Edgar Filing: MARRIOTT INTERNATIONAL INC /MD/

Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 28, 2007

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

For the transition period from to

Commission File No. 1-13881

MARRIOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)


Delaware		52-2055918
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

10400 Fernwood Road, Bethesda, Maryland		20817
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s Telephone Number, Including Area Code (301) 380-3000

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

Title of Each Class

Name of Each Exchange on Which Registered

Class A Common Stock, $0.01 par value

(354,043,159 shares outstanding as of January 25, 2008)

New York Stock Exchange

Chicago Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in rule 405 of the Securities Act. Yes x No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The aggregate market value of shares of common stock held by non-affiliates at June 15, 2007, was $13,599,596,837.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement prepared for the 2008 Annual Meeting of Shareholders are incorporated by reference into

Part III of this report.

MARRIOTT INTERNATIONAL, INC.

FORM 10-K TABLE OF CONTENTS

FISCAL YEAR ENDED DECEMBER 28, 2007


		Page No.
Part I.

Item 1.	Business	3
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Submission of Matters to a Vote of Security Holders	19

Part II.

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	58
Item 8.	Financial Statements and Supplementary Data	60
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	105
Item 9A.	Controls and Procedures	105
Item 9B.	Other Information	105

Part III.

Item 10.	Directors, Executive Officers and Corporate Governance	106
Item 11.	Executive Compensation	106
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	106
Item 13.	Certain Relationships and Related Transactions, and Director Independence	106
Item 14.	Principal Accounting Fees and Services	106

Part IV.

Item 15.	Exhibits and Financial Statement Schedules	110

	Signatures	113

Throughout this report, we refer to Marriott International, Inc., together with its subsidiaries, as “we,” “us,” or “the Company.” Unless otherwise specified, each reference to a particular year means the fiscal year ended on the date shown in the table below, rather than the corresponding calendar year:


Fiscal Year	Fiscal Year-end Date	Fiscal Year	Fiscal Year-end Date
2007	December 28, 2007	2003	January 2, 2004
2006	December 29, 2006	2002	January 3, 2003
2005	December 30, 2005	2001	December 28, 2001
2004	December 31, 2004	2000	December 29, 2000

PART I

Item 1.

Business.

We are a worldwide operator and franchisor of hotels and related lodging facilities. We were organized as a corporation in Delaware in 1997 and became a public company in 1998 when we were “spun off” as a separate entity by the company formerly named “Marriott International, Inc.” Our operations are grouped into the following five business segments:


Segment		Percentage of 2007 Total Revenues
North American Full-Service Lodging Segment		42%
North American Limited-Service Lodging Segment		17%
International Lodging Segment		12%
Luxury Lodging Segment		12%
Timeshare Segment		16%
Other unallocated corporate		1%

Prior to November 3, 2007, our operations also included our synthetic fuel business, which we now classify as discontinued operations.

Our business includes our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments. We develop, operate, and franchise hotels and corporate housing properties under 15 separate brand names, and we develop, operate, and market timeshare, fractional ownership, and residential properties under four separate brand names. We also provide services to home/condominium owner associations for projects associated with several of our brands.

Financial information by industry segment and geographic area as of and for the 2007, 2006, and 2005 fiscal years then ended appears in Footnote No. 19, “Business Segments,” of the Notes to our Consolidated Financial Statements included in this annual report.

Lodging

We operate or franchise 2,999 lodging properties worldwide, with 535,093 rooms as of year-end 2007 inclusive of 21 home and condominium products (1,916 units) for which we manage the related owners’ associations. In addition, we provided 2,156 furnished corporate housing rental units, which are not included in the totals. We believe that our portfolio of lodging brands is the broadest of any company in the world and that we are the leader in the quality tier of the vacation timesharing business. Consistent with our focus on management and franchising, we own very few of our lodging properties. We manage and franchise lodging properties employing the following brands:


North American Full-Service Lodging Segment		International Lodging Segment
• Marriott^® Hotels & Resorts		• Marriott^® Hotels & Resorts
• JW Marriott^® Hotels & Resorts		• JW Marriott^® Hotels & Resorts
• Renaissance^® Hotels & Resorts		• Renaissance^® Hotels & Resorts
• Renaissance ClubSport^®		• Courtyard by Marriott^®
		• Fairfield Inn by Marriott^®
North American Limited-Service Lodging Segment		• Residence Inn by Marriott^®
• Courtyard by Marriott^®(“Courtyard”)		• Marriott Executive Apartments^®
• Fairfield Inn by Marriott^®(“Fairfield Inn”)
• SpringHill Suites by Marriott ^® (“SpringHill Suites”)
• Residence Inn by Marriott^®(“Residence Inn”)		Timeshare Segment
• TownePlace Suites by Marriott^®(“TownePlace Suites”)		• Marriott Vacation Club ^SM
• Marriott ExecuStay^®		• The Ritz-Carlton Club^®
		• Grand Residences by Marriott^®
Luxury Segment		• Horizons by Marriott Vacation Club^®
• The Ritz-Carlton^®
• Bulgari Hotels & Resorts^®

The North American Full-Service segment and the North American Limited-Service segment include properties located in the continental United States and Canada. The Luxury segment includes worldwide properties. The International segment includes full-service and limited-service properties located outside the continental United States and Canada. Unless otherwise indicated, our references to Marriott Hotels & Resorts throughout this report include Marriott Conference Centers and JW Marriott Hotels & Resorts, references to Renaissance Hotels & Resorts include Renaissance ClubSport, and references to Fairfield Inn include Fairfield Inn & Suites.

In addition to the brands noted above, in 2007 we announced our new brand of family-friendly resorts and spas, “Nickelodeon Resorts by Marriott” and a new brand of lifestyle boutique hotels, “Edition.” At year-end 2007, no properties were yet open under either brand.

Company-Operated Lodging Properties

At year-end 2007, we operated 1,040 properties (266,751 rooms) under long-term management agreements with property owners, 31 properties (7,729 rooms) under long-term lease agreements with property owners (management and lease agreements together, “the Operating Agreements”), and six properties (1,316 rooms) as owned. The figures noted for properties operated under long-term management agreements include 21 residential products (1,916 units) for which we manage the related owners’ associations.

Terms of our management agreements vary, but typically we earn a management fee, which comprises a base management fee, which is a percentage of the revenues of the hotel and an incentive management fee, which is based on the profits of the hotel. Our management agreements also typically include reimbursement of costs (both direct and indirect) of operations. Such agreements are generally for initial periods of 20 to 30 years, with options to renew for up to 50 or more additional years. Our lease agreements also vary, but may include fixed annual rentals plus additional rentals based on a percentage of annual revenues in excess of a fixed amount. Many of the Operating Agreements are subordinated to mortgages or other liens securing indebtedness of the owners. Additionally, many of our Operating Agreements permit the owners to terminate the agreement if certain performance metrics are not met and financial returns fail to meet defined levels for a period of time and we have not cured such deficiencies.

For lodging facilities that we operate, we generally are responsible for hiring, training, and supervising the managers and employees required to operate the facilities and for purchasing supplies, both for which we generally are reimbursed by the owners. We provide centralized reservation services and national advertising, marketing and promotional services, as well as various accounting and data processing services. We are generally reimbursed by owners for the cost of providing these services.

Franchised Lodging Properties

We have franchising programs that permit the use of certain of our brand names and our lodging systems by other hotel owners and operators. Under these programs, we generally receive an initial application fee and continuing royalty fees, which typically range from 4 percent to 6 percent of room revenues for all brands, plus 2 percent to 3 percent of food and beverage revenues for certain full-service hotels. In addition, franchisees contribute to our national marketing and advertising programs and pay fees for use of our centralized reservation systems. At year-end 2007, we had 1,922 franchised properties (259,297 rooms).

Timeshare and Residential

We develop, operate, market, and sell timeshare interval, fractional ownership, and residential properties under four brand names and generate revenues from three primary sources: (1) selling fee simple and other forms of timeshare intervals and personal residences; (2) financing consumer purchases; and (3) operating the resorts. Many resorts are located adjacent to company-operated hotels, such as Marriott Hotels & Resorts and The Ritz-Carlton, and owners have access to certain hotel facilities during their vacation. Owners can trade their annual interval for intervals at other Marriott timesharing resorts or for intervals at certain timesharing resorts not otherwise sponsored by Marriott through a third-party exchange company. Owners can also trade their unused interval for points in the Marriott Rewards^® frequent stay program, enabling them to stay at over 2,900 company-operated or franchised properties worldwide.

We sell residential real estate in conjunction with luxury hotel development (Ritz-Carlton-Residential) and Timeshare segment projects (Ritz-Carlton Club-Residential and Grand Residences by Marriott-Residential). Our Timeshare segment residential projects are typically opened over time with limited inventory available at any one time. Residences developed in conjunction with hotels are typically constructed and sold by hotel owners with limited amounts, if any, of our capital at risk. While the worldwide residential market is very large, the luxurious nature of our residential properties, the quality and exclusivity associated with our brands, and the hospitality services that we provide, all serve to make our residential products distinctive.

Seasonality

In general, business at company-operated and franchised properties is relatively stable and includes only moderate seasonal fluctuations. Business at some resort properties may be seasonal depending on location.

Relationship with Major Customer

We operate a number of properties under long-term management agreements that are owned or leased by Host Hotels & Resorts, Inc. (“Host”). In addition, Host is a partner in several partnerships that own properties operated by us under long-term management agreements. See Footnote No. 22, “Relationship with Major Customer,” in the Notes to our Consolidated Financial Statements included in this annual report for more information.

Summary of Properties by Brand

At year-end 2007, we operated or franchised the following properties by brand (excluding 2,156 corporate housing rental units):


	Company-Operated		Franchised
Brand	Properties	Rooms	Properties	Rooms
U.S. Locations
Marriott Hotels & Resorts	146	73,937	167	50,647
Marriott Conference Centers	13	3,476	—	—
JW Marriott Hotels & Resorts	11	6,736	5	1,552
Renaissance Hotels & Resorts	36	16,198	34	9,744
Renaissance ClubSport	—	—	1	175
The Ritz-Carlton	36	11,627	—	—
The Ritz-Carlton-Residential ⁽¹⁾	16	1,614	—	—
Courtyard	272	42,429	421	54,330
Fairfield Inn	2	855	527	46,075
SpringHill Suites	24	3,700	152	16,745
Residence Inn	138	18,693	390	44,112
TownePlace Suites	34	3,661	107	10,461
Marriott Vacation Club ⁽²⁾	37	8,987	—	—
The Ritz-Carlton Club-Fractional ⁽²⁾	5	283	—	—
The Ritz-Carlton Club-Residential ^{(1), (2)}	2	138	—	—
Grand Residences by Marriott-Fractional ⁽²⁾	1	199	—	—
Grand Residences by Marriott-Residential ^{(1), (2)}	1	65	—	—
Horizons by Marriott Vacation Club ⁽²⁾	2	444	—	—
Non-U.S. Locations
Marriott Hotels & Resorts	122	34,016	34	9,936
JW Marriott Hotels & Resorts	21	8,183	1	61
Renaissance Hotels & Resorts	53	17,493	17	5,324
The Ritz-Carlton	34	9,978	—	—
The Ritz-Carlton-Residential ⁽¹⁾	1	93	—	—
Bulgari Hotels & Resorts	2	117	—	—
Marriott Executive Apartments	17	2,806	1	99
Courtyard	35	7,477	39	6,544
Fairfield Inn	—	—	8	947
SpringHill Suites	—	—	1	124
Residence Inn	1	190	17	2,421
Ramada International	2	332	—	—
Marriott Vacation Club ⁽²⁾	9	1,909	—	—
The Ritz-Carlton Club-Fractional ⁽²⁾	2	105	—	—
The Ritz-Carlton Club-Residential ^{(1), (2)}	1	6	—	—
Grand Residences by Marriott-Fractional ⁽²⁾	1	49	—	—

Total	1,077	275,796	1,922	259,297

⁽¹⁾	Represents projects where we manage the related owners association. Residential products are included once they possess a certificate of occupancy.

⁽²⁾	Indicates a Timeshare product. Includes products in active sales as well as those that are sold out.

The following table provides additional detail by brand as of year-end 2007, for our Timeshare properties:


	Total Properties ⁽¹⁾	Properties in Active Sales ⁽²⁾
100 Percent Company-Developed
Marriott Vacation Club	45	24
The Ritz-Carlton Club and Residences	6	4
Grand Residences by Marriott and Residences	3	3
Horizons by Marriott Vacation Club	2	2
Joint Ventures
Marriott Vacation Club	1	1
The Ritz-Carlton Club and Residences	4	4

Total	61	38

⁽¹⁾	Includes products that are in active sales as well as those that are sold out. Residential products are included once they possess a certificate of occupancy.

⁽²⁾	Products in active sales may not be ready for occupancy.

Summary of Properties by Country

At year-end 2007, we operated or franchised properties in the following 68 countries and territories:


Country	Properties ⁽¹⁾	Rooms ⁽¹⁾
Americas
Argentina	1	320
Aruba	4	1,637
Bahamas	1	6
Brazil	6	1,609
Canada	56	11,838
Cayman Islands	4	929
Chile	2	485
Costa Rica	3	620
Curacao	1	247
Dominican Republic	3	583
Ecuador	1	257
El Salvador	1	133
Guatemala	1	385
Honduras	1	153
Jamaica	1	427
Mexico	16	3,833
Panama	2	415
Peru	1	300
Puerto Rico	5	1,585
Saint Kitts and Nevis	2	559
Trinidad and Tobago	1	119
United States	2,580	426,883
U.S. Virgin Islands	5	862
Venezuela	1	269

Total Americas	2,699	454,454


Country	Properties ⁽¹⁾	Rooms ⁽¹⁾
Middle East and Africa
Armenia	1	226
Bahrain	1	264
Egypt	8	3,562
Israel	2	966
Jordan	3	644
Kuwait	2	604
Qatar	3	910
Saudi Arabia	3	749
Tunisia	1	227
Turkey	5	1,470
United Arab Emirates	6	1,150

Total Middle East and Africa	35	10,772

Asia
China	32	12,465
Guam	1	357
India	6	1,525
Indonesia	8	1,808
Japan	10	3,155
Malaysia	7	3,019
Pakistan	2	504
Philippines	2	899
Singapore	2	1,002
South Korea	4	1,501
Thailand	9	2,330
Vietnam	2	874

Total Asia	85	29,439

Australia	8	2,354

Continental Europe
Austria	7	1,686
Belgium	5	878
Czech Republic	5	937
Denmark	1	395
France	10	2,557
Georgia	2	245
Germany	36	8,243
Greece	1	314
Hungary	2	470
Italy	8	1,713
Kazakhstan	2	322
Netherlands	3	921
Poland	2	744
Portugal	3	933
Romania	1	402
Russia	8	2,101
Spain	9	2,359
Switzerland	3	620

Total Europe	108	25,840

United Kingdom and Ireland
Ireland	7	1,111
United Kingdom (England, Scotland, and Wales)	57	11,123

Total United Kingdom and Ireland	64	12,234

Total-All Countries and Territories	2,999	535,093

⁽¹⁾	Includes Timeshare products that are in active sales as well as those that are sold out. Products in active sales may not be ready for occupancy.

Descriptions of our Brands

North American Full-Service Segment, North American Limited-Service Segment,

and International Segment Lodging Products

Marriott Hotels & Resorts is our global flagship brand, primarily serving business and leisure upper-upscale travelers and meeting groups. Marriott properties are located in downtown, urban, and suburban areas, near airports, and at resort locations. Marriott inspires your best performance during travel, engineering an experience with the services and human touches that help you achieve and revive.

Typically, properties contain from 300 to 700 well-appointed rooms, the Revive^® bedding package, in-room high-speed Internet access, swimming pools, convention and banquet facilities, destination-driven restaurants and lounges, room service, concierge lounges, wireless Internet access in public places, and parking facilities. Sixteen properties have over 1,000 rooms. Many resort properties have additional recreational and entertainment facilities, such as tennis courts, golf courses, additional restaurants and lounges, and spa facilities. New and renovated properties typically reflect the new Marriott guest room which features contemporary residential design, warm colors, rich woods and architectural detail, flat-screen high-definition televisions, “plug and play” technology, and bathrooms reflecting spa-like luxury. At year-end 2007, there were 469 Marriott Hotels & Resorts properties (168,536 rooms), not including JW Marriott Hotels & Resorts or Marriott Conference Centers.

JW Marriott Hotels & Resorts is the Marriott brand’s collection of luxurious properties and resorts that cater to accomplished, discerning travelers seeking an elegant environment and personal service. At year-end 2007 there were 38 properties (16,532 rooms) primarily located in gateway cities and upscale locations throughout the world. JW Marriott Resorts offer attentive service and exceptional amenities, many with world-class golf and spa facilities. In addition to the features found in a typical Marriott full-service property, the facilities and amenities at JW Marriott Hotels & Resorts properties normally include larger guest rooms, higher end décor and furnishings, upgraded in-room amenities, upgraded business centers and fitness centers, and 24-hour room service.

At year-end 2007, there were 13 Marriott Conference Centers (3,476 rooms) throughout the United States. Some of the centers are used exclusively by employees of sponsoring organizations, while others are marketed to outside meeting groups and individuals. In addition to the features found in a typical Marriott full-service property, the centers typically include expanded meeting room space, banquet and dining facilities, and recreational facilities.


Marriott Hotels & Resorts, JW Marriott Hotels & Resorts, and Marriott Conference Centers Geographic Distribution at Year-end 2007	Properties
United States (42 states and the District of Columbia)	342	(136,348 rooms	)

Non-U.S. (49 countries and territories)
Americas	39
Continental Europe	37
United Kingdom and Ireland	50
Asia	29
Middle East and Africa	18
Australia	5

Total Non-U.S.	178	(52,196 rooms	)

Renaissance Hotels & Resorts is a distinctive and global quality-tier full-service brand that targets individual business and leisure travelers and group meetings seeking to discover stylish and personalized environments. Renaissance helps keep life on the road interesting with “Savvy Services,” and touches like destination restaurants and stylish designs that help guests enjoy access to new, ever-changing experiences on and off property.

Renaissance Hotels & Resorts properties are generally located at downtown locations in major cities, in suburban office parks, near major gateway airports, and in destination resorts. Most properties contain from 300 to 500 rooms. Renaissance properties and services typically feature distinctive décor, in-room high-speed Internet access, restaurants and lounges, room service, swimming pools, gift shops, concierge lounges, and meeting and banquet facilities. New and renovated properties typically reflect the new Renaissance guest room that blends fashion and provocative design with local touches. Rooms also feature sophisticated lighting, architectural detail, flat-screen high-definition televisions, and “plug and play” technology. Resort properties typically have additional recreational and entertainment facilities and services, including golf courses, tennis courts, water sports, additional restaurants, and spa facilities. At year-end 2007, there were 141 Renaissance Hotels & Resorts properties (48,934 rooms), including one Renaissance ClubSport property (175 rooms).


Renaissance Hotels & Resorts Geographic Distribution at Year-end 2007	Properties
United States (26 states and the District of Columbia)	71	(26,117 rooms	)

Non-U.S. (30 countries and territories)
Americas	8
Continental Europe	30
United Kingdom	5
Asia	22
Middle East and Africa	5

Total Non-U.S.	70	(22,817 rooms	)

Courtyard is our upper-moderate price select-service hotel product aimed primarily at transient business travel. Courtyard hotels maintain a residential atmosphere and typically contain 90 to 150 rooms in suburban locales and 140 to 340 rooms in downtown domestic and international locales. Well-landscaped grounds typically include a courtyard with a pool and social areas. Hotels feature functionally designed quality guest rooms and meeting rooms, free in-room and lobby high-speed Internet access (in North America), limited restaurant facilities, a swimming pool, an exercise room, and The Market (a self-serve food store open 24 hours a day). The operating systems developed for these hotels allow Courtyard to be price-competitive while providing better value through superior facilities and guest service. At year-end 2007, there were 767 Courtyards (110,780 rooms) operating in 29 countries and territories.


Courtyard Geographic Distribution at Year-end 2007	Properties
United States (47 states and the District of Columbia)	693	(96,759 rooms	)

Non-U.S. (28 countries and territories)
Americas	30
Continental Europe	31
Asia	7
Middle East and Africa	3
Australia	3

Total Non-U.S.	74	(14,021 rooms	)

Fairfield Inn is our hotel brand that competes in the lower-moderate price tier and is primarily aimed at value-conscious individual business travelers. Fairfield Inn (which includes Fairfield Inn & Suites) offers free in-room and lobby high-speed Internet access, a swimming pool, complimentary “Early Eats^TM” continental breakfast and free local phone calls. A typical Fairfield Inn or Fairfield Inn & Suites property has 60 to 140 rooms in suburban locations and up to 200 rooms in urban destinations. At year-end 2007, there were 334 Fairfield Inn properties and 203 Fairfield Inn & Suites properties (537 hotels total), operating in the United States, Canada, and Mexico.


Fairfield Inn and Fairfield Inn & Suites Geographic Distribution at Year-end 2007	Properties
United States (47 states)	529	(46,930 rooms	)

Non-U.S. Americas (Canada and Mexico)	8	(947 rooms	)

SpringHill Suites is our all-suite brand in the upper-moderate-price tier primarily targeting business travelers. SpringHill Suites properties typically have 90 to 165 studio suites that are more spacious than a typical hotel guest room. The brand offers a broad range of amenities, including free in-room and lobby high-speed Internet access, The Market (a self-serve food store open 24 hours a day), complimentary “Suite Seasons^®” hot breakfast buffet, exercise facilities, and a swimming pool. There were 177 properties (20,569 rooms) located in the United States and Canada at year-end 2007.

