pooling agreements whereby for
the limited purpose of calculating management fees and exercising certain
termination rights under the Operating Agreements, the management fees and
rights are considered in the aggregate for the Communities in each pool.

The Operating Agreements require Marriott International to furnish certain
services ("Central Administrative Services") which are generally furnished on a
central or regional basis to other senior living communities in the Marriott
retirement community system. Such services will include the following: (i)
marketing and public relations services; (ii) human resources program
development; (iii) information systems support and development; and (iv)
centralized computer payroll and accounting services. In lieu of reimbursement
for such services, Marriott International is paid an amount equal to 2% of
revenues. Generally, through the earlier of (i) the end of the seventh year of
the Operating Agreement or (ii) the date upon which certain performance
criteria have been met, 50% of the Central Administrative Services fee is
payable only to the extent that Operating Profit exceeds Owner's Priority.
However, the payment of fees for the Central Administrative Services is waived
for the first year of the Operating Agreement with the exception of one
Community in which it is waived for the first two years of the Operating
Agreement.

Marriott International is required under the Operating Agreements to deduct
an amount from revenues and place the funds into an interest-bearing reserve
account to cover the cost of (a) certain routine repairs and

F-17
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

maintenance to the Communities which are normally capitalized and (b)
replacements and renewals to the Communities' property and improvements. The
annual payment amount (expressed as a percentage of revenues) generally will be
2.65% through fiscal year 2002, 2.85% for fiscal years 2003 through 2007, and
3.5% thereafter. The amount contributed for fiscal year 1998 and the period
June 21, 1997 (inception) through January 2, 1998 was $6,291,000 and
$2,025,000, respectively. The Operating Agreements provide that the Company
shall provide Marriott International with sufficient funds to cover the cost of
certain major or non-routine repairs, alterations, improvements, renewals and
replacements to the Communities.

8. Due from (to) Marriott International

The components of the amounts due from (to) Marriott International, net, are
as follows:

<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Community operating expenses payable to Marriott
International.......................................... $(8,783) $(7,648)
Management fees payable to Marriott International....... (1,529) (1,262)
Community working capital due to the Company............ 5,955 6,093
Owner's distributions due to Company.................... 11,673 --
Other, net.............................................. 1,568 (355)
------- -------
Total................................................. $ 8,884 $(3,172)
======= =======
</TABLE>

9. Debt

Debt consists of the following as of January 1, 1999 and January 2, 1998:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Mortgage debt:
Secured by eight Communities with $221 million of
assets, with an interest rate of 10.008%, maturing
through 2020 (balance includes debt premium of $14.8
million)............................................... $135,719 $137,713
Secured by nine Communities with $96 million of assets,
with an interest rate of 9.93%, maturing through 2001
(balance includes debt premium of $1.7 million)........ 47,340 49,353
Other................................................... -- 26,403
-------- --------
Total mortgage debt................................... 183,059 213,469
-------- --------
Other debt:
Revenue bonds with an interest rate of 5.875%, due
2027................................................... 14,700 14,700
Note payable to Marriott International.................. -- 92,195
Capital lease obligations............................... 10,668 10,627
Other notes, with an average rate of 7.0%, maturing
through December 2001.................................. 4,649 18,943
-------- --------
Total other debt...................................... 30,017 136,465
-------- --------
213,076 349,934
-------- --------
Hotel working capital notes payable to Host Marriott, with
an interest rate of 5.12%, maturing through December
2009..................................................... 95,114 --
-------- --------
Total debt............................................ $308,190 $349,934
======== ========
</TABLE>

F-18
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Debt maturities at January 1, 1999, excluding the unamortized debt premiums
of approximately $16.5 million resulting from recording the mortgages at their
fair value on June 21, 1997, are as follows (in thousands):

<TABLE>
<S> <C>
1999................................................................ $ 5,906
2000................................................................ 4,638
2001................................................................ 47,553
2002................................................................ 2,504
2003................................................................ 5,977
Thereafter.......................................................... 225,037
--------
$291,615
========
</TABLE>

In conjunction with the acquisition of Forum, the Company recorded the debt
assumed at its fair value, which exceeded the face value by approximately $19
million. The Company is amortizing this adjustment to interest expense over the
remaining life of the related debt. The amortization for fiscal year 1998 and
the period from June 21, 1997 (inception) through January 2, 1998 totaled
$1,550,000 and $834,000, respectively. Cash paid for interest for fiscal year
1998 and the period from June 21, 1997 (inception) through January 2, 1998
totaled $19,825,000 and $8,183,000, respectively.

In conjunction with the June 21, 1997 acquisition of Forum, the Company
assumed $270 million of debt and issued $72 million in notes payable to
Marriott International. Subsequent to the acquisition, the Company issued
additional notes payable to Marriott International for additional expansion
units totaling approximately $20 million. In the second quarter of 1998, Host
Marriott repaid the $92 million in notes payable to Marriott International.
Host Marriott's prepayment of the debt was recorded as a capital contribution
to the Company.

During the first quarter of 1998, Host Marriott prepaid $26.4 million in
mortgage debt. Host Marriott's prepayment of the debt was recorded as a capital
contribution to the Company.

In December 1997, in connection with the acquisition of an additional 49%
interest in the Leisure Park Venture Limited Partnership the Company assumed
$14.7 million of revenue bonds and Marriott International provided $3.9 million
of debt financing. In connection with the Distribution, Host Marriott has
provided a guarantee on the revenue bonds.

Upon the commencement of the hotel leases, the Company purchased the working
capital of the hotels from Host Marriott for $95 million with the purchase
price evidenced by notes that bear interest at 5.12%. Interest on each note is
due simultaneously with the rent payment of each Hotel Lease. The principal
amount of each note is due upon the termination of each Hotel Lease. Upon
termination of the Hotel Lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note
Host Marriott will pay the Company the difference in cash.

The net assets of 17 of the Communities are subject to mortgage debt which
places restrictions on their assets. The net assets of these Communities
totaled approximately $161 million at January 1, 1999. The indentures governing
these mortgages contain restrictive covenants that, among other things, (i)
require maintenance of segregated cash collection of all rents; (ii) require
separate cash reserves for debt service, property improvements, real estate
taxes and insurance; and (iii) limit the ability to incur additional
indebtedness, issue stock or admit additional partners, enter into or cancel
leases, enter into certain transactions with affiliates or sell certain assets.

F-19
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. Income Taxes

Total deferred tax assets and liabilities as of January 1, 1999 and January
2, 1998 were as follows:

<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets..................................... $ 15,677 $ 15,125
Deferred tax liabilities................................ (77,030) (73,830)

-------- --------
Net deferred income tax liability..................... $(61,353) $(58,705)
======== ========
</TABLE>

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

<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Property and equipment.................................. $(72,993) $(68,687)
Debt adjustment to fair value at acquisition............ 6,662 7,591
Other, net.............................................. 4,978 2,391

- -------- --------
Net deferred income tax liability..................... $(61,353) $(58,705)
======== ========
</TABLE>

The provision for income taxes for fiscal year 1998 and for the period from
June 21, 1997 (inception) through January 2, 1998 consists of the following:

<TABLE>
<CAPTION>
Period from
June 21, 1997 (inception)
through
1998 January 2, 1998
------ -------------------------
(in thousands)
<S> <C> <C>
Current--Federal........................... $2,447 $ (25)
--State................................. 420
(5)
------ -----
2,867 (30)
------ -----
Deferred--Federal.......................... 1,062 238
--State................................. 182 41
------ -----
1,244 279
------ -----
$4,111 $ 249
====== =====
</TABLE>

A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for fiscal year 1998 and for the period from June 21,
1997 (inception) through January 2, 1998 follows:

<TABLE>
<CAPTION>
Period from

June 21, 1997 (inception)
through
1998 January 2, 1998
---- -------------------------
<S> <C> <C>
Statutory federal tax rate................. 35.0% 35.0%
State income taxes, net of federal tax
benefit................................... 6.0 6.0
---- ----
41.0% 41.0%
==== ====
</TABLE>

F-20
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Company was included in the consolidated federal income tax return of
Host Marriott and its affiliates (the "Group") for the period from June 21,
1997 (inception) through January 2, 1998 and for the period from January 3,
1998 through the Distribution Date. Tax expense was allocated to the Company as
a member of the Group based upon the relative contribution to the Group's
consolidated taxable income/loss and changes in temporary differences. This
allocation method results in federal and net state tax expense allocated for
all periods presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns. In
connection with the Distribution, the amounts due to Host Marriott as of the
Distribution Date for its allocable share of current income taxes payable were
forgiven and treated as a capital contribution. Pursuant to the tax sharing
agreement between the Company and Host Marriott, generally Host Marriott will
be responsible for paying taxes for periods through the Distribution Date and
the Company will be responsible for paying taxes for subsequent periods.

For income tax purposes, the Company has net operating loss carry forwards
of $11 million which expire through 2006.

11. Commitments and Contingencies

On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court for the Southern District
of Indiana (the "Indiana Court") against the general partner of one of the
Company's subsidiary partnerships, Forum Retirement Partners, LP ("FRP")
alleging breach of the partnership agreement, breach of fiduciary duty, fraud,
insider trading and civil conspiracy/aiding and abetting. On February 4, 1998,
the Plaintiff, MSLS, the general partner, Forum, Host Marriott and the Company
entered into a Settlement and Release Agreement (the "Settlement Agreement"),
pursuant to which Host Marriott agreed to purchase, at a price of $4.50 per
unit, the partnership units of each limited partner electing to join in the
Settlement Agreement. The Company held 79% of the outstanding limited partner
units in the partnership at that time. Host Marriott and the Company also
agreed to pay as much as an additional $.75 per unit (the "Additional Payment")
to the settling limited partners (the "Settling Partners"), under certain
conditions, in the event that the Company within three years following the date
of settlement initiates a tender offer for the purchase of units not presently
held by the Company or the Settling Partners. On February 5, 1998, the Indiana
Court entered an order approving the dismissal of the Plaintiff's case.

In connection with the Settlement Agreement, the Company acquired 2,141,795
limited partner units in 1998 for approximately $9,638,000. The purchase price
of the shares approximated fair value, and accordingly, no portion of the
purchase price has been expensed. As a result of this purchase, the Company's
ownership interest in FRP was increased to approximately 93%.

On February 12, 1999, FRP delivered a consent solicitation to the remaining
partnership unit holders requesting their consent to a merger agreement whereby
the partnership unit holders would receive $5.75 per limited partnership unit
from the Company. Consummation of the transaction is assured since the Company
owns approximately 93% of the outstanding limited partner units. The Company
expects the transaction to be completed by the end of the first quarter of 1999
at a cost of $6.2 million at which time the Company would be owner of all of
the limited partner units. Also, the Company will be required to pay the
Settling Partners an Additional Payment of approximately $550,000, which will
vary depending upon the date the transaction is consummated.

F-21
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

12. Fair Value of Financial Instruments

The fair values of certain financial liabilities are shown below:

<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands)
<S>
<C> <C> <C> <C>
Debt, net of capital leases............. $297,522 $294,769 $339,307 $339,307
</TABLE>

Valuations for secured debt are determined based on the expected future
payments discounted at risk-adjusted rates. The fair values of other notes are
estimated to be equal to their carrying value. Certain debt was adjusted to its
fair value in conjunction with the Company's acquisition of Forum on June 21,
1997.

13. Employee Stock Plans

In conjunction with the Distribution, the Company adopted two stock-based
compensation plans which are described below. Under the comprehensive stock
plan (the "Comprehensive Plan"), the Company may award to participating
employees (i) options to purchase the Company's common stock, (ii) deferred
shares of the Company's common stock and (iii) restricted shares of the
Company's common stock. In addition, the Company has an employee stock purchase
plan (the "Employee Stock Purchase Plan"). The principal terms and conditions
of the two plan
s are summarized below.

Total shares of common stock reserved and available for issuance under
employee stock plans at January 1, 1999 are:

<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Comprehensive Plan............................................ 4,000
Employee Stock Purchase Plan.................................. 430
-----
4,430
=====
</TABLE>

Employees of the Company as of January 1, 1999 were employed by Host
Marriott through the Distribution Date (the "Company Employees"). In connection
with the Distribution, unexercised options for Host Marriott stock and Host
Marriott deferred stock awards held by Company Employees as of the Distribution
Date
were redenominated and converted into options for Company stock and
Company deferred stock awards.

Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. The options generally expire up to 15 years after the date of
grant. Most options vest ratably over each of the first four years following
the date of the grant.

F-22
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table summarizes information about stock options outstanding
at January 1, 1999:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Shares Weighted Average Shares
Outstanding Remaining Weighted Average Exercisable Weighted Average
at Contractual Exercise at Exercise
Range of Exercise Prices January 1, 1999 Life Price January 1, 1999 Price
- ------------------------ --------------- ---------------- ---------------- --------------- ----------------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
$1-$4.................. 14 8 $ 3 14 $ 3
5- 9.................. 63 10 8 63 8
10-14.................. 46 12 13 23 13
15-19.................. 25 14 18 6 18
20-21.................. 34 14 21 9 21
--- ---
182 115
=== ===
</TABLE>

Deferred stock incentive plan shares granted to officers and key employees
generally vest over 10 years in annual installments commencing one year after
the date of grant. Certain employees may elect to defer payments until
termination or retirement. The Company accrues compensation expense for the
fair market value of the shares on the date of grant, less estimated
forfeitures.

On January 21, 1999, the Company issued 365,000 shares of restricted stock
under the Comprehensive Plan to officers and key employees that will vest
ratably over the next five years. The Company recognizes compensation expense
over the restriction period equal to the fair market value of the shares on the
date of issuance, adjusted for forfeitures.

Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at the lower of market value
at the beginning or end of the plan year.

14. Profit Sharing and Postemployment Benefit Plans

In connection with the Distribution, the Company established profit sharing
and other defined contribution plans for the benefit of employees meeting
certain eligibility requirements and electing participation in the plans. The
amount to be matched by the Company is determined annually by the Board of
Directors.

F-23
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
As of March 26, 1999
(unaudited, in thousands, except share data)

<TABLE>
<S> <C>
ASSETS
Property and equipment, net.......................................... $669,820
Hotel working capital................................................ 94,444
Due from hotel managers.............................................. 80,418
Due from Marriott Senior Living Services, Inc........................ 13,174
Other assets......................................................... 35,122
Cash and cash equivalents............................................ 60,801
--------
$953,779
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt:
Mortgage debt...................................................... $182,090
Other debt......................................................... 29,759
--------
211,849
Hotel working capital notes payable to Host Marriott................. 94,444
--------
Total debt....................................................... 306,293
Accounts payable and accrued expenses................................ 13,277
Other liabilities.................................................... 21,312
Due to Host Marriott................................................. 88,011
Deferred income taxes................................................ 61,816
--------
Total liabilities................................................ 490,709
--------
Shareholders' equity:
Common stock, 75 million shares authorized, 22.3 million shares
issued and outstanding, $.01 par value............................ 223
Additional paid-in capital......................................... 453,071
Retained earnings.................................................. 14,170
Treasury stock, .3 million shares.................................. (4,394)
--------
Total shareholders' equity....................................... 463,070
--------
$953,779
========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

F-24
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Twelve Weeks Ended March 26, 1999 and March 27, 1998
(unaudited, in thousands, except per share data)

<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
REVENUES
Hotels
Rooms..................................................... $582,896 $ --
Food and beverage......................................... 256,450 --
Other..................................................... 64,638 --
-------- -------
Total hotel revenues.................................. 903,984 --
-------- -------
Senior living
Routine................................................... 51,505 48,304
Ancillary................................................. 5,448 6,750
-------- -------
Total senior living revenues.......................... 56,953 55,054
-------- -------
Asset management revenues................................... 1,188 --
Equity in earnings of affiliates............................ 223 --
-------- -------
Total revenues.......................................... 962,348 55,054
-------- -------
OPERATING COSTS AND EXPENSES
Hotels
Property-level operating costs and expenses
Rooms................................................... 132,583 --
Food and beverage....................................... 187,971 --
Other................................................... 227,690 --
Other operating costs and expenses
Management fees......................................... 58,305 --
Lease expense........................................... 286,670 --
-------- -------
Total hotel operating costs and expenses.............. 893,219 --
-------- -------
Senior living
Property-level operating costs and expenses
Routine................................................. 32,402 30,251
Ancillary............................................... 4,107 5,246
Other operating costs and expenses
Depreciation and amortization........................... 5,069 4,793
Management fees paid to Marriott International.......... 3,422 2,970
Property taxes and other................................ 1,681 1,765
-------- -------
Total senior living operating costs and expenses...... 46,681 45,025
-------- -------
Asset management operating costs and expenses............... 1,067 --
-------- -------
Total operating costs and expenses.................... 940,967 45,025
-------- -------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST..... 21,381 10,029
Corporate expenses.......................................... (3,962) (754)
Interest expense............................................ (5,106) (6,519)
Interest income............................................. 1,072 322
-------- -------
INCOME BEFORE INCOME TAXES.................................. 13,385 3,078
Provision for income taxes.................................. (5,488) (1,262)
-------- -------
NET INCOME.................................................. $ 7,897 $ 1,816
======== =======
BASIC AND DILUTED EARNINGS PER COMMON SHARE................. $ .35 $ .08
======== =======
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

F-25
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Twelve weeks ended March 26, 1999 and March 27, 1998
(unaudited, in thousands)

<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 7,897 $ 1,816
Adjustments to reconcile net income to cash from operations:
Depreciation and amortization............................. 5,285
4,793
Amortization of debt premiums............................. (358) (358)
Income taxes.............................................. 4,910 1,262
Other..................................................... 83 --
Change in other operating accounts........................ 2,946 (6,632)
-------- -------
Cash from operations........................................ 20,763 881
-------- -------
INVESTING ACTIVITIES
Acquisitions................................................ -- (1,000)
Purchase of minority interests.............................. (6,888) --
Expansions.................................................. (14,005) --
Other capital expenditures.................................. (1,321) (954)
Change in capital improvement reserve....................... 1,326 (42)

-------- -------
Cash used in investing activities........................... (20,888) (1,996)
-------- -------
FINANCING ACTIVITIES
Repayments of debt.......................................... (870) (447)
Repurchases of common stock................................. (4,394) --
Change in financing reserves................................ (487) (96)
Other....................................................... (102) --
-------- -------
Cash used in financing activities........................... (5,853) (543)
-------- -------
Decrease in cash and cash equivalents....................... (5,978) (1,658)
Cash and cash equivalents, beginning of period.............. 66,779 17,644

-------- -------
Cash and cash equivalents, end of period.................... $ 60,801 $15,986
======== =======
SUPPLEMENTAL INFORMATION--NON-CASH ACTIVITY:
Contributions from Host Marriott:
Property and equipment.................................. $ -- $21,332
Acquisition of minority interests paid by Host Marriott. -- 6,276
Debt prepayment paid by Host Marriott................... -- 26,405
Other................................................... -- 1,074
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

F-26
<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 January 1, 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 March 26, 1999 and the results of operations and
cash flows for the twelve weeks ended March 26, 1999 and March 27, 1998.
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 two months of operations. The Company will record three months of
operations in each of the second and third quarters and four months of
operations in the fourth quarter.

2. On December 29, 1998 (the "Distribution Date"), the Company became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off the
Company to the shareholders of Host Marriott (the "Distribution"), as part of a
series of transactions pursuant to which Host Marriott elected to be considered
a real estate investment trust ("REIT"). As part of the Distribution, Host
Marriott distributed 20.5 million, or 94%, of the outstanding shares of common
stock of the Company to the Host Marriott shareholders. The remaining 1.4
million, or six percent, of the outstanding shares were used by Host Marriott
as part of the consideration paid on December 30, 1998 for Host Marriott's
acquisition of certain hotel properties. The shares were distributed on the
basis of one share of the Company's common stock for every ten shares of Host
Marriott common stock. On December 31, 1998, the Company entered into lease and
sublease agreements to lease substantially all of Host Marriott's hotels with
the existing management agreements of the leased and subleased hotels assigned
to the Company. As of March 26, 1999, the Company leased or subleased 120 full-
service and 71 limited-service hotels and owned 31 senior living communities.

3. 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. For the twelve weeks ended March 27, 1998, the weighted average
number of outstanding common shares is based on Host Marriott's weighted
average number of outstanding common shares, adjusted for the one- for-ten
distribution ratio.

F-27
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
Twelve Weeks Ended
-------------------
March 26, March 27,
1999 1998
--------- ---------
(in thousands)
<S> <C> <C>
Weighted average number of common shares outstanding.... 22,294 21,573
Assuming distribution of common shares granted under the
comprehensive stock plan, less shares assumed purchased
at average market price................................ 95 --
------ ------
Shares utilized for the calculation of diluted earnings
per share.............................................. 22,389 21,573
====== ======
</TABLE>

4. On March 29, 1999, the Company acquired a 74% limited partnership
interest in the Marriott Residence Inn USA Limited Partnership (the
"Partnership") from a Japanese investor for $34.4 million in cash and the
consolidation of $54.5 million of debt for a total consideration of $89
million. The Partnership owns eleven Residence Inn limited-service hotels that
are managed by Marriott International. Host Marriott owns a 5% general partner
interest in the Partnership.

5. In the first quarter of 1999, the Company announced a plan to repurchase
up to 1.5 million shares of its common stock. Over an extended period of time,
the Company intends to purchase shares through open market and privately
negotiated transactions at prices deemed advantageous to the Company. These
purchases will be subject to market conditions, applicable legal requirements
and other factors; however, the Company has no commitment or obligation to
purchase any particular amount of common stock and the stock repurchase program
could be suspended at any time at the Company's discretion. During the first
quarter of 1999, the Company repurchased 328,000 shares of its common stock for
approximately $4.4 million. Subsequent to March 26, 1999, the Company has
repurchased an additional 1,137,000 shares for approximately $17.7 million.

6. During the first quarter of 1999, the Company acquired the remaining 7%
limited partnership interests in Forum Retirement Partners, LP, a partnership
that owns nine senior living communities, for $6.7 million.

7. On April 15, 1999, Crestline Ventures LLC ("Ventures"), an indirectly
wholly owned subsidiary of the Company, entered into a secured, three-year $100
million revolving credit facility (the "Credit Facility") for funding future
investments in the lodging and senior living industries and for general
corporate purposes. The Credit Facility bears interest at a Eurodollar rate
plus 2.75%. An annual fee of .25% is charged on the unused portion of the
commitment. The Credit Facility is secured by substantially all of the assets
of Ventures and its subsidiaries, consisting of eight senior living
communities, and is also guaranteed by the Company and certain subsidiaries of
the Company. In the second quarter of 1999, the Company made total draws of $20
million on the Credit Facility.

8. The Company operates in two business segments: hotel leasing and
ownership and senior living community ownership. The Company's full-service
hotels are operated under the Marriott or Ritz-Carlton brands as well as, among
others, Four Seasons, Hyatt and Swissotel brands. The Company's limited-service
hotels are operated under the Courtyard by Marriott and Residence Inn 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

F-28
<PAGE>

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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 March 26, 1999
------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
-------- ------------- ----------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................ $903,984 $ 56,953 $1,411 $962,348
Operating profit........ 10,765 10,272 344 21,381
Interest income......... 108 325 639 1,072
Interest expense........ (1,137) (3,945) (24) (5,106)
Other................... (1,829) (640) (1,493) (3,962)
Income (loss) before
income taxes........... 7,907 6,012 (534) 13,385
<CAPTION>
Twelve Weeks Ended March 27, 1998
------------------------------------------------------
Hotels Senior Living Corporate & Other Consolidated
-------- ------------- ----------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................ $ -- $ 55,054 $ -- $ 55,054
Operating profit........ -- 10,029 -- 10,029
Interest income......... -- 322 -- 322
Interest expense........ -- (6,519) -- (6,519)
Other................... -- (754) -- (754)
Income before income
taxes.................. -- 3,078 -- 3,078
</TABLE>

Total assets for the segments are as follows:

<TABLE>
<CAPTION>
March 26,
1999
--------------
(in thousands)
<S> <C>
Hotels........................................................ $221,244
Senior living................................................. 712,714
Corporate and other........................................... 49,821
Eliminations.................................................. (30,000)
--------
$953,779
========
</TABLE>

F-29
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Marriott Senior Living Services, Inc.:

We have audited the accompanying consolidated balance sheet of Forum Group,
Inc. (a business unit wholly-owned by Marriott Senior Living Services, Inc.
("MSLSI")) as partitioned for sale to Host Marriott Corporation (see Note 1),
as of January 3, 1997, and the related consolidated statements of operations
and cash flows for the 40-week period ended January 3, 1997, and the 24-week
period ended June 20, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Forum
Group, Inc., as Partitioned for Sale to Host Marriott Corporation as of January
3, 1997, and the results of their operations and their cash flows for the 40-
week period ended January 3, 1997 and for the 24-week period ended June 20,
1997, in conformity with generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, the Company
has given retroactive effect to the change to include property-level revenues
and operating expense of its senior living communities in the statement of
operations.

