SECURITIESTable ANDof EXCHANGE COMMISSION Contents

~~Washington,~~SECURITIES ~~D.C.~~AND ~~20549~~EXCHANGE COMMISSION

~~FORM~~Washington, ~~10-Q~~D.C. 20549

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Quarterly Period Ended September 30, 2003
OR
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the Transition Period from to

FORM 10-Q

Commission File Number: 1-7959		Commission File Number: 1-6828
STARWOOD HOTELS & RESORTS WORLDWIDE, INC. (Exact name of Registrant as specified in its charter)		STARWOOD HOTELS & RESORTS (Exact name of Registrant as specified in its charter)
Maryland (State or other jurisdiction of incorporation or organization)		Maryland (State or other jurisdiction of incorporation or organization)
52-1193298 (I.R.S. employer identification no.)		52-0901263 (I.R.S. employer identification no.)
1111 Westchester Avenue White Plains, NY 10604 (Address of principal executive offices, including zip code)		1111 Westchester Avenue White Plains, NY 10604 (Address of principal executive offices, including zip code)
(914) 640-8100 (Registrant’s telephone number, including area code)		(914) 640-8100 (Registrant’s telephone number, including area code)


þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

~~Indicate~~For ~~by check mark whether~~ the ~~Registrants (1) have~~Quarterly ~~filed~~Period ~~all~~Ended ~~reports required to be filed by Section~~September ~~13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports)~~30, ~~and (2) have been subject to such filing requirements for the past 90 days. Yes þ No o~~ 2004

OR ~~Indicate by check mark whether the Registrant is~~ ~~an accelerated filer (as defined in Exchange Act~~ ~~Rule 12b-2). Yes þ No o~~

~~Indicate~~o ~~the~~Transition ~~number~~Report ofPursuant ~~shares~~to ~~outstanding~~Section of13 ~~each of~~or ~~the~~15(d) ~~issuer’s classes~~ of ~~common~~the ~~stock,~~Securities asExchange Act of ~~the latest practicable date:~~ 1934

~~202,245,750~~For ~~shares~~the ofTransition ~~common~~Period ~~stock, par value $0.01 per share, of Starwood Hotels & Resorts Worldwide, Inc. attached~~ from to and traded together with 202,245,750 Class B shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts, and 100 Class A shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts, all outstanding as of November 3, 2003.

~~TABLE~~Commission OFFile ~~CONTENTS~~Number: 1-7959

				Page
PART I.
Item 1.	Financial Statements
		Starwood Hotels & Resorts Worldwide, Inc.:
			Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		3
			Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002		4
			Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2003 and 2002		5
			Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002		6
		Starwood Hotels & Resorts:
			Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		7
			Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2003 and 2002		8
			Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002		9
		Notes to Financial Statements			10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations				30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk				44
Item 4.	Controls and Procedures				44
PART II.
Item 1.	Legal Proceedings				44
Item 2.	Changes in Securities and Use of Proceeds				44
Item 6.	Exhibits and Reports on Form 8-K				44

STARWOOD HOTELS &
RESORTS WORLDWIDE, INC.

1 (Exact name of Registrant as specified in its charter)

Maryland ~~PART~~(State ~~I. FINANCIAL~~or other jurisdiction ~~INFORMATION~~of incorporation or organization)

52-1193298
(I.R.S. employer identification no.)

1111 Westchester Avenue
White Plains, NY 10604
(Address of principal executive
offices, including zip code)

(914) 640-8100
(Registrant’s telephone number,
including area code)

Commission File Number: 1-6828

STARWOOD HOTELS &
RESORTS

(Exact name of Registrant as specified in its charter)

Maryland
(State or other jurisdiction
of incorporation or organization)

52-0901263
(I.R.S. employer identification no.)

1111 Westchester Avenue
White Plains, NY 10604
(Address of principal executive
offices, including zip code)

(914) 640-8100
(Registrant’s telephone number,
including area code)

Indicate by check mark whether the Registrants (1) have 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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes þ No [ ]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

207,277,986 shares of common stock, par value $0.01 per share, of Starwood Hotels & Resorts Worldwide, Inc. attached to and traded together with 207,277,986 Class B shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts, and 100 Class A shares of beneficial interest, par value $0.01 per share, of Starwood Hotels & Resorts, all outstanding as of November 4, 2004.

TABLE OF CONTENTS


		Page
PART I.
Item 1.	Financial Statements
	Starwood Hotels & Resorts Worldwide, Inc.:
	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003		3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2004 and 2003		4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2004 and 2003		5
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003		6
	Starwood Hotels & Resorts:
	Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003		7
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2004 and 2003		8
	Consolidated Condensed Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003		9
	Notes to Financial Statements		10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		46
Item 4.	Controls and Procedures		46
PART II.
Item 1.	Legal Proceedings		46
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 5.	Other Information		46
Item 6.	Exhibits and Reports on Form 8-K		46
Exhibit 10.1
Exhibit 10.2
Exhibit 31.1
Exhibit 31.2
Exhibit 31.3
Exhibit 31.4
Exhibit 32.1
Exhibit 32.2
Exhibit 32.3
Exhibit 32.4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

The following unaudited consolidated financial statements of Starwood Hotels & Resorts Worldwide, Inc. (the “Corporation”) and Starwood Hotels & Resorts (the “Trust” and, together with the Corporation, “Starwood” or the “Company”) are provided pursuant to the requirements of this Item. In the opinion of management, all adjustments necessary for fair presentation, consisting of normal recurring adjustments, have been included. ~~The~~ The consolidated financial statements ~~presented herein~~ have been prepared in accordance with the accounting policies described in the Company’s Joint Annual Report on Form 10-K for the year ended December 31, ~~2002 filed on February 28,~~ 2003 ~~as amended by our Joint Annual Report on Form 10K/ A~~ filed on ~~July~~March 72, ~~2003~~2004. See ~~the~~Note ~~notes~~1 to ~~financial~~the financial statements for the basis of presentation. The consolidated ~~financial~~ financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included ~~elsewhere~~in this ~~herein~~filing. Results for the three and nine months ended September 30, ~~2003~~2004 are not necessarily indicative of results to be expected for the full fiscal year ~~ending~~ ending December 31, ~~2003~~2004.

STARWOODTable HOTELSof & RESORTS WORLDWIDE, INC. Contents

~~CONSOLIDATED~~STARWOOD ~~BALANCE~~HOTELS ~~SHEETS~~& RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS (In millions, except share data)

		September 30,		~~September 30,~~		December 31,		~~December 31,~~
				2003				2002
		2004				2003
		(Unaudited)		~~(Unaudited)~~
ASSETS
Current assets:
Cash and cash equivalents	~~Cash and cash equivalents~~	$	231	$	~~787~~	$	427	$	~~108~~
Restricted cash	~~Restricted cash~~		189		84		81		~~108~~
	Accounts receivable, net of allowance for doubtful accounts of $52 and $45				398				398
Accounts receivable, net of allowance for doubtful accounts of $56 and $53			438				418
Inventories	~~Inventories~~		320		~~201~~		232		~~214~~
Prepaid expenses and other	~~Prepaid expenses and other~~		177		~~123~~		104		~~108~~
Total current assets		~~Total current assets~~	1,355		~~1,593~~		1,262		~~936~~
Investments			463		~~400~~		415		~~434~~
Plant, property and equipment, net			6,944		~~6,946~~		7,106		~~6,911~~
Assets held for sale					72				839
Goodwill and intangible assets, net			2,509				2,488
Goodwill and intangible assets, net					2,476				2,570
Other assets			737				623
Other assets					433				500
		$	12,008			$	11,894
				$	11,920			$	12,190
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current liabilities:
Short-term borrowings and current maturities of long-term debt		$	243			$	233
	Short-term borrowings and current maturities of long-term debt			$	442			$	870
Accounts payable			154				171
	Accounts payable				140				171
Accrued expenses			688				836
	Accrued expenses				618				723
Accrued salaries, wages and benefits			270				228
	Accrued salaries, wages and benefits				224				178
Accrued taxes and other			182				176
	Accrued taxes and other				139				188
Total current liabilities			1,537				1,644
		Total current liabilities			1,563				2,130
Long-term debt			4,258				4,393
Long-term debt					4,443				4,449
Deferred income taxes			840				898
Deferred income taxes					920				986
Other liabilities			655				574
Other liabilities					568				538
			7,290				7,509
					7,494				8,103
Minority interest			27				28
Minority interest					38				39
Exchangeable units and Class B preferred shares, at redemption value of $38.50			—				31
Exchangeable units and Class B preferred shares, at redemption value of $38.50.					33				51
Commitments and contingencies
Commitments and contingencies
Stockholders’ equity:
Stockholders’ equity:
Class A exchangeable preferred shares of the Trust; $0.01 par value; authorized
	Class A exchangeable preferred shares of the Trust; $0.01 par value; authorized 30,000,000 shares; outstanding 481,088 and 493,968 shares at September 30, 2003 and December 31, 2002, respectively				—				—
30,000,000 shares; outstanding 597,983 and 480,880 shares at September 30, 2004
	Corporation common stock; $0.01 par value; authorized 1,050,000,000 shares; outstanding 202,094,054 and 199,579,542 shares at September 30, 2003 and December 31, 2002, respectively				2				2
and December 31, 2003, respectively			—				—
	Trust Class B shares of beneficial interest; $0.01 par value; authorized 1,000,000,000 shares; outstanding 202,094,054 and 199,579,542 shares at September 30, 2003 and December 31, 2002, respectively				2				2
Corporation common stock; $0.01 par value; authorized 1,050,000,000 shares;
	Additional paid-in capital				4,962				4,905
outstanding 205,944,530 and 201,812,126 shares at September 30, 2004 and
	Deferred compensation				(13	)			(14	)
December 31, 2003, respectively			2				2
	Accumulated other comprehensive loss				(396	)			(474	)
Trust Class B shares of beneficial interest; $0.01 par value; authorized
	Accumulated deficit				(202	)			(424	)
1,000,000,000 shares; outstanding 205,944,530 and 201,812,126 shares at
		Total stockholders’ equity			4,355				3,997
September 30, 2004 and December 31, 2003, respectively			2				2
				$	11,920			$	12,190
Additional paid-in capital			5,043				4,952
Deferred compensation			(18	)			(9	)
Accumulated other comprehensive loss			(346	)			(334	)
Retained earnings (accumulated deficit)			8				(287	)
Total stockholders’ equity			4,691				4,326
		$	12,008			$	11,894

The accompanying notes to financial statements are an integral part of the above statements.

STARWOODTable HOTELSof & RESORTS WORLDWIDE, INC. Contents

~~CONSOLIDATED~~STARWOOD ~~STATEMENTS~~HOTELS OF& ~~INCOME~~RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF INCOME (In millions, except per Share data) (Unaudited)

(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenues
Owned, leased and consolidated joint venture hotels	$	811		$	735		$	2,448		$	2,288
Vacation ownership sales and services		175			129			443			327
Management fees, franchise fees and other income		105			68			299			184
Other revenues from managed and franchised properties		245			204			736			634

		1,336			1,136			3,926			3,433
Costs and Expenses
Owned, leased and consolidated joint venture hotels		617			577			1,864			1,781
Vacation ownership		132			98			334			252
Selling, general, administrative and other		74			45			244			159
Restructuring and other special credits, net		(37	)		(1	)		(37	)		(1	)
Depreciation		103			100			306			309
Amortization		4			4			13			14
Other expenses from managed and franchised properties		245			204			736			634

		1,138			1,027			3,460			3,148
Operating income		198			109			466			285
Gain on sale of VOI notes receivable		3			1			11			6
Equity earnings from unconsolidated ventures, net		6			2			22			10
Interest expense, net of interest income of $1, $2, $2 and $3		(64	)		(69	)		(193	)		(219	)
Loss on asset dispositions and impairments, net		(4	)		(3	)		(8	)		(179	)

Income (loss) from continuing operations before taxes and minority equity		139			40			298			(97	)
Income tax benefit (expense)		(34	)		7			(41	)		113
Minority equity in net loss		—			—			1			1

Income from continuing operations		105			47			258			17
Discontinued operations:
Loss from operations, net of tax expense of $0, $0, $0 and $1		—			—			—			(1	)
Gain on dispositions, net of tax (benefit) expense of $1, $0, $(33) and $40		2			1			37			206