Residence Inn is North America’s leading extended-stay brand. For today’s marathon business traveler, Residence Inn allows guests on long-term trips to experience all the comforts of home while traveling so that they can ‘Thrive on Long Stays’ in a particular location. Residence Inn provides connectivity to home and office, exercise options and comfortable places to work or relax. Residence Inn also provides upscale design and style, spacious suites with full kitchens, separate sleeping areas and “real” food at social events or in suite. At year-end 2007, there were 546 Residence Inn properties (65,416 rooms) located in the United States, Canada, and Mexico.


Residence Inn Geographic Distribution at Year-end 2007	Properties
United States (47 states and the District of Columbia)	528	(62,805 rooms	)

Non-U.S. Americas (Canada and Mexico)	18	(2,611 rooms	)

TownePlace Suites is a moderately priced extended-stay hotel product that is designed to appeal to business and leisure travelers who stay for five nights or more. Designed for the self-sufficient, value-conscious traveler, each suite generally provides functional spaces for living and working, including a full kitchen and a home office. TownePlace Suites associates are trained to provide insightful local knowledge, and each hotel specializes in delivering service that helps guests settle in to the local area. Additional amenities include housekeeping services, on-site exercise facilities, an outdoor pool, 24-hour staffing, free in-room high-speed Internet access, and laundry facilities. At year-end 2007, 141 TownePlace Suites properties (14,122 rooms) were located in 37 states.

Marriott ExecuStay provides furnished corporate apartments primarily for long-term stays nationwide. ExecuStay owns no residential real estate and provides units primarily through short-term lease agreements with apartment owners and managers and franchise agreements. At year-end 2007, Marriott leased approximately 2,100 apartments and our 11 franchisees leased over 2,300 apartments. Apartments are located in 44 different markets in the United States, of which 34 are franchised.

Marriott Executive Apartments. We provide temporary housing (“Serviced Apartments”) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some Serviced Apartments operate under the Marriott Executive Apartments brand, which is designed specifically for the long-term international traveler. At year-end 2007, 15 Marriott Executive Apartments and three other Serviced Apartments properties (2,905 rooms total) were located in 12 countries and territories. All Marriott Executive Apartments are located outside the United States.

Luxury Segment Lodging Products

The Ritz-Carlton is a leading global luxury lifestyle brand of hotels and resorts renowned for their distinctive architecture and for the high quality level of their facilities, dining options, and exceptional personalized guest service. Most of The Ritz-Carlton hotels have 250 to 400 guest rooms and typically include meeting and banquet facilities, a variety of restaurants and lounges, a club level, gift shops, high-speed Internet access, flat-screen high-definition televisions, swimming pools, and parking facilities. Guests at most of The Ritz-Carlton resorts have access to additional recreational amenities, such as tennis courts, golf courses, and health spas.


The Ritz-Carlton Geographic Distribution at Year-end 2007 ⁽¹⁾	Properties
United States (16 states and the District of Columbia)	52	(13,241 rooms	)

Non-U.S. (22 countries and territories)
Americas	7
Continental Europe	8
Asia	14
Middle East and Africa	6

Total Non-U.S.	35	(10,071 rooms	)

⁽¹⁾	Includes 17 home and condominium projects (1,707 units) for which we manage the related owners’ associations.

Bulgari Hotels & Resorts. Through a joint venture with jeweler and luxury goods designer Bulgari SpA we operate distinctive luxury hotel properties in prime locations under the name Bulgari Hotels & Resorts. The first property (58 rooms), the Bulgari Hotel Milano, opened in Milan, Italy, in 2004. The second property, the Bulgari Resort Bali, opened in late 2006 and includes 59 private villas, two restaurants, and comprehensive spa facilities. In November 2007, we opened two new restaurants in Tokyo, Japan, which we operate in connection with two new Bulgari retail stores. Other projects are currently in various stages of development in Europe, Asia, and North America.

Timeshare Segment Lodging Products

The Marriott Vacation Club (“MVC”) brand offers full-service villas featuring living and dining areas, one-, two-, and three-bedroom options, a full kitchen, and washer/dryer units. Customers may purchase a one-week interval or more at each resort. In 46 locations worldwide, this brand draws United States and international customers who vacation regularly with a focus on family, relaxation, and recreational activities. In the United States, in addition to other areas, MVC is located in Las Vegas, Nevada, in beach and/or golf communities in

Arizona, California, South Carolina, Florida, and Hawaii and in ski resorts in California, Colorado, and Utah. Internationally, MVC has resorts in Aruba, France, Spain, St. Thomas (U.S. Virgin Islands), the West Indies, and Thailand.

The Ritz-Carlton Club brand is a luxury-tier real estate fractional ownership and personal residence brand that combines the benefits of second-home ownership with personalized services and amenities. This brand is designed as a private club whose members have access to all Ritz-Carlton Clubs, and is offered in ski, golf, and beach destinations in the Bahamas, California, Colorado, St. Thomas (U.S. Virgin Islands), Florida, and Hawaii. Customers typically purchase three-to-five-week intervals, but may also purchase a residence outright.

Grand Residences by Marriott is an upper-quality-tier fractional ownership and personal residence brand for corporate and leisure customers. This brand is currently offering ownership in projects located in Lake Tahoe, California, Panama City, Florida, and London, England. Customers typically purchase three-to-13-week intervals.

Horizons by Marriott Vacation Club is Marriott Vacation Club’s moderately priced timeshare brand whose product offerings and customer base are currently focused on offering family vacations in entertainment communities. Horizons resorts are located in Orlando, Florida and Branson, Missouri. Customers may purchase a one-week interval or more at each resort.

We expect that our long-term timeshare growth will reflect opportunities presented by various third-party business structures, as well as a continued focus on our core and predominantly wholly owned Marriott Vacation Club brand. We also anticipate that residential and fractional products, especially of the luxury The Ritz-Carlton Club brand, will offer the fastest growth opportunity over the short-term within the Timeshare segment.

The Timeshare segment’s owner base continues to expand, with approximately 371,000 owners at year-end 2007, compared to approximately 343,000 at year-end 2006.


Timeshare (all brands) Geographic Distribution at Year-end 2007	Resorts	Units
Continental United States	43	8,572
Hawaii	5	1,544
Caribbean	7	993
Europe	5	932
Asia	1	144

Total	61	12,185

New Lodging Products

Nickelodeon Resorts by Marriott. In May 2007, we announced our new brand of family-friendly resorts and spas, “Nickelodeon Resorts by Marriott.” These upscale, self-contained resorts are expected to feature Nickelodeon signature activities, state-of-the-art pools, water parks, entertainment starring Nickelodeon’s characters such as Dora the Explorer and SpongeBob SquarePants, and spas for adults and kids. Projects are in various stages of development in the United States, and we expect to open the first property in San Diego in 2010. Other potential resort locations being considered for development include major family-oriented destinations in the United States, Caribbean and Mexican resort areas, the United Kingdom and Europe, Asia, Australia, and the Middle East.

Edition. In June 2007, we announced that we had joined forces with hotel innovator Ian Schrager to create next-generation lifestyle boutique hotels. Edition combines a personal, intimate, individualized, and unique lodging experience on a global scale. These new lifestyle boutique hotels attempt to push the boundaries, break new ground, and take the hotel industry to a new level. Plans include building and operating up to 100 distinct hotels around the world.

Other Activities

Marriott Golf manages 44 golf course facilities as part of our management of hotels and for other golf course owners.

We operate 14 systemwide hotel reservation centers, eight in the United States and Canada and six in other countries and territories, which handle reservation requests for our lodging brands worldwide, including franchised properties. We own one of the U.S. facilities and lease the others.

Additionally, we focus on increasing value for the consumer and “selling the way the customer wants to buy.” Our Look No Further^® Best Rate Guarantee, which assures customers that they won’t find cheaper rates than those available through our telephone reservation system, our Web site or any other Marriott reservation channel, our

strong Marriott Rewards loyalty program, and our information-rich and easy-to-use www.Marriott.com Web site all encourage customers to make reservations using the Marriott Web site. Our reservation system manages and controls inventory availability and pricing set by our hotels, and allows us to utilize online and offline agents where cost effective. With almost 3,000 hotels economies of scale enable us to minimize costs per occupied room, drive profits for our owners, and maximize our fee revenue.

Our Architecture and Construction (“A&C”) division provides design, development, construction, refurbishment, and procurement services to owners and franchisees of lodging properties on a voluntary basis outside the scope of and separate from our management or franchise contracts. Similar to third-party contractors, A&C provides these services for owners and franchisees of Marriott-branded properties on a fee basis.

Competition

We encounter strong competition both as a lodging operator and as a franchisor. We believe that by operating a number of hotels among our brands, we stay in direct touch with customers and react to changes in the marketplace more quickly than chains that rely exclusively on franchising. There are approximately 770 lodging management companies in the United States, including several that operate more than 100 properties. These operators are primarily private management firms, but also include several large national chains that own and operate their own hotels and also franchise their brands. Our management contracts are typically long-term in nature, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.

Affiliation with a national or regional brand is prevalent in the U.S. lodging industry. In 2007, approximately two-thirds of U.S. hotel rooms were brand-affiliated. Most of the branded properties are franchises, under which the operator pays the franchisor a fee for use of its hotel name and reservation system. The franchising business is fairly concentrated, with the six largest franchisors operating multiple brands accounting for a significant proportion of all U.S. rooms.

Outside the United States, branding is much less prevalent and most markets are served primarily by independent operators, although branding is more common for new hotel development. We believe that chain affiliation will increase in overseas markets as local economies grow, trade barriers are reduced, international travel accelerates and hotel owners seek the economies of centralized reservation systems and marketing programs.

Based on lodging industry data, we have a 9 percent share of the U.S. hotel market (based on number of rooms) and we estimate less than a 1 percent share of the lodging market outside the United States. We believe that our hotel brands are attractive to hotel owners seeking a management company or franchise affiliation because our hotels typically generate higher occupancies and Revenue per Available Room (“RevPAR”) than direct competitors in most market areas. We attribute this performance premium to our success in achieving and maintaining strong customer preference. We believe that the location and quality of our lodging facilities, our marketing programs, our reservation systems and our emphasis on guest service and satisfaction are contributing factors across all of our brands.

Properties that we operate or franchise are regularly upgraded to maintain their competitiveness. Most of our management agreements provide for the allocation of funds, generally a fixed percentage of revenue, for periodic renovation of buildings and replacement of furnishings. These ongoing refurbishment programs, along with periodic brand initiatives, are generally adequate to preserve or enhance the competitive position and earning power of the hotels and timeshare properties.

While service excellence is Marriott’s hallmark, we continually look for new ways to delight our guests. Currently, we are focused on elevating the Marriott experience beyond that of a traditional hotel stay to a total guest experience that encompasses exceptional style, personal luxury, and superior service. This approach to hospitality, “The New Look and Feel of Marriott Now,” is influenced by the world’s foremost innovations in design, technology, culinary expertise, service, and comfort. This evolution can be seen across all of our brands, in new and stylish hotel designs, luxurious bedding, exotic destinations, world-class spas and fitness centers, and inspired cuisine. Each brand, from luxury to moderately priced, will be more upscale and attuned to customer needs than ever before.

Our At Your Service^®program focuses on the total guest experience from point of reservation to checkout. As part of the pre-arrival planning service, guests receive a personalized email prior to check-in that includes local transportation, weather, and restaurant information, as well as directions and maps. At a growing number of hotels and resorts, service has been expanded to include a “virtual concierge.” Guests are able to reserve spa treatments, room service for delivery upon arrival, and other amenities specific to each property. Guests may also request complimentary amenities such as extra pillows, miniature refrigerators, and early check-in or late checkout. We have also streamlined the travel planning and booking process with the addition of Marriott Flexrez to At Your Service. In addition to booking hotel rooms on www.Marriott.com, our online customers can now find competitive airfare and car rental rates there as well.

The vacation ownership industry is one of the fastest growing segments in hospitality and is comprised of a number of highly competitive companies including several branded hotel companies. Since entering the timeshare industry over 20 years ago, we have become a recognized leader in vacation ownership worldwide. Competition in the timeshare interval, fractional, and residential business is based primarily on the quality and location of timeshare resorts, trust in the brand, the pricing of product offerings, and the availability of program benefits, such as exchange programs. We believe that our focus on offering distinct vacation experiences, combined with our financial strength, diverse market presence, strong brands, and well-maintained properties, will enable us to remain competitive. Approximately 40 percent of our timeshare ownership resort sales come from additional purchases by or referrals from existing owners.

Marriott Rewards is a frequent guest program with over 28 million members and nine participating Marriott brands. The Marriott Rewards program yields repeat guest business by rewarding frequent stays with points toward free hotel stays and other rewards, or airline miles with any of 29 participating airline programs. We believe that Marriott Rewards generates substantial repeat business that might otherwise go to competing hotels. In 2007, over 50 percent of our room nights were purchased by Marriott Rewards members. In addition, the ability of timeshare owners to convert unused intervals into Marriott Rewards points enhances the competitive position of our timeshare brand.

Discontinued Operations

Synthetic Fuel

Our synthetic fuel operation consisted of four coal-based synthetic fuel production facilities (the “Facilities”). Because tax credits under Section 45K of the IRC are not available for the production and sale of synthetic fuel produced from coal after calendar year-end 2007, and because high oil prices during 2007 will result in the phase-out of a significant portion of the tax credits available for synthetic fuel produced and sold in 2007, on November 3, 2007, we shut down the Facilities and permanently ceased production of synthetic fuel. Accordingly, we now report this business segment as a discontinued operation. The book value of the Facilities was zero at year-end 2007, as the Facilities have been transferred to third parties. Under the site leases for the Facilities, we were required to restore the leased premises to substantially the condition the premises were in when the leases were originally executed. However, we executed agreements with the lessors of the sites pursuant to which we transferred the Facilities to the lessors in exchange for the release of our obligations to restore the leased premises to their original conditions. Costs associated with shutting down the synthetic fuel operation and transferring the Facilities to the site lessors were not material.

Employee Relations

At year-end 2007, we had approximately 151,000 employees, approximately 8,700 of which were represented by labor unions. We believe relations with our employees are positive.

Environmental Compliance

Our compliance with laws and regulations relating to environmental protection and discharge of hazardous materials has not had a material impact on our capital expenditures, earnings or competitive position, and we do not anticipate any material impact from such compliance in the future.

Internet Address and Company SEC Filings

Our Internet address is www.Marriott.com. On the investor relations portion of our Web site, www.Marriott.com/investor, we provide a link to our electronic SEC filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports. All such filings are available free of charge and are available as soon as reasonably practicable after filing. The information found on our Web site is not part of this or any other report we file with or furnish to the United States Securities and Exchange Commission (the “SEC”).

Item 1A.

Risk Factors.

Forward-Looking Statements

We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations which follow under the headings “Business and Overview,” “Liquidity and Capital Resources,” and other statements throughout this report preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions.

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the SEC. We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

Risks and Uncertainties

We are subject to various risks that could have a negative effect on the Company and its financial condition. You should understand that these risks could cause results to differ materially from those expressed in forward-looking statements contained in this report and in other Company communications. Because there is no way to determine in advance whether, or to what extent, any present uncertainty will ultimately impact our business, you should give equal weight to each of the following:

Lodging Industry Risks

The lodging industry is highly competitive, which may impact our ability to compete successfully with other hotel and timeshare properties for customers. We generally operate in markets that contain numerous competitors. Each of our hotel and timeshare brands competes with major hotel chains in national and international venues and with independent companies in regional markets. Our ability to remain competitive and to attract and retain business and leisure travelers depends on our success in distinguishing the quality, value, and efficiency of our lodging products and services from those offered by others. If we are unable to compete successfully in these areas, this could limit our operating margins, diminish our market share, and reduce our earnings.

We are subject to the range of operating risks common to the hotel, timeshare, and corporate apartment industries. The profitability of the hotels, vacation timeshare resorts, and corporate apartments that we operate or franchise may be adversely affected by a number of factors, including:

(1)

the availability of and demand for hotel rooms, timeshare interval, fractional ownership and residential products, and apartments;

(2)

international, national, and regional economic and geopolitical conditions;

(3)

the impact of war, actual or threatened terrorist activity and heightened travel security measures instituted in response to war, terrorist activity or threats;

(4)

the desirability of particular locations and changes in travel patterns;

(5)

travelers’ fears of exposure to contagious diseases, such as Avian Flu and Severe Acute Respiratory Syndrome (“SARS”);

(6)

the occurrence of natural disasters, such as earthquakes, tsunamis, and hurricanes;

(7)

taxes and government regulations that influence or determine wages, prices, interest rates, construction procedures, and costs;

(8)

the availability and cost of capital to allow us and potential hotel owners and joint venture partners to fund investments;

(9)

regional and national development of competing properties;

(10)

increases in wages and other labor costs, energy, healthcare, insurance, transportation and fuel, and other expenses central to the conduct of our business, including recent increases in energy costs; and

(11)

organized labor activities, which could cause the diversion of business from hotels involved in labor negotiations, loss of group business, and/or increased labor costs.

Any one or more of these factors could limit or reduce the demand or the prices we are able to obtain for hotel rooms, timeshare units, residential units, and corporate apartments or could increase our costs and therefore reduce the profit of our lodging businesses. Reduced demand for hotels could also give rise to losses under loans, guarantees, and minority equity investments that we have made in connection with hotels that we manage. Even where such factors do not reduce demand, our profit margins may suffer if we are unable to fully recover increased operating costs from our customers.

The uncertain environment in the lodging industry will continue to impact our financial results and growth. Both the Company and the lodging industry were hurt by several events occurring over the last several years, including the global economic downturn, the terrorist attacks on New York and Washington in September 2001, the global outbreak of SARS in 2003, and military action in Iraq. Although by 2007 both the lodging and travel industries had recovered from the depressed levels during those years, recent concerns over the possibility of an economic slowdown have left it unclear whether the recent growth environment will continue. Accordingly, our financial results and growth could be harmed if the industry recovery stalls or is reversed.

Operational Risks

Our new branded hotel products may not be successful. We recently announced two new branded hotel products, Nickelodeon Resorts by Marriott^® and Edition, and may launch additional branded hotel products in the future. We cannot assure that these brands will be accepted by hotel owners, potential franchisees, or the traveling public, that we will recover the costs we incurred in developing the brands, or that the brands will be successful. In addition, each of these new brands involves cooperation and/or consultation with a third party, including some shared control over product design and development, sales and marketing and brand standards. Disagreements between us and these third parties regarding areas of consultation or shared control could slow the development of these new brands and/or impair Marriott’s ability to take actions it believes to be advisable for the success and profitability of such brands.

Our lodging operations are subject to international, national, and regional conditions. Because we conduct our business on a national and international platform, our activities are susceptible to changes in the performance of regional and global economies. In recent years, our business was hurt by decreases in travel resulting from recent economic conditions, the military action in Iraq, and the heightened travel security measures that have resulted from the threat of further terrorism. Our future economic performance is similarly subject to the uncertain economic environment in the United States and other regions, the resulting unknown pace of business travel, and the occurrence of any future incidents in the countries where we operate.

Risks relating to natural disasters, contagious disease, terrorist activity, and war could reduce the demand for lodging, which may adversely affect our revenues. So called “Acts of God,” such as hurricanes, earthquakes and other natural disasters, and the spread of contagious diseases, such as Avian Flu and SARS, in locations where we own, manage or franchise significant properties, and areas of the world from which we draw a large number of customers can cause a decline in the level of business and leisure travel and reduce the demand for lodging. Actual or threatened war, terrorist activity, political unrest, civil strife, and other geopolitical uncertainty can have a similar effect. Any one or more of these events may reduce the overall demand for hotel rooms, timeshare units, and corporate apartments or limit the prices that we are able to obtain for them, both of which could adversely affect our profits.

We may have disputes with the owners of the hotels that we manage or franchise. Consistent with our focus on management and franchising, we own very few of our lodging properties. The nature of our responsibilities under our management agreements to manage each hotel and enforce the standards required for our brands under both management and franchise agreements may be subject to interpretation and may give rise to disagreements in some instances. We seek to resolve any disagreements in order to develop and maintain positive relations with current and potential hotel owners and joint venture partners but have not always been able to do so. Failure to resolve such disagreements has in the past resulted in litigation, and could do so in the future.

Damage to or other potential losses involving properties that we own, manage or franchise may not be covered by insurance. We have comprehensive property and liability insurance policies with coverage features and insured limits that we believe are customary. Market forces beyond our control may nonetheless limit the scope of insurance coverage that we can obtain and our ability to obtain coverage at reasonable rates. Certain types of losses, generally of a catastrophic nature, such as earthquakes, hurricanes and floods, or terrorist acts, may be uninsurable or too expensive to justify obtaining insurance. As a result, we may not be successful in obtaining insurance without increases in cost or decreases in coverage levels. In addition, in the event of a substantial loss, the insurance coverage we carry may not be sufficient to pay the full market value or replacement cost of our lost investment or that of hotel owners or in some cases could result in certain losses being totally uninsured. As a result, we could lose some or all of the capital we have invested in a property, as well as the anticipated future revenue from the property, and we could remain obligated for guarantees, debt, or other financial obligations related to the property.