Arthur Andersen LLP

Washington, D.C.
September 28, 1998 (except with respect to the matter discussed in Note 11,
as to which the date is December 29, 1998.)

F-30
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION

CONSOLIDATED BALANCE SHEET
January 3, 1997
(in thousands)

<TABLE>
<S> <C>
ASSETS
Property and Equipment, net........................................... $507,325
Due from Manager...................................................... 18,908
Other Assets.......................................................... 20,221
Cash and Cash Equivalents............................................. 18,640
--------
Total Assets........................................................ $565,094
========
LIABILITIES AND EQUITY
Debt.................................................................. $244,318
Other Liabilities..................................................... 36,111
--------
Total Liabilities................................................... 280,429
Equity
Investments and Advances from Parent................................. 284,665
--------
Total Liabilities and Equity........................................ $565,094
========
</TABLE>

The accompanying notes are an integral part of this financial statement.

F-31
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
For the 24-week period ended June 20, 1997 and the 40-week period ended January
3, 1997
(in thousands)

<TABLE>
<CAPTION>
24-week period 40-week period
Ended ended
June 20, 1997 January 3, 1997
-------------- ---------------
<S> <C> <C>
REVENUES
Routine...................................... $84,646 $136,910
Ancillary.................................... 10,757 13,872
------- --------
95,403 150,782
------- --------
OPERATING COSTS AND EXPENSES
Property-level operations costs and expenses
Routine.................................... 53,059 82,779
Ancillary.................................. 8,774 12,016
Other operating costs and expenses
Depreciation and amortization.............. 6,698 8,494
Base management fees....................... 5,586 7,935
Property taxes and other................... 3,311 4,217
------- --------
Total operating costs and expenses....... 77,428 115,441
------- --------
OPERATING PROFIT BEFORE INTEREST AND MINORITY
INTEREST...................................... 17,975 35,341
Corporate expenses............................. (4,519) (6,380)
Interest expense............................... (9,141) (14,283)
Interest income................................ 598 1,111
Minority interest expense...................... (596) (482)
------- --------
INCOME BEFORE INCOME TAXES..................... 4,317 15,307
Provision for income taxes..................... (1,689) (5,973)
------- --------
NET INCOME..................................... $ 2,628 $ 9,334
======= ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-32
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE
TO HOST MARRIOTT CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
For the 24-week period ended June 20, 1997 and the 40-week period ended January
3, 1997
(in thousands)

<TABLE>
<CAPTION>
24-week period 40-week period
Ended ended
June 20, 1997 January 3, 1997
-------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income..................................... $ 2,628 $ 9,334
Adjustments to reconcile cash from operations:
Depreciation and amortization................ 6,698 8,494
Changes in operating accounts:
Other assets............................... (225) 2,891
Other liabilities.......................... (9,580) 6,151
------- ---------
Cash (used in)/provided by operating
activities.................................... (479) 26,870
------- ---------

INVESTING ACTIVITIES
Capital expenditures......................... (16,407) (65,577)
Acquisition of Forum Group, Inc.............. -- (94,009)
------- ---------
Cash used in investing activities.............. (16,407) (159,586)
------- ---------

FINANCING ACTIVITIES
Repayment of debt............................ (1,324) (2,281)
Debt prepayments............................. -- (92,111)
Other........................................ -- 1,208
Advances from parent......................... 13,997 225,834
------- ---------
Cash provided by financing activities.......... 12,673 132,650
------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS.......... (4,213) (66)
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 18,640 18,706
------- ---------
CASH AND CASH EQUIVALENTS, end of period....... $14,427 $ 18,640
======= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Noncash investing and financing activities:
Property, Plant and Equipment, net......... $(3,977) --
Debt....................................... 3,977 --
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-33
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

On June 21, 1997, HMC Senior Communities, Inc., ("HMCSC") a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"), acquired all of the
outstanding stock of Forum Group, Inc. and subsidiaries ("Forum") from Marriott
Senior Living Services, Inc. ("MSLSI"), a subsidiary of Marriott International,
Inc. ("MI" or the Parent Company), pursuant to a Stock Purchase Agreement (the
"Agreement") dated June 21, 1997. Certain operations and other assets and
liabilities of Forum including seven communities, management fees and Lifecare
bonds, specifically excluded from the Agreement, are not included in these
financial statements. Accordingly, these financial statements include only
assets and liabilities, along with the results from operations generated
therefrom, included in the Agreement (the "Partitioned Business").

The primary operations of the Partitioned Business is the ownership of 29
retirement communities ("Communities"), located in 11 states, managed by a
subsidiary of MSLSI.

The Partitioned Business was an organizational unit of MSLSI and its
majority owned and controlled subsidiaries and affiliates. The Parent Company
is incorporated in the state of Delaware. Its subsidiaries and affiliates are
incorporated or registered in other jurisdictions in the U.S. and a number of
other countries. The Partitioned Business is not a distinct legal entity.

On March 25, 1996, FG Acquisition Corp. ("Acquisition"), an Indiana
corporation and wholly-owned indirect subsidiary of MI acquired approximately
99.1% of the outstanding shares of common stock of Forum. Acquisition paid
total cash consideration of $297 million for the common stock it acquired, plus
certain warrants to purchase common stock which includes $94 million of cash
consideration for the 29 communities sold to HMCSC.

The Securities and Exchange Commission, in Staff Accounting Bulletin Number
55 ("SAB" 55), requires that historical financial statements of a subsidiary,
division, or lesser business component of another entity include certain
expenses incurred by the parent on its behalf. These expenses include officer
and employee salaries, rent or depreciation, advertising, accounting and legal
services, other selling, general and administrative expenses and other such
expenses. Investments and advances from parent represents the net amount of
investments and advances made by MI as a result of the acquisition and
operation of the Partitioned Business. These financial statements include the
adjustments necessary to comply with SAB 55.

Historically, the Partitioned Business' results of operations have been
included in the consolidated U.S. federal income tax return of MI. For
operations that do not pay their own income tax, MI internally allocates income
tax expense at the statutory rate after adjustment for state income taxes and
several other items. The income tax expense and other tax related information
in these statements has been calculated as if the Partitioned Business had not
been eligible to be included in the consolidated tax returns of MI. The
calculation of tax provisions and deferred taxes required certain assumptions,
allocations and estimates, which management believes are reasonable to
accurately reflect the tax reporting for the Partitioned Business as a stand-
alone taxpayer.

These consolidated financial statements include the results of operations
and cash flows of the Partitioned Business previously included in the MI
consolidated financial statements. These consolidated financial statements have
been prepared by management in accordance with generally accepted accounting
principles and include such estimates and adjustments as deemed necessary to
present fairly the consolidated financial position as of January 3, 1997 and
the results of operations and cash flows of the Partitioned Business for the
24-week period ended June 20, 1997 and the 40-week period ended January 3,
1997.

F-34
<PAGE>

FORUM GROUP, INC. AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The Partitioned Business receives certain services and participates in
certain centralized MI activities, the allocated costs of which are included in
these financial statements.

2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the
Partitioned Business after elimination of intercompany accounts and
transactions other than those with other units of MI.

Corporate Services

The Partitioned Business utilized the MI centralized systems for cash
management, payroll, purchasing and distribution, employee benefit plans,
insurance, administrative services and legal services. As a result, cash for
many communities was commingled with MI's general corporate funds. Similarly,
operating expenses, capital expenditures and other cash requirements of the
Partitioned Business were paid by MI and charged directly or allocated to the
Partitioned Business. Amounts are allocated to the Partitioned Business based
primarily on their use of the centralized systems. In the opinion of
management, MI's methods for allocating costs are reasonable; however, such
costs are not necessarily indicative of the costs that would have been incurred
if the Partitioned Business had been operated as an unaffiliated entity. It is
not practicable for the Partitioned Business to estimate what those costs would
have been had the Partitioned Business operated on a stand-alone basis.

Property and Equipment

Property and equipment is recorded at cost, including interest, land rent
and real estate taxes capitalized during development and construction, net of
accumulated depreciation. Interest capitalized as a cost of property and
equipment for the twenty-four week period ended June 20, 1997 and the forty-
week period ended January 3, 1997 was approximately $252,000 and $440,000
respectively. Interest costs are paid to MI and computed using MI's borrowing
rate for construction expenditures of 9.08% for the twenty-four-week period
ended June 20, 1997 and 7.35% for the forty-week period ended January 3, 1997.
Property and equipment includes capitalized costs incurred in developing the
real estate, including construction in progress for ongoing expansion programs
at various Communities as of January 3, 1997, which will be conveyed to Host
Marriott upon completion. Replacements and improvements that extend the useful
life of property and equipment are capitalized. Depreciation is computed using
the straight-line method over estimated useful lives as follows:

<TABLE>
<S> <C>
Buildings......................................................... 40 years
Furniture and Equipment........................................... 4-10 years
</TABLE>

A provision for value impairment is recorded whenever the estimated
undiscounted future cash flows from the property are less than the property's
net carrying value. No such provision was necessary at January 3, 1997.

Due from Manager

The principal component of Due from Manager is working capital under the
control of and utilized by a subsidiary of MSLSI in conjunction with the
operation of Forum's retirement communities. Both majority-owned and wholly-
owned partnerships and corporations within the Partitioned Business have
management agreements in effect with Forum, which require fees of 5% to 8% of
gross operating revenues.

F-35
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Cash and Cash Equivalents

Cash and cash equivalents include cash and highly liquid investments with an
original maturity of three months or less.

Deferred Revenue from Non-refundable Fees

Monthly fees deferred for the non-refundable portion of the entry fees are a
component of other liabilities. These amounts are recognized as health care
services revenue as services are performed over the expected term of the
resident's contract. See Note 3 for further discussion of entry fees.

Liability for Future Health Care Services

Certain resident and admission agreements at the Communities entitled
residents to receive limited amounts of health care up to defined maximums. The
estimated liabilities associated with the health care obligation have been
accrued in the consolidated balance sheet.

Revenue Recognition

Revenues represent gross community operating revenues consisting of routine
and ancillary revenues. Routine revenues are generated from monthly charges for
independent living apartments and daily charges for assisted living suites and
nursing beds, and are recognized monthly based on the terms of the residents'
agreements. Advance payments received for services are deferred until the
services are provided. Ancillary revenues are generated on a "fee for service"
basis for supplementary items required by residents and are recognized as the
services are provided.

A portion of revenues from health care services were attributable to
patients whose bills are paid by Medicare or Medicaid under contractual
arrangements. Reimbursement under these contractual arrangements are subject to
retroactive adjustments based on agency reviews. Revenues and receivables from
health care services are presented net of estimated contractual allowances in
the accompanying consolidated financial statements. Management believes
allowances recorded are adequate to cover any adjustments arising from
retroactive adjustments.

On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board reached a consensus on EITF 97-2,
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual
Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.

The Partitioned Business has considered the impact of EITF 97-2 on its
financial statements and has determined that it is preferable for it to include
property-level revenues and operating expenses of its senior living communities
in its statements of operations. The Partitioned Business has given retroactive
effect to the adoption of EITF 97-2 of EITF 97-2 in the accompanying
consolidated statement of operations. The adoption of EITF 97-2 increased both
revenues and operating costs and expenses by $61.8 and $94.8 million for the
24-week period ended June 20, 1997 and the 40-week period ended January 3,
1997, respectively, and had no impact on operating profit or net income.