Net income	$	107		$	48		$	295		$	222

Earnings Per Share – Basic
Continuing operations	$	0.51		$	0.23		$	1.25		$	0.09
Discontinued operations		0.01			0.01			0.18			1.01

Net income	$	0.52		$	0.24		$	1.43		$	1.10

Earnings Per Share – Diluted
Continuing operations	$	0.49		$	0.23		$	1.21		$	0.08
Discontinued operations		0.01			—			0.17			1.00

Net income	$	0.50		$	0.23		$	1.38		$	1.08

Weighted average number of Shares		208			203			207			202

Weighted average number of Shares assuming dilution		215			208			214			205

	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2003			2002			2003			2002
Revenues
Owned, leased and consolidated joint venture hotels	$	735		$	796		$	2,288		$	2,386
Other hotel and leisure		201			164			531			478
		936			960			2,819			2,864
Other revenues from managed and franchised properties		204			187			634			589
		1,140			1,147			3,453			3,453
Costs and Expenses
Owned, leased and consolidated joint venture hotels		577			583			1,781			1,739
Selling, general, administrative and other		143			123			411			318
Restructuring and other special credits, net		(1	)		(2	)		(1	)		(5	)
Depreciation		100			123			309			349
Amortization		5			6			18			16
		824			833			2,518			2,417
Other expenses from managed and franchised properties		204			187			634			589
		1,028			1,020			3,152			3,006
Operating income		112			127			301			447
Interest expense, net of interest income of $2, $0, $3 and $1		(69	)		(77	)		(219	)		(260	)
Gain (loss) on asset dispositions and impairments, net		(3	)		6			(179	)		2
		40			56			(97	)		189
Income tax benefit (expense)		7			(3	)		113			(27	)
Minority equity in net loss		—			—			1			–
Income from continuing operations		47			53			17			162
Discontinued operations:
Loss from operations, net of tax expense (benefit) of $0, $(1), $1 and $0		—			(1	)		(1	)		(2	)
Gain on dispositions, net of tax expense (benefit) of $0, $0, $40 and $(104)		1			—			206			104
Net income	$	48		$	52		$	222		$	264
Earnings Per Share — Basic
Continuing operations	$	0.23		$	0.27		$	0.09		$	0.81
Discontinued operations		0.01			(0.01	)		1.01			0.50
Net income	$	0.24		$	0.26		$	1.10		$	1.31
Earnings per Share — Diluted
Continuing operations	$	0.23		$	0.26		$	0.08		$	0.79
Discontinued operations		—			—			1.00			0.50
Net income	$	0.23		$	0.26		$	1.08		$	1.29
Weighted average number of Shares		203			201			202			201
Weighted average number of Shares assuming dilution		208			204			205			205

The accompanying notes to financial statements are an integral part of the above statements.

4 ~~The accompanying notes to financial statements are an integral part of the above statements.~~

4 Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions) (Unaudited)

(In millions)


	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2004		2003			2004			2003
Net income	$	107	$	48		$	295		$	222
Other comprehensive income, net of taxes:
Foreign currency translation		13		6			(14	)		77
Unrealized holding gains (losses)		—		(3	)		2			5
Minimum pension liability adjustments		—		—			—			(3	)
Change in fair value of derivative instruments		—		—			—			(1	)

		13		3			(12	)		78

Comprehensive income	$	120	$	51		$	283		$	300

The accompanying notes to financial statements are an integral part of the above statements. ~~(Unaudited)~~

	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2003			2002			2003			2002
Net income	$	48		$	52		$	222		$	264
Other comprehensive income (loss), net of taxes:
Foreign currency translation		6			(17	)		77			(36	)
Unrealized holding gains		(3	)		—			5			3
Minimum pension liability adjustments		—			—			(3	)		—
Change in fair value of derivative instruments		—			(1	)		(1	)		6
Early termination of derivative instruments		—			—			—			15
		3			(18	)		78			(12	)
Comprehensive income	$	51		$	34		$	300		$	252

TheTable accompanying notes to financial statements are an integral part of the above statements. Contents

5STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

~~STARWOOD~~CONSOLIDATED ~~HOTELS &~~CONDENSED ~~RESORTS~~STATEMENTS ~~WORLDWIDE,~~OF CASH FLOWS ~~INC.~~(In millions) (Unaudited)

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30,
	2004			2003
Operating Activities
Net income	$	295		$	222
Exclude:
Discontinued operations		(37	)		(205	)

Income from continuing operations		258			17
Depreciation and amortization		319			323
Loss on asset dispositions and impairments, net		8			179
Other adjustments to income from continuing operations		(19	)		90
Decrease (increase) in restricted cash		(197	)		13
Other changes in working capital		(33	)		56
Accrued and deferred income taxes and other		40			(177	)

Cash from continuing operations		376			501
Cash from discontinued operations		1			10

Cash from operating activities		377			511

Investing Activities
Purchases of plant, property and equipment		(208	)		(192	)
Proceeds from asset sales		18			1,034
Acquisitions, net of acquired cash		(65	)		—
Investments		(56	)		(7	)
Other, net		(13	)		2

Cash from (used for) investing activities		(324	)		837

Financing Activities
Revolving credit facility and short-term repayments, net		(11	)		(321	)
Long-term debt issued		300			446
Long-term debt repaid		(388	)		(654	)
Distributions paid		(172	)		(170	)
Proceeds from employee stock option exercises		251			43
Share repurchases		(232	)		—
Other, net		1			(22	)

Cash used for financing activities		(251	)		(678	)

Exchange rate effect on cash and cash equivalents		2			9

Increase (decrease) in cash and cash equivalents		(196	)		679
Cash and cash equivalents — beginning of period		427			108

Cash and cash equivalents — end of period	$	231		$	787

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	176		$	170

Income taxes, net of refunds	$	23		$	41

~~(In~~The ~~millions)~~accompanying notes to financial statements are an integral part of the above statements.

6 ~~(Unaudited)~~

		Nine Months Ended
		September 30,
		2003			2002
Operating Activities
Net income		$	222		$	264
Exclude:
Discontinued operations			(205	)		(102	)
Income from continuing operations			17			162
Loss (gain) on asset dispositions and impairments, net			179			(2	)
Depreciation and amortization			327			365
Changes in working capital			83			(12	)
Income taxes and other, net			(90	)		36
Cash from continuing operations			516			549
Cash from discontinued operations			10			12
	Cash from operating activities		526			561
Investing Activities
Purchases of plant, property and equipment			(195	)		(205	)
Proceeds from asset sales, net			1,034			18
Acquisitions, net of acquired cash and investments			(7	)		(43	)
Other, net			2			3
	Cash from (used for) investing activities		834			(227	)
Financing Activities
Revolving credit facility and short-term borrowings, net			(321	)		(208	)
Long-term debt issued			446			1,664
Long-term debt repaid			(654	)		(1,826	)
Distributions paid			(170	)		(40	)
Other, net			9			91
	Cash used for financing activities		(690	)		(319	)
Exchange rate effect on cash and cash equivalents			9			8
Increase in cash and cash equivalents			679			23
Cash and cash equivalents — beginning of period			108			107
Cash and cash equivalents — end of period		$	787		$	130
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
	Interest	$	170		$	175
	Income taxes, net of refunds	$	41		$	64

~~The~~STARWOOD ~~accompanying~~HOTELS ~~notes~~& ~~to financial statements~~RESORTS ~~are an integral part of the above statements.~~

6CONSOLIDATED BALANCE SHEETS (In millions, except share data)

STARWOOD HOTELS & RESORTS


	September 30,			December 31,
	2004			2003
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	1		$	2
Receivable, Corporation		526			465
Prepaid expenses and other		—			1

Total current assets		527			468
Investments, Corporation		848			848
Investments		28			25
Plant, property and equipment, net		3,252			3,324
Long-term receivables, Corporation, net		1,989			2,098
Goodwill and intangible assets, net		207			207
Other assets		10			8

	$	6,861		$	6,978

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	10		$	9
Accounts payable		1			4
Accrued expenses		19			20
Distributions payable, Corporation		—			183
Distributions payable		—			172

Total current liabilities		30			388
Long-term debt		438			445

		468			833

Minority interest		28			29

Exchangeable units and Class B preferred shares, at redemption value of $38.50		—			30

Commitments and contingencies
Stockholders’ equity:
Class A exchangeable preferred shares; $0.01 par value; authorized 30,000,000 shares; outstanding 597,983 and 480,880 shares at September 30, 2004 and December 31, 2003, respectively		—			—
Class A shares of beneficial interest; $0.01 par value; authorized 5,000 shares; outstanding 100 shares at September 30, 2004 and December 31, 2003		—			—
Trust Class B shares of beneficial interest; $0.01 par value; authorized 1,000,000,000 shares; outstanding 205,944,530 and 201,812,126 shares at September 30, 2004 and December 31, 2003, respectively		2			2
Additional paid-in capital		7,737			7,714
Accumulated deficit		(1,374	)		(1,630	)

Total stockholders’ equity		6,365			6,086

	$	6,861		$	6,978

~~CONSOLIDATED~~The ~~BALANCE~~accompanying ~~SHEETS~~notes to financial statements are an integral part of the above statements.

7 ~~(In millions, except share data)~~

			September 30,			December 31,
			2003			2002
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	—		$	2
	Restricted cash			1			—
	Receivable, Corporation			52			41
	Prepaid expenses and other			1			1
		Total current assets		54			44
Investments, Corporation				848			848
Investments				25			27
Plant, property and equipment, net				3,275			3,362
Assets held for sale				72			648
Long-term receivables, Corporation, net				2,393			2,070
Goodwill and intangible assets, net				223			223
Other assets				7			8
			$	6,897		$	7,230
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Short-term borrowings and current maturities of long-term debt		$	9		$	9
	Accounts payable			1			8
	Accrued expenses			21			24
	Distributions payable, Corporation			—			148
	Distributions payable			—			170
		Total current liabilities		31			359
Long-term debt				448			438
				479			797
Minority interest				31			30
Exchangeable units and Class B preferred shares, at redemption value of $38.50				30			48
Commitments and contingencies
Stockholders’ equity:
	Class A exchangeable preferred shares; $0.01 par value; authorized 30,000,000 shares; outstanding 481,088 and 493,968 shares at September 30, 2003 and December 31, 2002, respectively			—			—
	Class A shares of beneficial interest; $0.01 par value; authorized 5,000 shares; outstanding 100 shares at September 30, 2003 and December 31, 2002			—			—
	Trust Class B shares of beneficial interest; $0.01 par value; authorized 1,000,000,000 shares; outstanding 202,094,054 and 199,579,542 shares at September 30, 2003 and December 31, 2002, respectively			2			2
	Additional paid-in capital			7,715			7,704
	Accumulated deficit			(1,360	)		(1,351	)
		Total stockholders’ equity		6,357			6,355
			$	6,897		$	7,230

~~The~~STARWOOD ~~accompanying~~HOTELS ~~notes~~& ~~to financial statements~~RESORTS ~~are an integral part of the above statements.~~

7CONSOLIDATED STATEMENTS OF INCOME (In millions) (Unaudited)

STARWOOD HOTELS & RESORTS


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenues
Rent and interest, Corporation	$	136		$	131			$398			$394

		136			131			398			394

Costs and Expenses
Selling, general and administrative		—			—			2			2
Depreciation		39			39			117			125

		39			39			119			127

		97			92			279			267
Equity losses from unconsolidated joint ventures and other		—			(1	)		(1	)		(2	)
Interest expense, net		(10	)		(10	)		(27	)		(27	)
Loss on asset dispositions and impairments, net		(1	)		(2	)		(2	)		(185	)
Income tax benefit (expense)		4			(1	)		7			(3	)
Minority equity in net income		(1	)		(1	)		—			(1	)

Net income	$	89		$	77		$	256		$	49

~~CONSOLIDATED~~The ~~STATEMENTS~~accompanying OFnotes ~~INCOME~~to financial statements are an integral part of the above statements.