Development and Financing Risks

Our growth strategy depends upon third-party owners/operators, and future arrangements with these third parties may be less favorable. Our present growth strategy for development of additional lodging facilities entails entering into and maintaining various arrangements with property owners. The terms of our management agreements, franchise agreements, and leases for each of our lodging facilities are influenced by contract terms offered by our competitors, among other things. We cannot assure you that any of our current arrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enter into new agreements in the future on terms that are as favorable to us as those that exist today.

Our ability to grow our management and franchise systems is subject to the range of risks associated with real estate investments. Our ability to sustain continued growth through management or franchise agreements for new hotels and the conversion of existing facilities to managed or franchised Marriott brands is affected, and may potentially be limited, by a variety of factors influencing real estate development generally. These include site availability, financing, planning, zoning and other local approvals, and other limitations that may be imposed by market and submarket factors, such as projected room occupancy, changes in growth in demand compared to projected supply, territorial restrictions in our management and franchise agreements, costs of construction, and anticipated room rate structure.

We depend on capital to buy and maintain hotels, and hotel owners or we may be unable to access capital when necessary. In order to fund new hotel investments, as well as refurbish and improve existing hotels, both the Company and current and potential hotel owners must periodically spend money. The availability of funds for new investments and maintenance of existing hotels depends in large measure on capital markets and liquidity factors over which we can exert little control. Our ability to recover loan and guarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt or otherwise may also affect our ability to recycle and raise new capital. In addition, downgrades of our public debt ratings by Standard & Poor’s, Moody’s Investor Service or similar companies could increase our cost of capital.

Further volatility in the credit markets could adversely impact our ability to sell the loans that our Timeshare business generates. Our Timeshare business provides financing to purchasers of our timeshare and fractional properties, and we periodically sell interests in those loans in the securities markets. While we do not believe that recent volatility in the credit markets will prevent us from continuing to sell those notes on attractive terms, further volatility could cause future sale terms to be materially less favorable to us or prevent us from selling our timeshare notes entirely, which in turn would reduce future gains and could result in increased borrowings to provide capital to replace anticipated proceeds from such sales.

Our development activities expose us to project cost, completion, and resale risks. We develop new hotel, timeshare interval, fractional ownership, and residential properties, both directly and through partnerships, joint ventures, and other business structures with third parties. Our involvement in the development of properties presents a number of risks, including that: (1) construction delays, cost overruns, or so called “Acts of God” such as earthquakes, hurricanes, floods or fires may increase overall project costs or result in project cancellations; (2) we may be unable to recover development costs we incur for projects that are not pursued to completion; (3) conditions within capital markets may limit our ability, or that of third parties with whom we do business, to raise capital for completion of projects that have commenced or development of future properties; and (4) properties that we develop could become less attractive due to changes in mortgage rates, market absorption or oversupply, with the result that we may not be able to sell such properties for a profit or at the prices or selling pace we anticipate.

Development activities that involve our co-investment with third parties may result in disputes that could increase project costs, impair project operations, or increase project completion risks. Partnerships, joint ventures, and other business structures involving our co-investment with third parties generally include some form of shared control over the operations of the business and create additional risks, including the possibility that other investors in such ventures could become bankrupt or otherwise lack the financial resources to meet their obligations, or could have or develop business interests, policies or objectives that are inconsistent with ours. Although we actively seek to minimize such risks before investing in partnerships, joint ventures or similar structures, actions by another investor may present additional risks of project delay, increased project costs, or operational difficulties following project completion.

Risks associated with development and sale of residential properties that are associated with our lodging and timeshare properties or brands may reduce our profits. In certain hotel and timeshare projects we participate, through minority interests and/or licensing fees, in the development and sale of residential properties associated with

our brands, including luxury residences, and condominiums under our Ritz-Carlton and Marriott brands. Such projects pose additional risks beyond those generally associated with our lodging and timeshare businesses, which may reduce our profits or compromise our brand equity, including the following:

•

Decreases in residential real estate and vacation home prices or demand generally, which have historically been cyclical, could reduce our profits or even result in losses on residential sales, result in significant carrying costs if the pace of sales is slower than we anticipate, or make it more difficult to convince future hotel development partners of the value added by our brands;

•

Increases in interest rates, reductions in mortgage availability, or increases in the costs of residential ownership could prevent potential customers from buying residential products or reduce the prices they are willing to pay; and

•

Residential construction may be subject to warranty and liability claims, and the costs of resolving such claims may be significant.

Technology, Information Protection, and Privacy Risks

A failure to keep pace with developments in technology could impair our operations or competitive position. The lodging and timeshare industries continue to demand the use of sophisticated technology and systems, including those used for our reservation, revenue management and property management systems, our Marriott Rewards program, and technologies we make available to our guests. These technologies and systems must be refined, updated, and/or replaced with more advanced systems on a regular basis. If we are unable to do so as quickly as our competitors or within budgeted costs and time frames, our business could suffer. We also may not achieve the benefits that we anticipate from any new technology or system, and a failure to do so could result in higher than anticipated costs or could impair our operating results.

An increase in the use of third-party Internet reservation services could adversely impact our revenues. Some of our hotel rooms are booked through Internet travel intermediaries, such as Expedia.com^®, Travelocity.com^®, and Priceline.com^®, serving both the leisure and, increasingly, the corporate travel and group meeting sectors. While Marriott’s Look No Further^® Best Rate Guarantee has greatly reduced the ability of these Internet travel intermediaries to undercut the published rates at our hotels, these intermediaries continue their attempts to commoditize hotel rooms by aggressively marketing to price-sensitive travelers and corporate accounts and increasing the importance of general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their travel services rather than to our lodging brands. Although we expect to continue to maintain and even increase the strength of our brands in the online marketplace, if the amount of sales made through Internet intermediaries increases significantly, our business and profitability may be harmed.

Failure to maintain the integrity of internal or customer data could result in faulty business decisions, damage of reputation and/or subject us to costs, fines or lawsuits. Our businesses require collection and retention of large volumes of internal and customer data, including credit card numbers and other personally identifiable information of our customers as they are entered into, processed by, summarized by, and reported by our various information systems. We also maintain personally identifiable information about our employees. The integrity and protection of that customer, employee, and company data is critical to us. If that data is not accurate or complete we could make faulty decisions. Our customers also have a high expectation that we will adequately protect their personal information, and the regulatory environment surrounding information security and privacy is increasingly demanding, both in the U.S. and other international jurisdictions in which we operate. A significant theft, loss or fraudulent use of customer, employee or company data could adversely impact our reputation and could result in remedial and other expenses, fines and litigation.

Changes in privacy law could adversely affect our ability to market our products effectively. Our Timeshare segment, and to a lesser extent our other lodging segments, rely on a variety of direct marketing techniques, including telemarketing, email marketing, and postal mailings. Any further restrictions in laws such as the Telemarketing Sales Rule, CANSPAM Act, and various U.S. state laws, or new federal laws, regarding marketing and solicitation or international data protection laws that govern these activities could adversely affect the continuing effectiveness of telemarketing, email, and postal mailing techniques and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our sales of timeshare units and other products. We also obtain access to potential customers from travel service providers or other companies with whom we have substantial relationships and market to some individuals on these lists directly or by including our marketing message in the other company’s marketing materials. If the acquisition of these lists was prohibited or otherwise restricted, our ability to develop new customers and introduce them to our products could be impaired.

Other Risks

If we cannot attract and retain talented associates our business could suffer. We compete with other companies both within and outside of our industry for talented personnel. If we are not able to recruit, train, develop and retain sufficient numbers of talented associates, we could experience increased associate turnover, decreased guest satisfaction, low morale, inefficiency or internal control failures. Insufficient numbers of talented associates could also limit our ability to grow and expand our businesses.

Delaware law and our governing corporate documents contain, and our board of directors could implement, anti-takeover provisions that could deter takeover attempts. Under the Delaware business combination statute, a stockholder holding 15 percent or more of our outstanding voting stock could not acquire us without board of director’s consent for at least three years after the date the stockholder first held 15 percent or more of the voting stock. Our governing corporate documents also, among other things, require supermajority votes in connection with mergers and similar transactions. In addition, our Board of Directors could, without stockholder approval, implement other anti-takeover defenses, such as a stockholder rights plan to replace the existing stockholder’s rights plan that will expire in March 2008 and which we do not presently plan to renew.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

Company-operated properties are described in Part I, Item 1, “Business,” earlier in this report. We believe our properties are in generally good physical condition with the need for only routine repairs and maintenance and periodic capital improvements. Most of our regional offices and reservation centers, both domestically and internationally, are located in leased facilities. We also lease space in six office buildings with combined space of approximately 1.3 million square feet in Maryland and Florida where our corporate, Ritz-Carlton, and Marriott Vacation Club International headquarters are located.

Item 3.

Legal Proceedings.

From time to time, we are subject to certain legal proceedings and claims in the ordinary course of business, including adjustments proposed during governmental examinations of the various tax returns we file. We currently are not aware of any legal proceedings or claims that we believe will have, individually or in aggregate, a material adverse effect on our business, financial condition, or operating results.

Item 4.

Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this report.

Executive Officers of the Registrant

See Part III, Item 10 of this report for information about our executive officers.

Part II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information and Dividends

On June 9, 2006, we completed a two-for-one stock split that was effected in the form of a stock dividend. For periods prior to the stock split, all share and per share data in this Annual Report on Form 10-K have been retroactively adjusted to reflect the stock split.

The range of prices of our common stock and dividends declared per share for each quarterly period within the last two years are as follows:


		Stock Price				Dividends Declared Per Share
		High		Low		Dividends Declared Per Share
2006	First Quarter	$	35.35	$	32.32	$	0.0525
	Second Quarter		38.38		34.20		0.0625
	Third Quarter		38.44		34.30		0.0625
	Fourth Quarter		48.31		37.19		0.0625

		Stock Price				Dividends Declared Per Share
		High		Low		Dividends Declared Per Share
2007	First Quarter	$	51.50	$	44.79	$	0.0625
	Second Quarter		52.00		43.90		0.0750
	Third Quarter		48.85		39.70		0.0750
	Fourth Quarter		45.10		31.34		0.0750

At January 25, 2008, there were 354,043,159 shares of Class A Common Stock outstanding held by 48,288 shareholders of record. Our Class A Common Stock is traded on the New York Stock Exchange and the Chicago Stock Exchange. The year-end closing price for our stock was $34.12 on December 28, 2007, and $47.72 on December 29, 2006. All prices are reported on the consolidated transaction reporting system.

Fourth Quarter 2007 Issuer Purchases of Equity Securities


*(in millions, except per share amounts)* Period	Total Number of Shares Purchased	Average Price per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs ⁽¹⁾	Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs ⁽¹⁾
September 8, 2007-October 5, 2007	1.9	$	42.97	1.9	43.4
October 6, 2007-November 2, 2007	4.6		40.50	4.6	38.8
November 3, 2007-November 30, 2007	0.9		36.72	0.9	37.9
December 1, 2007-December 28, 2007	4.7		34.12	4.7	33.2

⁽¹⁾

On August 2, 2007, we announced that our Board of Directors increased, by 40 million shares, the authorization to repurchase our Class A Common Stock for a total outstanding authorization of approximately 51 million shares on that date. We repurchase shares in the open market and in privately negotiated transactions.

Item 6.

Selected Financial Data.

The following table presents a summary of selected historical financial data for the Company derived from our financial statements as of and for our last eight fiscal years.

Since the information in this table is only a summary and does not provide all of the information contained in our financial statements, including the related notes, you should read “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements.


	Fiscal Year ⁽¹⁾
*($ in millions, except per share data)*	2007			2006			2005		2004		2003		2002			2001			2000
Income Statement Data:
Revenues ⁽²⁾	$	12,990		$	11,995		$	11,129	$	9,778	$	8,712	$	8,222		$	7,768		$	7,911

Operating income ⁽²⁾	$	1,188		$	1,087		$	699	$	575	$	481	$	455		$	420		$	762

Income from continuing operations	$	697		$	712		$	543	$	487	$	380	$	365		$	269		$	490
Cumulative effect of change in accounting principle ⁽³⁾		—			(109	)		—		—		—		—			—			—
Discontinued operations ⁽⁴⁾		(1	)		5			126		109		122		(88	)		(33	)		(11	)

Net income	$	696		$	608		$	669	$	596	$	502	$	277		$	236		$	479

Per Share Data:
Diluted earnings per share from continuing operations	$	1.75		$	1.65		$	1.17	$	1.01	$	0.77	$	0.72		$	0.52		$	0.96
Diluted loss per share from cumulative effect of accounting change		—			(0.25	)		—		—		—		—			—			—
Diluted earnings (loss) per share from discontinued operations		—			0.01			0.28		0.23		0.25		(0.17	)		(0.06	)		(0.02	)

Diluted earnings per share	$	1.75		$	1.41		$	1.45	$	1.24	$	1.02	$	0.55		$	0.46		$	0.94

Cash dividends declared per share	$	0.2875		$	0.2400		$	0.2000	$	0.1650	$	0.1475	$	0.1375		$	0.1275		$	0.1175

Balance Sheet Data (at end of year):
Total assets	$	8,942		$	8,588		$	8,530	$	8,668	$	8,177	$	8,296		$	9,107		$	8,237
Long-term debt ⁽²⁾		2,790			1,818			1,681		836		1,391		1,553			2,708			1,908
Shareholders’ equity		1,429			2,618			3,252		4,081		3,838		3,573			3,478			3,267
Other Data:
Base management fees ⁽²⁾	$	620		$	553		$	497	$	435	$	388	$	379		$	372		$	383
Franchise fees ⁽²⁾		439			390			329		296		245		232			220			208
Incentive management fees ⁽²⁾		369			281			201		142		109		162			202			316

Total fees	$	1,428		$	1,224		$	1,027	$	873	$	742	$	773		$	794		$	907

Fee Revenue-Source:
North America ⁽⁵⁾	$	1,115		$	955		$	809	$	682	$	592	$	626		$	664		$	779
Outside North America		313			269			218		191		150		147			130			128

Total fees	$	1,428		$	1,224		$	1,027	$	873	$	742	$	773		$	794		$	907

⁽¹⁾	All fiscal years included 52 weeks, except for 2002, which included 53 weeks.

⁽²⁾	Balances do not reflect the impact of discontinued operations.

⁽³⁾	We adopted Statement of Position 04-2 “Accounting for Real Estate Time-Sharing Transactions,” in our 2006 first quarter which we reported in our Consolidated Statements of Income as a cumulative effect of change in accounting principle.

⁽⁴⁾	In 2002, we announced our intent to sell, and subsequently did sell, our Senior Living Services business and exited our Distribution Services business. In 2007, we exited our synthetic fuel business. These businesses are now reflected as discontinued operations.

⁽⁵⁾	Includes the continental United States and Canada.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

BUSINESS AND OVERVIEW

We are a worldwide operator and franchisor of 2,999 properties (535,093 rooms) and related facilities. The figures in the preceding sentence are as of year-end 2007 and include 21 home and condominium projects (1,916 units) for which we manage the related owners’ associations. In addition, we provided 2,156 furnished corporate housing rental units, which are not included in the totals.

Our operations are grouped into five business segments: North American Full-Service Lodging, North American Limited-Service Lodging, International Lodging, Luxury Lodging, and Timeshare. We operate, develop, and franchise under 19 separate brand names in 68 countries and territories.

We earn base, incentive, and franchise fees based upon the terms of our management and franchise agreements. Revenues are also generated from the following sources associated with our Timeshare segment: (1) selling timeshare interval, fractional ownership, and residential properties; (2) operating the resorts and residential properties; and (3) financing customer purchases of timesharing intervals. We earn revenues from the limited number of hotels we own or lease. Finally, we earn fees in association with affinity card endorsements and the sale of branded residential real estate.

Generally, lodging demand remained strong through 2007, driven by continued strength associated with worldwide business travel. In general, luxury, international, and full-service properties experienced stronger demand than limited-service properties. Strong demand enabled us to increase rates at the property level, which resulted in solid year-over-year RevPAR increases. Revenue mix improvement is a function of the strong demand environment and results as some less profitable business is limited in favor of more profitable business, such as fewer discounted leisure packages in favor of more corporate business. This strategy of shifting business to higher rated tiers, yielded strong year-over-year average daily rate growth and only modest occupancy declines. In addition, group rates continue to increase as business negotiated in earlier years at lower rates is replaced with business negotiated at higher rates.

Demand for our brands is strong in many markets around the world. For our North American comparable properties, RevPAR increases in 2007, as compared to the year-ago period, were particularly strong in Dallas, New York City, Los Angeles, and San Francisco. Internationally, 2007 RevPAR increases as compared to the prior year were particularly strong in Central and South East Asia, South America, the Middle East, and Eastern Europe.

Our approach to improving property-level and above-property productivity has benefited our profitability, as well as that of owners and franchisees. Driving room rate improvement, benchmarking successful performance, and leveraging our size have all contributed to property-level margin improvements and higher incentive management fees to us. We continue to enhance the appeal of our proprietary Web site, www.Marriott.com, through functionality and service improvements, and we continue to capture an increasing proportion of property-level reservations via this cost-efficient channel.

Our brands are strong as a result of superior customer service with an emphasis on guest and associate satisfaction, the worldwide presence and quality of our brands, our Marriott Rewards loyalty program, an information-rich and easy-to-use Web site, a multi-channel central reservations system, and desirable property amenities. We, along with owners and franchisees, continue to invest in our brands by means of new, refreshed, and reinvented properties, new room and public space designs and enhanced amenities and technology offerings.

In 2007, we announced our agreement with the Nickelodeon division of Viacom, Inc. and Miller Global Properties, LLC to co-develop a new lodging resort brand and concept for travelers seeking fun and adventure, “Nickelodeon Resorts by Marriott.” Also during 2007, we announced our agreement with Ian Schrager to create a global boutique lifestyle hotel brand “Edition” on a large scale.

See Part I, Item 1A., “Risk Factors,” of this report for important information regarding forward-looking statements made in this report and risks and uncertainties that the Company faces.

CONSOLIDATED RESULTS

The following discussion presents an analysis of results of our operations for 2007, 2006, and 2005.

Continuing Operations

Revenues

2007 Compared to 2006

Revenues increased by $995 million (8 percent) to $12,990 million in 2007 from $11,995 million in 2006, as a result of stronger demand for hotel rooms worldwide, which allowed us to increase room rates and favorable exchange rates worldwide. Base management and franchise fees increased by $116 million as a result of stronger RevPAR and unit growth, as we opened 203 properties (29,200 rooms) throughout 2007. In 2006, we recognized $5 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, versus no similar fees in 2007. Incentive management fees increased by $88 million due to stronger RevPAR and property-level margin improvements associated with room rate increases and productivity improvements. Incentive management fees included $17 million and $10 million for 2007 and 2006, respectively, that were calculated based on prior periods’ results, but not earned and due until the periods in which they were recognized. Furthermore, incentive management fees for 2007 included $13 million and base management fees for 2007 included $6 million of business interruption insurance proceeds associated with hurricanes in prior years compared to $1 million of business interruption insurance proceeds received in 2006. Stronger catering, food and beverage, spa, and other profits also drove property-level margins higher. Year-over-year RevPAR increases were driven primarily by rate increases.

Timeshare sales and services revenue increased by $170 million (11 percent) in 2007 over the prior year. The increase largely reflected development revenue increases over the prior year as some newer projects reached revenue recognition thresholds. In 2006, some projects were in the early stages of development and did not reach revenue recognition thresholds until 2007. The increase in revenue also reflects increased services and financing revenue.

Owned, leased, corporate housing and other revenue increased by $121 million (11 percent). The increase largely reflected stronger RevPAR and the mix of owned and leased properties in 2007, as compared to 2006, and to a lesser extent, higher fees associated with affinity card endorsements and the sale of branded residential real estate, offset by the recognition of $19 million of hotel management and franchise agreement termination fees in 2007, as compared to the recognition of $26 million of such fees in 2006.

The $995 million increase in total revenue includes $500 million of increased cost reimbursements revenue, to $8,575 million in 2007 from $8,075 million in the prior year. This revenue represents reimbursements of costs incurred on behalf of managed and franchised properties and relates, predominantly, to payroll costs at managed properties where we are the employer. As we record cost reimbursements based upon the costs incurred with no added markup, this revenue and related expense have no impact on either our operating income or net income. The increase in reimbursed costs is primarily attributable to wage increases, sales growth, and the growth in the number of properties we manage. We added 15 managed properties (4,870 rooms) and 138 franchised properties (15,963 rooms) to our system in 2007, net of properties exiting the system.

2006 Compared to 2005

Revenues increased by $866 million (8 percent) to $11,995 million in 2006 from $11,129 million in 2005, as a result of stronger demand for hotel rooms worldwide. Base management and franchise fees increased by $117 million as a result of stronger RevPAR and unit growth. In 2006, we recognized $5 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006. Incentive management fees increased by $80 million due to stronger RevPAR and property-level margin improvements associated with room rate increases and productivity improvements. Incentive management fees include $10 million and $14 million for 2006 and 2005, respectively, that were calculated based on prior periods’ earnings but not earned and due until the periods in which they were recognized. Stronger catering, food and beverage, spa, and other profits also drove property-level margins higher. Year-over-year RevPAR increases were driven primarily by rate increases. Owned and leased revenue increased significantly, primarily as a result of our purchase, early in the second half of 2005, of 13 formerly managed properties from CTF Holdings Ltd. (“CTF”). See Footnote No. 8, “Acquisitions and Dispositions,” later in this report for a detailed description of the CTF transaction. As planned, eight of the CTF properties were sold during 2006: one property was sold in the first quarter; five properties were sold in the second quarter; and two properties were sold in the third quarter.