Use of Estimates

F-36
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements, and the reported amounts of revenues and expenses
during the reporting period. Accordingly, actual results could differ from
those estimates.

Reclassification

Certain previously reported amounts have been reclassified to conform with
the current period presentation.

Fiscal Year

Forum's fiscal year ends on the Friday nearest to December 31st.

3. Continuing Care Agreements

Residents of the Lifecare Communities (Brookside, Overland Park and Pueblo
Norte) are required to sign a continuing care agreement ("Care Agreement") with
Forum. The Care Agreements stipulate, among other things, the amount of all
entry fees and monthly fees, the type of residential unit being provided, and
Forum's obligations to provide both health care and non-health care services.
In addition, the Care Agreements provide Forum with the right to increase
future monthly fees. The Care Agreements are terminated upon the receipt of
written termination notice from the resident, or the death of the resident.

When estimated costs to be incurred under continuing care agreements exceed
estimated revenues, excess costs are accrued currently. Based upon the expected
positive net cash flow, relating to the agreements no liability or expense has
been recorded in the accompanying financial statements.

The components of the entry fees are as follows:

(i) Lifecare Bonds--This component is refundable to the resident or the
resident's estate upon termination or cancellation of the Care Agreement.
Lifecare Bonds are substantially non-interest bearing and equal to either
100%, 90% or 50% initially, depending on the type of plan, of the total
entry fee less any Additional Occupant Lifecare Fee. Lifecare Bonds and
corresponding cash reserves at January 3, 1997 are excluded from the
consolidated balance sheet. Pursuant to the Agreement, MSLSI will retain
the liability for redemption of these bonds.

(ii) Additional Occupant Lifecare Fee--This is a non-refundable fee for
each additional occupant in a residential unit.

(iii) Lifecare Fee--This component is non-refundable and equals the
total entry fee less the two components described in (i) and (ii). These
fees are generally amortized over a 50 to 60 month period, depending on the
individual plan.

4. Other Assets

Security deposits, normally for one month's rent at the Community, are
recorded as a current liability because residents typically terminate their
rental agreement with a 30-day notice. The liability had a balance of
$5,148,000 at January 3, 1997. In addition, certain states require that
security deposits be placed in an escrow account. These escrow balances
amounted to $7,696,000 at January 3, 1997, and are classified as other assets
in the accompanying consolidated balance sheet. In some cases, to ensure prompt
payment to a resident, unrestricted cash is utilized to pay the security
deposits and is thereafter reimbursed out of funds held in the appropriate
escrow account. Other assets also consists of prepaid real estate taxes and
restricted cash accounts for property additions, debt service and insurance.

F-37
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

5. Debt

Debt at January 3, 1997 consisted of the following (in millions):

<TABLE>
<S> <C>
Secured debt, average interest rate 7.6% at January 3, 1997 maturing
through 2020........................................................ $221
Debt due to related party............................................ 15
Capital lease obligations............................................ 8
----
$244
====
</TABLE>

Included in debt due to related party is approximately $15.5 million of
secured bonds owed to MI.

Aggregate debt maturities, including capital lease obligations, are: 1997--
$22.3 million; 1998--$7.1 million; 1999--$33.2 million; 2000--$50.4 million,
2001--$5.5 million and $125.7 million thereafter. Interest paid for the 24-week
period ended June 20, 1997, and the 40-week period ended January 3, 1997, was
approximately $9.7 million and $14.3 million, respectively.

6. Fair Value of Financial Instruments

The fair value of current assets, current liabilities and amounts due to MI
are assumed to be equal to their reported carrying amounts. The fair value of
the Partitioned Business' debt instruments approximates the carrying amount,
with the exception of two fixed-rate debt instruments. These instruments, which
represent property indebtedness, have been calculated to have a fair value, by
discounting the scheduled loan payments to maturity using rates that are
believed to be currently available for debt of similar terms and maturities.
Due to restrictions of transferability and prepayment, previously modified debt
terms and other property specific competitive conditions, the Partitioned
Business may be unable to refinance the indebtedness to obtain such calculated
debt amounts reported. The carrying amount and fair value at January 3, 1997 of
these two fixed-rate debt instruments is $171,264,000 and $180,979,000
respectively.

7. Income Taxes

Income taxes are calculated under the basis described in Note 1. The
Partitioned Business adopted Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109"), effective January 2, 1993. The
Partitioned Business' deferred tax assets or liabilities are included in
investments and advances from parent on the consolidated balance sheet because
those amounts are currently being paid to or accrued from MI. The temporary
differences that give rise to significant deferred tax assets or liabilities
are property and equipment, debt premiums and reserves.

The income tax provision (benefit) is determined as if the Partitioned
Business filed a separate income tax return. The provision (benefit) for income
taxes consists of (in thousands):

<TABLE>
<CAPTION>
24-week period 40-week period
Ended Ended
June 20, 1997 January 3, 1997
-------------- ---------------
<S> <C> <C>
Current--Federal.............................. $(3,125) $ 617
--State.................................... (357) 71
------- ------
(3,482) 688
------- ------
Deferred--Federal............................. 4,641 4,743
--State................................... 530 542
------- ------
5,171 5,285
------- ------
$ 1,689 $5,973
======= ======
</TABLE>

F-38
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A reconciliation of the statutory Federal tax rate to the Partitioned
Business' effective income tax rate for the 24-week period ended June 20, 1997
and the 40-week period ended January 3, 1997 follows:

<TABLE>
<S> <C>
Statutory federal tax rate............................................. 35.0%
State income taxes, net of federal tax benefit......................... 4.0%
----
39.0%
====
</TABLE>

The provision or benefit is not indicative of what should have been recorded
if the Partitioned Business had determined the tax provision or benefit based
on its share of MI's allocation of a tax provision or benefit to all entities
included in the consolidated return based on taxable income or loss. However,
the Partitioned Business will reimburse or be reimbursed by MI for its share of
the consolidated provision or benefit based on MI's allocation of the provision
or benefit to all entities included in the consolidated return based on taxable
income or loss. The difference between the liability to or the receivable from
MI and the tax provision or benefit determined as if the Partitioned Business
filed a separate tax return will be recorded as a capital contribution or a
dividend.

8. Related Party Transactions

Due to Marriott International, Inc.

Cash from the Partitioned Business is deposited with MI's general corporate
funds. Similarly, operating expenses, capital expenditures, centralized
services and other cash requirements of the Partitioned Business are paid by MI
and charged directly or allocated to the Partitioned Business. The intercompany
rate for non-capitalization borrowings was 6% for the 24-week period ended June
20, 1997 and the 40-week period ended January 3,1997. These borrowings have no
specific repayment term.

The Partitioned Business is insured through MI's self-insurance program for
property damage, general liability, workers' compensation and employee medical
coverage. MI charges the Partitioned Business on a per occurrence basis.

Costs Allocated from Marriott International, Inc.

The costs allocated to the Partitioned Business, contained in its
consolidated statements of operations, are approximately $4.7 million and $6.6
million for the 24-week period ended June 20, 1997 and the 40-week period ended
January 3, 1997, respectively.

9. Commitments and Contingencies

Effective June 21, 1997, the management agreements between Forum, as
manager, and entities included in the Partitioned Business have either been
assigned to MSLSI or new agreements between MSLSI and those entities have been
executed.

10. Litigation

On June 15, 1995, The Russell F. Knapp Revocable Trust (the "Plaintiff")
filed a complaint in the United States District Court of the Southern District
of Indiana (the "Indiana Court") against Forum Retirement Inc., ("FRI") a
wholly-owned subsidiary of Forum, and general partner of Forum Retirement
Partners L.P. (the "Partnership"), alleging breach of the partnership
agreement, breach of fiduciary duty, fraud, insider trading and civil
conspiracy/aiding and abetting. On February 4, 1998, the Plaintiff, MSLSI, FRI,
Forum and Host Marriott entered into a Settlement and Release Agreement (the
"Settlement Agreement"), pursuant to which Host Marriott agreed to pay each
limited partner electing to join in the Settlement Agreement $4.50 per unit in

F-39
<PAGE>

FORUM GROUP, INC., AS PARTITIONED FOR SALE TO HOST MARRIOTT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

exchange for (i) the transfer of all Partnership units owned by a settling
limited partner; (ii) an agreement by each settling limited partner not to
purchase additional Partnership units; (iii) a release of all claims asserted
in the litigation; and (iv) a dismissal of the litigation. Because of the
derivative nature of the allegations contained in the Plaintiff's complaint,
the General Partner invited all limited partners, in their sole discretion, to
participate in the Settlement Agreement, and detailed the requirements for
participation in two notices to unitholders, dated March 27, 1998, and May 6,
1998, respectively. Initially, the period within which a limited partner could
elect to participate in the Settlement Agreement was scheduled to expire on
April 27, 1998. This period was extended to May 22, 1998. Host Marriott also
agreed to pay as much as an additional $1.25 per unit to the settling Limited
Partners, under certain conditions, in the event that Host Marriott within
three years following the date of settlement initiates a tender offer for the
purchase of units not presently held by Host Marriott or the settling Limited
Partners. On February 5, 1998, the Indiana Court entered an order approving the
dismissal of the Plaintiff's case.

In connection with the Settlement Agreement, Host Marriott initially
acquired 1,000,894 limited partner units from the Plaintiff and related parties
for $4,504,023 on March 25, 1998. Host Marriott subsequently acquired
additional 1,140,901 limited partner units from other limited partners electing
to participate in the Settlement Agreement for $5,134,055. As a result of these
purchases, Host Marriott's current ownership interest in the Partnership,
directly or through affiliates, increased to approximately 93%.

On July 21, 1998, Forum Retirement, Inc. announced that it had received a
proposal from Host Marriott to acquire all remaining outstanding Partnership
Units for $4.50 per Unit. Host Marriott currently owns 14,151,169 of the
15,285,248 outstanding Units of the Partnership. Completion of the proposed
transaction is contingent on several items including but not limited to, FRI
Board approval and approval of an advisory committee of the Board which will
consider the transaction from the perspective of the holders of the remaining
Units and the issuance of a fairness opinion with respect to the proposed
transaction by the financial advisors to such advisory committee.

On July 22, 1998, Harbor Finance Partners, LTD. ("Harbor Finance"), a
Partnership unitholder, filed a purported class action lawsuit relating to Host
Marriott's proposal in Delaware State Chancery Court against Host Marriott,
FRI, two of their affiliates, the Partnership, and FRI's directors. Harbor
Finance alleges in the complaint that these defendants breached their fiduciary
duties to the unitholders by offering an inadequate price for the units,
attempting to improperly influence the market price of the units, and failing
to provide for a mechanism that would establish a fair price for the units.
Harbor Finance is seeking certification of a class, an injunction to prevent
completion of the proposed transaction or, in the alternative, rescission of
the transaction, and compensatory damages. Punitive damages are not sought in
the action. FRI believes that there is no merit to the allegations contained in
the complaint, and that this litigation will not have a material, adverse
effect on the financial performance of the Partnership. The appointment of the
Board's advisory committee and the required fairness opinion will ensure that
an adequate price will be paid.

11. Subsequent Event

On the December 29, 1998, Host Marriott completed its plan of reorganizing
its business by spinning-off Crestline Capital Corporation ("Crestline
Capital," formerly known as HMCSC) to the shareholders of Host Marriott as part
of a series of transactions pursuant to which Host Marriott elected to be
considered a REIT. As part of the Distribution, Host Marriott distributed 20.5
million, or 94%, of the outstanding shares of common stock of Crestline Capital
to the Host Marriott shareholders. The remaining 1.4 million, or six percent,
of the outstanding shares were used by Host Marriott as part of the
consideration paid on December 30, 1998 for Host Marriott's acquisition of
certain hotel properties from The Blackstone Group and a series of funds
controlled by Blackstone Real Estate Partners (the "Blackstone Acquisition").
The shares were distributed on the basis of one share of Crestline Capital's
common stock for every ten shares of Host Marriott common stock.

F-40
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Limited Partners of
Marriott Residence Inn USA Limited Partnership:

We have audited the accompanying balance sheets of Marriott Residence Inn
USA Limited Partnership (a Delaware limited partnership) as of December 31,
1998 and 1997, and the related statements of operations, changes in partners'
capital and cash flows for the years ended December 31, 1998, 1997 and 1996.
These financial statements are the responsibility of the General Partner's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Marriott Residence Inn USA
Limited Partnership as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years ended December 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.