8 ~~(In millions)~~

(Unaudited) Table of Contents

	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2003			2002			2003			2002
Revenues
Unconsolidated joint ventures and other	$	(1	)	$	—		$	(2	)	$	1
Rent and interest, Corporation		131			135			394			439
		130			135			392			440
Costs and Expenses
Selling, general and administrative		—			—			2			2
Depreciation		39			55			125			163
		39			55			127			165
		91			80			265			275
Interest expense, net		(10	)		(9	)		(27	)		(27	)
Loss on asset dispositions and impairments, net		(2	)		—			(185	)		(3	)
Income tax expense		(1	)		(1	)		(3	)		(4	)
Minority equity in net income		(1	)		(2	)		(1	)		(2	)
Net income	$	77		$	68		$	49		$	239

STARWOOD HOTELS & RESORTS

~~The~~CONSOLIDATED ~~accompanying~~CONDENSED ~~notes~~STATEMENTS toOF ~~financial~~CASH ~~statements~~FLOWS ~~are~~(In ~~an integral part of the above statements.~~millions) (Unaudited)


	Nine Months Ended
	September 30,
	2004			2003
Operating Activities
Net income	$	256		$	49
Depreciation		117			125
Loss on asset dispositions and impairments, net		2			185
Changes in working capital		44			(343	)
Income taxes and other, net		(1	)		3

Cash from operating activities		418			19

Investing Activities
Purchases of plant, property and equipment		(72	)		(40	)
Proceeds from asset sales		25			394

Cash from (used for) investing activities		(47	)		354

Financing Activities
Long-term debt issued		—			70
Long-term debt repaid		(7	)		(60	)
Distributions paid		(172	)		(170	)
Distributions paid to Corporation		(183	)		(206	)
Proceeds from employee stock option exercises		39			8
Share repurchases		(24	)		—
Other, net		(25	)		(17	)

Cash used for financing activities		(372	)		(375	)

Decrease in cash and cash equivalents		(1	)		(2	)
Cash and cash equivalents — beginning of period		2			2

Cash and cash equivalents — end of period	$	1		$	—

Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	25		$	26

Income taxes, net of refunds	$	(3	)	$	2

~~STARWOOD~~The ~~HOTELS &~~accompanying ~~RESORTS~~notes ~~WORLDWIDE, INC~~to financial statements are an integral part of the above statements.

9 ~~AND STARWOOD HOTELS & RESORTS~~

CONSOLIDATEDTable CONDENSEDof STATEMENTS OF CASH FLOWS Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. ~~(In~~AND ~~millions)~~STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS

Note 1. Basis of Presentation ~~(Unaudited)~~

		Nine Months
		Ended
		September 30,
		2003			2002
Operating Activities
Net income		$	49		$	239
Loss on asset dispositions and impairments, net			185			3
Depreciation			125			163
Changes in working capital			(343	)		(296	)
Other, net			3			6
	Cash from operating activities		19			115
Investing Activities
Purchases of plant, property and equipment			(40	)		(49	)
Proceeds from asset sales, net			394			5
Acquisitions, net of acquired cash			—			(7	)
Other, net			—			2
	Cash from (used for) investing activities		354			(49	)
Financing Activities
Long-term debt issued			70			—
Long-term debt repaid			(60	)		(34	)
Distributions paid			(170	)		(40	)
Distributions paid to Corporation			(206	)		—
Other, net			(9	)		6
	Cash used for financing activities		(375	)		(68	)
Decrease in cash and cash equivalents			(2	)		(2	)
Cash and cash equivalents — beginning of period			2			3
Cash and cash equivalents — end of period		$	—		$	1
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
	Interest	$	26		$	26
	Income taxes	$	2		$	3

The accompanying consolidated financial statements represent (i) Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the “Corporation”), including Sheraton Holding Corporation (“Sheraton Holding”) (formerly ITT Corporation) and its subsidiaries and Starwood Hotels & Resorts and its subsidiaries (the “Trust” and together with the Corporation, “Starwood” or the “Company”), and (ii) the Trust.

Starwood is one of the leading hotel and leisure companies in the world with more than 750 properties in more than 80 countries and 110,000 employees at its owned and managed properties. With internationally renowned brands, Starwood is a fully integrated owner, operator and franchisor of hotels and resorts including: St. Regis®, The ~~accompanying~~Luxury ~~notes~~Collection®, toSheraton®, ~~financial~~Westin®, ~~statements~~Four ~~are~~Points® anby ~~integral~~Sheraton, ~~part~~and W® brands, as well as Starwood Vacation Ownership, Inc., one of the ~~above~~premier ~~statements~~developers and operators of high quality vacation interval ownership resorts. For more information, please visit www.starwood.com. Please note that the information on the Company’s website is not incorporated by reference.

9 The Trust was formed in 1969 and elected to be taxed as a real estate investment trust (“REIT”) under the Internal Revenue Code (the “Code”). The Trust is one of the largest REITs in the United States. The Corporation was formed in 1980. The Trust is currently a subsidiary of the Corporation, which indirectly holds all outstanding Class A Shares of Beneficial Interest in the Trust (“Class A Shares”). Non-voting Class B Shares of Beneficial Interest in the Trust (“Class B Shares”) trade together with the shares of Common Stock of the Corporation (each a “Corporation Share”) on a one-for-one basis, and pursuant to an agreement between the Corporation and the Trust, may be transferred only in units (“Shares”) consisting of one Corporation Share and one Class B Share.

The Corporation, through its subsidiaries, is the general partner of, and ~~STARWOOD~~held, ~~HOTELS~~as of September &30, ~~RESORTS~~2004, ~~WORLDWIDE~~an aggregate 98.4% partnership interest in SLC Operating Limited Partnership (the “Operating Partnership”). The Trust, ~~INC~~through its subsidiaries, is the general partner of, and held an aggregate 97.4% partnership interest in SLT Realty Limited Partnership (the “Realty Partnership” and, together with the Operating Partnership, the “Partnerships”) as of September 30, 2004. The units of the Partnerships (“LP Units”) held by the limited partners of the respective Partnerships are exchangeable on a one-for-one basis for Shares. At September 30, 2004, there were approximately 5.6 million LP Units outstanding (including 4.3 million LP Units held by the Corporation). For all periods presented, the LP Units are assumed to have been converted to Shares for purposes of calculating basic and diluted weighted average Shares outstanding.

10 ~~AND STARWOOD HOTELS & RESORTS~~

NOTESTable TOof FINANCIAL STATEMENTS Contents

~~Note 1~~STARWOOD HOTELS & RESORTS WORLDWIDE, INC. ~~Basis~~ ofAND ~~Presentation~~STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS – (Continued)

~~The~~Note ~~accompanying consolidated financial statements represent (i) Starwood Hotels & Resorts Worldwide, Inc~~2. ~~and~~Significant ~~its~~Accounting ~~subsidiaries (the~~Policies ~~“Corporation”), including Sheraton Holding Corporation~~ ~~and its subsidiaries and Starwood Hotels & Resorts and~~ ~~its subsidiaries (the “Trust” and together with the Corporation, “Starwood” or the “Company”), and (ii) the Trust.~~

~~Starwood~~Earnings isPer ~~one of the world’s largest hotel and leisure companies~~Share. ~~Starwood’s~~The ~~status~~following asreconciliation ~~one~~ of ~~the leading~~basic ~~hotel~~earnings ~~and leisure companies resulted~~ from continuing ~~the~~operations ~~1998 acquisitions~~to ofdiluted ~~Westin~~earnings ~~Hotels &~~from ~~Resorts~~continuing ~~Worldwide,~~operations ~~Inc.~~assumes ~~and~~the ~~certain~~conversion of ~~its~~LP ~~affiliates~~Units ~~(“Westin”)~~to ~~(the “Westin~~Shares ~~Merger”) and ITT Corporation~~ (~~the~~in ~~“ITT Merger”)~~millions, ~~renamed~~except ~~Sheraton~~per ~~Holding~~Share ~~Corporation (“Sheraton Holding”~~data).:

The Company’s principal business is hotels and leisure, which is comprised of a worldwide hospitality network of more than 700 full-service hotels as well as vacation ownership resorts primarily serving two markets: luxury and upscale.


	Three Months Ended September 30,
	2004						2003
	Earnings		Shares		Per Share		Earnings		Shares		Per Share
Basic earnings from continuing operations	$	105		208	$	0.51	$	47		203	$	0.23
Effect of dilutive securities:
Employee options and restricted stock awards		—		7				—		5

Diluted earnings from continuing operations	$	105		215	$	0.49	$	47		208	$	0.23

On October 1, 1999, the Company completed the acquisition of Starwood Vacation Ownership, Inc. (formerly Vistana, Inc.) (“SVO”), whereby SVO merged with and into a subsidiary of the Corporation and thereby became a wholly owned subsidiary of the Corporation. SVO’s principal operations include the acquisition, development and operation of vacation ownership resorts; marketing and selling vacation ownership interests (“VOIs”) in the resorts; and providing financing to customers who purchase such interests. Starwood considers SVO’s vacation ownership operations to be a separate segment from its hotel business.


	Nine Months Ended September 30,
	2004						2003
	Earnings		Shares		Per Share		Earnings		Shares		Per Share
Basic earnings from continuing operations	$	258		207	$	1.25	$	17		202	$	0.09
Effect of dilutive securities:
Employee options and restricted stock awards		—		7				—		3

Diluted earnings from continuing operations	$	258		214	$	1.21	$	17		205	$	0.08

~~The~~Included ~~Trust~~in ~~was~~the ~~formed~~basic inShare ~~1969~~numbers ~~and~~are ~~elected~~approximately to651,000 beshares and ~~taxed~~764,000 asshares aof ~~real~~Class A ~~estate~~Exchangeable ~~investment~~Preferred ~~trust~~Shares (“~~REIT~~Class A EPS”) ~~under~~and ~~the~~Class B ~~Internal~~Exchangeable ~~Revenue~~Preferred ~~Code~~Shares (~~the~~ “~~Code~~Class B EPS”). Infor ~~1980,~~ the three and nine ~~Trust~~months ~~formed~~ended ~~the~~September 30, ~~Corporation~~2004, respectively, and ~~made~~approximately a1.2 million shares ~~distribution~~for toboth the ~~Trust’s~~ ~~shareholders~~three ofand ~~one~~nine ~~share~~months ofended ~~common stock~~September 30, ~~par value $0~~2003.01 ~~per~~As ~~share,~~ of ~~the Corporation (a “Corporation~~September ~~Share”)~~30, ~~for~~2004 ~~each~~and ~~common~~2003, ~~share~~7.5 million ofshares ~~beneficial~~and ~~interest~~13.0 million shares, ~~par~~respectively, ~~value~~issuable ~~$0.01~~under ~~per~~convertible ~~share,~~debt ofwere excluded from the ~~Trust~~calculation (aof ~~“Trust~~diluted earnings per Share~~”). Until~~ ~~January 6,~~numbers ~~1999,~~as the ~~Corporation~~trigger ~~Shares~~events ~~and~~for ~~Trust Shares~~conversion ~~were~~had ~~paired~~not occurred. onIn aany ~~one-for-one~~period ~~basis~~in ~~and,~~which ~~pursuant~~such totrigger ~~an agreement~~events ~~between~~are ~~the~~met, ~~Corporation and~~ the ~~Trust,~~Shares ~~could~~ would be ~~held or~~included ~~transferred only~~ in ~~units~~the ~~(“Paired~~calculation ~~Shares”) consisting~~ of ~~one~~diluted ~~Corporation~~earnings per Share numbers and ~~one~~the interest ~~Trust~~expense ~~Share.~~associated ~~The Trust~~with isthe ~~one~~corresponding ofconvertible ~~the~~debt ~~largest~~would ~~REITs~~be added inback ~~the~~to ~~United~~basic ~~States~~earnings from continuing operations.

During 1998, Congress enacted tax legislation that had the effect of eliminating the grandfathering for certain interests in real property acquired after March 26, 1998 by a formation of a “paired share REITReclassifications.” ~~In response~~Certain toreclassifications ~~this~~have ~~legislation,~~been amade reorganization of the Corporation and the Trust (the “Reorganization”) was proposed by the Company and was approved by the Corporation and Trust shareholders on January 6, 1999. As a result of the Reorganization, the Trust became a subsidiary of the Corporation, which indirectly holds all outstanding shares of the new Class A shares of beneficial interest in the Trust (“Class A Shares”). Each outstanding Trust Share was converted into one share of the new non-voting Class B shares of beneficial interest in the Trust (a “Class B Share”). The Corporation Shares and the Class B Shares trade together on a one-for-one basis, and pursuant to ~~an agreement between~~ the ~~Corporation and the Trust, may be~~prior ~~transferred~~year ~~only~~financial instatements units (“Shares”) consisting of one Corporation Share and one Class B Share. The Reorganization was accounted for as a reorganization of two companies under common control. As such, there was no revaluation of the assets and liabilities of the combining companies. Unless otherwise stated herein, all information with respect to ~~Shares~~conform ~~refers~~ to ~~Shares~~ onthe orcurrent ~~since~~year ~~January 6, 1999 and to Paired Shares for periods before January 6, 1999~~presentation.