Timeshare sales and services revenue increased by $90 million (6 percent) over the prior year. The increase largely reflects $77 million of revenue in 2006 from note securitization gains. As detailed later in the “Cumulative Effect of Change in Accounting Principle” narrative, note securitization gains of $69 million for 2005 are not reflected in revenue, but instead are a component of gains and other income. Additionally, financing and services revenue increased in 2006 versus the prior year, as did villa rental revenue. Partially offsetting these increases, development revenue declined due to projects in the early stages of development that did not reach revenue recognition thresholds and limited available inventory associated with projects that sold out or were nearing sell-out.

The $866 million increase in total revenue includes $404 million of increased cost reimbursements revenue, to $8,075 million in 2006 from $7,671 million in the prior year. The increase in reimbursed costs is primarily attributable to the growth in the number of properties we manage and to wage increases. We added 13 managed properties (4,126 rooms) and 77 franchised properties (11,286 rooms) to our system in 2006, net of properties exiting the system.

Operating Income

2007 Compared to 2006

Operating income increased by $101 million (9 percent) to $1,188 million in 2007 from $1,087 million in the prior year. The increase in operating income reflects stronger combined base management, incentive management, and franchise fees of $204 million, partially offset by higher general, administrative, and other expenses of $91 million, lower Timeshare sales and services revenue net of direct expenses of $7 million, and lower owned, leased, corporate housing, and other revenue net of direct expenses of $5 million.

The combined base management, incentive management, and franchise fees increase of $204 million reflected strong RevPAR growth, unit growth, and property-level margin improvements and favorable exchange rates worldwide. In 2006, we recognized $5 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, versus no similar fees in 2007. Incentive management fees included $17 million and $10 million for 2007 and 2006, respectively, that were calculated based on prior periods’ results, but not earned and due until the periods in which they were recognized. Furthermore, incentive management fees for 2007 included $13 million and base management fees included $6 million of business interruption insurance proceeds associated with hurricanes in prior years compared to $1 million of business interruption insurance proceeds received in 2006.

As compared to the year-ago period, general, administrative, and other expenses increased by $91 million (13 percent) from $677 million in 2006 to $768 million in 2007. In 2007, we incurred a $35 million charge related to excise taxes associated with the settlement of issues raised during the Internal Revenue Service and Department of Labor examination of our employee stock ownership plan (“ESOP”) feature of our Employees’ Profit Sharing, Retirement and Savings Plan and Trust (the “Plan”). See Footnote No. 3, “Income Taxes,” for additional information on the ESOP settlement. Additionally, the increase was attributable to, among other things, increased costs related to our unit growth, development and systems improvements, increased litigation expenses, and increased other administrative costs. Also unfavorably impacting general, administrative, and other expenses, when compared to the prior year, were foreign exchange losses totaling $2 million in 2007 as compared to foreign exchange gains of $6 million in 2006 and $1 million of guarantee charges in 2007 while the year-ago period reflected $6 million of guarantee reversals. Partially offsetting the aforementioned increases were $4 million of lower hotel operating agreement performance cure payments in 2007 as compared to 2006 and a $9 million reversal in 2007 of reserves that were no longer required. Increased legal expenses in 2007 include charges associated with litigation and other legal matters. Of the $91 million increase in total general, administrative, and other expenses, an increase of $13 million was attributable to our Lodging segments and a $78 million increase was unallocated.

Timeshare sales and services revenue net of direct expenses of $350 million decreased by $7 million, as compared to the prior year, primarily reflecting flat development revenue net of product costs and marketing and selling costs and $12 million of increased financing revenue net of financing expenses, more than offset by the reversal in 2006 of $15 million reversal of contingency reserves and $4 million of lower services revenue net of services expenses. Flat development revenue net of product costs and marketing and selling costs reflected newer projects that reached reportability thresholds in 2007, offset by several other projects that were approaching sell-out. The increase in financing revenue net of financing costs primarily reflects increased accretion, interest income, and higher note sale gains in 2007, as compared to 2006.

The $5 million decrease in owned, leased, corporate housing, and other revenue net of direct expenses reflected $19 million in hotel management and franchise agreement termination fees received in 2007, as compared to $26 million in 2006. Depreciation charges totaling $8 million were recorded in 2007 associated with one owned

property that was reclassified from “held for sale” to “held and used” during 2007 as compared to depreciation charges recorded in 2006 of $7 million associated with two properties that were reclassified from “held for sale” to “held and used.” Partially offsetting the aforementioned decreases in owned, leased, corporate housing, and other revenue net of direct expenses was the favorable impact of $4 million associated with both the stronger demand environment in 2007 and the impact of the sale and purchase of several properties.

2006 Compared to 2005

Operating income increased by $388 million (56 percent) to $1,087 million in 2006 from $699 million in the prior year. The increase in 2006 is, in part, due to a combined base management, franchise, and incentive management fee increase of $197 million, reflecting stronger RevPAR growth, unit growth, and property-level margin improvements. Stronger owned, leased, corporate housing, and other revenue net of direct expenses contributed $17 million of the improvement in operating income and reflected the strong demand environment in 2006 and the impact of the CTF hotel properties acquired in 2005. The $17 million improvement in 2006 versus the prior year reflects increased owned and leased results of $20 million, a $12 million increase in hotel management and franchise agreement termination fees received and $5 million of higher other income, partially offset by $20 million of lower land lease income. Also reflected in the year-over-year change in owned and leased results are depreciation charges totaling $7 million recorded in 2006 associated with two properties that were reclassified in 2006 from “held for sale” to “held and used.” The depreciation charges totaling $7 million represented the amount that would have been recognized had the two properties been continuously classified as “held and used.”

Timeshare sales and services revenue net of direct expenses increased by $98 million (38 percent) in 2006 and largely reflects $77 million of revenue in 2006 from note securitization gains. As noted earlier in the “Revenue” discussion, note securitization gains of $69 million for 2005 are not reflected in revenue, but instead are a component of gains and other income. Also reflected in the $98 million favorable variance, development revenue net of expenses increased by $14 million and financing, services and other revenue net of expenses increased by $7 million. Increased development revenue net of expenses primarily reflects lower development expenses associated with projects in 2006 in the early stages of development that did not reach revenue recognition thresholds and the timing of expenses associated with Statement of Position 04-2, “Accounting for Real Estate Time-Sharing Transactions” (“SOP 04-2”), implemented in 2006. Increased financing, services and other revenue net of expenses reflects a $15 million reversal of marketing related contingency reserves in 2006.

As compared to the year-ago period, general, administrative, and other expenses decreased by $76 million (10 percent) to $677 million in 2006 from $753 million in 2005. In 2005, we incurred general, administrative, and other expenses of $94 million primarily due to the non-cash write-off of deferred contract acquisition costs associated with the termination of management agreements resulting from the CTF transaction. We also incurred general, administrative, and other expenses of $30 million in 2005 associated with our bedding incentive program. We implemented the bedding incentive program in the 2005 second quarter to help ensure that guests could enjoy the comfort and luxury of our new bedding by year-end 2005. Further impacting general, administrative, and other expenses, 2005 reflected hotel operating agreement performance cure payments of $15 million versus a $6 million similar payment in 2006, and 2005 also reflected $9 million of guarantee charges associated with three properties versus the reversal of an additional $5 million of guarantee charges in 2006. Additionally, impacting the year-over-year general, administrative, and other expenses variance were foreign exchange gains totaling $6 million in 2006 as compared to losses of $5 million in 2005. Also impacting the year-over-year change in general, administrative, and other expenses, an additional $22 million reflects unit growth, systems improvements, higher program and joint venture development expenses, and customary increases in ordinary costs such as wages and benefits. Development expenses and deferred compensation expenses were higher in 2006 by $15 million and $5 million, respectively. As noted under the heading “New Accounting Standards” in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” section of our 2006 Form 10-K, we adopted a new accounting standard in 2006 associated with share-based compensation. This new standard resulted in incremental general, administrative, and other expenses of $39 million versus 2005, primarily impacting the unallocated portion of our general, administrative, and other expenses. Of the $76 million decrease in total general, administrative, and other expenses, a decrease of $124 million was attributable to our Lodging segments and a $48 million increase was unallocated.

Gains and Other Income (Expense)

The table below shows our gains and other income for fiscal years 2007, 2006, and 2005:


*($ in millions)*	2007		2006			2005
Timeshare note sale gains	$	—	$	—		$	69
Gains on sales of real estate and other		39		26			34
Loss on expected land sale		—		(37	)		—
Other note sale/repayment gains		1		2			25
Gains on forgiveness of debt		12		—			—
Gain on sale/income on redemption of joint venture and other investments		31		68			7
Income from cost method joint ventures		14		15			14

	$	97	$	74		$	149

2007 Compared to 2006

The $12 million gain on forgiveness of debt for 2007 was associated with government incentives. The loans were forgiven in recognition of our contribution to job growth and economic development. Gain on sale/income on redemption of joint venture and other investments of $31 million in 2007 reflected an $18 million gain associated with the sale of stock we held and net gains totaling $13 million on the sale of joint venture investments. Gain on sale/income on redemption of joint venture and other investments of $68 million in 2006 comprised $43 million of net gains associated with the sale of joint venture investments and the redemption of preferred stock we held in one investee which generated a gain of $25 million.

2006 Compared to 2005

Gain on sale/income on redemption of joint venture and other investments of $68 million in 2006 represents $43 million of net gains associated with the sale of joint venture and other investments and $25 million of income associated with the redemption of preferred stock we held in one investee. As further explained in the earlier “Revenues” discussion for 2006, Timeshare segment note sale gains of $77 million in 2006 are presented in the “Timeshare sales and services” revenue caption.

Interest Expense

2007 Compared to 2006

Interest expense increased by $60 million (48 percent) to $184 million for 2007 from $124 million in 2006. Of the $60 million increase over 2006, $78 million was due to: $26 million of higher interest reflecting a higher outstanding commercial paper balance, primarily due to increased share repurchases and the ESOP settlement payments, and related interest rates; $25 million of interest associated with our Series H Senior Notes issuance which occurred late in 2006 and our Series I and Series J Senior Notes issuances which occurred in 2007; a charge of $13 million in 2007 related to the ESOP settlement; charges totaling $53 million and $46 million in 2007 and 2006, respectively, relating to interest on accumulated cash inflows in advance of our cash outflows for various programs that we operate on the owners’ behalf including Marriott Rewards, gift certificates, and self-insurance programs; interest totaling $5 million associated with other additional debt; and the write off of $2 million of deferred financing costs associated with the refinancing of our revolving credit agreement in 2007. See Footnote No. 3, “Income Taxes,” for additional information on the ESOP settlement. The increase in interest on the programs we operate on behalf of the owners over the year-ago period is attributable to higher liability balances and higher interest rates. Partially offsetting the $78 million interest expense increases over 2006 was an $18 million favorable variance to last year for higher capitalized interest associated with construction projects.

2006 Compared to 2005

Interest expense increased by $18 million (17 percent) to $124 million in 2006 from $106 million in 2005. Included within interest expense for 2006 and 2005 are charges totaling $46 million and $29 million, respectively, relating to interest on accumulated cash inflows, in advance of our cash outflows for various programs that we operate on the owners’ behalf. The increase in interest on these programs over 2005 is related to higher liability balances and higher interest rates. Interest expense also increased in 2006, due to our June 2005 Series F Notes issuance, our June 2006 Series H Notes issuance, and higher commercial paper balances coupled with higher rates. Partially offsetting these increases were interest expense declines associated with the payoff, at maturity, of both our Series D Notes in April 2005 and Series B Notes in November 2005, and the exchange of our Series C and Series E Notes for lower interest rate Series G Notes in 2005.

Interest Income, Provision for Loan Losses, and Income Tax

2007 Compared to 2006

Interest income, before the provision for loan losses, decreased by $11 million (22 percent) to $38 million in 2007 from $49 million in 2006, primarily reflecting lower interest income associated with loans that have been repaid to us, partially offset by the impact associated with new loan fundings.

Loan loss provisions increased by $20 million versus the prior year primarily reflecting a $12 million charge associated with one property and a $5 million charge to write off our remaining exposure associated with our investment in a Delta Airlines, Inc. (“Delta”) lease versus loan loss reversals of $3 million in 2006. For additional information regarding the Delta lease investment write-off, see the “Investment in Leveraged Lease” caption later in this report.

Our tax provision increased by $61 million (16 percent) from a tax provision of $380 million in 2006 to a tax provision of $441 million in 2007 and reflected higher pretax income from our Lodging segments as well as a higher tax rate in 2007, primarily reflecting both increased taxes associated with our international operations and a less favorable mix of taxable earnings between countries. Increased taxes also reflect a charge for a German legislative tax change in 2007, which had a one-time impact and $6 million of taxes in 2007 associated with additional interest on the ESOP settlement. See Footnote No. 3, “Income Taxes,” for additional information on the ESOP settlement.

2006 Compared to 2005

Interest income, before the provision for loan losses, decreased by $30 million (38 percent) to $49 million in 2006 from $79 million in 2005, primarily reflecting the impact of loans repaid to us in 2005. Loan loss provisions decreased by $31 million versus the prior year reflecting the reversal of loan loss provisions totaling $3 million in 2006 compared to a charge of $17 million in 2005 due to the impairment of our Delta lease, see the “Investment in Leveraged Lease” caption later in this report for additional information and an $11 million loan loss provision in 2005 associated with one property.

Our tax provision totaled $380 million in 2006 compared to a tax provision of $284 million in 2005. The difference of $96 million is attributable to higher taxes in 2006 associated with higher pretax income from our lodging operations.

Equity in Earnings

2007 Compared to 2006

Equity in earnings increased by $12 million from $3 million in 2006 to $15 million in 2007 and reflected the mix of investments, compared to 2006, and stronger results at several joint ventures reflecting the strong lodging demand environment in 2007, for one joint venture, the reopening of a hotel, late in 2006, in Mexico, which had been closed following a hurricane in 2005 and strong demand in 2007 for our timeshare products in Hawaii.

2006 Compared to 2005

The $33 million decline from earnings of $36 million in 2005 to earnings of $3 million in 2006, attributable to our equity investments, reflected the recognition in 2005 of $30 million of equity earnings from the sale of hotels by three equity joint ventures in which we had equity interests. In addition, since 2005 we have sold several equity joint ventures.

Income from Continuing Operations

2007 Compared to 2006

Compared to 2006, income from continuing operations decreased by $15 million (2 percent) to $697 million in 2007, and diluted earnings per share from continuing operations increased by $0.10 (6 percent) to $1.75. As discussed in more detail in the preceding sections beginning with “Operating Income,” the decrease versus the prior year is due to higher general, administrative, and other expenses ($91 million), higher taxes ($61 million), higher interest expense ($60 million), higher loan loss provision ($20 million), lower interest income ($11 million), lower timeshare sales and services revenue net of direct expenses ($7 million), and lower owned, leased, corporate housing, and other revenue net of direct expenses ($5 million). Partially offsetting these unfavorable variances were higher fee income ($204 million), higher gains and other income ($23 million), higher equity investment results ($12 million), and a higher minority interest benefit ($1 million).

2006 Compared to 2005

Compared to 2005, income from continuing operations increased by $169 million (31 percent) to $712 million in 2006, and diluted earnings per share from continuing operations increased by $0.48 (41 percent) to $1.65. As discussed in more detail in the preceding sections beginning with “Operating Income,” the increase versus the prior year is due to higher fee income ($197 million), higher timeshare sales and services revenue net of direct expenses ($98 million), lower general, administrative, and other expenses ($76 million), a lower loan loss provision ($31 million), higher owned, leased, corporate housing, and other revenue net of direct expenses ($17 million), and lower minority interest expense ($2 million). Partially offsetting these favorable variances, were significantly higher taxes ($96 million), lower gains and other income ($75 million), lower equity investment results ($33 million), lower interest income ($30 million), and higher interest expense ($18 million).

Cumulative Effect of Change in Accounting Principle

2006

Statement of Position 04-2, “Accounting for Real Estate Time-Sharing Transactions”

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) No. 152, “Accounting for Real Estate Time-Sharing Transactions-an amendment of FASB Statements No. 66 and 67,” and the American Institute of Certified Public Accountants issued SOP 04-2. Additionally, the FASB amended FAS No. 66, “Accounting for Sales of Real Estate,” and FAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects,” to exclude accounting for real estate time-sharing transactions from these statements. We adopted SOP 04-2 at the beginning of the 2006 first quarter.

Under SOP 04-2, we charge the majority of sales and marketing costs we incur to sell timeshares to expense when incurred. We also record an estimate of expected uncollectibility on notes receivable that we receive from timeshare purchasers as a reduction in revenue at the time that we recognize profit on a timeshare sale. We also account for rental and other operations during holding periods as incidental operations, which requires us to record any excess of revenues over costs as a reduction of inventory costs.

The adoption of SOP 04-2 in 2006, which we reported as a cumulative effect of change in accounting principle in our Consolidated Statements of Income, resulted in a non-cash after-tax charge of $109 million ($0.25 per diluted share). The pretax charge totaled $173 million and comprised a $130 million inventory write-down, the establishment of a $25 million notes receivable reserve and an increase in current liabilities of $18 million.

We estimate that, for the 20-year period from 2008 through 2027, the cost of completing improvements and currently planned amenities for our owned timeshare properties will be approximately $1.7 billion.

Business Segments

We are a diversified hospitality company with operations in five business segments:

•

North American Full-Service Lodging, which includes Marriott Hotels & Resorts, Marriott Conference Centers, JW Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Renaissance ClubSport properties located in the continental United States and Canada;

•

North American Limited-Service Lodging, which includes Courtyard, Fairfield Inn, SpringHill Suites, Residence Inn, TownePlace Suites, and Marriott ExecuStay properties located in the continental United States and Canada;

•

International Lodging, which includes Marriott Hotels & Resorts, JW Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Courtyard, Fairfield Inn, Residence Inn, Ramada International, and Marriott Executive Apartments properties located outside the continental United States and Canada;

•

Luxury Lodging, which includes The Ritz-Carlton and Bulgari Hotels & Resorts properties worldwide; and

•

Timeshare, which includes the development, marketing, operation, and sale of timeshare, fractional ownership, and residential properties worldwide under Marriott Vacation Club, The Ritz-Carlton Club, Grand Residences by Marriott, and Horizons by Marriott Vacation Club.

In addition to the segments above, in 2007 we exited the synthetic fuel business, which was formerly a separate segment but which we now report under discontinued operations.

In 2006, we analyzed our internal reporting process and implemented changes in the fourth quarter that were designed to improve efficiency and, as part of this process, we evaluated the impact on segment reporting. Accordingly, we now report five operating segments, and no longer allocate indirect administrative expenses to our segments. We reflect this revised segment reporting throughout this report for all periods presented, and present historical figures in a manner that is consistent with the revised segment reporting. See also the Form 8-K that we filed on March 19, 2007, furnishing quarterly Revenues and Income from Continuing Operations for each of 2006 and 2005 in the new segment format.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense, indirect general, administrative, and other expenses, or income taxes. With the exception of the Timeshare segment, we do not allocate interest income to our segments. Because note sales are an integral part of the Timeshare segment, we include note sale gains in our Timeshare segment results. We include interest income associated with Timeshare segment notes in our Timeshare segment results because financing sales are an integral part of that segment’s operations. We also allocate other gains or losses as well as equity in earnings or losses from our joint ventures and divisional general, administrative, and other expenses to each of our segments. “Other unallocated corporate” represents that portion of our revenues, general, administrative, and other expenses, equity in earnings or losses, and other gains or losses that are not allocable to our segments.

We aggregate the brands presented within our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments considering their similar economic characteristics, types of customers, distribution channels, the regulatory business environment of the brands and operations within each segment, and our organizational and management reporting structure.