As discussed in Note 2 to the financial statements, the Partnership has
given retroactive effect to the change to include property-level revenues and
operating expenses of its inns in the statement of operations.

Arthur Andersen LLP

Washington, D.C.
May 18, 1999

F-41
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

BALANCE SHEET
December 31, 1998 and 1997

<TABLE>
<CAPTION>
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Property and equipment, net....................... $ 76,522,171 $ 79,327,711
Cash and cash equivalents......................... 6,473,502 3,701,029
Property improvement fund......................... 1,120,997 681,891
Due from Residence Inn by Marriott, Inc. and
affiliates....................................... 1,327,153 1,018,453
Other assets...................................... 737,638 1,080,130
------------- ------------
Total assets.................................... $ 86,181,461 $ 85,809,214
============= ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt................................... $ 54,628,029 $ 55,465,042
Accounts payable and accrued expenses........... 13,524 482,931
Deferred incentive management fees payable to
Residence Inn by Marriott, Inc. and
affiliates..................................... 1,068,122 421,346
------------- ------------
Total liabilities............................. 55,709,675 56,369,319
------------- ------------
PARTNERS' CAPITAL
General Partner
Capital contributions, net of offering costs
of $70,681................................... 3,129,319 3,129,319
Cumulative net income......................... 1,542,020 1,247,705
Capital distributions......................... (1,369,601) (953,601)
------------- ------------
Total general partners' capital............. 3,301,738 3,423,423
------------- ------------
Limited Partners
Capital contributions, net of offering costs
of $3,692,932................................ 93,978,130 93,978,130
Cumulative net income......................... 34,578,858 28,986,877
Capital distributions......................... (101,386,940) (96,948,535)
------------- ------------
Total limited partners' capital............. 27,170,048 26,016,472
------------- ------------
Total partners' capital..................... 30,471,786 29,439,895
------------- ------------
Total liabilities and partners' capital....... $ 86,181,461 $ 85,809,214
============= ============
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-42
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Suites............................... $38,766,657 $37,922,552 $36,788,045
Other operating departments.......... 1,997,330 1,953,354 1,936,057
----------- ----------- -----------
Total revenues................... 40,763,987 39,875,906 38,724,102
----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Suites............................. 8,020,529 7,522,464 7,297,185
Other operating departments........ 972,812 735,431 717,598
Other Inn operating expenses....... 10,515,512 9,845,183 9,813,711
----------- ----------- -----------
Total property-level costs and
expenses........................ 19,508,853 18,103,078 17,828,494
Depreciation and amortization........ 4,293,394 4,048,361 3,726,389
Residence Inn system fee............. 1,550,666 1,516,902 1,471,520
Property taxes....................... 1,514,981 1,427,637 1,426,548
Incentive management fee............. 1,081,786 1,223,705 467,633
Base management fee.................. 815,280 797,518 774,482
Equipment rent and other............. 680,167 757,442 663,614
----------- ----------- -----------
Total operating costs and
expenses........................ 29,445,127 27,874,643 26,358,680
----------- ----------- -----------
OPERATING PROFIT....................... 11,318,860 12,001,263 12,365,422
Interest expense..................... (5,697,301) (5,895,884) (6,377,022)
Interest income...................... 264,737 307,689 426,748
----------- ----------- -----------
NET INCOME............................. $ 5,886,296 $ 6,413,068 $ 6,415,148
=========== =========== ===========
ALLOCATION OF NET INCOME
General Partner...................... 294,315 $ 320,653 $ 320,757
Limited Partners..................... 5,591,981 6,092,415 6,094,391
----------- ----------- -----------
$ 5,886,296 $ 6,413,068 $ 6,415,148
=========== =========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(608 Units)........................... $ 9,197 $ 10,020 $ 10,024
=========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-43
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
General Limited
Partner Partners Total
---------- ----------- -----------
<S> <C> <C> <C>
Balance, December 31, 1995................ $3,498,063 $25,998,482 $29,496,545
Capital distributions................... (364,050) (7,031,216) (7,395,266)
Net income.............................. 320,757 6,094,391 6,415,148
---------- ----------- -----------
Balance, December 31, 1996................ 3,454,770 25,061,657 28,516,427
Capital distributions................... (352,000) (5,137,600) (5,489,600)
Net income.............................. 320,653 6,092,415 6,413,068
---------- ----------- -----------
Balance, December 31, 1997................ 3,423,423 26,016,472 29,439,895
Capital distributions................... (416,000) (4,438,405) (4,854,405)
Net income.............................. 294,315 5,591,981 5,886,296
---------- ----------- -----------
Balance, December 31, 1998................ $3,301,738 $27,170,048 $30,471,786
========== =========== ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-44
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income........................... $ 5,886,296 $ 6,413,068 $ 6,415,148
Noncash items:
Depreciation and amortization...... 4,293,394 4,048,361 3,726,389
Amortization of deferred financing
costs as interest expense......... 385,678 388,465 388,465
Working capital changes:
Due from Residence Inn by Marriott,
Inc............................... (308,700) 6,540 (215,850)
Accounts payable and accrued
expenses.......................... 177,369 371,604 (27,653)
----------- ------------ -----------
Cash provided by operations...... 10,434,037 11,228,038 10,286,499
----------- ------------ -----------
INVESTING ACTIVITIES
Additions to property and equipment.. (1,442,258) (4,907,987) (1,916,314)
Change in restricted cash............ -- 3,793,208 --
Changes in property improvement fund,
net................................. (439,106) 2,512,082 (241,522)
----------- ------------ -----------
Cash (used in) provided by
investing activities.............. (1,881,364) 1,397,303 (2,157,836)
----------- ------------ -----------
FINANCING ACTIVITIES
Capital distributions................ (4,854,405) (5,489,600) (7,395,266)
Payment of financing costs........... (88,782) -- --
Repayment of mortgage principal...... (837,013) (760,233) (6,122,816)
(Repayments of) proceeds from note
payable to Host Marriott
Corporation......................... -- (5,392,667) 5,392,667
----------- ------------ -----------
Cash used in financing
activities...................... (5,780,200) (11,642,500) (8,125,415)
----------- ------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS.. 2,772,473 982,841 3,248
CASH AND CASH EQUIVALENTS, beginning of
year.................................. 3,701,029 2,718,188 2,714,940
----------- ------------ -----------
CASH AND CASH EQUIVALENTS, end of
year.................................. $ 6,473,502 $ 3,701,029 $ 2,718,188
=========== ============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest............... $ 5,758,000 $ 5,556,000 $ 5,989,000
=========== ============ ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-45
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS

Note 1. The Partnership

Description of the Partnership

Marriott Residence Inn USA Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed to acquire, own and operate 11
Residence Inn by Marriott hotels (the "Inns"). The Inns are located in eight
states and have a total of 1,294 suites. The Inns are managed by Residence Inn
by Marriott, Inc. (the "Manager"), a wholly-owned subsidiary of Marriott
International, Inc. ("MII"), as part of the Residence Inn by Marriott hotel
system.

The Partnership was formed on August 21, 1991 and operations commenced on
December 30, 1991 (the "Closing Date"). On the Closing Date, the Inns were
contributed to the Partnership pursuant to the terms of a contribution
agreement between Host Marriott, the Manager, several wholly-owned subsidiaries
of Host Marriott (collectively, the "Contributing Limited Partners") and the
Partnership. In consideration for their contribution, the Contributing Limited
Partners received 608 limited partner interests ("Units"), representing a 95%
interest, and the proceeds of a $58,000,000 mortgage loan (see Note 5). The
General Partner contributed $3,200,000 for a 5% interest in the Partnership.

On June 30, 1992 (the "Initial Equity Closing Date"), the Contributing
Limited Partners transferred 170 Units to non-Host Marriott investors. All
remaining Units were transferred between December 31, 1992 and December 2,
1994. For U.S. Federal income tax reporting purposes (IRC Section
708(b)(1)(B)), a termination of the Partnership occurred on March 15, 1993 (the
"Remeasurement Date") as a result of the sale of 50% of the interests in the
Partnership's capital and profits in the previous twelve months. As a result of
the termination, for tax purposes, the Partnership was treated as distributing
its properties to the partners who immediately thereafter contributed the
properties to a new partnership. There were no adjustments made to these
financial statements as a result of this termination. However, on a tax basis,
under applicable U.S. Federal income tax regulations, the carrying value of the
property and equipment were adjusted to reflect its fair market value on the
Remeasurement Date.

On April 17, 1998, Host Marriott Corporation ("Host Marriott"), the parent
of RIBM Three LLC, the sole general partner of the partnership (the "General
Partner"), announced that its Board of Directors authorized the Company to
reorganize its business operations to qualify as a real estate investment trust
("REIT") to become effective as of January 1, 1999 (the "REIT Conversion"). On
December 29, 1998, Host Marriott announced that it had completed substantially
all the steps necessary to complete the REIT Conversion, including spinning off
Crestline Capital Corporation, to the shareholders of Host Marriott,
("Crestline Capital") and expected to qualify as a REIT under the applicable
Federal income tax laws beginning January 1, 1999. Subsequent to the REIT
Conversion, Host Marriott is referred to as Host REIT. In connection with the
REIT Conversion, Host REIT contributed substantially all of its hotel assets to
a newly formed partnership, Host Marriott L.P. ("Host LP").

On December 24, 1998, in connection with Host Marriott's conversion to a
real estate investment trust (the "Conversion"), the name of the general
partner changed from Marriott RIBM Three Corporation to RIBM Three LLC. Prior
to the Conversion, the General Partner was a wholly-owned subsidiary of Host
Marriott. Pursuant to the Conversion, Host Marriott contributed a 1% Class A
managing interest in the General Partner to Host Marriott L.P., and a 99% Class
B interest in the General Partner to Rockledge Hotel Properties, Inc., a non-
controlled subsidiary of Host Marriott L.P. In March 1999, Crestline Capital
purchased a 74% limited partner interest in the Partnership for $34.4 million
from the limited partners.

F-46
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

Partnership Allocations and Distributions

Pursuant to the terms of the partnership agreement, Partnership
allocations, for U.S. Federal income tax purposes, and distributions
subsequent to the Initial Equity Closing Date are generally made as follows:

a. Cash available for distribution will generally be distributed (i)
first, 100% to the limited partners, until the limited partners have
received, with respect to such year, an amount equal to 11% of their
average daily outstanding Net Invested Capital, defined as the excess of
capital contributions over cumulative distributions of net refinancing
and/or sales proceeds ("Capital Receipts"); (ii) second, 100% to the
General Partner until the General Partner has received, with respect to
such year, an amount equal to 11% of Net Invested Capital; (iii) third, 5%
to the General Partner and 95% to the limited partners, until the partners
have received cumulative distributions of Capital Receipts equal to the
partners' capital contributions; and (iv) thereafter, 15% to the General
Partner and 85% to the limited partners.

b. Capital Receipts not retained by the Partnership will be distributed
(i) first, 100% to the limited partners until the limited partners have
received an amount equal to the unpaid portion of a 14% return on Net
Invested Capital; (ii) second, 100% to the limited partners until the
partners have received cumulative distributions of Capital Receipts equal
to their capital contributions; (iii) third, 100% to the General Partner
until the General Partner has received an amount equal to the unpaid
portion of a 14% return on Net Invested Capital; (iv) fourth, 100% to the
General Partner until the General Partner has received cumulative
distributions of Capital Receipts equal to its capital contribution; and
(v) thereafter, 15% to the General Partner and 85% to the limited partners.

c. Proceeds from the sale of substantially all of the assets of the
Partnership will be distributed to the partners in accordance with their
capital account balances as adjusted to take into account gain or loss
resulting from such sale.

d. Net profits will generally be allocated to the partners in proportion
to the distributions of cash available for distribution; however, the
General Partner will not be allocated less than 1%.

e. Net losses will generally be allocated 5% to the General Partner and
95% to the limited partners.

f. Gain recognized by the Partnership will generally be allocated (i)
first, to all partners whose capital accounts have negative balances until
such balances are brought to zero; (ii) next, to all partners in the amount
necessary to bring their respective capital account balances to an amount
equal to their Net Invested Capital plus a 14% return on Net Invested
Capital; and (iii) thereafter, in amounts necessary to bring the ratio of
the General Partner and limited partners' capital account balances in
excess of capital priority amounts, as defined, to 15% and 85%,
respectively.

g. Losses recognized by the Partnership will generally be allocated (i)
first, 85% to limited partners and 15% to the General Partner until
positive capital account balances in excess of capital priority amounts, as
defined, have been eliminated; (ii) next, to all partners whose capital
accounts have positive balances until such balances have been eliminated;
and (iii) thereafter, 100% to the General Partner.