Stock-Based Compensation. The Company has several stock-based employee long-term incentive plans. The ~~Corporation,~~Company ~~through~~accounts ~~its~~for ~~subsidiaries,~~those isplans under the ~~general~~recognition ~~partner~~and measurement principles of, Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” and ~~held~~related interpretations. In general, no stock-based employee compensation cost is reflected in net income as ofall ~~September 30,~~options ~~2003,~~granted to employees under these plans have an exercise ~~aggregate~~price ~~98.1%~~equal ~~partnership~~to ~~interest~~the ~~in,~~fair ~~SLC~~value ~~Operating~~of ~~Limited Partnership~~the (underlying common stock on the ~~“Operating~~date ~~Partnership”)~~of grant. The ~~Trust, through~~following ~~its~~table ~~subsidiaries,~~illustrates is the ~~general~~effect ~~partner~~on ~~of,~~net income and ~~held an~~earnings ~~aggregate~~per ~~97.3%~~Share ~~partnership~~if ~~interest~~the ~~in,~~Company ~~SLT~~had ~~Realty~~applied ~~Limited~~the fair value recognition provisions of ~~Partnership~~Statement of Financial Accounting Standards (~~the~~“SFAS”) No. 123 “~~Realty~~Accounting ~~Partnership~~for Stock-Based Compensation” ~~and,~~to ~~together with~~stock-based ~~the~~employee ~~Operating~~compensation:

1011

STARWOODTable HOTELS &of RESORTS WORLDWIDE, INC. Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

NOTES TO FINANCIAL STATEMENTS — (Continued)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
				(in millions except per share data)
Net income as reported	$	107		$	48		$	295		$	222
Deduct: SFAS No. 123 compensation cost		(25	)		(23	)		(72	)		(78	)
Tax effect		9			8			25			27

Proforma net income	$	91		$	33		$	248		$	171

Earnings per Share:
Basic, as reported	$	0.52		$	0.24		$	1.43		$	1.10

Basic, proforma	$	0.44		$	0.16		$	1.20		$	0.85

Diluted, as reported	$	0.50		$	0.23		$	1.38		$	1.08

Diluted, proforma	$	0.42		$	0.16		$	1.16		$	0.83

Partnership, the “Partnerships”) as of September 30, 2003. The units of the Partnerships (“LP Units”) held by the limited partners of the respective Partnerships are exchangeable on a one-for-one basis for Shares. At September 30, 2003, there were approximately 5.7 million LP Units outstanding (including 4.3 million LP Units held by the Corporation). For all periods presented, the LP Units are assumed to have been converted to Shares for purposes of calculating basic and diluted weighted average Shares outstanding.


	Three Months Ended
	September 30,
	2004			2003
Average Black Scholes Assumptions:
Dividend Yield		2.1	%		3.1	%
Volatility		36	%		41	%
Risk-free rate		3.1	%		1.9	%
Expected life	4 yrs.			3 yrs.

Recently ~~Note 2~~Issued Accounting Standards. ~~Significant~~ In December 2003, the Financial Accounting Standards Board (“FASB”) issued ~~Policies~~SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits” (SFAS No. 132-(R)). SFAS No. 132-(R) retains the disclosure requirements in the original SFAS No. 132, but requires additional disclosures related to plan assets, plan obligations, cash flows and net periodic benefit cost of defined benefit pension and other postretirement plans. In addition, this statement requires interim period disclosure of the components of net periodic benefit costs and contributions if significantly different from previously reported amounts. The Company adopted SFAS No. 132-(R) effective December 31, 2003 for its domestic pension and postretirement plans. SFAS No. 132-(R) will be effective December 31, 2004 for the Company’s foreign pension plans.

In ~~Earnings~~January 2003, ~~Per~~the ~~Share~~FASB issued Financial Interpretation No. ~~The~~ ~~following~~(“FIN”) ~~reconciliation~~46 ofwhich ~~basic~~requires ~~earnings~~a ~~per~~variable ~~Share~~interest entity (“VIE”) to ~~diluted~~be ~~earnings~~consolidated ~~from~~by ~~continuing~~its primary ~~operations~~beneficiary ~~assumes~~(“PB”). The PB is the ~~conversion~~party ofthat LPabsorbs ~~Units~~a tomajority ~~Shares~~of ~~(in~~the VIE’s ~~millions,~~expected ~~except~~losses ~~per~~and/or ~~Share~~receives ~~data):~~a majority of the expected residual returns.

		Three Months Ended September 30,
		2003						2002
		Earnings		Shares		Per Share		Earnings		Shares		Per Share
Basic earnings from continuing operations		$	47		203	$	0.23	$	53		201	$	0.27
Effect of dilutive securities:
	Employee options and restricted stock awards		—		5				—		3
Diluted earnings from continuing operations		$	47		208	$	0.23	$	53		204	$	0.26

In December 2003, the FASB revised FIN 46 (“FIN 46-(R)”), delaying the effective date for certain entities created before February 1, 2003 and making other amendments to clarify the application of the guidance. In adopting FIN 46 and FIN 46-(R), the Company has evaluated its various variable interests to determine whether they are in VIE’s. These variable interests, which generally represent modest interests relative to the other investors in the ventures, are primarily related to the Company’s strategy to expand its role as a third-party manager of hotels and resorts, allowing the Company to increase the presence of its lodging brands and gain additional cash flow. The evaluation identified the following types of variable interests: (a) subordinated loans to ventures which have typically taken the form of first or second mortgage loans, (b) equity investments in ventures which have typically ranged from 10% to 30% of the equity, (c) guarantees to ventures which have typically related to loan guarantees on new construction projects that are well capitalized and which typically expire within a few years of the hotel’s opening and (d) other types of contributions to ventures owning hotels to secure the management or franchise contract. The Company also reviewed its other management and franchise agreements related to hotels that the Company has no other investments in and concluded that such arrangements were not variable interests since the Company is paid at a level commensurate with the services provided and on the same level as other operating liabilities and the hotel owners retain the right to terminate the arrangements under certain circumstances.

		Nine Months Ended September 30,
		2003						2002
		Earnings		Shares		Per Share		Earnings		Shares		Per Share
Basic earnings from continuing operations		$	17		202	$	0.09	$	162		201	$	0.81
Effect of dilutive securities:
	Employee options and restricted stock awards		—		3				—		4
Diluted earnings from continuing operations		$	17		205	$	0.08	$	162		205	$	0.79

IncludedTable in the Basic Share numbers are approximately 1.2 million shares of Class A EPS and Class B EPS for both the three and nine months ended September 30, 2003 and approximately 1.6 million shares for both the three and nine months ended September 30, 2002. Contents

~~Reclassifications. Certain~~STARWOOD ~~reclassifications~~HOTELS ~~have been~~& ~~made~~RESORTS toWORLDWIDE, ~~the~~INC. AND ~~prior~~STARWOOD ~~year~~HOTELS ~~financial~~& ~~statements~~RESORTS NOTES toTO ~~conform~~FINANCIAL ~~to the~~STATEMENTS ~~current~~— ~~year presentation~~(Continued)

~~Stock-Based Compensation.~~Of ~~The~~the ~~Company~~nearly ~~accounts for~~600 ~~its~~hotels ~~stock-based~~that ~~employee~~the ~~long-term~~Company ~~incentive~~manages ~~plans~~or ~~under~~franchises, the ~~recognition~~Company ~~and~~has ~~measurement~~identified ~~principles~~approximately of20 ~~APB~~hotels ~~Opinion~~that it has a variable interest Noin. 25 ~~“Accounting~~For ~~for~~those ~~Stock~~ventures ~~Issued~~that tothe ~~Employees” and~~Company ~~related~~holds ~~interpretations.~~a Novariable ~~stock-based~~interest, ~~employee~~it ~~compensation~~determined ~~cost~~that isthe ~~reflected~~Company inwas ~~net~~not ~~income~~the asPB ~~all~~and ~~options granted~~such toVIE’s ~~employees~~should ~~under~~not ~~these~~be ~~plans~~consolidated ~~have~~in the anCompany’s ~~exercise~~financial ~~price~~statements. The Company’s outstanding loan balances ~~equal~~exposed to ~~the~~losses ~~fair~~as ~~value~~a result of ~~the~~its ~~underlying~~involvement ~~common~~in ~~stock~~VIE’s ontotaled ~~the~~$82 million ~~date~~at ofSeptember 30, ~~grant~~2004. ~~The~~Equity ~~following~~investments ~~table~~and ~~illustrates~~other ~~the~~types ~~effect~~of ~~on net~~investments ~~income~~related to VIE’s totaled $42 million and ~~earnings~~$40 million, ~~per~~respectively, ~~Share~~at September 30, if2004. Information concerning the Company’s ~~had~~exposure ~~applied~~to ~~the~~loss or ~~fair~~loan ~~value~~guarantees ~~recognition~~and ~~provisions~~commitments ofto ~~Statement~~fund other types of contributions is summarized in Note 13. Commitments and Contingencies.

11 The Company adopted FIN 46 for entities created or modified subsequent to January 31, 2003 as of December 31, 2003 and adopted FIN 46-(R) as of March 31, 2004. The adoption of FIN 46 and FIN 46-(R) did not result in the consolidation of any VIE’s.

~~STARWOOD~~Note ~~HOTELS &~~3. ~~RESORTS~~Restricted ~~WORLDWIDE,~~Cash ~~INC.~~

Provisions of certain of the Company’s secured debt require that cash ~~AND~~reserves ~~STARWOOD~~be ~~HOTELS~~maintained. Additional cash reserves are required if aggregate operations of the related hotels fall below a specified level. Additional cash reserves for certain debt became required in late 2003 following a difficult period in the hospitality industry, resulting from the war in Iraq and the worldwide economic downturn. As of September &30, 2004, $7 million and $97 ~~RESORTS~~million of restricted cash is included in restricted cash and other assets, respectively, in our consolidated balance sheet related to these required cash reserves. As of December 31, 2003, $13 million was included in restricted cash in our consolidated balance sheet related to these required cash reserves. The additional cash reserves, which are expected to continue to accrue and remain restricted through the end of 2005, are not expected to have a material impact on the Company’s liquidity. Once aggregate hotel operations meet the specified levels over the required time period, the additional cash reserves, plus accrued interest, will be released to the Company.

In addition, state and local regulations governing sales of Vacation ~~NOTES~~Ownership TOInterests ~~FINANCIAL~~(“VOIs”) allow the purchaser of such a VOI to rescind the ~~STATEMENTS~~sale subsequent to its completion for a pre-specified number of days or until a certificate of occupancy is obtained. As such, cash collected from such sales during the rescission period is also classified as restricted cash in our consolidated balance sheets. At September —30, 2004 and December ~~(Continued)~~31, 2003, we have $171 million and $56 million, respectively, of such restricted cash.

~~Financial~~Note ~~Accounting Standards (“SFAS”) No~~4. ~~123~~ ~~“Accounting for Stock-Based Compensation”~~Acquisitions ~~to stock-based employee compensation:~~

		Three Months						Nine Months
		Ended						Ended
		September 30,						September 30,
		2003			2002			2003			2002
		(In millions, except per Share data)
Net income, as reported		$	48		$	52		$	222		$	264
Deduct: SFAS No. 123 compensation cost			(23	)		(26	)		(78	)		(86	)
	Tax effect		8			9			27			30
Proforma net income		$	33		$	35		$	171		$	208
Earnings per Share:
Basic, as reported		$	0.24		$	0.26		$	1.10		$	1.31
Basic, proforma		$	0.16		$	0.17		$	0.85		$	1.03
Diluted, as reported		$	0.23		$	0.26		$	1.08		$	1.29
Diluted, proforma		$	0.16		$	0.17		$	0.83		$	1.01

In March 2004, the Company acquired the 413-room Sheraton Kauai Resort on Poipu Beach in Kauai, Hawaii. The purchase price for the property was approximately $40 million and was funded from available cash. Prior to the acquisition, the Company managed the property for the former owner.