Total Lodging Products by Segment

At year-end 2007, we operated or franchised the following properties by segment (excluding 2,156 corporate housing rental units):


	Total Lodging Products
	Properties			Rooms
	U.S.	Non-U.S.	Total	U.S.	Non-U.S.	Total
North American Full-Service Lodging Segment ⁽¹⁾
Marriott Hotels & Resorts	309	12	321	121,842	4,556	126,398
Marriott Conference Centers	13	—	13	3,476	—	3,476
JW Marriott Hotels & Resorts	15	—	15	7,901	—	7,901
Renaissance Hotels & Resorts	70	3	73	25,942	1,034	26,976
Renaissance ClubSport	1	—	1	175	—	175

	408	15	423	159,336	5,590	164,926

North American Limited-Service Lodging Segment ⁽¹⁾
Courtyard	693	16	709	96,759	2,847	99,606
Fairfield Inn	529	7	536	46,930	741	47,671
SpringHill Suites	176	1	177	20,445	124	20,569
Residence Inn	528	17	545	62,805	2,536	65,341
TownePlace Suites	141	—	141	14,122	—	14,122

	2,067	41	2,108	241,061	6,248	247,309

International Lodging Segment ⁽¹⁾
Marriott Hotels & Resorts	4	144	148	2,742	39,396	42,138
JW Marriott Hotels & Resorts	1	22	23	387	8,244	8,631
Renaissance Hotels & Resorts	—	67	67	—	21,783	21,783
Courtyard	—	58	58	—	11,174	11,174
Fairfield Inn	—	1	1	—	206	206
Residence Inn	—	1	1	—	75	75
Marriott Executive Apartments	—	18	18	—	2,905	2,905
Ramada International	—	2	2	—	332	332

	5	313	318	3,129	84,115	87,244

Luxury Lodging Segment
The Ritz-Carlton	36	34	70	11,627	9,978	21,605
Bulgari Hotels & Resorts	—	2	2	—	117	117
The Ritz-Carlton-Residential ⁽²⁾	16	1	17	1,614	93	1,707

	52	37	89	13,241	10,188	23,429

Timeshare Lodging Segment ⁽³⁾
Marriott Vacation Club	37	9	46	8,987	1,909	10,896
The Ritz-Carlton Club-Fractional	5	2	7	283	105	388
The Ritz-Carlton Club-Residential ⁽²⁾	2	1	3	138	6	144
Grand Residences by Marriott-Fractional	1	1	2	199	49	248
Grand Residences by Marriott-Residential ^{(1), (2)}	1	—	1	65	—	65
Horizons by Marriott Vacation Club	2	—	2	444	—	444

	48	13	61	10,116	2,069	12,185

Total	2,580	419	2,999	426,883	108,210	535,093

⁽¹⁾	North American includes properties located in the continental United States and Canada. International includes properties located outside the continental United States and Canada.

⁽²⁾	Represents projects where we manage the related owners’ association. Residential products are included once they possess a certificate of occupancy.

⁽³⁾	Includes resorts that are in active sales as well as those that are sold out. Products in active sales may not be ready for occupancy.

Revenues


*($ in millions)*	2007			2006			2005
North American Full-Service Segment	$	5,476		$	5,196		$	5,116
North American Limited-Service Segment		2,198			2,060			1,886
International Segment		1,594			1,411			1,017
Luxury Segment		1,576			1,423			1,333
Timeshare Segment		2,065			1,840			1,721

Total segment revenues		12,909			11,930			11,073
Other unallocated corporate		81			65			56

	$	12,990		$	11,995		$	11,129

Income from Continuing Operations
*($ in millions)*	2007			2006			2005
North American Full-Service Segment	$	478		$	455		$	349
North American Limited-Service Segment		461			380			303
International Segment		271			237			133
Luxury Segment		72			63			45
Timeshare Segment		306			280			271

Total segment financial results		1,588			1,415			1,101
Other unallocated corporate		(287	)		(251	)		(219	)
Interest income, provision for loan losses and interest expense		(163	)		(72	)		(55	)
Income taxes		(441	)		(380	)		(284	)

	$	697		$	712		$	543

Equity in Earnings (Losses) of Equity Method Investees
*($ in millions)*	2007			2006			2005
North American Full-Service Segment	$	3		$	2		$	21
North American Limited-Service Segment		2			—			(6	)
International Segment		3			—			20
Luxury Segment		(4	)		(2	)		(1	)
Timeshare Segment		10			(2	)		1

Total segment equity in earnings (losses)		14			(2	)		35
Other unallocated corporate		1			5			1

	$	15		$	3		$	36

Our business includes our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments. We consider total segment revenues and total segment financial results to be meaningful indicators of our performance because they measure our growth in profitability and enable investors to compare the revenues and results of our operations to those of other lodging companies.

We consider RevPAR to be a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. We calculate RevPAR by dividing room sales for comparable properties by room nights available to guests for the period. RevPAR may not be comparable to similarly titled measures, such as revenues.

Company-operated house profit margin is the ratio of property-level gross operating profit (also known as house profit) to total property-level revenue. This ratio measures our overall ability as the operator to produce property-level profits by generating sales and controlling the operating expenses over which we have the most direct control. Gross operating profit includes room, food and beverage, and other revenue and the related expenses including payroll and benefits expenses, as well as repairs and maintenance, utility, general and administrative, and sales and marketing expenses. Gross operating profit does not include the impact of management fees, furniture, fixtures and equipment replacement reserves, insurance, taxes, or other fixed expenses.

2007 Compared to 2006

We added 203 properties (29,200 rooms) and 55 properties (9,722 rooms) exited the system in 2007, not including residential products. We also added three residential properties (347 units).

Total segment financial results increased by $173 million (12 percent) to $1,588 million in 2007 from $1,415 million in 2006, and total segment revenues increased by $979 million to $12,909 million in 2007, an 8 percent increase from revenues of $11,930 million in 2006. The results, as compared to the prior year, reflect a $204 million (17 percent) increase in combined base management, franchise, and incentive management fees from $1,224 million in 2006 to $1,428 million in 2007, a $16 million increase in earnings associated with equity investments, and a $1 million minority interest benefit. Partially offsetting these favorable variances was a decrease of $18 million in owned, leased, corporate housing, and other revenue net of direct expenses, $13 million of increased general, administrative, and other expenses, a decrease of $10 million in gains and other income, and a decrease of $7 million in timeshare sales and services revenue net of direct expenses.

Higher RevPAR for comparable rooms, resulting from both domestic and international rate increases, higher property-level food and beverage and other revenue, and new unit growth, drove the increase in base management and franchise fees. In 2006, we recognized $5 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, versus no similar fees in 2007. Incentive management fees increased by $88 million (31 percent) during 2007, reflecting the impact of strong room rate increases and property-level margin improvements associated with productivity improvements. Incentive management fees included $17 million and $10 million for 2007 and 2006, respectively, that were calculated based on prior periods’ earnings, but not earned and due until the periods in which they were recognized. Furthermore, incentive management fees for 2007 also included $13 million of business interruption insurance proceeds associated with hurricanes in prior years and base management fees included $6 million and $1 million of business interruption insurance proceeds, also associated with hurricanes in prior years, received in 2007 and 2006, respectively. In 2007, 67 percent of our managed properties paid incentive management fees to us versus 62 percent in 2006.

Systemwide RevPAR, which includes data from our franchised properties, in addition to our owned, leased, and managed properties, for comparable North American properties increased by 6.0 percent over 2006, and RevPAR for our comparable North American company-operated properties increased by 6.2 percent over 2006.

Systemwide RevPAR for comparable international properties increased by 8.4 percent, and RevPAR for comparable international company-operated properties increased by 8.9 percent. Worldwide RevPAR for comparable systemwide properties increased by 6.5 percent (7.6 percent using actual dollars) while worldwide RevPAR for comparable company-operated properties increased by 7.0 percent.

As compared to 2006, 2007 worldwide comparable company-operated house profit margins increased by 150 basis points, while North American company-operated house profit margins improved by 160 basis points versus 2006. For 2007, as compared to 2006, house profit per available room (“HP-PAR”) at our full-service managed properties in North America increased by 10.6 percent. HP-PAR at our North American limited-service managed properties increased by 8.9 percent, and worldwide HP-PAR for all our brands increased by 11.0 percent on a constant dollar basis.

2006 Compared to 2005

We added 136 properties (23,466 rooms) and 45 properties (8,616 rooms) left the system in 2006. Most of the properties that left the system were limited-service properties.

Total segment financial results increased by $314 million (29 percent) to $1,415 million in 2006 from $1,101 million in 2005, and total segment revenues increased by $857 million to $11,930 million in 2006, an 8 percent increase from revenues of $11,073 million in 2005. The results as compared to the prior year reflect a $197 million (19 percent) increase in combined base management, franchise, and incentive management fees from $1,027 million in 2005 to $1,224 million in 2006, $124 million of lower general, administrative, and other expenses, $8 million of increased owned, leased, corporate housing, and other revenue net of direct expenses, a $98 million increase in timeshare sales and services revenue net of direct expenses, and an increase in minority interest of $2 million, partially offset by $78 million of lower gains and other income and a $37 million decline in earnings associated with equity investments. Higher RevPAR for comparable rooms, resulting from both domestic and international rate increases, higher property-level food and beverage and other revenue, and new unit growth drove the increase in base management and franchise fees. In 2006, we recognized $5 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006. Incentive management fees increased by $80 million (40 percent) during 2006, reflecting the impact of strong room rate improvement and property-level margin improvements. Incentive management fees include $10 million and $14 million for 2006 and 2005,

respectively, that were calculated based on prior periods’ earnings, but not earned and due until the periods in which they were recognized. In 2006, 62 percent of our managed properties paid incentive management fees to us versus 51 percent in 2005.

Systemwide RevPAR for comparable North American properties increased by 9.1 percent over 2005 and RevPAR for our comparable North American company-operated properties increased by 8.9 percent.

Systemwide RevPAR for comparable international properties, increased by 10.5 percent, and RevPAR for comparable international company-operated properties increased by 11.1 percent. Worldwide RevPAR for comparable systemwide properties increased by 9.4 percent while worldwide RevPAR for comparable company-operated properties increased by 9.5 percent.

In addition, worldwide comparable company-operated house profit margins increased by 230 basis points, while North American company-operated house profit margins improved by 240 basis points versus 2005. For 2006, as compared to 2005, HP-PAR at our full-service managed properties in North America increased by 16.3 percent. HP-PAR at our North American limited-service managed properties increased by 12.6 percent, and worldwide HP-PAR for all our brands increased by 15.4 percent on a constant dollar basis.

Lodging Development

We opened 203 properties, totaling 29,200 rooms, across our brands in 2007 and 55 properties (9,722 rooms) left the system, not including residential products. We also added three residential properties (347 units). Highlights of the year included:

•

Converting 26 properties (5,618 rooms), or 18 percent of our gross room additions for the year, from other brands, and 21 percent of the rooms were located in international markets;

•

Opening approximately 16 percent of all the new rooms outside the United States;

•

Adding 156 properties (17,517 rooms) to our North American Limited-Service brands; and

•

Opening two new Marriott Vacation Club properties in the West Indies on the island of St. Kitts, and the U.S. Virgin Islands on the island of St. Thomas, as well as one new Ritz-Carlton Club and residences property in San Francisco, California.

We currently have more than 125,000 hotel rooms under construction, awaiting conversion, or approved for development in our hotel development pipeline and we expect to add over 30,000 hotel rooms and timeshare units to our system in 2008. We expect to remove approximately 5,000 rooms from our system during the 2008 full year.

We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. Nonetheless, our ability to sell properties that we develop and the ability of hotel developers to build or acquire new Marriott-branded properties, both of which are important parts of our growth plan, depend in part on capital access, availability and cost for other hotel developers and third-party owners. These growth plans are subject to numerous risks and uncertainties, many of which are outside of our control. See the “Forward-Looking Statements” and “Risks and Uncertainties” captions earlier in this report and the “Liquidity and Capital Resources” caption later in this report.

Statistics. The following tables show occupancy, average daily rate, and RevPAR for comparable properties, for each of the brands in our North American Full-Service and North American Limited-Service segments, for our International segment by region, and the principal brand in our Luxury segment, The Ritz-Carlton. We have not presented statistics for company-operated Fairfield Inn properties in these tables because we operate only a limited number of properties, as the brand is predominantly franchised and such information would not be meaningful (identified as “nm” in the tables that follow). Systemwide statistics include data from our franchised properties, in addition to our owned, leased, and managed properties.

The occupancy, average daily rate, and RevPAR statistics used throughout this report for 2007 include the period from December 30, 2006, through December 28, 2007, the statistics for 2006 include the period from December 31, 2005, through December 29, 2006, and the statistics for 2005 include the period from January 1, 2005, through December 30, 2005 (except in each case, for The Ritz-Carlton brand properties and properties located outside of the continental United States and Canada, which for them includes the period from January 1 through December 31 for each year).


	Comparable Company-Operated North American Properties ⁽¹⁾						Comparable Systemwide North American Properties⁽¹⁾
	2007			Change vs. 2006			2007			Change vs. 2006
Marriott Hotels & Resorts ⁽²⁾
Occupancy		72.6	%	1.0	%	pts.		70.8	%	0.6	%	pts.
Average Daily Rate	$	175.41		5.4	%		$	160.61		5.5	%
RevPAR	$	127.43		6.9	%		$	113.66		6.4	%

Renaissance Hotels & Resorts
Occupancy		73.1	%	0.4	%	pts.		71.8	%	-0.4	%	pts.
Average Daily Rate	$	169.93		5.4	%		$	157.29		5.8	%
RevPAR	$	124.17		5.9	%		$	112.96		5.1	%

Composite North American Full-Service ⁽³⁾
Occupancy		72.7	%	0.9	%	pts.		70.9	%	0.5	%	pts.
Average Daily Rate	$	174.54		5.4	%		$	160.10		5.5	%
RevPAR	$	126.92		6.8	%		$	113.56		6.2	%

The Ritz-Carlton North America
Occupancy		72.3	%	0.1	%	pts.		72.3	%	0.1	%	pts.
Average Daily Rate	$	331.48		7.3	%		$	331.48		7.3	%
RevPAR	$	239.67		7.5	%		$	239.67		7.5	%

Composite North American Full-Service and Luxury ⁽⁴⁾
Occupancy		72.7	%	0.8	%	pts.		71.0	%	0.4	%	pts.
Average Daily Rate	$	189.41		5.7	%		$	169.92		5.7	%
RevPAR	$	137.66		6.9	%		$	120.65		6.4	%

Residence Inn
Occupancy		77.7	%	-0.5	%	pts.		78.2	%	-0.8	%	pts.
Average Daily Rate	$	124.24		4.6	%		$	122.44		6.1	%
RevPAR	$	96.53		3.9	%		$	95.80		5.1	%

Courtyard
Occupancy		70.4	%	-0.4	%	pts.		72.1	%	-0.2	%	pts.
Average Daily Rate	$	127.34		5.6	%		$	124.12		5.9	%
RevPAR	$	89.69		4.9	%		$	89.53		5.6	%

Fairfield Inn
Occupancy		nm		nm				70.5	%	-0.3	%	pts.
Average Daily Rate		nm		nm			$	88.19		7.2	%
RevPAR		nm		nm			$	62.17		6.7	%

TownePlace Suites
Occupancy		74.2	%	-1.1	%	pts.		73.5	%	-2.4	%	pts.
Average Daily Rate	$	85.65		8.9	%		$	86.93		8.4	%
RevPAR	$	63.56		7.2	%		$	63.89		5.0	%

SpringHill Suites
Occupancy		72.6	%	0.6	%	pts.		73.2	%	-0.6	%	pts.
Average Daily Rate	$	107.86		4.2	%		$	106.49		6.5	%
RevPAR	$	78.27		5.0	%		$	77.97		5.7	%

Composite North American Limited-Service⁽⁵⁾
Occupancy		72.7	%	-0.4	%	pts.		73.6	%	-0.5	%	pts.
Average Daily Rate	$	122.63		5.4	%		$	113.34		6.3	%
RevPAR	$	89.18		4.8	%		$	83.37		5.6	%

Composite North American⁽⁶⁾
Occupancy		72.7	%	0.3	%	pts.		72.6	%	-0.2	%	pts.
Average Daily Rate	$	159.01		5.8	%		$	134.62		6.2	%
RevPAR	$	115.60		6.2	%		$	97.70		6.0	%

⁽¹⁾

Statistics are for the fifty-two weeks ended December 28, 2007, and December 29, 2006, except for Ritz-Carlton for which the statistics are for the twelve months ended December 31, 2007, and December 31, 2006. For properties located in Canada the comparison to 2006 is on a constant U.S. dollar basis.

⁽²⁾	Marriott Hotels & Resorts includes JW Marriott Hotels & Resorts.

⁽³⁾	Composite North American Full-Service statistics include properties located in the continental United States and Canada for Marriott Hotels & Resorts and Renaissance Hotels & Resorts.

⁽⁴⁾	Composite North American Full-Service and Luxury includes Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Ritz-Carlton.

⁽⁵⁾	Composite North American Limited-Service statistics include properties located in the continental United States and Canada for Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, and SpringHill Suites.

⁽⁶⁾	Composite North American statistics include properties located in the continental United States and Canada for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton.


	Comparable Company-Operated Properties ⁽¹⁾						Comparable Systemwide Properties⁽¹⁾
	2007			Change vs. 2006			2007			Change vs. 2006

Caribbean and Latin America ⁽²⁾
Occupancy		76.5	%	2.4	%	pts.		74.8	%	2.8	%	pts.
Average Daily Rate	$	167.56		9.2	%		$	156.76		7.5	%
RevPAR	$	128.25		12.7	%		$	117.20		11.7	%

Continental Europe ⁽²⁾
Occupancy		74.4	%	1.3	%	pts.		72.0	%	1.2	%	pts.
Average Daily Rate	$	173.92		5.8	%		$	174.93		5.4	%
RevPAR	$	129.34		7.7	%		$	126.01		7.3	%

United Kingdom ⁽²⁾
Occupancy		77.8	%	0.1	%	pts.		77.4	%	0.3	%	pts.
Average Daily Rate	$	203.27		5.2	%		$	200.65		4.7	%
RevPAR	$	158.08		5.2	%		$	155.27		5.1	%

Middle East and Africa ⁽²⁾
Occupancy		73.3	%	4.8	%	pts.		72.4	%	4.9	%	pts.
Average Daily Rate	$	135.74		9.1	%		$	133.98		9.0	%
RevPAR	$	99.57		16.8	%		$	96.95		17.0	%

Asia Pacific ^{(2), (3)}
Occupancy		75.2	%	-0.8	%	pts.		75.3	%	-0.5	%	pts.
Average Daily Rate	$	147.79		8.9	%		$	148.67		7.7	%
RevPAR	$	111.15		7.8	%		$	111.92		7.0	%

Regional Composite^{(4), (5)}
Occupancy		75.7	%	0.8	%	pts.		74.6	%	1.0	%	pts.
Average Daily Rate	$	168.30		7.0	%		$	166.03		6.3	%
RevPAR	$	127.44		8.2	%		$	123.78		7.8	%

International Luxury ⁽⁶⁾
Occupancy		72.7	%	4.0	%	pts.		72.7	%	4.0	%	pts.
Average Daily Rate	$	292.24		6.1	%		$	292.24		6.1	%
RevPAR	$	212.54		12.2	%		$	212.54		12.2	%

Total International ⁽⁷⁾
Occupancy		75.4	%	1.2	%	pts.		74.4	%	1.3	%	pts.
Average Daily Rate	$	180.73		7.2	%		$	176.57		6.6	%
RevPAR	$	136.29		8.9	%		$	131.36		8.4	%

⁽¹⁾

Financial results for all properties are reported on a period-end basis, while statistics for properties located outside the continental United States and Canada are reported on a month-end basis. The statistics are for January through December. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2006 is on a constant U.S. dollar basis.

⁽²⁾	Regional information includes Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Courtyard properties located outside of the continental United States and Canada.

⁽³⁾	Excludes Hawaii.

⁽⁴⁾	Includes Hawaii.

⁽⁵⁾	Regional Composite statistics include all properties located outside of the continental United States and Canada for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Courtyard.

⁽⁶⁾	Includes The Ritz-Carlton properties located outside of North America and Bulgari Hotels & Resorts.

⁽⁷⁾	Total International includes Regional Composite statistics and statistics for The Ritz-Carlton International and Bulgari Hotels & Resorts.


	Comparable Company-Operated Properties⁽¹⁾						Comparable Systemwide Properties⁽¹⁾
	2007			Change vs. 2006			2007			Change vs. 2006
Composite Luxury⁽²⁾
Occupancy		72.5	%	1.8	%	pts.		72.5	%	1.8	%	pts.
Average Daily Rate	$	314.36		6.6	%		$	314.36		6.6	%
RevPAR	$	227.87		9.4	%		$	227.87		9.4	%

Total Worldwide ⁽³⁾
Occupancy		73.5	%	0.5	%	pts.		72.9	%	0.1	%	pts.
Average Daily Rate	$	165.19		6.2	%		$	141.60		6.4	%
RevPAR	$	121.34		7.0	%		$	103.19		6.5	%

⁽¹⁾

Financial results for all properties are reported on a period-end basis, while statistics for properties located outside the continental United States and Canada are reported on a month-end basis. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2006 is on a constant U.S. dollar basis.

⁽²⁾	Composite Luxury includes worldwide properties for The Ritz-Carlton and Bulgari Hotels & Resorts.

⁽³⁾

Total Worldwide statistics include all properties worldwide for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton. Statistics for properties located in the continental United States and Canada (except for The Ritz-Carlton) represent the fifty-two weeks ended December 28, 2007, and December 29, 2006. Statistics for all The Ritz-Carlton properties and properties located outside of the continental United States and Canada represent the twelve months ended December 31, 2007, and December 31, 2006.