For financial reporting purposes, net profits and losses are allocated
among partners based upon their stated interests in cash available for
distributions.

Note 2. Summary of Significant Accounting Policies

Basis of Accounting

The Partnership's records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.

F-47
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

Use of Estimates

Cash and Cash Equivalents

The Partnership considers all highly liquid investments with an original
maturity of three months or less at date of purchase to be cash equivalents.

Property and Equipment

Property and equipment is recorded at cost. Property and equipment
contributed by Host Marriott and its affiliates has been recorded at its
carryover basis. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets as follows:

<TABLE>
<S> <C>
Buildings and improvements...................................... 40 years
Furniture and equipment......................................... 4-10 years
</TABLE>

All property and equipment is pledged as security for the mortgage debt
described in Note 5.

The Partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties on an
individual property basis will be less than their net book value. If a property
is impaired, its basis is adjusted to fair market value.

Restricted Cash Reserve

A restricted cash reserve was available to support distributions to the
limited partners if, and to the extent, cash distributions for any year through
1996 otherwise would be insufficient to provide the limited partners an
annualized return on the limited partners' capital contributions equal to 11%
for 1996 and 10.75% for 1995. The remaining balance in the restricted cash
reserve at February 15, 1997 became part of the Partnership's general working
capital and was used to repay the note payable due to Host Marriott (see Note
5).

Deferred Financing Costs

Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt and amendments (see Note 5) and are amortized using
the straight-line method, which approximates the effective interest method,
over the term of the loan. The Partnership paid $88,782 in financing costs
during the year ended December 31, 1998 in connection with the extension of the
mortgage debt. Accumulated amortization of the deferred financing costs was
$2,719,501 and $2,333,822 as of December 31, 1998 and 1997, respectively.

Revenues and Expenses

Revenues primarily represent gross revenues generated by the Inns.

On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board ("FASB") reached a consensus on EITF 97-2
"Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician
Practice Management Entities and Certain Other Entities with Contractual

F-48
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

Management Arrangements." EITF 97-2 addresses the circumstances in which a
management entity may include the revenues and expenses of a managed entity in
its financial statements.

The Partnership assessed the impact of EITF 97-2 on its financial statements
and determined that EITF 97-2 requires the Partnership to include property-
level revenues and operating expenses of its Inns in its Statement of
Operations. The Partnership has given retroactive effect to the adoption of
EITF 97-2 in the accompanying statement of operations. Application of EITF 97-2
to the financial statements for the years ended December 31, 1998, 1997 and
1996 increased both revenues and operating expenses by approximately $19.5
million, $18.1 million and $17.8 million, respectively, and had no impact on
operating profit or net income.

Interest Rate Swap Agreement

The Partnership entered into an interest rate swap agreement to convert
certain portions of its variable rate debt to a fixed rate basis. The interest
rate differential to be paid or received on the interest rate swap agreement is
accrued as interest rates change and is recognized as an adjustment to interest
expense (see Note 5).

Income Taxes

Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods, shorter depreciable lives for the assets,
differences in the timing of recognition of certain fees and straight-line rent
adjustments. As a result of these differences, the excess of the tax basis in
Partnership net liabilities over the Partnership net liabilities reported in
the accompanying financial statements is $7,218,000 and $9,907,000 as of
December 31, 1998 and 1997, respectively.

Reclassifications

Certain prior year amounts have been reclassified to conform with current
year presentation.

Note 3. Property and Equipment

Property and equipment consists of the following as of December 31:

<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Land and improvements............................ $ 9,710,712 $ 9,658,977
Buildings and improvements....................... 73,470,126 73,039,408
Furniture and equipment.......................... 18,742,798 17,782,993
------------ ------------
101,923,636 100,481,378
Less accumulated depreciation.................... (25,401,465) (21,153,667)
------------ ------------
$ 76,522,171 $ 79,327,711
============ ============
</TABLE>

F-49
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

Note 4. Estimated Fair Value of Financial Instruments

The estimated fair value of financial instruments is shown below. Fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts:

<TABLE>
<CAPTION>
As of December 31, 1998 As of December 31, 1997
-------------------------- --------------------------
Carrying Estimated Fair Carrying Estimated Fair
Amount Value Amount Value
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Mortgage debt........... $54,628,029 $54,628,029 $55,465,042 $56,808,151
Interest Rate Swap
Agreement.............. $ -- $ -- $ -- $ 532,231
</TABLE>

The estimated fair value of the mortgage debt are based on the expected
future debt service payments discounted at risk adjusted rates.

The estimated fair value of the interest rate swap agreement is based on the
estimated amount the Partnership would pay or receive to terminate the
agreement. The notional amount of the agreement was $25,836,467 at December 31,
1997. The Swap Agreement expired on December 31, 1998.

Note 5. Debt

Term Loan

On the Closing Date, the Partnership entered into a loan agreement with a
life insurance company, as lead lender and servicer, to provide $58,000,000 of
non-recourse debt (the "Term Loan"). The Term Loan was amortized on the basis
of a 25-year amortization schedule which commenced in March 1994 and matured on
December 31, 1998.

The Term Loan was evidenced by (i) promissory notes aggregating $31,000,000
(the "Fixed Rate Notes") which bore interest at a fixed rate of 9.66% per annum
and (ii) promissory notes aggregating $27,000,000 (the "Floating Rate Notes")
which bore interest at 1.85 percentage points over the three-month London
Interbank Offered Rate. On the Closing Date, the Partnership entered into an
interest rate swap agreement (the "Swap Agreement") with a third party to
effectively fix the interest rate on the Floating Rate Notes at 9.66% per annum
until maturity of the Term Loan. The counterparty's obligations under the Swap
Agreement were guaranteed by the parent company of the counterparty, a national
investment banking institution. There was no nonperformance by the counterparty
during the term of the agreement. The Partnership's obligations under the Swap
Agreement were secured by a pledge of collateral by the General Partner. The
Swap Agreement expired on December 31, 1998.

On December 31, 1998, the Term Loan was amended such that its maturity date
was extended from December 31, 1998 to December 31, 1999. The Term Loan was
extended for only one year in anticipation of a possible sale of the
Partnership's hotels in 1999. As a result of the Amendment, the Fixed Rate
Notes and Floating Rate Notes were consolidated into a single indebtedness in
the principal amount of $54,628,029 (the "Amended Term Loan"). The Amended Term
Loan bears interest at 3.3 percentage points over the three-month LIBOR (the
"Contract Rate"). The Contract Rate in effect on December 31, 1998 was 8.6%. On
the Amendment date, the Partnership made the following payments: (1) $529,740
in interest due and payable on the Term Loan, (2) a $50,000 underwriting fee
payable in connection with the Amendment, and (3) $38,782 in legal fees.
Beginning February 1, 1999, monthly principal payments of $75,000 will be made
on the Amended Term Loan, in addition to monthly interest payments calculated
on the basis of the Contract Rate and the outstanding principal balance. All
unpaid principal and interest is due at the maturity of the Amended Term Loan
on December 31, 1999.

F-50
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

The Amended Term Loan is secured by first mortgages on the Partnership's fee
or leasehold interest in ten of the Inns (the "Term Loan Inns"), a security
interest in all personal property associated with the Term Loan Inns including
furniture and equipment, inventory, contracts and other general intangibles,
and an assignment of the Partnership's rights under the management agreement.

Raleigh Mortgage Loan

On the Closing Date, the Partnership assumed one of the Contributing Limited
Partner's obligations under a nonrecourse mortgage loan in the original
principal amount of $5,900,000 with respect to the Raleigh Inn. The loan
carried a fixed interest rate of 10.25% and required monthly payments of
interest and principal, based on a 30-year amortization schedule, until
maturity on July 1, 1996. On July 1, 1996, the Raleigh Mortgage Loan was fully
repaid with proceeds advanced under a loan from Host Marriott.

Note Payable to Host Marriott

On July 1, 1996, the Raleigh Mortgage Loan was repaid in full with proceeds
of a $5,392,667 unsecured nonrecourse loan from Host Marriott. Interest on the
loan accrues at prime plus one percent. The loan matured on April 30, 1997 with
the entire balance due at that time. The Partnership repaid the loan with funds
released from the restricted cash reserve and cash from Partnership operating
activity. During 1997 and 1996, $160,500 and $209,100, respectively, of
interest was paid to Host Marriott. The weighted average interest rate was
9.36% and 9.25% for the years ended December 31, 1997 and 1996, respectively.

Note 6. Management Agreement

The Manager operates the Inns pursuant to a long-term management agreement
with an initial term expiring December 30, 2011. The Manager has the option to
extend the agreement on one or more Inns for up to five 10-year terms. The
Manager earns a base management fee equal to 2% of the Inns' gross revenues,
which is subordinate to payment of qualifying debt service payments, a
provision for Partnership administrative expenses and retention by the
Partnership of annual cash flow from operations of $7,040,000. The Manager is
also entitled to an incentive management fee equal to 20% of operating profit,
as defined, in excess of $9,500,000 for each calendar year. The incentive
management fee is payable out of 50% of cash flow from operations remaining
after payment of debt service, provision for Partnership administrative
expenses, retention by the Partnership of annual cash flow from operations of
$7,040,000, payment of current base management fees, payment of amounts due
pursuant to any loans from Host Marriott and deferred base management fees.
Through December 31, 1996, base and incentive management fees not paid
currently were waived by the Manager. Subsequent to December 31, 1996, any base
and incentive management fees not paid are earned by the Manager and have been
accrued by the Partnership. For the years ended December 31, 1998, 1997 and
1996, $815,280, $797,518 and $774,482 of base management fees and $436,798,
$802,359 and $467,633 of incentive management fees, respectively, were paid to
the Manager. As of December 31, 1998 and 1997, respectively, $1,068,122 and
$421,346 in incentive management fees were deferred.

The management agreement also provides for a Residence Inn system fee equal
to 4% of suite revenues. In addition, the Manager is reimbursed for each Inn's
pro rata share of the actual costs and expenses incurred in providing certain
services ("Chain Services") on a central or regional basis to all hotels
operated by the Manager. As franchiser of the Residence Inn by Marriott system,
the Manager maintains a marketing fund to pay the costs associated with certain
system-wide advertising, promotional and public relations materials and
programs and the operation of a toll-free reservation system. Each Inn
contributes 2.5% of suite revenues to the marketing fund. For the years ended
December 31, 1998, 1997 and 1996, the Partnership paid Residence Inn system
fees of $1,550,666, $1,516,902 and $1,471,520, reimbursed the Manager for
$962,145, $764,094 and

F-51
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS--(Continued)

$748,229 of Chain Services and contributed $969,166, $948,064 and $919,701 to
the marketing fund, respectively. The Partnership is required to provide the
Manager with working capital to meet the operating needs of the Inns. As of
December 31, 1998 and 1997, $642,500 had been advanced to the Manager for
working capital.

The management agreement also provides for the establishment of a property
improvement fund for the Inns. Contributions to the property improvement fund
are equal to 5% of gross revenues of each Inn. During 1998, 1997 and 1996, the
Partnership contributed $2,038,199, $1,994,000 and $1,936,000, respectively, to
the property improvement fund.

Note 7. Meriden Ground Lease

On the Closing Date, the Partnership assumed all of Host Marriott's rights
and obligations as tenant under the ground lease with respect to the land on
which the Meriden Inn is located. The initial term of the ground lease will
expire on August 14, 2013. The Partnership will have the option to extend the
term thereof for up to ten consecutive periods of five years each. Rent for the
initial term in the amount of $1,200,000 was prepaid by Host Marriott and is
amortized on a straight-line basis over the initial term of the lease. Rent
after the initial term will be prepaid in varying amounts at the beginning of
each applicable extended term. As of December 31, 1998 and 1997, accumulated
amortization of the prepaid ground rent was $319,791 and $274,196,
respectively.