		Three Months
		Ended
		September 30,
		2003			2002
Average Black Scholes Assumptions:
	Dividend Yield		3.1	%		2.1	%
	Volatility		41	%		47	%
	Risk-free rate		1.9	%		2.6	%
	Expected life		3 yrs			3 yrs

In the fourth quarter of 2003, the Company commenced a tender offer to acquire any and all of the outstanding limited partnership units of Westin Hotels Limited Partnership, the entity that indirectly owns the Westin Michigan Avenue Hotel in Chicago, Illinois. The tender offer expired on February 20, 2004 and approximately 34,000 units were tendered to the Company and accepted for payment, representing approximately 25% of the outstanding units. The purchase price of approximately $27 million was funded from available cash.

~~Recently Issued Accounting Standards.~~ In ~~May 2003~~January 2004, the ~~Financial Accounting~~Company ~~Standards~~acquired ~~Board~~a ~~(“FASB”)~~95% ~~issued~~interest ~~SFAS No. 150~~in ~~“Accounting~~Bliss ~~for~~World ~~Certain Financial Instruments~~LLC ~~with~~which ~~Characteristics~~operates ofthree ~~both~~stand ~~Liabilities~~alone ~~and~~spas ~~Equity.”~~(two ~~This statement~~in ~~establishes~~New ~~standards~~York, ~~for~~New ~~how~~York ~~an issuer classifies~~ and ~~measures~~ ~~certain~~one ~~financial instruments with characteristics of~~in ~~both liabilities and equity~~London, ~~and~~England) ~~is effective for financial instruments entered into or modified after May 31, 2003,~~ and ~~otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. As~~ a ~~result~~beauty ~~of further~~products ~~discussion~~business bywith ~~the~~distribution ~~FASB~~through ~~on October 8, 2003, the FASB~~its ~~clarified~~own ~~that~~internet ~~minority~~site ~~interests~~and incatalogue ~~consolidated partnerships with specified finite lives should be reclassified~~ as ~~liabilities~~ ~~and~~well ~~presented at fair market value unless the interests are convertible into the equity of the parent. Fair market value adjustments occurring subsequent to July 1, 2003 would be recorded~~ as athrough ~~component~~third ofparty ~~interest~~retail ~~expense~~stores. At ~~their~~The ~~October 29,~~aggregate ~~2003~~purchase ~~meeting,~~price ~~the FASB agreed to indefinitely defer the implementation of a portion of SFAS No. 150 regarding the accounting treatment~~ for ~~minority~~ ~~interests in finite life partnerships. Therefore, until a final resolution is reached,~~ the ~~Company~~acquired ~~will~~interest ~~not~~was ~~implement this~~approximately ~~aspect of the standard. If the company were to adopt this~~$25 ~~aspect~~million ofand ~~the~~was ~~standard~~funded ~~under~~from ~~its~~available ~~current provisions, it is not expected to have a material impact on the Company’s financial statements~~cash.

InNote ~~January 2003, the FASB issued Financial Interpretation (“FIN”) No~~5. ~~46, “Consolidation~~ ofDiscontinued ~~Variable Interest Entities”~~Operations ~~(“VIE’s”) in an effort to expand and clarify~~ ~~existing accounting guidance that addresses when a company~~ should include in its financial statements the assets, liabilities and activities of another entity. FIN No. 46 is effective immediately for all enterprises with variable interests in VIE’s created after January 31, 2003. FIN No. 46 provisions must be applied to variable interests in VIE’s created before February 1, 2003 beginning in the fourth quarter of 2003. If an entity is determined to be a VIE, it must be

12 In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” as a result of the sale in June 2003 of the Hotel Principe di Savoia in Milan, Italy (“Principe”), with no continuing involvement, the accompanying 2003 consolidated financial statements reflect the results of operations of the Principe as a discontinued operation. Interest expense of $0 million and $7 million, respectively, for the three and nine months ended September 30, 2003 was allocated to discontinued operations based upon the amount of Euro denominated debt that was required to be repaid upon the consummation of the sale.

~~STARWOOD~~ For ~~HOTELS &~~the ~~RESORTS~~three ~~WORLDWIDE~~months ended September 30, 2004, the $2 million gain on ~~INC~~dispositions relates to a post-closing adjustment for the sale of the Principe.

13 ~~AND STARWOOD HOTELS & RESORTS~~

NOTESTable TOof FINANCIAL STATEMENTS — (Continued) Contents

~~consolidated~~STARWOOD byHOTELS ~~the~~& ~~enterprise~~RESORTS ~~that absorbs the majority of the VIE’s expected losses if they occur~~WORLDWIDE, ~~receives~~ ~~a majority of the VIE’s expected residual returns if they occur, or both~~INC. ~~Where it is reasonably possible that the~~ ~~company~~AND ~~will~~STARWOOD ~~consolidate~~HOTELS or& ~~disclose information about a VIE,~~RESORTS ~~the~~NOTES ~~company~~TO ~~must~~FINANCIAL ~~disclose~~STATEMENTS ~~the~~— ~~nature, purpose, size and activity~~(Continued) ~~of the VIE and the company’s maximum exposure to loss as a~~ ~~result of its involvement with the VIE in all financial~~ ~~statements issued after January 31, 2003.~~

~~FIN~~For ~~No. 46~~the ~~does~~nine ~~not~~months ~~apply~~ended toSeptember 30, ~~qualifying special purpose entities~~2004, ~~such as those typically used by~~ the ~~Company~~ togain ~~sell~~on ~~notes receivable originated by the vacation~~dispositions ~~ownership~~relates ~~business~~primarily into ~~connection with~~ the ~~sale~~favorable resolution of ~~VOIs.~~certain ~~These qualifying~~tax ~~special~~matters ~~purpose~~related ~~entities will continue~~ to be ~~accounted~~the ~~for~~1999 indivestiture ~~accordance with SFAS No. 140 “Accounting for Transfers and Servicing~~ of ~~Financial~~the ~~Assets and~~Company’s ~~Extinguishments~~gaming ~~of Liabilities — a replacement of FASB Statement No~~business. ~~125”.~~

~~The~~For ~~Company~~the ~~has~~nine ~~reviewed~~months ~~its~~ended ~~different~~September 30, ~~forms~~2003, ofthe gain on disposition ~~investments~~consists ~~and~~of at$194 million ~~this~~(pre-tax) ~~time,~~of ~~does~~gains ~~not~~recorded ~~believe~~in ~~that~~connection ~~the~~with ~~adoption~~the sale of ~~FIN~~the NoPrincipe. 46 ~~will~~Also, ~~result~~for in the ~~consolidation~~three ofand anine months ended September 30, ~~significant~~2003, ~~number~~the ofgain ~~previously~~on ~~unconsolidated~~dispositions ~~entities.~~includes ~~The adoption~~the reversal of ~~FIN No.~~$1 46million ~~may~~and ~~result~~$52 million in(pre-tax), ~~additional~~respectively, ~~disclosure~~of liabilities relating to the Company’s ~~about~~former agaming ~~limited~~business ~~number~~disposed of ~~investments~~ in ~~VIE’s~~1999. The Company believes that these ~~does~~liabilities ~~not~~are ~~expect~~no ~~such~~longer ~~disclosure~~required toas bethe ~~material~~related contingencies have been resolved.

InSummary ~~November~~financial ~~2002,~~information ~~the FASB issued FIN No. 45 “Guarantor Accounting and Disclosure Requirements~~ for ~~Guarantees,~~ ~~Including~~discontinued ~~Indirect~~operations ~~Guarantees of Indebtedness of Others”. This interpretation modifies the accounting treatment for certain guarantees and~~ is ~~effective~~as ~~for~~follows ~~all guarantees~~(in ~~issued~~millions) ~~or modified after December 31, 2002. The~~(unaudited): ~~new disclosure rules are effective for interim or annual periods~~ ending after December 15, 2002. The Company has incorporated the disclosure requirements into this filing and is monitoring its new guarantees for compliance. The adoption of FIN No. 45 did not have a material impact on the Company.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have a material impact on the Company’s consolidated financial position or cash flows; however it may affect the timing of recognizing future restructuring costs.


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2004		2003		2004		2003
Income Statement Data
Revenues	$	—	$	—	$	—	$	22
Operating income	$	—	$	—	$	—	$	7
Interest expense on debt repaid with sales proceeds	$	—	$	—	$	—	$	7
Income tax expense	$	—	$	—	$	—	$	1
Loss from operations, net of tax	$	—	$	—	$	—	$	(1	)
Gain on dispositions, net of tax	$	2	$	1	$	37	$	206

Note 36. ~~Assets Held~~ ~~for~~Restructuring ~~Sale~~and Other Special Credits

The Company ~~considers~~had ~~properties~~remaining accruals related to berestructuring ~~assets~~charges of $22 ~~held~~million ~~for~~and ~~sale~~$24 million, ~~when~~respectively, ~~management~~at ~~approves~~September 30, 2004 and ~~commits~~December 31, 2003, toof awhich ~~formal plan~~$18 million toand ~~actively~~$20 million, ~~market~~respectively, ais ~~property~~included ~~for~~in ~~sale~~other liabilities orin athe ~~signed~~accompanying ~~sales~~September 30, 2004 and December 31, 2003 ~~contract~~consolidated ~~exists~~balance sheets. ~~Upon~~During ~~designation~~the asthree anand ~~asset~~nine ~~held~~months ~~for~~ended ~~sale~~September 30, ~~the~~2004, ~~Company records~~ the ~~carrying~~Company ~~value~~reversed ofa ~~each~~$37 million ~~property~~reserve atpreviously ~~the~~recorded ~~lower~~through ofrestructuring ~~its~~and ~~carrying~~other ~~value~~special orcharges ~~its~~due ~~estimated~~to ~~fair~~a ~~value,~~favorable ~~less~~judgment in a ~~estimated~~litigation ~~costs~~matter to(see ~~sell,~~Note ~~and~~13 for details). During the ~~Company~~nine ~~stops~~months ~~recording~~ended ~~depreciation~~September 30, ~~expense.~~2003, ~~Any~~the ~~gain~~Company ~~realized~~recorded ina ~~connection~~net ~~with~~reversal ~~the sale~~of $1 million of ~~properties~~other special ~~for~~charges ~~which~~related to the ~~Company~~collections ~~has~~of ~~significant continuing~~receivables ~~involvement~~which ~~(such~~were aspreviously deemed ~~through~~uncollectible. aThe ~~management~~following ~~or franchise~~table ~~agreement)~~summarizes isrestructuring ~~deferred~~ and ~~recognized~~other special ~~over~~credits ~~the~~activity ~~life~~during of the ~~associated~~three ~~involvement~~and ~~(e.g.,~~nine ~~the~~months ~~initial~~ended ~~term~~September 30, 2004 ofand ~~the related~~2003 ~~agreement~~(in millions).:

In June 2003, the Company sold the Hotel Principe di Savoia in Milan, Italy (“Principe”) for 275 million Euro (approximately $315 million based on exchange rates at the time the sale closed) in gross cash proceeds. The Company will have no continuing involvement with the Principe, therefore the Principe results and related gain on sale are reported as discontinued operations for all periods presented. See Note 4. Discontinued Operations for further discussion.


	Noncash		Cash		Expenditures			Total
	Charges		Expenditures		Accrued			Credit
Three Months Ended September 30, 2004
Other special credits:
Reserve reversal related to a litigation matter	$	—	$	—	$	(37	)	$	(37	)

Total other special credits	$	—	$	—	$	(37	)	$	(37	)

In June 2003, the Company also sold a portfolio of assets including four hotels, a marina and shipyard, a golf club and a 51% interest in its undeveloped land in Costa Smeralda in Sardinia, Italy (“Sardinia Assets”) for 290 million Euro (approximately $340 million based on exchange rates at the time the sale closed) in gross cash proceeds. The Company continues to manage the four hotels subject to long-term management contracts. Accordingly, the results related to the Sardinia Assets prior to the sale date are not classified as discontinued


	Noncash		Cash		Expenditures			Total
	Charges		Expenditures		Accrued			Credit
Nine Months Ended September 30, 2004
Other special credits:
Reserve reversal related to a litigation matter	$	—	$	—	$	(37	)	$	(37	)

Total other special credits	$	—	$	—	$	(37	)	$	(37	)

1314

STARWOODTable HOTELS &of RESORTS WORLDWIDE, INC. Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

NOTES TO FINANCIAL STATEMENTS — (Continued)


	Noncash		Cash		Expenditures			Total
	Charges		Expenditures		Accrued			Credit
Three Months Ended September 30, 2003
Other special credits:
Adjustments to receivables previously written down	$	—	$	—	$	(1	)	$	(1	)

Total other special credits	$	—	$	—	$	(1	)	$	(1	)

operations and the gain on sale of $82 million, which is subject to final adjustments which are not expected to be material, was deferred and is being recognized in earnings over the 10.5 year life of the management contracts.