	Comparable Company-Operated North American Properties ⁽¹⁾						Comparable Systemwide North American Properties⁽¹⁾
	2006			Change vs. 2005			2006			Change vs. 2005
Marriott Hotels & Resorts ⁽²⁾
Occupancy		72.3	%	-0.6	%	pts.		70.9	%	0.2	%	pts.
Average Daily Rate	$	168.11		9.1	%		$	154.37		8.3	%
RevPAR	$	121.58		8.3	%		$	109.48		8.6	%

Renaissance Hotels & Resorts
Occupancy		72.8	%	0.6	%	pts.		72.2	%	1.1	%	pts.
Average Daily Rate	$	162.96		8.7	%		$	151.91		8.4	%
RevPAR	$	118.57		9.6	%		$	109.75		10.0	%

Composite North American Full-Service ⁽³⁾
Occupancy		72.4	%	-0.4	%	pts.		71.1	%	0.3	%	pts.
Average Daily Rate	$	167.27		9.0	%		$	153.99		8.3	%
RevPAR	$	121.10		8.5	%		$	109.52		8.9	%

The Ritz-Carlton North America
Occupancy		72.9	%	2.1	%	pts.		72.9	%	2.1	%	pts.
Average Daily Rate	$	307.20		7.1	%		$	307.20		7.1	%
RevPAR	$	223.88		10.3	%		$	223.88		10.3	%

Composite North American Full-Service and Luxury ⁽⁴⁾
Occupancy		72.4	%	-0.1	%	pts.		71.2	%	0.5	%	pts.
Average Daily Rate	$	180.17		8.9	%		$	163.03		8.3	%
RevPAR	$	130.52		8.7	%		$	116.11		9.0	%

Residence Inn
Occupancy		78.3	%	-1.8	%	pts.		79.2	%	-0.5	%	pts.
Average Daily Rate	$	117.99		9.2	%		$	113.85		8.2	%
RevPAR	$	92.35		6.8	%		$	90.15		7.6	%

Courtyard
Occupancy		70.9	%	-0.4	%	pts.		72.5	%	0.1	%	pts.
Average Daily Rate	$	119.30		10.9	%		$	116.67		9.5	%
RevPAR	$	84.62		10.3	%		$	84.57		9.7	%

Fairfield Inn
Occupancy		nm		nm				70.7	%	1.0	%	pts.
Average Daily Rate		nm		nm			$	82.05		9.1	%
RevPAR		nm		nm			$	58.01		10.6	%

TownePlace Suites
Occupancy		75.3	%	-0.3	%	pts.		75.7	%	-0.2	%	pts.
Average Daily Rate	$	78.68		10.9	%		$	79.69		10.2	%
RevPAR	$	59.28		10.4	%		$	60.35		9.9	%

SpringHill Suites
Occupancy		72.3	%	-2.0	%	pts.		74.1	%	0.2	%	pts.
Average Daily Rate	$	102.86		10.7	%		$	98.76		9.8	%
RevPAR	$	74.42		7.8	%		$	73.16		10.0	%

Composite North American Limited-Service⁽⁵⁾
Occupancy		73.3	%	-0.8	%	pts.		74.2	%	0.1	%	pts.
Average Daily Rate	$	115.24		10.4	%		$	105.65		9.0	%
RevPAR	$	84.41		9.1	%		$	78.34		9.2	%

Composite North American⁽⁶⁾
Occupancy		72.8	%	-0.4	%	pts.		73.0	%	0.3	%	pts.
Average Daily Rate	$	152.14		9.5	%		$	128.07		8.7	%
RevPAR	$	110.74		8.9	%		$	93.47		9.1	%

⁽¹⁾

Statistics are for the fifty-two weeks ended December 29, 2006, and December 30, 2005, except for Ritz-Carlton for which the statistics are for the twelve months ended December 31, 2006, and December 31, 2005. For properties located in Canada the comparison to 2005 is on a constant U.S. dollar basis.

⁽²⁾	Marriott Hotels & Resorts includes JW Marriott Hotels & Resorts.

⁽³⁾	Composite North American Full-Service statistics include properties located in the continental United States and Canada for Marriott Hotels & Resorts and Renaissance Hotels & Resorts.

⁽⁴⁾	Composite North American Full-Service and Luxury includes Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Ritz-Carlton.

⁽⁵⁾	Composite North American Limited-Service statistics include properties located in the continental United States and Canada for Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, and SpringHill Suites.

⁽⁶⁾	Composite North American statistics include properties located in the continental United States and Canada for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton.


	Comparable Company-Operated Properties ⁽¹⁾						Comparable Systemwide Properties⁽¹⁾
	2006			Change vs. 2005			2006			Change vs. 2005
Caribbean and Latin America ⁽²⁾
Occupancy		74.9	%	1.5	%	pts.		73.0	%	0.5	%	pts.
Average Daily Rate	$	159.93		9.7	%		$	150.93		9.2	%
RevPAR	$	119.81		12.0	%		$	110.11		9.9	%

Continental Europe ⁽²⁾
Occupancy		72.6	%	2.0	%	pts.		70.7	%	1.9	%	pts.
Average Daily Rate	$	147.28		6.6	%		$	150.58		7.2	%
RevPAR	$	106.95		9.6	%		$	106.53		10.2	%

United Kingdom ⁽²⁾
Occupancy		79.6	%	3.5	%	pts.		75.1	%	3.1	%	pts.
Average Daily Rate	$	225.38		9.5	%		$	204.99		8.6	%
RevPAR	$	179.44		14.6	%		$	153.94		13.3	%

Middle East and Africa ⁽²⁾
Occupancy		68.9	%	-0.3	%	pts.		69.0	%	-0.7	%	pts.
Average Daily Rate	$	143.12		11.0	%		$	134.95		11.5	%
RevPAR	$	98.58		10.5	%		$	93.05		10.3	%

Asia Pacific ^{(2), (3)}
Occupancy		75.8	%	1.0	%	pts.		76.2	%	0.9	%	pts.
Average Daily Rate	$	127.09		11.3	%		$	129.26		9.8	%
RevPAR	$	96.28		12.7	%		$	98.46		11.2	%

Regional Composite^{(4), (5)}
Occupancy		74.6	%	1.3	%	pts.		73.6	%	1.1	%	pts.
Average Daily Rate	$	148.13		9.5	%		$	147.12		9.0	%
RevPAR	$	110.53		11.4	%		$	108.32		10.7	%

International Luxury ⁽⁶⁾
Occupancy		71.7	%	-0.1	%	pts.		71.7	%	-0.1	%	pts.
Average Daily Rate	$	241.90		9.2	%		$	241.90		9.2	%
RevPAR	$	173.35		9.1	%		$	173.55		9.1	%

Total International ⁽⁷⁾
Occupancy		74.4	%	1.2	%	pts.		73.5	%	1.0	%	pts.
Average Daily Rate	$	153.99		9.4	%		$	152.02		9.0	%
RevPAR	$	114.61		11.1	%		$	111.78		10.5	%

⁽¹⁾

⁽²⁾	Regional information includes Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Courtyard properties located outside of the continental United States and Canada.

⁽³⁾	Excludes Hawaii.

⁽⁴⁾	Includes Hawaii.

⁽⁵⁾	Regional Composite statistics include all properties located outside of the continental United States and Canada for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Courtyard.

⁽⁶⁾	Includes The Ritz-Carlton properties located outside of North America and Bulgari Hotels & Resorts.

⁽⁷⁾	Total International includes Regional Composite statistics and statistics for The Ritz-Carlton International and Bulgari Hotels & Resorts.


	Comparable Company-Operated Properties⁽¹⁾						Comparable Systemwide Properties⁽¹⁾
	2006			Change vs. 2005			2006			Change vs. 2005
Composite Luxury⁽²⁾
Occupancy		72.5	%	1.4	%	pts.		72.5	%	1.4	%	pts.
Average Daily Rate	$	289.50		7.5	%		$	289.50		7.5	%
RevPAR	$	209.88		9.7	%		$	209.88		9.7	%

Total Worldwide ⁽³⁾
Occupancy		73.2	%	0.0	%	pts.		73.1	%	0.4	%	pts.
Average Daily Rate	$	152.63		9.5	%		$	131.92		8.8	%
RevPAR	$	111.75		9.5	%		$	96.39		9.4	%

⁽¹⁾

Financial results for all properties are reported on a period-end basis, while statistics for properties located outside the continental United States and Canada are reported on a month-end basis. For the properties located in countries that use currencies other than the U.S. dollar, the comparison to 2005 is on a constant U.S. dollar basis.

⁽²⁾	Composite Luxury includes worldwide properties for The Ritz-Carlton and Bulgari Hotels & Resorts.

⁽³⁾

Total Worldwide statistics include all properties worldwide for Marriott Hotels & Resorts, Renaissance Hotels & Resorts, Residence Inn, Courtyard, Fairfield Inn, TownePlace Suites, SpringHill Suites, and The Ritz-Carlton. Statistics for properties located in the continental United States and Canada (except for The Ritz-Carlton) represent the fifty-two weeks ended December 29, 2006, and December 30, 2005. Statistics for all The Ritz-Carlton properties and properties located outside of the continental United States and Canada represent the twelve months ended December 31, 2006, and December 31, 2005.

North American Full-Service Lodging includes Marriott Hotels & Resorts, Marriott Conference Centers, JW Marriott Hotels & Resorts, Renaissance Hotels & Resorts, and Renaissance ClubSport.


							Annual Change
*($ in millions)*	2007		2006		2005		2007/2006		2006/2005
Segment revenues	$	5,476	$	5,196	$	5,116	5	%	2	%

Segment results	$	478	$	455	$	349	5	%	30	%

2007 Compared to 2006

In 2007, across our North American Full-Service Lodging segment, we added 13 properties (3,947 rooms) and six properties (2,853 rooms) left the system.

In 2007, RevPAR for comparable company-operated North American full-service properties increased by 6.8 percent to $126.92. Occupancy for these properties increased by 0.9 percentage points to 72.7 percent, and average daily rates increased by 5.4 percent to $174.54.

The $23 million increase in segment results compared to 2006 reflects a $65 million increase in base management, incentive management, and franchise fees, partially offset by a $22 million decline in gains and other income and a $20 million decrease in owned, leased, and other revenue net of direct expenses.

The $65 million increase in fees was largely due to stronger RevPAR and property-level margins, driven primarily by rate increases and productivity improvements. Incentive management fees for 2007 reflect the receipt of $12 million and base management fees for 2007 reflect the receipt of $2 million, both of which were for business interruption insurance proceeds associated with Hurricane Katrina, and no similar fees in 2006. Additionally, 2006 reflected the recognition of $3 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, compared to the recognition of no similar fees in 2007.

Gains and other income was $22 million lower in 2007, as compared to 2006, and reflected a $37 million charge in 2006 associated with a straight-line rent receivable, partially offset by the redemption of preferred stock in a cost method investee that generated income of $25 million in 2006 and $34 million of lower other gains in 2007, as compared to 2006. The $34 million decrease in other gains compared to the prior year reflects gains in 2006 associated with the sale of joint venture investments and real estate, while 2007 reflects limited similar activity. Owned, leased, and other revenue net of direct expenses decreased by $20 million and reflected properties sold and $10 million of hotel management and franchise agreement termination fees received in 2006, compared to $3 million of such fees received in 2007. General, administrative, and other expenses for 2007 were unchanged as compared to 2006 primarily reflecting $5 million of hotel management agreement performance cure payments in 2006 offset by a guarantee charge in 2007 associated with one property and the write-off of a deferred contract acquisition cost associated with another property that left the system.

2006 Compared to 2005

In 2006, across our North American Full-Service Lodging segment, we added 15 properties (4,971 rooms) and six properties (1,604 rooms) left the system.

In 2006, RevPAR for comparable company-operated North American full-service properties increased by 8.5 percent to $121.10. Occupancy for these properties decreased by 0.4 percentage points, and average daily rates increased by 9.0 percent to $167.27.

Compared to the prior year, our 2006 results reflect a $59 million increase in base management, incentive management, and franchise fees. The increase in fees is largely due to stronger RevPAR, driven primarily by rate increases and, to a lesser extent, higher food and beverage, meeting room rental and other revenue, and productivity improvements, all of which favorably impacted property-level house profit margins. The growth in the number of rooms, year-over-year, also contributed to the increase in fees. Incentive management fees included $10 million for 2005 that were calculated based on prior periods’ earnings but not earned and due until they were recognized. Similarly, base management fees for 2006 included $4 million of fees that were calculated based on prior periods’ results, but not earned and due until 2006. Owned, leased, and other revenue net of direct expenses decreased by $8 million primarily as a result of properties sold in 2006 and the receipt in 2005 of a $10 million hotel agreement termination fee associated with one property, partially offset by the receipt in 2006 of $10 million of hotel management and franchise agreement termination fees.

General, administrative, and other expenses decreased by $69 million as a result of, among other things, a $60 million charge in 2005 associated with the CTF transaction, more fully discussed in the previous “Operating Income” discussion, as well as expenses of $14 million in 2005 related to our bedding incentive program, partially offset by increased expenses in 2006 reflecting costs related to unit growth and development, systems improvements, and increases in ordinary costs such as wages and benefits. In 2005, general, administrative, and other expenses included $3 million of hotel management agreement performance cure payments associated with one property. In 2006, general, administrative, and other expenses included a $5 million hotel management agreement performance cure payment.

Gains and other income was $3 million higher than the prior year and reflected the redemption of preferred stock in a cost method investee that generated income of $25 million in 2006 and $15 million of higher net gains and other income in 2006 reflecting gains in 2006 associated with the sale of joint venture investments and real estate that were partially offset by lower gains in 2006 associated with the sale or repayment before maturity of loans receivable associated with several properties. Gains and other income for 2006 reflected a $37 million non-cash charge to adjust the carrying amount to net realizable value associated with land we own and lease, as further described in the “Expected Land Sale” caption in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our 2006 Form 10-K. Equity results decreased by $19 million versus the prior year and reflected the recognition in 2005 of $16 million in equity earnings from two joint ventures as a result of the ventures’ sale of hotels and our sale of some joint venture investments in 2005 and 2006, offset to some extent by improved equity joint venture results reflecting the stronger demand environment.

North American Limited-Service Lodging includes Courtyard, Fairfield Inn, SpringHill Suites, Residence Inn, TownePlace Suites, and Marriott ExecuStay.


							Annual Change
*($ in millions)*	2007		2006		2005		2007/2006		2006/2005
Segment revenues	$	2,198	$	2,060	$	1,886	7	%	9	%

Segment results	$	461	$	380	$	303	21	%	25	%

2007 Compared to 2006

Across our North American Limited-Service Lodging segment, we added 156 properties (17,517 rooms) and 16 properties (1,853 rooms) left the system in 2007. The properties that left the system were primarily associated with our Fairfield Inn brand.

In 2007, RevPAR for comparable company-operated North American limited-service properties increased by 4.8 percent to $89.18. Occupancy for these properties decreased by 0.4 percentage points to 72.7 percent, and average daily rates increased by 5.4 percent to $122.63.

The $81 million increase in segment results, as compared to 2006, primarily reflects an $83 million increase in base management, incentive management, and franchise fees, a $5 million increase in owned, leased, and other revenue net of direct expenses, a $2 million increase in gains and other income, and a $2 million increase in joint venture equity earnings, partially offset by $11 million of higher general, administrative, and other expenses.

In 2007, we recognized $15 million of incentive management fees that were calculated based on prior years’ results but not earned and due until 2007 as compared to the recognition of no similar fees in 2006. The additional increase in fees is largely due to higher RevPAR, driven by rate increases, which increased base management and franchise fees, and to productivity improvements, which increased property-level margins and incentive management fees. Additionally, growth in the number of rooms contributed to the increase in base management and franchise fees. The $5 million increase in owned, leased, and other revenue net of direct expenses is primarily a result of hotel franchise agreement termination fees of $6 million received in 2007, which were associated with properties, primarily our Fairfield Inn brand, that left our system and $1 million of similar fees in 2006. The $11 million increase in general, administrative, and other expenses in 2007 primarily reflects the impact of unit growth and development and the write-off of $3 million of deferred contract acquisition costs.

2006 Compared to 2005

Across our North American Limited-Service Lodging segment, we added 91 properties (11,329 rooms) and 28 properties (3,647 rooms) left the system in 2006. The properties that left the system were primarily associated with our Fairfield Inn brand.

In 2006, RevPAR for comparable company-operated North American limited-service properties increased by 9.1 percent to $84.41. Occupancy for these properties decreased by 0.8 percentage points to 73.3 percent, and average daily rates increased by 10.4 percent to $115.24.

The $77 million increase in segment results for 2006 primarily reflects a $77 million increase in base management, incentive management, and franchise fees, $27 million of lower general, administrative, and other expenses, and $6 million of increased equity results, partially offset by a $14 million decrease in owned, leased, and other revenue net of direct expenses and a $19 million decrease in gains and other income. The increase in fees is largely due to higher RevPAR, driven by rate increases, which impacted property-level house profits and, to a lesser extent, to 2006 productivity improvements and the growth in the number of rooms. Stronger performance at our renovated Courtyard properties, versus nonrenovated properties, also contributed to the increase in segment results over the prior year. The decrease in owned, leased, and other revenue net of direct expenses reflects lower lease revenue as a result of our sale, late in 2005, of a portfolio of land underlying 75 Courtyard hotels, partially offset by improved owned and leased results in 2006 reflecting stronger demand.

The decrease in general, administrative, and other expenses of $27 million is attributable to the recognition of expenses in 2005 totaling $11 million associated with our bedding incentive program, a $6 million litigation charge and a $3 million guarantee charge. Improved equity results in 2006 versus 2005 reflect the impact of a stronger demand environment in 2006, new joint ventures and the impact of owning a 50 percent interest in the Courtyard Joint Venture through the first quarter of 2005 versus owning a 21 percent interest thereafter. For additional information regarding the Courtyard Joint Venture, see the “Courtyard Joint Venture” caption in the “Liquidity and Capital Resources” section in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2005 Form 10-K. Gains and other income decreased by $19 million in 2006 as a result of the 2005 sale of a portfolio of land that generated gains and other income of $17 million, a $10 million gain in 2005 associated with the repayment, before maturity, to us of the loan we made to the Courtyard Joint Venture, partially offset by higher other real estate and other gains of $4 million in 2006 and increased income of $4 million in 2006 associated with cost method joint ventures.

International Lodging includes International Marriott Hotels & Resorts, International JW Marriott Hotels & Resorts, International Renaissance Hotels & Resorts, International Courtyard, International Fairfield Inn, International Residence Inn, Ramada International, and Marriott Executive Apartments.


							Annual Change
*($ in millions)*	2007		2006		2005		2007/2006		2006/2005
Segment revenues	$	1,594	$	1,411	$	1,017	13	%	39	%

Segment results	$	271	$	237	$	133	14	%	78	%

2007 Compared to 2006

Across our International Lodging segment, we added 20 properties (4,686 rooms) and 31 properties (4,678 rooms) left the system in 2007.

In 2007, RevPAR for comparable company-operated international properties increased by 8.2 percent to $127.44. Occupancy for these properties increased by 0.8 percentage points to 75.7 percent, and average daily rates increased by 7.0 percent to $168.30. Results for our international operations were strong across most regions. RevPAR increases as compared to the prior year were particularly strong in Central and South East Asia, South America, the Middle East, and Eastern Europe.

The $34 million increase in segment results in 2007 as compared to 2006, reflects a $27 million increase in base management, incentive management, and franchise fees, an $11 million increase in gains and other income, and a $3 million increase in joint venture equity earnings, partially offset by $7 million of higher general, administrative, and other expenses. Incentive management fees included $2 million for 2007 that were calculated based on prior periods’ earnings, but not earned and due until recognized, compared to $10 million of similar fees in 2006.

The increase in fees is largely due to strong demand and higher RevPAR, driven by rate increases and favorable exchange rates. The $11 million increase in gains and other income reflects higher gains in 2007 on real estate sales, as compared to the year-ago period, offset by lower gains on the sale of joint ventures. The $7 million increase in general, administrative, and other expenses from 2006 is primarily attributable to costs related to our unit growth and development. Owned, leased, and other revenue net of direct expenses remained flat primarily reflecting hotel management and franchise agreement termination fees of $8 million received in 2007 and $12 million of similar fees in 2006, entirely offset by the improved performance of our owned and leased properties in 2007.

2006 Compared to 2005

Across our International Lodging segment, we added 22 properties (5,242 rooms) and 10 properties (3,136 rooms) left the system in 2006.

In 2006, RevPAR for comparable company-operated international properties increased by 11.1 percent to $114.61. Occupancy for these properties increased by 1.2 percentage points to 74.4 percent, and average daily rates increased by 9.4 percent to $153.99. Results for our international operations were strong across most regions. China, Mexico, Australia, Germany, France, the United Kingdom, and certain Middle Eastern countries all had strong RevPAR increases.

The $104 million increase in segment results for 2006 primarily reflects a $43 million increase in base management, incentive management, and franchise fees, $37 million of lower general, administrative, and other expenses, $29 million of increased owned, leased, and other revenue net of expenses, and a $15 million increase in gains and other income, partially offset by $20 million of lower equity results. Incentive management fees included $10 million and $4 million for 2006 and 2005, respectively, that were calculated based on prior periods’ earnings, but not earned and due until the periods they were recognized. The increase in fees is largely due to higher RevPAR, driven by rate increases, which impacted property-level house profits and, to a lesser extent, to productivity improvements and the growth in the number of rooms.