F-52
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

CONDENSED BALANCE SHEET
As of March 31, 1999
(unaudited)

<TABLE>
<S> <C>
ASSETS
Property and equipment, net........................................ $76,027,932
Cash and cash equivalents.......................................... 8,459,534
Due from Residence Inn by Marriott, Inc............................ 1,906,299
Property improvement fund.......................................... 1,446,601
Other assets....................................................... 704,104
-----------
$88,544,470
===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt.................................................... $54,478,029
Deferred incentive management fee due to Residence Inn by
Marriott, Inc................................................... 1,145,122
Accounts payable and accrued expenses............................ 411,516
-----------
Total Liabilities.............................................. 56,034,667
-----------
PARTNERS' CAPITAL
General Partner.................................................. 3,403,642
Limited Partners................................................. 29,106,162
-----------
Total Partners' Capital........................................ 32,509,803
-----------
$88,544,470
===========
</TABLE>

See Notes to Condensed Financial Statements.

F-53
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended
------------------------
March 31, March 31,
1999 1998
----------- -----------
<S> <C> <C>
REVENUES
Inn revenues
Suites............................................ $ 9,287,496 $ 9,074,529
Other............................................. 455,439 440,247
----------- -----------
Total Inn revenues.............................. 9,742,935 9,514,776
----------- -----------
OPERATING COSTS AND EXPENSES
Property-level costs and expenses
Suites............................................ 1,949,878 1,797,638
Other operating departments....................... 229,919 237,216
Other Inn operating expenses...................... 2,511,839 2,418,248
----------- -----------
Total Inn property-level costs and expenses..... 4,691,636 4,453,102
Depreciation and amortization....................... 676,264 958,991
Incentive management fee............................ 232,179 246,365
Residence Inn system fee............................ 371,499 362,981
Property taxes...................................... 372,356 373,700
Base management fee................................. 194,859 190,296
Equipment rent and other............................ 69,278 66,737
----------- -----------
6,608,071 6,652,172
----------- -----------
OPERATING PROFIT...................................... 3,134,864 2,862,604
Interest expense.................................... (1,192,383) (1,432,599)
Interest income..................................... 95,536 63,528
----------- -----------
NET INCOME............................................ $ 2,038,017 $ 1,493,533
=========== ===========
ALLOCATION OF NET INCOME
General Partner..................................... $ 101,901 $ 74,677
Limited Partners.................................... 1,936,116 1,418,856
----------- -----------
$ 2,038,017 $ 1,493,533
=========== ===========
NET INCOME PER LIMITED PARTNER UNIT
(608 Units)......................................... $ 3,184 $ 2,334
=========== ===========
</TABLE>

See Notes to Condensed Financial Statements.

F-54
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>
Three Months Ended
-----------------------------
March 31, 1999 March 31, 1998
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................... $2,038,017 $1,493,533
Noncash items................................. 698,399 1,056,108
Changes in operating accounts................. (104,154) (518,108)
---------- ----------
Cash provided by operating activities....... 2,632,262 2,031,533
---------- ----------
INVESTING ACTIVITIES
Change in property improvement fund........... (325,604) (405,185)
Additions to property and equipment........... (170,626) (84,079)
---------- ----------
Cash used in investing activities........... (496,230) (489,264)
---------- ----------
FINANCING ACTIVITIES
Principal payments on mortgage debt........... (150,000) (201,765)
Capital distributions to partners............. -- (2,934,400)
---------- ----------
Cash used in financing activities........... (150,000) (3,136,165)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.......................................... 1,986,032 (1,593,896)
CASH AND CASH EQUIVALENTS, at beginning of peri-
od............................................. 6,473,502 3,701,029
---------- ----------
CASH AND CASH EQUIVALENTS, at end of period..... $8,459,534 $2,107,133
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMA-
TION:
Cash paid for mortgage interest............. $ 772,714 $1,337,113
========== ==========
</TABLE>

See Notes to Condensed Financial Statements.

F-55
<PAGE>

MARRIOTT RESIDENCE INN USA LIMITED PARTNERSHIP

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. The accompanying condensed financial statements have been prepared by
Marriott Residence Inn USA Limited Partnership (the "Partnership") 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 from the accompanying financial
statements. The Partnership believes the disclosures made are adequate to make
the information presented not misleading. However, the condensed financial
statements should be read in conjunction with the Partnership's financial
statements and notes thereto included herein.

In the opinion of the Partnership, the accompanying condensed financial
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position of the
Partnership as of March 31, 1999, and the results of operations and cash flows
for the three months ended March 31, 1999 and 1998. Interim results are not
necessarily indicative of fiscal year performance because of seasonal and
short-term variations.

For financial reporting purposes, the net income of the Partnership is
allocated 95% to the limited partners and 5% to RIBM Three LLC (the "General
Partner"). Significant differences exist between the net income for financial
reporting purposes and the net income for Federal income tax purposes. These
differences are due primarily to the use, for Federal income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets
and differences in the timing of the recognition of incentive management fee
expense.

2. Revenues represent the gross sales generated by the Partnership's Inns.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial
Accounting Standards Board reached a consensus on EITF 97-2, "Application of
FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.

The Partnership considered the impact of EITF 97-2 on its condensed
financial statements and determined that EITF 97-2 requires the Partnership to
include property-level sales and operating expenses of its Inns in its
statement of operations for the period during which the Partnership operated
the Inns through a management agreement. The Partnership has given retroactive
effect to the adoption of EITF 97-2 in the accompanying condensed statement of
operations. Application of EITF 97-2 to the financial statements for the three
months ended March 31, 1999 and 1998, increased both revenues and operating
expenses by $4.7 million, and $4.5 million, respectively, and had no impact on
operating profit or net income.

3. Certain reclassifications were made to prior year financial statements to
conform to the 1999 presentation.

4. On March 29, 1999, Crestline Capital Corporation acquired 474 limited
partner units, or a 74% interest in the Partnership. In May 1999, Crestline
acquired an additional 20 limited partner units for $1.6 million in cash
increasing Crestline's ownership to a 77% limited partnership interest in the
Partnership.

F-56
<PAGE>

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

No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.

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

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.................................................................. 1
Risk Factors............................................................. 3
Use of Proceeds.......................................................... 13
Price Range of Our Common Stock.......................................... 13
Dividend Policy.......................................................... 13
Selected Consolidated Financial Data..................................... 14
Capitalization........................................................... 16
Pro Forma Financial Information.......................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 37
Management............................................................... 67
Principal Stockholders................................................... 72
Certain Relationships and Related Transactions........................... 74
Description of Capital Stock............................................. 76
The Selling Stockholders................................................. 83
Plan of Distribution..................................................... 85
Legal Matters............................................................ 87
Experts.................................................................. 87
Where You Can Find More Information...................................... 87
Index to Financial Statements............................................ F-1
</TABLE>

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

1,400,002 Shares

Crestline Capital Corporation

Common Stock

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 16. Exhibits and Financial Statement Schedules

(a) Exhibits

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to
the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-64657), dated
September 29, 1998)

3.3 Articles of Amendment and Restatement of Articles of Incorporation
(incorporated by reference to Exhibit 3.3 to the Company's Amendment
No. 2 to Registration Statement on Form S-1 (Reg. No. 333-64657),
dated November 12, 1998)

4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1
to the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

5.1 Legal Opinion of Tracy M.J. Colden

#10.1 Form of Hotel Lease Agreement between the Company and Host Marriott
for Full-Service Hotels Managed by Marriott International
(incorporated by reference to Exhibit 10.1 to the Company's Amendment
No. 3 to Registration Statement on Form S-1 (Reg. No. 333-64657),
dated November 20, 1998)

#10.2 Form of Hotel Lease Agreement between a Subsidiary of Host Marriott
and HPT for Limited-Service Hotels (incorporated by reference to
Exhibit 10.2 to the Company's Amendment No. 2 to Registration
Statement on Form S-1 (Reg. No. 333-64657), dated November 12, 1998)

#10.3 Form of Hotel Sublease Agreement Between the Company and Host Marriott
for Limited -Service Hotels (incorporated by reference to Exhibit 10.3
to the Company's Amendment No. 3 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 20, 1998)

#10.4 Form of Full-Service Hotel Management Agreement between the Company
and Marriott International (incorporated by reference to Exhibit 10.4
to the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

#10.5 Form of Owner's Agreement between the Company, Host Marriott and
Marriott International (incorporated by reference to Exhibit 10.5 to
the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

#10.6 Form of Limited-Service Hotel Management Agreement between the Company
and Marriott International (incorporated by reference to Exhibit 10.6
to the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

#10.7 Form of Communities Operating Agreement between the Company and
Marriott International (incorporated by reference to Exhibit 10.7 to
the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

10.8 Form of First Amendment to Communities Operating Agreement
(incorporated by reference to Exhibit 10.8 to the Company's Amendment
No. 2 to Registration Statement on Form S-1 (Reg. No. 333-64657),
dated November 12, 1998)
</TABLE>

II-1
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.9 Noncompetition Agreement dated as of December 28, 1998 by and among
Host Marriott Corporation, Host Marriott, L.P., the Company, Fernwood
Hotel Assets, Inc. and Rockledge Hotel Properties, Inc. (incorporated
by reference to Exhibit 99.2 to the Company's Current Report on Form
8-K (Reg. No. 1-14635), dated December 30, 1998)

10.10 Form of Amended and Restated Communities Non-Competition Agreement
(incorporated by reference to Exhibit 10.10 to the Company's Amendment
No. 2 to Registration Statement on Form S-1 (Reg. No. 333-64657),
dated November 12, 1998)

10.11 Restated Hotel Non-Competition Agreement between Host Marriott and
Marriott International (incorporated by reference to Exhibit 10.11 to
the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

10.12 Form of First Amendment to Restated Hotel Non-Competition Agreement
(incorporated by reference to Exhibit 10.12 to the Company's Amendment
No. 3 to Registration Statement on Form S-1 (Reg. No. 333-64657),
dated November 20, 1998)

10.13 Form of Working Capital Note and Agreement (incorporated by reference
to Exhibit 10.24 to the Company's Amendment No. 2 to Registration
Statement on Form S-1 (Reg. No. 333-64657), dated November 12, 1998)

10.14 Form of Tax Sharing Agreement between the Company and Host Marriott
(incorporated by reference to Exhibit 10.14 to the Company's Amendment
No. 3 to Registration Statement on Form S-1 (Reg. No. 333-64657),
dated November 20, 1998)

10.15 Form of FF&E Lease between the Company and Non-Controlled Subsidiaries
of Host Marriott (incorporated by reference to Exhibit 10.15 to the
Company's Amendment No. 3 to Registration Statement on Form S-1 (Reg.
No. 333-64657), dated November 20, 1998)

10.16 Form of Guaranty Agreement between the Company, the Lessees and Host
Marriott (incorporated by reference to Exhibit 10.16 to the Company's
Amendment No. 3 to Registration Statement on Form S-1 (Reg. No. 333-
64657), dated November 20, 1998)

10.17 Form of Pooling Agreement between the Company and Host Marriott
(incorporated by reference to Exhibit 10.17 to the Company's Amendment
No. 3 to Registration Statement on Form S-1 (Reg. No. 333-64657),
dated November 20, 1998)

10.18 Form of Employee Benefits and Other Employment Matters Allocation
Agreement between the Company and Host Marriott (incorporated by
reference to Exhibit 10.18 to the Company's Amendment No. 2 to
Registration Statement on Form S-1 (Reg. No. 333-64657), dated
November 12, 1998)

10.19 Form of Asset Management Agreement between the Company and Host
Marriott (incorporated by reference to Exhibit 10.19 to the Company's
Amendment No. 2 to Registration Statement on Form S-1 (Reg. No. 333-
64657), dated November 12, 1998)

10.20 Form of Asset Management Agreement between the Company and Non-
Controlled Subsidiary of Host Marriott (incorporated by reference to
Exhibit 10.20 to the Company's Amendment No. 2 to Registration
Statement on Form S-1 (Reg. No. 333-64657), dated November 12, 1998)

10.21 Registration Rights Agreement between the Company and the Contributors
(as defined therein) (incorporated by reference to Exhibit 10.21 to
the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

10.22 Tax Matters Agreement dated June 21, 1997 among the Company, Host
Marriott, Forum, Marriott International and MSLS (incorporated by
reference to Exhibit 10.22 to the Company's Amendment No. 2 to
Registration Statement on Form S-1 (Reg. No. 333-64657), dated
November 12, 1998)
</TABLE>

II-2
<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------

<C> <S>
10.23 Indemnity Agreement dated June 21, 1997 among the Company, Host
Marriott, Marriott International and MSLS (incorporated by reference
to Exhibit 10.23 to the Company's Amendment No. 2 to Registration
Statement on Form S-1 (Reg. No. 333-64657), dated November 12, 1998)

10.24 Distribution Agreement dated as of December 28, 1998 by and among Host
Marriott Corporation, Host Marriott, L.P., the Company, Fernwood Hotel
Assets, Inc. And Rockledge Hotel Properties, Inc. (incorporated by
reference to Exhibit 99.1 to the Company's Current Report on Form 8-K
(Reg. No. 1-14635), dated December 30, 1998)

12.1* Computation of Ratio of Earnings to Fixed Charges.
21.1* Subsidiaries of Crestline Capital Corporation

23.1 Consent of Tracy M.J. Colden (included in Exhibit 5.1)

23.2 Consent of Arthur Andersen LLP

24.1* Powers of attorney from officers and directors of the Company signing
by an attorney in fact (included on Signature Page)

</TABLE>

- --------

* Previously filed.
# Agreement filed is illustrative of numerous other agreements to which the
Company is or will be a party.