	Noncash		Cash		Expenditures			Total
	Charges		Expenditures		Accrued			Credit
Nine Months Ended September 30, 2003
Other special credits:
Adjustments to receivables previously written down	$	—	$	—	$	(1	)	$	(1	)

Total other special credits	$	—	$	—	$	(1	)	$	(1	)

AtNote ~~the end of the first quarter of 2003, the Company approved a plan to sell a portfolio of 18 non-core domestic hotels including several non-proprietary branded hotels~~7. AsNotes aReceivable ~~result,~~Securitizations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, the Company classified these hotels as held for sale in the accompanying consolidated balance sheets and ~~recorded~~ ~~an impairment charge of approximately $174 million~~Sales ~~(pre-tax) to reflect the fair value less selling costs of this~~ ~~portfolio in the first half of 2003. In the latter part of the~~ second quarter and throughout the third quarter, the Company sold 15 of these non-core domestic hotels for approximately $404 million and in October 2003, completed the sale of one additional hotel. The majority of these hotels were sold subject to franchise agreements. An additional charge of $3 million was recorded in the third quarter of 2003 primarily related to post closing adjustments to the sale prices of these hotels. The Company expects to close the remaining two sales later in 2003.

At September 30, 2004, the Company had approximately $167 million in net ~~Note~~timeshare notes receivable. From time to time, the Company securitizes or 4sells these timeshare notes receivable. ~~Discontinued~~ The Company accounts for its notes ~~Operations~~receivable securitizations and sales transactions in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities—a Replacement of FASB Statement No. 125”. The Company retains interests in the notes receivable which are transferred to special purpose entities (“SPEs”) or qualified special purpose entities (“QSPEs”) which are accounted for as over-collateralizations and interest only strips (“Beneficial Interests”). These Beneficial Interests are treated as “trading” for transactions prior to 2002 and “available-for-sale” for transactions thereafter under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”

InDuring ~~accordance~~the ~~with~~three ~~SFAS~~months ~~No.~~ended September ~~144~~30, as2004, athe ~~result of~~Company ~~the~~sold ~~sale~~$25 million of ~~the~~notes ~~Principe~~receivable ~~(see~~into ~~Note 3.~~an ~~Assets~~SPE ~~Held~~established ~~for Sale) with no continuing involvement~~ in June 2004 ~~2003, the~~(see ~~accompanying~~discussion ~~consolidated~~below) ~~financial~~resulting ~~statements~~in ~~reflect~~cash ~~the results~~proceeds of ~~operations of the Principe as a discontinued operation. Interest expense of~~ $024 million and ~~$7 million,~~ ~~respectively,~~a ~~for~~gain ~~the~~of ~~three and nine month period ended September 30, 2003 and~~ $~~4 million and~~3 ~~$11~~ million, ~~respectively,~~which ~~for~~is ~~the~~included ~~three~~in ~~and~~gain ~~nine~~on ~~month periods~~sale ~~ended September 30, 2002 was allocated to discontinued operations based upon the amount~~ of ~~Euro denominated~~VOI ~~debt~~notes ~~that~~receivable ~~was~~in ~~required to be repaid upon~~ the ~~consummation~~consolidated ofstatements ~~the sale. The amount~~ of ~~Euro denominated debt allocated to discontinued operations was approximately $284 million at December 31, 2002~~income. ~~Summary financial~~ ~~information for discontinued operations is as follows (in~~ ~~millions) (unaudited):~~

	December 31,
	2002
Balance Sheet Data
Total long lived assets	$	63
Goodwill	$	55
Total assets	$	123
Total liabilities	$	11
Debt allocated or attributed to discontinued operations	$	284
Working capital deficiency	$	(2	)

In June 2004, the Company sold, without recourse, through an SPE, $63 million of notes receivable originated in connection with the sale of VOIs. The Company continues to service the sold notes. This sale and servicing arrangement was negotiated on an arms-length basis based on market conditions. The Beneficial Interests in the sold notes are economically equivalent to over-collateralization and an interest-only strip that provides credit enhancement to the third-party purchaser of the notes. The right to receive cash flows from the Beneficial Interests is limited to cash available after paying the SPE’s financing expenses, program fees and absorbing credit losses related to the sold notes. Net cash proceeds received from this sale of notes receivable were approximately $57 million. Gains from the sale of these notes totaled $7 million and are reflected in gain on sale of VOI notes receivable in the statement of income for the nine months ended September 30, 2004. An additional $1 million of gains were recognized due to the substitution of defaulted notes in the nine months ended September 30, 2004 pursuant to the substitution rights described below.

	Three Months					Nine Months
	Ended					Ended
	September 30,					September 30,
	2003		2002			2003			2002
Income Statement Data
Revenues	$	—	$	10		$	22		$	32
Operating income	$	—	$	2		$	7		$	9
Interest expense on debt repaid with sales proceeds	$	—	$	4		$	7		$	11
Income tax expense (benefit)	$	—	$	(1	)	$	1		$	—
Loss from operations, net of tax	$	—	$	(1	)	$	(1	)	$	(2	)
Gain on disposition, net of tax	$	1	$	—		$	206		$	104

During the nine months ended September 30, 2003, the Company sold $30 million of notes receivable into a then-existing SPE resulting in a gain of $4 million, which is included in gain on sale of VOI notes receivable in the consolidated statements of income. An additional $2 million of gains were recognized due to the substitution of defaulted notes in the nine months ended September 30, 2003 pursuant to the substitution rights described below.

14 At September 30, 2004, $292 million of principal balances are outstanding under sales of receivables. Delinquencies of more than 90 days on these receivables at September 30, 2004 amounted to approximately $4 million.

15 ~~STARWOOD HOTELS & RESORTS WORLDWIDE, INC.~~

ANDTable STARWOODof HOTELS & RESORTS Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

~~For~~Under the ~~nine~~existing ~~months~~receivable ~~ended September 30~~sales, ~~2003,~~ the ~~gain~~Company ~~from~~has ~~disposition~~the ~~consists~~option ~~of $194 million~~to ~~(pre-tax)~~repurchase ofdefaulted ~~gains~~notes ~~recorded in connection~~ with ~~the~~certain ~~sale~~limitations of(as ~~the Principe~~defined) onincluded ~~June 30, 2003 and~~ in the ~~reversal~~transactions ~~of $52 million~~for ~~(pre-tax)~~their ofoutstanding ~~reserves~~principal ~~relating~~amounts. toThe ~~the~~ Company’s ~~former~~has ~~gaming~~been able ~~business~~to ~~disposed~~resell ofVOIs inunderlying ~~1999.~~the ~~The Company~~notes ~~believes~~repurchased ~~that~~under these ~~reserves~~provisions without ~~are~~incurring nosignificant ~~longer required~~losses.

~~During~~At the ~~second~~time ~~quarter~~ of ~~2002,~~each ~~the~~receivable ~~Company recorded~~sale aand ~~gain~~at ofthe ~~$104~~end ~~million~~of ~~from~~each ~~discontinued operations~~financial ~~primarily~~reporting ~~related to Internal Revenue Service regulations issued in 2002~~period, ~~which allowed~~ the Company toestimates ~~recognize a tax benefit from a loss on~~ the ~~1999~~fair ~~sale~~value of its ~~former gaming business. The~~Beneficial ~~tax~~Interests ~~loss~~using ~~was~~a ~~previously~~discounted ~~disallowed~~cash ~~under~~flow ~~the old regulations~~model. ~~The~~ ~~remaining~~All ~~gain~~assumptions ~~resulted~~used ~~from~~in ~~an adjustment to~~ the ~~Company’s~~models ~~tax~~are ~~basis~~reviewed inand ~~its~~updated, ~~World~~if ~~Directories subsidiary~~necessary, ~~which~~ ~~was~~based ~~disposed~~on ofcurrent intrends ~~early 1998. The increase in the tax~~and ~~basis~~historical ~~has the effect of reducing the deferred tax liability relating to the gain on this disposition~~experience.

The Company has completed a sensitivity analysis on the net present value ~~Note 5~~of the Beneficial Interests to measure the change in value associated with independent changes in individual key variables. ~~Restructuring~~ The methodology used applied unfavorable changes that would be considered statistically significant to the key variables of expected prepayment rate, discount rate and ~~Other~~expected ~~Special~~gross credit ~~Credits~~losses. The net present value of Beneficial Interests at September 30, 2004 was approximately $56 million. The decreases in value of the Beneficial Interests as a result of various changes in key variables are as follows (in millions):

The Company had remaining accruals related to restructuring charges of $25 million at September 30, 2003 and December 31, 2002, of which $21 million is included in other liabilities in the accompanying September 30, 2003 and December 31, 2002 consolidated balance sheets. During the nine months ended September 30, 2003, the Company recorded a net reversal of $1 million of other special charges related to the collections of receivables which were previously deemed uncollectible. During the nine months ended September 30, 2002, the Company recorded a net reversal of $5 million of other special charges primarily related to sales of its investments in certain e-business ventures previously deemed impaired and the collections of receivables which were previously deemed uncollectible. The following table summarizes restructuring and other special credits activity during the three and nine months ended September 30, 2003 and 2002:


	Beneficial
	Interests
Annual prepayment rate:
100 basis points-dollars	$	0.4
100 basis points-percentage		0.7	%
200 basis points-dollars	$	0.8
200 basis points-percentage		1.4	%
Discount rate:
100 basis points-dollars	$	1.4
100 basis points-percentage		2.7	%
200 basis points-dollars	$	2.8
200 basis points-percentage		5.3	%
Gross annual rate of credit losses:
100 basis points-dollars	$	3.5
100 basis points-percentage		6.6	%
200 basis points-dollars	$	6.9
200 basis points-percentage		13.0	%

		Noncash		Cash		Expenditures			Total
		Charges		Expenditures		Accrued			Credit
Three Months Ended September 30, 2003
Other special credits:
	Adjustments to receivables previously written down	$	—	$	—	$	(1	)	$	(1	)
Total other special credits		$	—	$	—	$	(1	)	$	(1	)

Note 8. Derivative Financial Instruments

		Noncash		Cash		Expenditures			Total
		Charges		Expenditures		Accrued			Credit
Nine Months Ended September 30, 2003
Other special credits:
	Adjustments to receivables previously written down	$	—	$	—	$	(1	)	$	(1	)
Total other special credits		$	—	$	—	$	(1	)	$	(1	)

The Company enters into interest rate swap agreements to manage interest expense. The Company’s objective is to manage the impact of interest rates on the results of operations, cash flows and the market value of the Company’s debt.

15 In March 2004, the Company terminated certain interest rate swap agreements, with a notional amount of $1 billion under which the Company was paying floating rates and receiving fixed rates of interest (“Fair Value Swaps”), resulting in a $33 million cash payment to the Company. The proceeds were used for general corporate purposes and will result in a reduction of the interest expense on the corresponding underlying debt (Sheraton Holding Public Debt and Senior Notes) through 2007, the scheduled maturity of the terminated Fair Value Swaps. In order to adjust its fixed versus floating rate debt position, the Company immediately entered into two new Fair Value Swaps with an aggregate notional amount of $300 million.

The new Fair Value Swaps hedge the change in fair value of certain fixed ~~STARWOOD~~rate ~~HOTELS~~debt related to fluctuations in interest rates and mature in 2012. The Fair Value Swaps modify the Company’s interest rate exposure by effectively converting debt with a fixed rate to a floating rate. The fair value of the Fair Value Swaps was a liability of approximately $14 &million ~~RESORTS~~at ~~WORLDWIDE~~September 30, ~~INC~~2004.