Equity results decreased by $20 million in 2006 versus 2005 and reflected the recognition in 2005 of $14 million in equity earnings from a joint venture as a result of the venture’s sale of a hotel and $4 million of increased equity losses in 2006 associated with one joint venture’s hotel that was closed for renovation. The increase of $29 million in owned, leased, and other revenue net of direct expenses reflects $19 million of improved results for owned and leased properties primarily due to the stronger demand environment and an increase of $12 million for hotel agreement termination fees for several properties. The $19 million improvement in owned and leased results also reflects the impact of a $5 million charge in 2006 for depreciation expense associated with one property that was reclassified from “held for sale” to “held and used” as it was not sold within one year of its classification as “held for sale,” as had been expected.

The $15 million increase in gains and other income is primarily attributable to gains on the sale of various joint ventures throughout 2006, partially offset by a decrease in other income associated with one of the sold cost method joint venture investments. The decrease in general, administrative, and other expenses of $37 million is attributable to the recognition of expenses in 2005 totaling $5 million associated with our bedding incentive program as well as a $34 million charge in 2005 associated with the CTF transaction discussed more fully in the previous operating income disclosure. Also impacting general, administrative, and other expenses, in 2005 we recorded expenses totaling $6 million associated with two guarantees and 2006 reflected $7 million of increased expenses related to unit growth and development, systems improvements, and increased ordinary costs such as wages and benefits.

Luxury Lodging includes The Ritz-Carlton and Bulgari Hotels & Resorts.


							Annual Change
*($ in millions)*	2007		2006		2005		2007/2006		2006/2005
Segment revenues	$	1,576	$	1,423	$	1,333	11	%	7	%

Segment results	$	72	$	63	$	45	14	%	40	%

2007 Compared to 2006

Across our Luxury Lodging segment, we added 11 properties (2,529 rooms) and one property (273 rooms) left the system in 2007. In addition, we added three residential products (347 units) in 2007.

In 2007, RevPAR for comparable company-operated luxury properties increased by 9.4 percent to $227.87. Occupancy for these properties increased by 1.8 percentage points to 72.5 percent, and average daily rates increased by 6.6 percent to $314.36.

The $9 million increase in segment results, as compared to 2006, reflected a $20 million increase in base management and incentive management fees, partially offset by $3 million of lower owned, leased, and other revenue net of direct expenses, $6 million of increased general, administrative, and other expenses, and $2 million of lower equity joint venture results. Fiscal year 2006 included $2 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006, as compared to no similar fees in 2007. The increase in fees over the prior year reflects stronger RevPAR driven by rate increases, new properties added to

the system, the receipt in 2007 of $5 million of business interruption insurance proceeds associated with hurricanes in prior years, the year-over-year favorable impact associated with the reopening, late in 2006, of two properties impacted by the same aforementioned hurricanes and increased branding fees. The $6 million increase in general, administrative, and other expenses is primarily attributable to costs related to our unit growth and development. The $3 million decrease in owned, leased, and other revenue net of direct expenses reflected charges totaling $8 million in 2007 for depreciation expense associated with one property that was reclassified from “held and used,” as the property no longer satisfied the criteria to be classified as “held for sale,” partially offset by a favorable $3 million impact associated with the opening of a new leased property in 2007.

2006 Compared to 2005

Across our Luxury Lodging segment, we added three properties (424 rooms) and one property (229 rooms) left the system in 2006.

In 2006, RevPAR for comparable company-operated luxury properties increased by 9.7 percent to $209.88. Occupancy for these properties increased by 1.4 percentage points to 72.5 percent, and average daily rates increased by 7.5 percent to $289.50.

The $18 million increase in segment results for 2006 primarily reflects a $16 million increase in base management and incentive management fees, $7 million of lower general, administrative, and other expenses and $1 million of higher owned, leased, and other revenue net of direct expenses, partially offset by $5 million of lower gains and other income. The increase in fees is largely due to higher RevPAR, driven by rate increases, which impacted property-level house profits and, to a lesser extent, to productivity improvements, the growth in the number of rooms, and the recognition of $2 million of base management fees that were calculated based on prior periods’ results, but not earned and due until 2006.

The decrease in general, administrative, and other expenses of $7 million is attributable to a 2005 hotel management agreement performance termination cure payment of $12 million associated with one property, partially offset by a $5 million increase in expenses in 2006 reflecting costs related to unit growth and development and an increase in ordinary costs such as wages and benefits. Gains and other income decreased by $5 million in 2006 as a result of a $9 million gain in 2005 associated with the repayment before maturity of a note receivable associated with one property, partially offset by gains totaling $3 million associated with the 2006 sale of a preferred interest in one property.

Timeshare includes our Marriott Vacation Club, The Ritz-Carlton Club, Grand Residences by Marriott, and Horizons by Marriott Vacation Club brands.


										Annual Change
*($ in millions)*	2007			2006			2005			2007/2006		2006/2005
Segment Revenues
Segment revenues	$	2,065		$	1,840		$	1,721		12	%	7	%

Segment Results
Base management fee revenue	$	43		$	34		$	32
Timeshare sales and services, net		350			357			259
Joint venture equity		10			(2	)		1
Minority interest		1			—			—
General, administrative, and other expense		(98	)		(109	)		(93	)
Gains and other income		—			—			72

Segment results	$	306		$	280		$	271		9	%	3	%

Sales and Services Revenue
Development	$	1,208		$	1,112		$	1,208
Services		315			286			151
Financing		195			171			72
Other revenue		29			8			56

Sales and services revenue	$	1,747		$	1,577		$	1,487		11	%	6	%

Contract Sales
Timeshare	$	1,221		$	1,207		$	1,187
Fractional		44			42			101
Residential		(9	)		5			22

Total company		1,256			1,254			1,310

Timeshare		33			28			49
Fractional		54			68			17
Residential		58			282			24

Total joint venture		145			378			90

Total contract sales	$	1,401		$	1,632		$	1,400		-14	%	17	%

2007 Compared to 2006

Timeshare contract sales, including sales made by our timeshare joint venture projects, represent sales of timeshare interval, fractional ownership, and residential ownership products before the adjustment for percentage-of-completion accounting. Timeshare contract sales decreased by 14 percent as compared to 2006, reflecting fewer residential and fractional sales, partially offset by increased timeshare sales. Contract sales in 2006 reflected particularly strong joint venture residential sales associated with the launch of our San Francisco and Kapalua, Hawaii products.

The $225 million increase in Timeshare segment revenues from $1,840 million to $2,065 million reflected a $170 million increase in timeshare sales and services revenue, a $46 million increase in cost reimbursements revenue, and $9 million of increased base management fees. The increase in timeshare sales and services revenue primarily reflects newer projects that reached reportability thresholds in 2007 and increased services and financing revenue. Higher base management fees reflect the growing number of timeshare resorts under management. Timeshare segment revenues include $50 million and $41 million of interest income for 2007 and 2006, respectively, and note sale gains of $81 million and $77 million for 2007 and 2006, respectively, recorded in our Consolidated Statements of Income on the “Timeshare sales and services” revenue line, associated with Timeshare segment notes receivable.

Segment results of $306 million in 2007 increased by $26 million over 2006 and primarily reflected $9 million of increased base management fees, $12 million of increased joint venture equity results, and $11 million of lower general, administrative, and other expenses, partially offset by $7 million of lower timeshare sales and services revenue net of expenses. Timeshare sales and services revenue net of direct expenses of $350 million decreased by $7 million, as compared to the prior year, primarily reflecting flat development revenue net of product costs and marketing and selling costs and $12 million of increased financing revenue net of financing expenses, partially offset by the $15 million reversal of contingency reserves in 2006 and $4 million of lower services revenue net of services expenses. Flat development revenue net of product costs and marketing and selling costs reflected newer projects that reached reportability thresholds in 2007,

offset by several other projects that were approaching sell-out. The increase in financing revenue net of financing costs primarily reflects increased accretion, interest income, and higher note sale gains in 2007, as compared to 2006. As compared to the prior year, the $12 million increase in joint venture equity results primarily reflects strong demand in 2007 for our products in Kapalua, Hawaii and start-up costs in 2006 associated with that joint venture. The $11 million decrease in general, administrative, and other expenses reflected lower program and systems expenses in 2007.

2006 Compared to 2005

Timeshare contract sales increased by 17 percent in 2006. Timeshare segment revenues of $1,840 million and $1,721 million in 2006 and 2005, respectively, include $41 million and $38 million for 2006 and 2005, respectively, of interest income, recorded in our Consolidated Statements of Income on the “Timeshare sales and services” revenue line, associated with Timeshare segment notes receivable. The $119 million increase in Timeshare segment revenues reflects a $90 million increase in Timeshare sales and services revenue, a $27 million increase in cost reimbursements revenue, and $2 million of increased base management fees. The $90 million increase in Timeshare sales and services revenue primarily reflects $77 million of revenue in 2006 from note securitization gains. As detailed earlier in the “Cumulative Effect of Change in Accounting Principle” narrative, note securitization gains of $69 million for 2005 are not reflected in revenue, but instead are a component of gains and other income.

Segment results of $280 million in 2006 increased by $9 million over 2005. The $9 million increase includes an increase of $98 million for Timeshare sales and services revenue net of direct expenses and a $2 million increase in base management fees, partially offset by a decline of $72 million in gains and other income, a $16 million increase in general, administrative, and other expenses, and $3 million of lower joint venture equity earnings. The increase in Timeshare sales and services revenue net of direct expenses of $98 million largely reflects $77 million of revenue in 2006 from note securitization gains. Note securitization gains of $69 million for 2005 are not reflected in revenue, but instead are a component of gains and other income. Also reflected in the $98 million variance, development revenue net of expenses increased by $14 million primarily reflecting lower development expenses in 2006 associated with projects in the early stages of development that did not reach revenue recognition thresholds and the timing of expenses associated with SOP 04-2, implemented in 2006. Additionally, the $98 million variance reflected a $15 million reversal of marketing related contingency reserves and $12 million of higher financing revenue net of expense, partially offset by $21 million of lower services revenue net of expenses. The $3 million decline in equity income primarily reflects start-up losses associated with several new joint ventures, partially offset by improved performance at other joint ventures. The $72 million decline in gains and other income primarily reflected $69 million of note securitization gains in 2005 versus the recording of note securitization gains in revenue for 2006, while the $16 million increase in general, administrative, and other expenses reflected higher program and joint venture development expenses, and customary increases in ordinary costs such as wages and benefits.

Investment in Leveraged Lease

Historically, we had a $23 million investment in an aircraft leveraged lease with Delta, which we acquired in 1994. The gross investment was comprised of rentals receivable and the residual value of the aircraft offset by unearned income. On September 14, 2005, Delta filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code and informed us that it wished to restructure the lease. As a result, our investment was impaired and we had recorded pretax charges of approximately $18 million through 2006. We recorded an additional $5 million loss related to this investment in fiscal 2007. We have no remaining exposure related to this historical investment.

Effective Tax Rate

Tax credits contributed by our synthetic fuel operations have significantly reduced our effective tax rate during the last several years. As we exited the business in November 2007 our future effective tax rate is likely to increase significantly, thereby reducing our after-tax profits.

DISCONTINUED OPERATIONS

Synthetic Fuel

The tax credits provided under Internal Revenue Code Section 45K were only available for the production and sale of synthetic fuels produced from coal through December 31, 2007. Given high oil prices during 2007 and the anticipated and related phase-out of a significant portion of tax credits available for synthetic fuel produced and sold in 2007, we permanently ceased operations at our synthetic fuel facilities on November 3, 2007 and report this business as a discontinued operation. See Footnote No. 2, “Discontinued Operations,” and Footnote No. 17, “Contingencies,” in this report for additional information regarding the Synthetic Fuel segment.

2007 Compared to 2006

For 2007, the synthetic fuel operation generated revenue of $352 million versus revenue of $165 million for the prior year, primarily reflecting higher production in 2007. Production in 2006 reflected production suspensions instituted in response to high oil prices. Income from the Synthetic Fuel segment declined from $5 million in 2006 to a loss of $1 million in 2007, primarily reflecting increased operating losses associated with higher production in 2007, partially offset by increased revenue and increased tax credits associated with higher production and, on the increased operating losses, a higher tax benefit. Results for 2007 also reflect an estimated 70.71 percent phase-out of tax credits due to high oil prices versus a phase-out that was estimated at year-end 2006 to be 39 percent for 2006. Additionally, results in 2007 reflect interest costs of $8 million associated with hedges entered into in response to high oil prices.

2006 Compared to 2005

For 2006, the synthetic fuel operation generated revenue of $165 million versus revenue of $421 million for the prior year, primarily reflecting significantly lower production in 2006 as a result of production suspensions instituted in response to high oil prices. Income from the Synthetic Fuel segment declined from $125 million in 2005 to $5 million in 2006, primarily as a result of both lower production in 2006 and the estimated 39 percent phase-out of tax credits at year-end 2006 due to high oil prices in 2006. Additionally, results in 2006 reflect interest costs of $4 million associated with hedges entered into in response to high oil prices. Segment results for 2006 also reflect a $5 million charge reflecting the write-down of assets at the Alabama production facility as the adjacent mine was closed at year-end and we did not anticipate operating the facility again at this location.

Distribution Services

In 2005, we had income, net of tax, of $1 million associated with the distribution services business that we exited in 2002.

New Accounting Standards

FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”

We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”) on December 30, 2006, the first day of our 2007 fiscal year. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” which seeks to standardize practices associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Under FIN 48, an entity may only recognize or continue to recognize tax positions that meet a “more likely than not” threshold. We recorded the cumulative effect of applying FIN 48 of $155 million as an adjustment to the opening balance of retained earnings and additional paid-in-capital on December 30, 2006, the first day of our 2007 fiscal year. See Footnote No. 3, “Income Taxes,” for additional information.

Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets-an Amendment of FASB Statement No. 140”

We adopted FASB’s FAS No. 156 on December 30, 2006, the first day of our 2007 fiscal year. FAS No. 156 requires that all separately recognized servicing assets and liabilities initially be measured at fair value, if practicable. It also allows an entity to subsequently elect fair value measurement for its servicing assets and liabilities. We recorded the cumulative effect of applying FAS No. 156, of $1 million, net of tax, as an adjustment to the opening balance of retained earnings on December 30, 2006. See Footnote No. 11, “Asset Securitizations,” for additional information.

Future Adoption of Accounting Standards

EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums”

In November 2006, the Emerging Issues Task Force of FASB (“EITF”) reached a consensus on EITF Issue No. 06-8, “Applicability of the Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums” (“EITF 06-8”). EITF 06-8 will require condominium sales to meet the continuing investment criterion in FAS No. 66 in order to recognize profit under the

percentage of completion method. EITF 06-8 will be effective for annual reporting periods beginning after March 15, 2007, which for us begins with our 2008 fiscal year. The cumulative effect of applying EITF 06-8, if any, will be recorded as an adjustment to the opening balance of retained earnings in the year of adoption. We do not expect the impact of adoption of EITF 06-8 to be material.

FAS No. 157, “Fair Value Measurements”

In September 2006, the FASB issued FAS No. 157, “Fair Value Measurements” (“FAS No. 157”). This standard defines fair value, establishes a methodology for measuring fair value, and expands the required disclosure for fair value measurements. FAS No. 157 is effective for fiscal years beginning after November 15, 2007, which for us begins with our 2008 fiscal year. Provisions of FAS No. 157 must be applied prospectively as of the beginning of the first fiscal year in which FAS No. 157 is applied. In November 2007, the FASB agreed to partially defer the effective date, for one year, of FAS No. 157, for non-financial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. We are currently evaluating the impact that FAS No. 157 will have on our financial statements.

Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115”

In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115” (“FAS No. 159”). This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007, which for us begins with our 2008 fiscal year. We do not expect to elect the fair value measurement option for any financial assets or liabilities at the present time.

EITF Issue No. 07-6, “Accounting for Sales of Real Estate Subject to the Requirements of FASB Statement No. 66, ‘Accounting for Sales of Real Estate,’ When the Agreement Includes a Buy-Sell Clause”

In December 2007, the EITF reached a consensus on EITF Issue No. 07-6, “Accounting for Sales of Real Estate Subject to the Requirements of FASB Statement No. 66, ‘Accounting for Sales of Real Estate,’ When the Agreement Includes a Buy-Sell Clause” (“EITF 07-6”). EITF 07-6 clarifies whether a buy-sell clause is a prohibited form of continuing involvement that would preclude partial sales treatment under FAS No. 66. EITF 07-6 is effective for new arrangements entered into and assessments of existing transactions originally accounted for under the deposit, profit-sharing, leasing, or financing methods for reasons other than the exercise of a buy-sell clause performed in fiscal years beginning after December 15, 2007, which for us begins with our 2008 fiscal year. We do not expect EITF 07-6 to have a material impact on our financial statements.

Financial Accounting Standards No. 141 (Revised 2007), “Business Combinations”

On December 4, 2007, the FASB issued FAS No. 141 (Revised 2007), “Business Combinations” (“FAS No. 141(R)”). FAS No. 141(R) will significantly change the accounting for business combinations. Under FAS No. 141(R), an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. FAS No. 141(R) also includes a substantial number of new disclosure requirements. FAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, which for us begins with our 2009 fiscal year. We are currently evaluating the impact that FAS No. 141(R) will have on our financial statements.

Financial Accounting Standards No. 160, “Non-controlling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51”

On December 4, 2007, the FASB issued FAS No. 160, “Non-controlling Interests in Consolidated Financial Statements-an Amendment of Accounting Research Bulletin (“ARB”) No. 51” (“FAS No. 160”). FAS No. 160 establishes new accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a non-controlling interest (minority interest) as equity in the consolidated financial statements separate from the parent’s equity. The amount of net income attributable to the non-controlling interest will be included in consolidated net income on the face of the income statement. FAS No. 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the non-controlling equity investment on the deconsolidation date. FAS No. 160 also includes expanded disclosure requirements regarding the interests of the

parent and its non-controlling interest. FAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008, which for us begins with our 2009 fiscal year. We are currently evaluating the impact that FAS No. 160 will have on our financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements and Our Credit Facilities

We are party to a multicurrency revolving credit agreement that provides for borrowings and letters of credit and supports our commercial paper program. On May 14, 2007, we amended and restated this facility to increase the aggregate borrowings available under the facility from $2 billion to $2.5 billion and extended the expiration of the facility from 2011 to 2012. The material terms of the amended and restated credit agreement were otherwise unchanged. Borrowings under the facility bear interest at the London Interbank Offered Rate (LIBOR) plus a spread based on our public debt rating. Additionally, we pay annual fees on the facility at a rate also based on our public debt rating. We do not anticipate that fluctuations in the availability of the commercial paper market will affect our liquidity because of the flexibility provided by our credit facility. We classify commercial paper as long-term debt based on our ability and intent to refinance it on a long-term basis.

At year-end 2007, our available borrowing capacity amounted to $2.151 billion and reflected borrowing capacity of $2.5 billion under the credit facility, plus our cash balance of $332 million, less letters of credit outstanding totaling $96 million, and less $585 million of outstanding commercial paper supported by the facility. We consider these resources, together with cash we expect to generate from operations, adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, meet debt service, and fulfill other cash requirements. We periodically evaluate opportunities to issue and sell additional debt or equity securities, obtain credit facilities from lenders, or repurchase, refinance, or otherwise restructure our long-term debt for strategic reasons, or to further strengthen our financial position.

We issue short-term commercial paper in the United States and in Europe. Our commercial paper issuances are subject to the then-current demand for our commercial paper in each of these markets, as we have no commitments from buyers to purchase our commercial paper. We reserve unused capacity under our credit facility to repay outstanding commercial paper borrowings in the event that the commercial paper market is not available to us for any reason when outstanding borrowings mature.

We monitor the status of the capital markets and regularly evaluate the effect that changes in capital market conditions may have on our ability to execute our announced growth plans. We expect that part of our financing and liquidity needs will continue to be met through commercial paper borrowings and access to long-term committed credit facilities. If conditions in the lodging industry deteriorate, or if disruptions in the commercial paper market take place as they did in the immediate aftermath of September 11, 2001, we may be unable to place some or all of our commercial paper on a temporary or extended basis and may have to rely more on borrowings under the credit facility, which may or may not carry a higher cost than commercial paper.

Cash from Operations

Cash from operations, depreciation expense, and amortization expense for the last three fiscal years are as follows:


*($ in millions)*	2007		2006		2005
Cash from operations	$	778	$	970	$	840
Depreciation expense		162		155		156
Amortization expense		35		33		28

Our ratio of current assets to current liabilities was roughly 1.2 to 1.0 at year-end 2007 and 1.3 to 1.0 at year-end 2006. We minimize working capital through cash management, strict credit-granting policies, aggressive collection efforts, and high inventory turnover. We also have significant borrowing capacity under our revolving credit facility should we need additional working capital.