(b) Financial Statement Schedule

The following financial statement schedule of the Company is filed as
part of this Registration Statement and should be read in conjunction with
the consolidated financial statements of the Company.

Schedule III--Real Estate and Accumulated Depreciation S-1 to S-2

Schedules other than that listed above have been omitted because they
are not required or are not applicable, or the required information is
shown in the financial statements or notes thereto.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Bethesda, state of
Maryland, on June 28, 1999.

Crestline Capital Corporation

/s/ Larry K. Harvey
By: _________________________________
Name: Larry K. Harvey
Title: Senior Vice President and
Corporate Controller

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Tracy M.J. Colden and Larry K. Harvey, and each
of them (with full power to each of them to act alone), their true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for them and in their name, place and stead, in any and all capacities, to sign
on their behalf individually and in each capacity stated below any and all
amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto and other documents
in connection therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents and either of them, or their
substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by each of the following persons in the
capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
* Chairman of the Board, June 28, 1999
______________________________________ President and Chief
Bruce D. Wardinski Executive Officer
(Principal Executive
Officer)

* Executive Vice President, June 28, 1999
______________________________________ Chief Financial Officer
James L. Francis and Treasurer (Principal
Financial Officer)

/s/ Larry K. Harvey Senior Vice President and June 28, 1999
______________________________________ Corporate Controller
Larry K. Harvey (Principal Accounting
Officer)

Director
______________________________________
Adam M. Aron
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director June 28, 1999
______________________________________
Louise M. Cromwell

Director
______________________________________
Kelvin L. Davis

Director
______________________________________
John W. Marriott III

* Director June 28, 1999
______________________________________
John B. Morse, Jr.

* Director June 28, 1999
______________________________________
Christopher J. Nassetta

* Director June 28, 1999
______________________________________
Michael A. Wildish
</TABLE>

/s/ Larry K. Harvey

*By: _______________________

Larry K. Harvey

Attorney-in-fact

II-5
<PAGE>

SCHEDULE III
Page 1 of 2

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

REAL ESTATE AND ACCUMULATED DEPRECIATION
January 1, 1999
(in thousands)

<TABLE>
<CAPTION>
Gross Amount at
Initial Costs January 1, 1999
------------------ Subse- --------------------------- Date of
Buildings quent Buildings Accumu- Comple-
& Costs & lated tion of Depre-
Improve- Capital- Improve- Depre- Construc- Date ciation
Description Debt Land ments ized Land ments Total ciation tion Acquired Life
----------- -------- -------- --------- -------- -------- --------- -------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
The Forum at
Memorial Woods
Houston, TX..... $ 23,912 $ 7,417 $ 30,688 $ 9,367 $ 7,417 $ 40,055 $ 47,472 $ (1,485) N/A 1997 40
The Forum at Park
Lane
Dallas, TX...... 24,542 5,472 30,261 46 5,472 30,307 35,779 (937) N/A 1997 40
The Forum at
Knightsbridge
Columbus, OH.... 21,901 -- 30,970 9,083 -- 40,053 40,053 (1,521) N/A 1997 40
The Remington
Club I
San Diego, CA... -- 4,225 32,060 47 4,225 32,107 36,332 (1,181) N/A 1997 40
The Remington
Club II
San Diego, CA... -- 4,089 31,454 514 4,089 31,968 36,057 (1,830) N/A 1997 40
Forwood Manor
Wilmington, DE.. -- 4,710 24,291 4,922 4,710 29,213 33,923 (951) N/A 1997 40
Other properties,
each less than
5% of total..... 112,704 77,658 281,539 67,190 87,889 338,498 426,387 (17,455) N/A Various Various
-------- -------- -------- ------- -------- -------- -------- --------
Total........... $183,059 $103,571 $461,263 $91,169 $113,802 $542,201 $656,003 $(25,360)
======== ======== ======== ======= ======== ======== ======== ========
</TABLE>

S-1
<PAGE>

SCHEDULE III
Page 2 of 2

CRESTLINE CAPITAL CORPORATION AND SUBSIDIARIES

REAL ESTATE AND ACCUMULATED DEPRECIATION
January 1, 1999
(in thousands)

Notes:

(A) The change in total cost of properties for the fiscal year ended
January 1, 1999 and the period from June 21, 1997 (inception) through January
2, 1998 is as follows:

<TABLE>
<S> <C>
Balance as of June 21, 1997......................................... $546,056
Additions:
Contributions f
rom Host Marriott................................ 43,931(1)
Capital expenditures............................................ 30,783
--------
Balance as of January 2, 1998....................................... 620,770
Additions:
Contributions from Host Marriott................................ 7,801(1)
Acquisitions.................................................... 18,779
Capital expenditures............................................ 8,653
--------
Balance as of January 1, 1999....................................... $656,003
========
</TABLE>

(B) The change in accumulated depreciation and amortization of real estate
assets for the fiscal year ended January 1, 1999 and the period from June 21,
1997 (inception) through January 2, 1998 is as follows:

<TABLE>
<S>
<C>
Balance as of June 21, 1997......................................... $ --
Depreciation and amortization..................................... (8,696)
--------
Balance as of January 2, 1998....................................... (8,696)
Depreciation and amortization..................................... (16,664)
--------
Balance as of January 1, 1999....................................... $(25,360)
========
</TABLE>

(D) The total cost of properties excludes construction-in-progress
properties.

- ----------------
(1) During fiscal year 1998 and the period from June 21, 1997 (inception)
t
hrough January 2, 1998, Host Marriott contributed buildings and
improvements of $43,931,000 and 7,801,000, respectively, to the Company.

S-2
<PAGE>

EXHIBIT INDEX

3.2 Bylaws (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-64657), dated
September 29, 1998)

3.3 Articles of Amendment and Restatement of Articles of Incorporation
(incorporated by reference to Exhibit 3.3 to the Company's Amendment
No. 2 to Registr
ation Statement on Form S-1 (Reg. No. 333-64657),
dated November 12, 1998)

4.1 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1
to the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

5.1 Legal Opinion of Tracy M.J. Colden

#10.3 Form of Hotel Sublease Agr
eement Between the Company and Host Marriott
for Limited -Service Hotels (incorporated by reference to Exhibit 10.3
to the Company's Amendment No. 3 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 20, 1998)

#10.6 Form of Limited-Service Hotel Management Agreement between the Company
and Marriott International (incorporated by reference to Exhibit 10.6
to the
Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

10.9 Noncompetition Agreement dated as of December 28, 1998 by and among
Host Marriott Corporation, Host Marriott, L.P., the Company, Fernwood
Hotel Assets, Inc. and Rockledge Hotel Properties, Inc. (incorporated
by reference to Exhibit 99.2 to the Company's Current Report on Form
8-K (Reg. No. 1-14635), dated D
ecember 30, 1998)

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.11 Restated Hotel Non-Competition Agreement between Host Marriott and
Marriott International (incorporated by reference to Exhibit 10.11 to
the Company's Amendment No. 2 to Registration Statement on Form S-1
(Reg. No. 333-64657), dated November 12, 1998)

10.23 Indemnity Agreement dated June 21, 1997 among the Company, Host
Marriott, Marriott International and MSLS (incorporated by reference
to Exhibit 10.23 to the Company's Amendment No. 2 to Registration
Statement on Form S-1 (Reg. No. 333-64657), dated November 12, 1998)

</TABLE>

<PAGE>

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
12.1* Computation of Ratio of Earnings to Fixed Charges

21.1* Subsidiaries of Crestline Capital Corporation

23.1 Consent of Tracy M.J. Colden (included in Exhibit 5.1)

23.2 Consent of Arthur Andersen LLP

24.1* Powers of attorney from officers and directors of the Company signing
by an attorney in fact (included on Signature Page)
</TABLE>
- --------

* Previously filed.
# Agreement filed is illustrative of numerous other agreements to which the
Company is or will be a party.

(b) Financial Statement Schedules

Schedules not listed above are omitted because of the absence of the
conditions under which they are required or because the information
required by such omitted schedules is set forth in the financial statements
or the notes thereto.

<PAGE>

EXHIBIT 5.1

June 28, 1999

Board of Directors
Crestline Capital Corporation
6600 Rockledge Drive
Bethesda, Maryland 20817

Ladies and Gentlemen:

Re: Registration Statement on Form S-1; 1,400,002 shares of
Common Stock
-------------

We have acted as counsel to Crestline Capital Corporation, a Maryland
corporation (the "Company") in connection with the registration of 1,400,002
shares of the Company's common stock, par value $.01 per share (the "Shares")
under the Securities Act of 1933, as amended, by the Company on Form S-1, as
amended (the "Registration Statement"), filed with the Securities and Exchange
Commission. This opinion letter is furnished to you at your request to enable
you to fulfill the requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R.
(S)229.601(b)(5) in connection with the Registration Statement.

In connection with the opinion hereinafter given, we have examined executed
originals, or copies thereof certified to our satisfaction, of certificates and
other statements of public officials, or officers and representatives of the
Company and other persons, and such agreements, instruments and documents as we
have deemed necessary as a basis for the opinion hereinafter expressed.

In our examination, we have assumed the genuineness of all signatures
(other than as to the Company), the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic or reproduced copies and the authenticity of
the originals of such copies. This opinion letter is given, and all statements
herein are made, in the context of the foregoing.

This opinion letter is based as to matters of law solely on applicable
provisions of Maryland law. We express no opinion as to any other laws,
statutes, ordinances, rules or regulations or as to compliance with the
securities (or "blue sky") laws.

Based upon, subject to and limited by the foregoing, we are of the opinion
that the Shares have been validly issued, fully paid and nonassessable.

This opinion letter is prepared solely for your use in connection with the
filing of the Registration Statement on the date of the opinion letter and
speaks as of the date hereof. We assume no obligation to advise you of any
changes in the foregoing subsequent to the delivery of this opinion letter.
<PAGE>

Board of Directors
June 28, 1999
Page Two

We hereby consent to the filing of this opinion letter as Exhibit 5.1 to
the Registration Statement. In giving this consent, we do not thereby admit
that we are an "expert" within the meaning of the Securities Act of 1933, as
amended.

Very truly yours,

CRESTLINE CAPITAL CORPORATION
LAW DEPARTMENT

By: /s/ Tracy M.J. Colden
-----------------------------------------
Tracy M.J. Colden
Senior Vice President and General Counsel

-2-

<PAGE>

Exhibit 23.2

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement (File No. 333-79243) of our reports in
Crestline Capital Corporation's Form 10-K and to all references to our Firm
included in this registration statement.

Arthur Andersen LLP

Washington, D.C.

June 28, 1999