16 ~~AND STARWOOD HOTELS & RESORTS~~

NOTESTable TOof FINANCIAL STATEMENTS — (Continued) Contents

		Noncash		Cash		Expenditures			Total
		Charges		Expenditures		Accrued			Credit
Three Months Ended September 30, 2002
Other special credits:
	Adjustments to e-business investment previously written down	$	—	$	—	$	(2	)	$	(2	)
Total other special credits		$	—	$	—	$	(2	)	$	(2	)

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS — (Continued)

		Noncash		Cash		Expenditures			Total
		Charges		Expenditures		Accrued			Credit
Nine Months Ended September 30, 2002
Other special credits:
	Adjustments to e-business investments previously written down	$	—		—	$	(3	)	$	(3	)
	Adjustments to receivables previously written down		—		—		(4	)		(4	)
	Argentina expropriation loss		2		—		—			2
Total other special credits		$	2	$	—	$	(7	)	$	(5	)

From time to time, the Company uses various hedging instruments to manage the foreign currency exposure associated with the Company’s foreign currency denominated assets and liabilities (“Foreign Currency Hedges”). At September 30, 2004, the Company had two Foreign Currency Hedges outstanding with a U.S. dollar equivalent of the contractual amount of approximately $304 million. These contracts hedge certain Euro-denominated assets and mature through February 2005. Changes in the fair value of the hedging instruments are classified in the same manner as changes in the underlying asset due to fluctuations in foreign currency exchange rates. The fair value of the Foreign Currency Hedges at September 30, 2004 was a liability of approximately $6 million.

Periodically, the Company hedges the net assets of certain international ~~Note 6~~subsidiaries (“Net Investment Hedges”) using various hedging instruments to manage the translation and economic exposures related to the Company’s net investments in these subsidiaries. ~~Notes~~ The Company measures the effectiveness of ~~Receivable~~derivatives ~~Securitizations~~designated as Net Investment Hedges by using the changes in forward exchange rates because this method best reflects the Company’s risk management strategies and ~~Sales~~the economics of those strategies in the financial statements. Under this method, the change in fair value of the hedging instrument attributable to the changes in forward exchange rates is reported in stockholders’ equity to offset the translation results on the hedged net investment. The remaining change in fair value of the hedging instrument, if any, is recognized through income. As of September 30, 2004, the Company had one Net Investment Hedge with a U.S. dollar equivalent of the contractual amount of $243 million that matures in June 2005. The Net Investment Hedge minimizes the effect fluctuations in foreign currency exchange rates have on a portion of the Company’s net investment in certain Euro-denominated subsidiaries (“Euro Net Investment Hedges”). The fair value of the Euro Net Investment Hedge at September 30, 2004 was a liability of approximately $6 million.

AtThe ~~September 30,~~counterparties ~~2003, the Company has approximately $154 million in net timeshare notes receivable. From time~~ to ~~time,~~ the Company’s ~~securitizes~~derivative orfinancial ~~sells these~~instruments ~~timeshare notes receivable. The Company accounts for its~~are ~~notes~~major ~~receivable~~financial ~~securitizations and sales as transactions in accordance with SFAS No~~institutions. ~~140.~~ The Company ~~accounted~~does ~~for both~~not ofexpect ~~the~~its ~~transactions described below as SFAS No. 140~~derivative ~~sales.~~financial ~~The~~instruments ~~Company retains interests in the assets transferred~~ to ~~qualified~~significantly ~~and~~impact ~~non-qualified~~earnings ~~special~~in purpose entities which are accounted for as over-collateralizations and interest only strips (“Beneficial or Retained Interests”). These Beneficial or Retained Interests are treated as “trading” for transactions prior to 2002 and “available-for-sale” for transactions thereafter under the ~~provisions~~next ~~of SFAS No. 115 “Accounting for Certain~~twelve ~~Investments in Debt and Equity Securities~~months.”

~~During~~Note the nine months ended September 30, 2003, the Company sold $30 million of notes receivable into existing special purpose entities (see discussion below), resulting in a gain of $4 million, which is included in other hotel and leisure revenues in the consolidated statements of income9. ~~An additional $2 million of gains were~~Debt ~~recognized due to the substitution of defaulted notes in the~~ ~~nine month periods ended September 30, 2003, pursuant to~~ ~~the substitution rights described below.~~

In ~~June 2002~~August 2004, the Company ~~sold,~~completed ~~without recourse, through~~ a ~~special~~$300 million ~~purpose~~addition ~~entity~~to (the ~~“SPE”), notes~~term ~~receivable~~loan ~~originated~~under byits ~~the~~existing ~~Company’s~~Senior ~~vacation~~Credit ~~ownership operations~~Facility. inThe ~~connection~~Senior ~~with~~Credit ~~the~~Facility ~~sale~~now consists of ~~VOIs~~a $1.0 billion Ifrevolving ~~certain conditions~~loan ~~are~~and ~~not met, the Company may be obligated to repurchase~~ a ~~transferred~~$600 million ~~note~~term ifloan, ~~representations or warranties~~each ~~made~~maturing byin ~~the~~2006 ~~Company~~ with ~~regard~~a toone ~~the~~year ~~transferred~~extension ~~note~~option ~~are found~~and ~~not to have been accurate at the date of transfer. The Company may elect to substitute~~ a ~~non-qualifying~~current ~~note~~interest ~~with~~rate ~~another~~of ~~qualifying~~LIBOR ~~note,~~plus ~~if available~~1. ~~The Company continues to service the sold notes~~25%. The Company’s right to receive cash flows from the Beneficial and Retained Interests is limited to cash available after paying the SPE’s financing expenses, program fees and absorbing credit losses related to the sold notes. Net cash proceeds ~~received from this sale of notes receivable through September 30, 2002~~ were ~~approximately $102 million.~~used ~~Gains~~to ~~from~~repay ~~the~~a ~~sale~~portion of ~~these notes totaled $12 million for~~ the ~~nine months ended September 30,~~existing ~~2002~~revolving ~~and~~credit ~~are~~facility ~~included in other hotel~~ and ~~leisure~~for ~~revenues~~general incorporate ~~the consolidated statements of income~~purposes. ~~An additional $1 million~~

16 In May 2001, the Company sold an aggregate face amount of $572 million Series B zero coupon convertible senior notes (along with $244 million of Series A notes, which were subsequently repurchased in May 2002) due 2021. The Series B convertible notes were convertible only when the market price of the Company’s Shares exceeded 120% of the then-accreted conversion price of the convertible senior notes. The maximum conversion of notes was approximately 5.8 million Shares. Holders of Series B Convertible Senior Notes put the majority of these notes to the Company in May 2004 for a purchase price of approximately $311 million, leaving notes with an accreted value of approximately $20 million outstanding as of September 30, 2004 (maximum conversion of approximately 342,000 Shares).

~~STARWOOD~~Note ~~HOTELS &~~10. ~~RESORTS~~Pension ~~WORLDWIDE,~~and Postretirement Benefit Plans ~~INC.~~

The following table presents the components of net periodic benefit cost ~~AND~~for ~~STARWOOD~~the ~~HOTELS~~three and nine months ended September &30, 2004 and 2003 (in millions): ~~RESORTS~~

17 ~~NOTES TO FINANCIAL STATEMENTS — (Continued)~~

ofTable gains was recognized due to the substitution of defaulted notes in the nine month period ending September 30, 2002 pursuant to the substitution rights described below. Contents

AtSTARWOOD ~~September 30,~~HOTELS ~~2003,~~& ~~$110 million~~RESORTS ~~of principal~~WORLDWIDE, ~~balances are outstanding under the sale of receivables in 2001 and an additional $126 million of principal balances are outstanding under the sales of receivables in 2002~~INC. ~~Delinquencies~~AND ofSTARWOOD ~~more~~HOTELS ~~than~~& ~~90 days on these receivables at~~RESORTS ~~September 30,~~NOTES ~~2003~~TO ~~amounted~~FINANCIAL toSTATEMENTS ~~approximately $3 million~~— ~~and $2 million for the sales of receivables~~(Continued) ~~in 2001 and 2002, respectively.~~

Under receivable sales completed in 2001 and 2002, the Company has an option to repurchase defaulted notes (as defined) included in the transactions for their outstanding principal amounts. The Company has been able to resell vacation ownership interests underlying the loans that it repurchased under these provisions without incurring significant losses.


	Three Months Ended September 30,
				2004									2003

	Pension			Foreign Pension			Postretirement			Pension			Foreign Pension			Postretirement
	Benefits			Benefits			Benefits			Benefits			Benefits			Benefits
Service cost	$	—		$	1.1		$	—		$	—		$	0.9		$	—
Interest cost		0.3			2.0			0.4			0.4			1.9			0.6
Expected return on plan assets		—			(2.0	)		(0.2	)		(0.2	)		(1.8	)		(0.3	)
Amortization of:
Prior service income		—			(0.1	)		—			—			(0.1	)		—
Actuarial (gain) loss		(0.1	)		0.6			(0.1	)		(0.1	)		0.6			—

Net periodic benefit cost	$	0.2		$	1.6		$	0.1		$	0.1		$	1.5		$	0.3

At the time of the receivable sales in 2001 and 2002 and at the end of each financial reporting period, the Company estimates the fair value of its Beneficial and Retained Interests using a discounted cash flow model. All assumptions used in the models are reviewed and updated, if necessary, based on current trends and historical experience.


	Nine Months Ended September 30,
				2004									2003

	Pension			Foreign Pension			Postretirement			Pension			Foreign Pension			Postretirement
	Benefits			Benefits			Benefits			Benefits			Benefits			Benefits
Service cost	$	—		$	3.2		$	0.1		$	—		$	2.9		$	0.1
Interest cost		0.8			6.0			1.3			1.4			5.6			1.5
Expected return on plan assets		(0.1	)		(5.8	)		(0.7	)		(0.7	)		(5.4	)		(0.8	)
Amortization of:
Prior service income		—			(0.3	)		—			—			(0.3	)		—
Actuarial (gain) loss		(0.1	)		1.8			(0.1	)		(0.2	)		1.8			—

SFAS 87 cost/SFAS 106 cost	$	0.6		$	4.9		$	0.6		$	0.5		$	4.6		$	0.8

SFAS 88 settlement gain		(1.6	)		—			—			(0.3	)		—			—

Net periodic benefit cost (income)	$	(1.0	)	$	4.9		$	0.6		$	0.2		$	4.6		$	0.8

~~The~~For ~~Company has completed a sensitivity analysis on~~ the ~~net~~three ~~present~~and ~~value~~nine ofmonths ~~the~~ended ~~Beneficial~~September 30, ~~and~~2004, ~~Retained Interests to measure~~ the ~~change~~Company ~~in value associated with~~has ~~independent~~contributed ~~changes~~$0.3 million inand ~~individual key variables~~$0.9 million, ~~The methodology used applied unfavorable changes that would be considered statistically significant for the key variables of prepayment rate~~respectively, ~~discount~~to ~~rate~~its ~~and expected gross credit losses. The net~~domestic ~~present~~pension ~~value~~plans ~~of Beneficial~~ and ~~Retained Interests at September 30, 2003 was approximately~~ $200.8 million and ~~approximately~~ $292.1 million, respectively., ~~The~~to ~~decrease in~~its ~~value~~postretirement ofbenefit ~~the Beneficial and Retained Interests as a result of~~plan. ~~various changes in key variables are as follows (in millions):~~

		Beneficial			Retained
		Interests			Interests
Annual prepayment:
	100 basis points-dollars	$	0.1		$	0.2
	100 basis points-percentage		0.5	%		0.9	%
	200 basis points-dollars	$	0.2		$	0.5
	200 basis points-percentage		1.0	%		1.7	%
Discount rate:
	100 basis points-dollars	$	0.3		$	0.6
	100 basis points-percentage		1.6	%		2.1	%
	200 basis points-dollars	$	0.6		$	1.2
	200 basis points-percentage		3.2	%		4.1	%
Gross annual rate of credit losses:
	100 basis points-dollars	$	1.0		$	1.9
	100 basis points-percentage		4.9	%		6.7	%
	200 basis points-dollars	$	1.9		$	3.8
	200 basis points-percentage		9.6	%		13.1	%

Note 11. Stockholders’ Equity

~~Note~~ Exchangeable 7Units and Preferred Shares. ~~Derivative~~During ~~Financial~~1998, ~~Instruments~~5.5 million shares of Class B EPS and approximately 800,000 exchangeable units were issued by the Trust in connection with the acquisition of Westin Hotels & Resorts Worldwide, Inc. (the “Westin Merger”). Class B EPS had a liquidation preference of $38.50 per share and provided the holders with the right, from the fifth anniversary of the Westin Merger, for a one-year period, which expired on January 3, 2004, to require the Trust to redeem such shares in cash at a price of $38.50. After January 4, 2004, the Trust may choose to settle Class B EPS redemptions for $38.50 in cash or convert them into shares of Class A EPS (at a $38.50 conversion price). Exchangeable units are convertible on a one-for-one basis (subject to certain adjustments) to Class B EPS or Shares. For the nine months ended September 30, 2004, approximately 676,000 shares of Class B EPS were redeemed; 408,000 shares were redeemed for approximately $16 million in cash prior to January 4, 2004 and subsequent to January 4, 2004, at the Trust’s option, 109,000 shares of Class B EPS were converted into 119,000 Class A EPS and 159,000 shares were redeemed for approximately $6 million in cash. At September 30, 2004, there are approximately 126,000 shares of Class B EPS and exchangeable units outstanding.