Our ratios of earnings to fixed charges for the last five fiscal years, the calculations of which are detailed in Exhibit 12 to this report, are as follows:


Fiscal Years
2007	2006	2005	2004	2003
4.3x	5.3x	4.6x	4.9x	3.9x

While our Timeshare segment generates strong operating cash flow, year-to-year cash flow varies based on the timing of both cash outlays for the acquisition and development of new resorts and cash received from purchaser financing. We include timeshare reportable sales we finance in cash from operations when we collect cash payments or the notes are sold for cash. The following table shows the net operating activity from our Timeshare segment (which does not include the portion of income from continuing operations from our Timeshare segment):


*($ in millions)*	2007			2006			2005
Timeshare segment development (in excess of) less than cost of sales	$	(55	)	$	(83	)	$	40
New Timeshare segment mortgages, net of collections		(559	)		(537	)		(441	)
Note repurchases		(30	)		(55	)		(23	)
Financially reportable sales (in excess of) less than closed sales		(16	)		61			(57	)
Note sale gains		(81	)		(77	)		(69	)
Note sale proceeds		515			508			399
Collection on retained interests in notes sold and servicing fees		106			96			90
Other cash (outflows) inflows		(35	)		(17	)		26

Net cash outflows from Timeshare segment activity	$	(155	)	$	(104	)	$	(35	)

Our ability to sell Timeshare segment notes is dependent upon continued liquidity within the asset-backed and broader structured credit markets. While the recent dislocation in the capital markets has resulted in a general reduction in liquidity for new asset-backed issuances, we believe that demand remains sufficient for our continued sale of Timeshare segment notes, albeit at somewhat less favorable terms. If the liquidity of the markets decreases further, or the underlying quality of any future Timeshare segment notes we originate were to deteriorate, we might have increased difficulty or be unable to consummate such sales, although we do not expect such deterioration.

Investing Activities Cash Flows

Capital Expenditures and Other Investments. Capital expenditures of $671 million in 2007, $529 million in 2006, and $780 million in 2005 included expenditures related to the development and construction of new hotels and acquisitions of hotel properties, as well as improvements to existing properties and systems initiatives. Timeshare segment development expenditures, which are included in “Cash from Operations,” as noted in that section’s narrative, are not reflected in these numbers. Over time, we have sold lodging properties under development subject to long-term management agreements. The ability of third-party purchasers to raise the necessary debt and equity capital depends in part on the perceived risks inherent in the lodging industry and other constraints inherent in the capital markets as a whole. Although we expect to continue to consummate such real estate sales, if we were unable to do so, our liquidity could decrease and we could have increased exposure to the operating risks of owning real estate. We monitor the status of the capital markets and regularly evaluate the potential impact on our business operations of changes in capital market conditions. We also expect to continue to make other investments in connection with adding units to our lodging business. These investments include loans and minority equity investments.

Fluctuations in the values of hotel real estate generally have little impact on the overall results of our Lodging segments because: (1) we own less than 1 percent of the total number of hotels that we operate or franchise; (2) management and franchise fees are generally based upon hotel revenues and profits rather than current hotel property values; and (3) our management agreements generally do not terminate upon hotel sale.

At the end of 2007, we were party to a venture that developed and marketed fractional ownership and residential interests. Subsequent to year-end 2007, we purchased our partner’s interest in the joint venture. Concurrent with this transaction, we purchased additional land from our partner as well. Cash consideration for this transaction totaled $37 million and we acquired assets and liabilities totaling $74 million and $37 million, respectively, on the date of purchase.

Dispositions. Property and asset sales generated cash proceeds of $745 million in 2007, $798 million in 2006, and $298 million in 2005. In 2007, we closed on the sales of 13 properties and five joint venture investments. Cash proceeds of $90 million for a parcel of land sold in 2007 are not reflected in the $745 million as the proceeds were initially recorded as a deposit because of a contingency. Accordingly, these proceeds impacted the “Other investing activities” section of our Consolidated Statements of Cash Flows rather than “Dispositions.”

Loan Activity. We have made loans to owners of hotels that we operate or franchise, typically to facilitate the development of a new hotel. Based on historical experience, over time we expect these owners to repay the loans in accordance with the loan agreements, or earlier as the hotels mature and capital markets permit. Loan collections and sales, net of advances during 2007, amounted to $75 million. Lodging senior loans outstanding totaled

$7 million (which included a current portion of $4 million) at year-end 2007 and $9 million (which included a current portion of $1 million) at year-end 2006. Lodging mezzanine and other loans totaled $206 million (which included a current portion of $18 million) at year-end 2007 and $268 million (which included a current portion of $32 million) at year-end 2006. In 2007 our notes receivable balance associated with Lodging senior loans and Lodging mezzanine and other loans, declined by $64 million and primarily reflects the repayment or sale of several loans and the reserve against an underperforming loan.

Equity and Cost Method Investments. Cash outflows of $40 million in 2007 associated with equity and cost method investments primarily reflects our investments in two joint ventures. Cash outflows of $95 million in 2006 associated with equity and cost method investments primarily reflects our investments in three joint ventures. Cash outflows of $216 million in 2005 associated with equity and cost method investments primarily reflects our establishment in 2005 of a 50/50 joint venture with Whitbread PLC (“Whitbread”). For additional information regarding Whitbread see Footnote No. 10, “Marriott and Whitbread Joint Venture” in our 2006 Form 10-K.

Cash from Financing Activities

Debt. Debt increased by $1,132 million in 2007, from $1,833 million to $2,965 million at year-end 2007, due to the issuance of $346 million (book value at issuance) of Series I Senior Notes (described more fully below), the issuance of $397 million (book value at issuance) of Series J Senior Notes (described more fully below), a net increase in commercial paper outstanding of $270 million and other debt increases of $119 million. Debt increased by $96 million in 2006, from $1,737 million to $1,833 million at year-end 2006, due to the issuance of $349 million (book value at issuance) of Series H Senior Notes, partially offset by a net reduction in commercial paper outstanding of $184 million, and other debt decreases of $69 million.

In 2007, we issued $350 million of aggregate principal amount of 6.375 percent Series I Senior Notes due 2017. The offering of the notes closed on June 25, 2007. We received net proceeds before expenses of approximately $346 million from this offering, after deducting the underwriting discount and estimated expenses of the offering. We used these proceeds for general corporate purposes, including the repayment of commercial paper borrowings. Interest on these notes will be paid on June 15 and December 15 of each year, and commenced on December 15, 2007. The notes will mature on June 15, 2017, and are redeemable, in whole or in part, at any time and from time to time under the terms provided in the form of note.

Also in 2007, we issued $400 million of aggregate principal amount of 5.625 percent Series J Senior Notes due 2013. The offering of the notes closed on October 19, 2007. We received net proceeds before expenses of approximately $396 million from this offering, after deducting the underwriting discount and estimated expenses of the offering. We used these proceeds for general corporate purposes, including working capital, acquisitions, stock repurchases and the repayment of commercial paper borrowings. Interest on these notes will be paid on February 15 and August 15 of each year, and commenced on February 15, 2008. The notes will mature on February 15, 2013, and are redeemable, in whole or in part, at any time and from time to time under the terms provided in the form of note.

Both the Series I Senior Notes and the Series J Senior Notes were issued under an indenture with The Bank of New York, successor to JPMorgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as trustee, dated as of November 16, 1998.

Our financial objectives include diversifying our financing sources, optimizing the mix and maturity of our long-term debt and reducing our working capital. At year-end 2007, our long-term debt had an average interest rate of 6.0 percent and an average maturity of approximately 5.9 years. The ratio of fixed-rate long-term debt to total long-term debt was 0.8 to 1.0 at year-end 2007. At the end of 2007, we had long-term public debt ratings of BBB from Standard and Poor’s and Baa2 from Moody’s.

Subsequent to year-end 2007, on January 15, 2008, we made a $94 million cash payment of principal and interest to retire, at maturity, all of our outstanding Series E Senior Notes.

Share Repurchases. We purchased 41.0 million shares of our Class A Common Stock in 2007 at an average price of $43.32 per share, 41.5 million shares of our Class A Common Stock in 2006 at an average price of $38.13 per share, and 51.4 million shares of our Class A Common Stock in 2005 at an average price of $32.12 per share. We purchase shares in the open market and in privately negotiated transactions. As of year-end 2007, 33.2 million shares remained available for repurchase under authorizations from our Board of Directors.

Dividends. In April 2007, our Board of Directors increased the quarterly cash dividend by 2 percent to $0.0750 per share.

Contractual Obligations and Off Balance Sheet Arrangements

The following table summarizes our contractual obligations as of year-end 2007:

Contractual Obligations


			Payments Due by Period
*($ in millions)*	Total		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
Debt ⁽¹⁾	$	3,855	$	300	$	405	$	596	$	2,554
Capital lease obligations ⁽¹⁾		12		1		2		2		7
Operating leases where we are the primary obligor:
Recourse		1,394		121		256		219		798
Non-recourse		439		21		30		30		358
Operating leases where we are secondarily liable		166		30		60		43		33
Other long-term liabilities		110		3		14		5		88

Total contractual obligations	$	5,976	$	476	$	767	$	895	$	3,838

⁽¹⁾ Includes principal as well as interest payments. The total amount of unrecognized tax benefits as of year-end 2007 was $132 million and is not reflected in the Contractual Obligations table. As a large taxpayer, we are under continual audit by the Internal Revenue Service and other taxing authorities on several open tax positions, and it is possible that the amount of the liability for unrecognized tax benefits could change during the next 52-week period. While it is possible that one or more of these examinations may be resolved in the next year, it is not anticipated that a significant impact to the unrecognized tax benefit balance will occur. See Footnote No. 3, “Income Taxes,” for additional information. The following table summarizes our commitments as of year-end 2007: Other Commercial Commitments

			Amount of Commitment Expiration Per Period
*($ in millions)*	Total Amounts Committed		Less Than 1 Year		1-3 Years		3-5 Years		After 5 Years
Total guarantees where we are the primary obligor	$	315	$	21	$	89	$	49	$	156
Total guarantees where we are secondarily liable		322		46		91		112		73

Total other commercial commitments	$	637	$	67	$	180	$	161	$	229

Our guarantees where we are the primary obligor of $315 million listed in the preceding table include $41 million of operating profit guarantees that will not be in effect until the underlying properties open and we begin to operate the properties.

The guarantees where we are secondarily liable of $322 million in the preceding table include $245 million of guarantees that expire in the years 2011 through 2013, related to Senior Living Services lease obligations and lifecare bonds for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor of the leases and a portion of the lifecare bonds, and CNL Retirement Properties, Inc. (“CNL”), which subsequently merged with Health Care Property Investors, Inc., is the primary obligor of the remainder of the lifecare bonds. Prior to our sale of the Senior Living Services business in 2003, these preexisting guarantees were guarantees by us of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds. We do not expect to fund under the guarantees.

The guarantees in the preceding table for which we are secondarily liable include lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $7 million and total remaining rent payments through the initial term of approximately $77 million. Most of these obligations expire at the end of the 2023 calendar year. CTF has made available €35 million in cash collateral in the event that we are required to fund under such guarantees (approximately €7 million [$11 million] remained at year-end 2007). As CTF obtains releases from the landlords and these hotels exit the system, our contingent liability exposure of approximately $77 million will decline. Since the time we assumed these guarantees, we have not funded any amounts and we do not expect to fund any amounts under these guarantees in the future.

Furthermore, in addition to the guarantees noted in the preceding table, we have provided a project completion guarantee to a lender for a project with an estimated aggregate total cost of $586 million. Payments for cost overruns for this project will be satisfied by the joint venture via contributions from the partners, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is

34 percent. We do not expect to fund under this guarantee. We have also provided a project completion guarantee to another lender for a project with an estimated aggregate total cost of $80 million. Payments for cost overruns for this project will be satisfied by the joint venture via contributions from the partners, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is 25 percent. We do not expect to fund under this guarantee. The carrying value of the liabilities associated with these two project completion guarantees is $7 million.

In addition to the guarantees described above, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability or damage occurring as a result of the actions of the other joint venture owner or our own actions.

In addition to the guarantees noted previously, as of year-end 2007, we had extended approximately $4 million of loan commitments to owners of lodging properties, under which we expect to fund approximately $2 million within one year. We do not expect to fund the remaining $2 million of commitments, which expire after five years.

At year-end 2007, we also have commitments to invest up to $44 million of equity for minority interests in partnerships that plan to purchase North American full-service and limited-service properties or purchase or develop hotel anchored mixed-use real estate projects, which expire as follows: $14 million in one to two years; and $30 million in three to five years. As of year-end 2007, we also have a commitment to invest up to $25 million in a joint venture of which we have funded $12 million and have $13 million remaining that we expect to fund within one year. As of year-end 2007, we also had a commitment to invest up to $29 million (€20 million) in a joint venture in which we are an investor. We currently do not expect to fund under this commitment.

At year-end 2007 we had $96 million of letters of credit outstanding on our behalf, the majority of which related to our self-insurance programs. Surety bonds issued on our behalf as of year-end 2007 totaled $468 million, the majority of which were requested by federal, state or local governments related to our lodging operations, including our Timeshare segment and self-insurance programs.

In the normal course of the hotel management business, we enter into purchase commitments to manage the daily operating needs of hotels we manage for owners. Since we are reimbursed from the cash flows of the hotels, these obligations have minimal impact on our net income and cash flow.

RELATED PARTY TRANSACTIONS

Equity Method Investments

We have equity method investments in entities that own properties for which we provide management and/or franchise services and receive fees. In addition, in some cases we provide loans, preferred equity or guarantees to these entities. Our ownership interest in these equity method investments generally varies from 10 to 50 percent. The amount of consolidated retained earnings that represents undistributed earnings attributable to our equity investments totaled $9 million at year-end 2007.

The following tables present financial data resulting from transactions with these related parties:

Income Statement Data


	*($ in millions)*	2007			2006			2005
	Base management fees	$	56		$	62		$	83
	Franchise fees		1			2			2
	Incentive management fees		26			22			14
	Cost reimbursements		510			649			936
	Owned, leased, corporate housing, and other revenue		—			—			19

	Total revenue	$	593		$	735		$	1,054

	General, administrative, and other	$	(4	)	$	(1	)	$	(19	)
	Reimbursed costs		(510	)		(649	)		(936	)
	Gains and other income		25			28			54
	Interest expense		(1	)		(1	)		—
	Interest income		4			4			31
	(Provision for) reversal of provision for loan losses		(12	)		1			—
	Equity in earnings		15			3			36

Balance Sheet Data

	*($ in millions)*	At Year-end 2007			At Year-end 2006
	Current assets-accounts and notes receivable	$	42		$	76
	Deferred development		2			—
	Contract acquisition costs		33			34
	Equity and cost method investments		316			377
	Loans to equity method investees		21			27
	Long-term deferred tax asset, net		1			4
	Current liabilities:
	Other payables and accruals		(2	)		(2	)
	Other long-term liabilities		(16	)		(13	)

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if:

•

it requires assumptions to be made that were uncertain at the time the estimate was made; and

•

changes in the estimate, or different estimates that could have been selected, could have a material effect on our consolidated results of operations or financial condition.

Management has discussed the development and selection of its critical accounting estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed the disclosure presented below relating to them.

Marriott Rewards

Marriott Rewards is our frequent guest loyalty program. Marriott Rewards members earn points based on their monetary spending at our lodging operations, purchases of timeshare interval, fractional ownership, and residential products and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by car rental and credit card companies. Points, which we track on members’ behalf, can be redeemed for stays at most of our lodging operations, airline tickets, airline frequent flyer program miles, rental cars, and a variety of other awards; however, points cannot be redeemed for cash. We provide Marriott Rewards as a marketing program to participating properties. We charge the cost of operating the program, including the estimated cost of award redemption, to properties based on members’ qualifying expenditures.

We defer revenue received from managed, franchised, and Marriott-owned/leased hotels and program partners equal to the fair value of our future redemption obligation. We determine the fair value of the future redemption obligation based on statistical formulas that project timing of future point redemption based on historical levels, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These judgment factors determine the required liability for outstanding points.

Our management and franchise agreements require that we be reimbursed currently for the costs of operating the program, including marketing, promotion, communication with, and performing member services for the Marriott Rewards members. Due to the requirement that properties reimburse us for program operating costs as incurred, we receive and recognize the balance of the revenue from properties in connection with the Marriott Rewards program at the time such costs are incurred and expensed. We recognize the component of revenue from program partners that corresponds to program maintenance services over the expected life of the points awarded. Upon the redemption of points, we recognize as revenue the amounts previously deferred and recognize the corresponding expense relating to the costs of the awards redeemed.

Valuation of Goodwill

We evaluate the fair value of goodwill to assess potential impairments on an annual basis, or during the year if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We evaluate the fair value of goodwill at the reporting unit level and make that determination based upon future cash flow projections that assume certain growth projections which may or may not occur. We record an impairment loss for goodwill when the carrying value of the intangible asset is less than its estimated fair value.

Loan Loss Reserves

Lodging Senior Loans and Lodging Mezzanine and Other Loans

We measure loan impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. For impaired loans, we establish a specific impairment reserve for the difference between the recorded investment in the loan and the present value of the expected future cash flows, that assumes certain growth projections which may or may not occur, or the estimated fair value of the collateral. We apply our loan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose of applying such policy. Where we determine that a loan is impaired, we recognize interest income on a cash basis. At year-end 2007, our recorded investment in impaired loans was $112 million. We had a $92 million allowance for credit losses, leaving $20 million of our investment in impaired loans for which there was no related allowance for credit losses. At year-end 2006, our recorded investment in impaired loans was $92 million. We had a $70 million allowance for credit losses, leaving $22 million of our investment in impaired loans for which there was no related allowance for credit losses. During 2007 and 2006, our average investment in impaired loans totaled $102 million and $138 million, respectively.

Loans to Timeshare Owners

In accordance with the adoption of SOP 04-2 in 2006, we record an estimate of expected uncollectibility on notes receivable that we receive from timeshare purchasers as a reduction of revenue at the time we recognize profit on a timeshare sale. We assess uncollectibility based on pools of receivables, because we hold large numbers of homogeneous timeshare notes receivable. We estimate uncollectibles based on historical activity for similar timeshare notes receivable over the past three years. We use a technique referred to as static pool analysis, which tracks uncollectibles for each year’s sales over the life of those notes. At year-end 2007 and year-end 2006, our allowance for credit losses associated with “Loans to timeshare owners” totaled $19 million and $29 million, respectively.

Legal Contingencies

We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. We record an accrual for loss contingencies when a loss is probable and the amount of the loss can be reasonably estimated. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.

Income Taxes

We record the current year amounts payable or refundable, as well as the consequences of events that give rise to deferred tax assets and liabilities based on differences in how those events are treated for tax purposes. We base our estimate of deferred tax assets and liabilities on current tax laws and rates and, in certain cases, business plans and other expectations about future outcomes.

Changes in existing laws and rates and their related interpretations, and future business results may affect the amount of deferred tax liabilities or the valuation of deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.

OTHER MATTERS

Inflation

Inflation has been moderate in recent years and has not had a significant impact on our businesses.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

We are exposed to market risk from changes in interest rates, foreign exchange rates, and debt and equity prices, and with respect to our synthetic fuel business, changes in oil prices. We manage our exposure to these risks by monitoring available financing alternatives, through development and application of credit granting policies and by entering into derivative arrangements. We do not foresee any significant changes in either our exposure to fluctuations in interest rates or foreign exchange rates or how such exposure is managed in the future.

We are exposed to interest rate risk on our floating-rate notes receivable, our residual interests retained in connection with the sale of Timeshare segment notes receivable and the fair value of our fixed-rate notes receivable. Changes in interest rates also impact our floating-rate long-term debt and the fair value of our fixed-rate long-term debt.

We are also subject to risk from changes in debt and equity prices from our investments in debt securities and common stock, which have a carrying value of $55 million at year-end 2007, which we account for as available-for-sale securities under FAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, we do not use derivatives for trading or speculative purposes.

At year-end 2007, we were party to the following derivative instruments:

•

An interest rate swap agreement under which we receive a floating rate of interest and pay a fixed rate of interest. The swap modifies our interest rate exposure by effectively converting a note receivable with a fixed rate to a floating rate. The aggregate notional amount of the swap was $92 million and it matures in 2010.

•

Four outstanding interest rate swap agreements to manage interest rate risk associated with the residual interests we retain in conjunction with our timeshare note sales. Historically, we have been required by purchasers and/or rating agencies to utilize interest rate swaps to protect the excess spread within our sold-note pools. The aggregate notional amount of the swaps was $157 million, and they expire through 2022.

•

Option contracts to hedge the potential volatility of earnings and cash flows associated with variations in foreign exchange rates during 2008. The aggregate dollar equivalent of the notional amounts of the contracts was approximately $86 million, and they expire throughout 2008.

•

Forward contracts to hedge forecasted transactions for contracts denominated in foreign currencies. The aggregate dollar equivalent of the notional amounts was approximately $58 million, and they expire in 2008 and 2010.

•

Forward foreign exchange contracts to manage the foreign currency exposure related to certain monetary assets. The aggregate dollar equivalent of the notional amounts of the forward contracts was $133 million at year-end 2007.

•

Oil price hedges to manage the volatility associated with oil prices and the uncertainty surrounding the potential phase-out of tax credits in 2007. The hedges cover 19 million barrels of oil and expired on December 31, 2007.

The following table sets forth the scheduled maturities and the total fair value of our derivatives and other financial instruments as of year-end 2007:


	Maturities by Period
*($ in millions)*	2008		2009		2010		2011		2012		There- after			Total Carrying Amount			Total Fair Value
Assets-Maturities represent expected principal receipts, fair values represent assets.

Timeshare segment notes receivable	$	68	$	47	$	42	$	38	$	38	$	243		$	476		$	476
Average interest rate															12.70	%

Fixed-rate notes receivable	$	17	$	4	$	88	$	—	$	—	$	25		$	134		$	138
Average interest rate															12.05	%

Floating-rate notes receivable	$	4	$	—	$	4	$	20	$	19	$	32		$	79		$	79
Average interest rate													</