18 The Company enters into interest rate swap agreements to manage interest expense. The Company’s objective is to manage the impact of interest rates on the results of operations, cash flows and the market value of the Company’s debt. At September 30, 2003, the Company had one outstanding interest rate swap

17 Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

~~AND~~Note ~~STARWOOD~~12. ~~HOTELS &~~Business Segment Information ~~RESORTS~~

The Company has two operating segments: hotels and vacation ownership. ~~NOTES~~The TOhotel ~~FINANCIAL~~segment generally represents a worldwide network of owned, leased and ~~STATEMENTS — (Continued)~~consolidated joint venture hotels and resorts operated primarily under the Company’s proprietary brand names including St. Regis®, The Luxury Collection®, Sheraton®, Westin®, W® and Four Points® by Sheraton as well as hotels and resorts which are managed or franchised under these brand names in exchange for fees. The vacation ownership segment includes the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs and providing financing to customers who purchase such interests.

~~agreement~~ The ~~under~~performance ~~which~~of the ~~Company~~hotels ~~pays a fixed rate~~ and ~~receives~~vacation aownership ~~variable~~segments ~~rate~~is ~~of interest (the~~evaluated ~~“Interest~~primarily ~~Rate~~on ~~Swap~~operating ~~Agreement”).~~profit ~~The~~before ~~notional~~corporate ~~amount of~~selling, ~~the~~general ~~Interest Rate Swap Agreement was approximately~~and ~~$47 million~~administrative ~~and~~expense, ~~the~~interest, ~~estimated~~gains ~~fair~~on ~~value of~~ the ~~Interest Rate~~sale ~~Swap Agreement was a liability~~ of ~~approximately~~real ~~$50~~estate,~~000~~ ~~as of~~restructuring ~~September 30,~~and ~~2003.~~other ~~This~~special ~~agreement~~charges is(credits), ~~scheduled~~and toincome ~~mature~~taxes. inThe ~~December~~Company ~~2003~~does ~~and,~~not ~~upon~~allocate ~~maturity,~~these ~~any~~items ~~unrealized~~to ~~gains or~~its ~~losses will be recognized in the Company’s earnings~~segments.

At September 30, 2003, the Company also had five outstanding interest rate swap agreements under which the Company pays floating rates and receives fixed rates of interest (the “Fair Value Swaps”). The ~~aggregate~~following ~~notional amount~~table ofpresents ~~the~~revenues, ~~Fair~~operating ~~Value~~income, ~~Swaps was $1.050 billion. The Fair~~capital ~~Value~~expenditures ~~Swaps hedge the change in fair value of certain fixed rate debt related to fluctuations in interest rates~~ and ~~mature through~~assets ~~2007.~~for ~~The Fair Value Swaps modify~~ the Company’s ~~interest~~ ~~rate~~reportable ~~exposure~~segments by(in ~~effectively converting debt with a~~millions): ~~fixed rate to a floating rate. The fair value of the Fair Value~~ ~~Swaps was an asset of approximately $23 million at September 30, 2003.~~

From time to time, the Company uses various hedging instruments to hedge the foreign currency exposure associated with the Company’s non-U.S.-dollar denominated assets and liabilities (“Foreign Currency Hedges”). At September 30, 2003, the Company had one Foreign Currency Hedge outstanding with a U.S. dollar equivalent of the contractual amount of the contract of approximately $167 million. This contract matures August 2004. The fair value of this hedge is a liability of approximately $11 million at September 30, 2003.


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2004			2003			2004			2003
Revenues:
Hotel	$	1,143		$	992		$	3,429		$	3,061
Vacation Ownership		193			144			497			372

Total	$	1,336		$	1,136		$	3,926		$	3,433

Operating income:
Hotel	$	157		$	102		$	473		$	315
Vacation Ownership		41			28			101			67

Total segment operating income		198			130			574			382
Selling, general, administrative and other		(37	)		(22	)		(145	)		(98	)
Restructuring and other special credits, net		37			1			37			1

Operating income		198			109			466			285
Gain on sale of VOI notes receivable		3			1			11			6
Equity earnings (loss) from unconsolidated ventures, net:
Hotel		4			(1	)		15			5
Vacation Ownership		2			3			7			5
Interest expense, net		(64	)		(69	)		(193	)		(219	)
Loss on asset dispositions and impairments, net		(4	)		(3	)		(8	)		(179	)

Income (loss) from continuing operations before taxes and minority equity	$	139		$	40		$	298		$	(97	)

Capital expenditures:
Hotel	$	51		$	53		$	163		$	137
Vacation Ownership		11			7			19			37
Corporate		10			6			26			18

Total	$	72		$	66		$	208		$	192

Periodically, the Company hedges the net assets of certain international subsidiaries (“Net Investment Hedges”) using various hedging instruments to manage the translation and economic exposures related to the Company’s investments in these subsidiaries. The Company measures the effectiveness of derivatives designated as Net Investment Hedges by using the changes in forward exchange rates because this method best reflects the Company’s risk management strategies and the economics of those strategies in the financial statements. Under this method, the change in fair value of the hedging instrument attributable to the changes in forward exchange rates is reported in stockholders’ equity to offset the translation results on the hedged net investment. The remaining change in fair value of the hedging instrument, if any, is recognized through income. As of September 30, 2003, the Company had two Net Investment Hedges on a portion of the Company’s Euro-denominated subsidiaries (“Euro Net Investment Hedges”). The Euro Net Investment Hedges minimize currency risk arising from Euro-based net assets. The Euro Net Investment Hedges have a total notional amount of 200 million Euro and mature in June 2004. The fair value of these hedges is a liability of approximately $5 million at September 30, 2003.


	September 30, 2004		December 31, 2003
Assets:
Hotel	$	10,772	$	10,922
Vacation Ownership		1,169		879
Corporate		67		93

Total	$	12,008	$	11,894

19 ~~The Company does not expect its derivative financial instruments to significantly impact earnings for the next twelve months.~~

NoteTable 8.of Stockholders’ EquityContents

~~Exchangeable~~STARWOOD ~~Preferred~~HOTELS ~~Shares. During~~& ~~1998,~~RESORTS ~~5.5 million shares of Class B EPS and approximately 800~~WORLDWIDE,~~000 exchangeable~~ ~~units were issued by the Trust in connection with the Westin Merger~~INC. ~~Exchangeable units and Class B EPS~~ ~~have~~AND aSTARWOOD ~~liquidation~~HOTELS ~~preference~~& ~~of $38.50 per share and provide~~RESORTS ~~the~~NOTES ~~holders~~TO ~~with~~FINANCIAL ~~the~~STATEMENTS ~~right,~~— from and after the fifth anniversary of the Westin Merger, which began on January 2, 2003, to require the Trust to redeem such shares at a price of $38.50 for a one-year period after which, they are convertible only into Shares on a one-for-one basis. Shares of exchangeable units and Class B EPS are convertible on a one-for-one basis (~~subject to certain adjustments~~Continued) ~~to Class A EPS.~~ ~~During the nine months ended September 30, 2003, in~~ ~~accordance with the terms of the Class B EPS discussed~~ above, 463,010 units of Class B EPS were put back to the Company for approximately $18 million. At September 30, 2003, there are approximately 870,000 Class B EPS and exchangeable units outstanding that may be put back to the Company before January 2, 2004.

18Note 13. Commitments and Contingencies

Guaranteed Loans and Commitments. In limited cases, the Company has made ~~STARWOOD~~loans ~~HOTELS~~to owners of or partners in hotel or resort ventures for which the Company has a management or franchise agreement. Loans outstanding under this program totaled $162 &million ~~RESORTS~~at ~~WORLDWIDE~~September 30, 2004. The Company evaluates ~~INC~~these loans for impairment, and at September 30, 2004, believes these loans are collectible. Unfunded loan commitments aggregating $61 million were outstanding at September 30, 2004, none of which are expected to be funded in 2004 but $46 million are expected to be funded in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. The Company also has $58 million of equity and other potential contributions associated with managed or joint venture properties, $18 million of which is expected to be funded in 2004.

The Company participates in programs with unaffiliated lenders in which ~~AND~~the ~~STARWOOD~~Company ~~HOTELS~~may partially guarantee loans made to facilitate third-party ownership of hotels that the Company manages or franchises. As of September 30, 2004, the Company was a guarantor for loans which could reach a maximum of $114 &million relating to three hotels opened in the past three years: the St. ~~RESORTS~~Regis in Monarch Beach, California, which opened in mid-2001; the Westin Kierland Resort and Spa in Scottsdale, Arizona, which opened in November 2002; and the Westin in Charlotte, North Carolina, which opened in April 2003. In connection with the loan guarantee for the Westin Charlotte, the Company also entered into a guarantee to fund working capital shortfalls for this resort through 2005. No significant fundings are anticipated under this working capital guarantee. The Company does not anticipate any funding under the remaining loan guarantees in 2004, as all projects are well capitalized. Furthermore, since each of these properties was funded with significant equity and subordinated debt financing, if the Company’s loan guarantees were to be called, the Company could take an equity position in these properties at values significantly below construction costs.

Additionally, during the second quarter of 2004, the Company entered into ~~NOTES~~a TOlong-term ~~FINANCIAL~~management contract to manage the Westin Boston, Seaport Hotel in ~~STATEMENTS~~Boston, Massachusetts, which is under construction and scheduled to open in 2006. In connection with this agreement, the Company will provide up to $28 million in mezzanine loans ($13 — million of which has been funded) as well as various guarantees, including a principal repayment guarantee for the term of the senior debt (~~Continued~~four years with a one-year extension option), which is capped at $40 million, and a debt service guarantee during the term of the senior debt, which is limited to the interest expense on the amounts drawn under such debt and principal amortization. Any payments under the debt service guarantee, attributable to principal, will reduce the cap under the principal repayment guarantee. The fair value of these guarantees of $3 million is reflected in other liabilities in the accompanying balance sheet as of September 30, 2004. In addition, Starwood has issued a completion guarantee for this approximate $200 million project. In the event the completion guarantee is called on, Starwood would have recourse to a guaranteed maximum price contract from the general contractor, performance bonds from all major trade contractors and a payment bond from the general contractor. Starwood would only be required to perform under the completion guarantee in the event of a default by the general contractor that is not cured by the contractor or the applicable bonds. The Company does not anticipate that it would be required to perform under these guarantees.

~~Note~~ Surety 9.bonds ~~Business~~issued ~~Segment~~on ~~Information~~behalf of the Company as of September 30, 2004 totaled $34 million, the majority of which were required by state or local governments relating to our vacation ownership operations and by insurers to secure large deductible insurance programs.

~~The~~To ~~Company~~secure ~~has~~management ~~two~~contracts, ~~operating~~the ~~segments:~~Company ~~hotels~~may provide performance ~~and~~guarantees ~~vacation~~to ~~ownership~~third-party owners. ~~The~~Most ~~hotel~~of ~~segment~~these ~~represents~~performance aguarantees ~~worldwide~~allow ~~network~~the ofCompany ~~owned,~~to ~~leased~~terminate ~~and~~the ~~consolidated~~contract ~~joint~~rather ~~venture~~than ~~hotels~~fund shortfalls if certain ~~and~~performance ~~resorts~~levels ~~operated~~are ~~primarily~~not ~~under~~met. In limited cases, the Company’s is obliged to ~~proprietary~~fund ~~brand~~shortfalls ~~names~~in ~~including~~performance Stlevels through the issuances of loans. As of September ~~Regis®~~30, ~~The~~2004, the Company had 8 management contracts with performance ~~Luxury~~guarantees ~~Collection®,~~with ~~Sheraton®,~~possible ~~Westin®~~cash outlays of up to $71 million, W®$50 million of ~~and~~which, ~~Four~~if ~~Points®~~required, bywould ~~Sheraton~~be asfunded ~~well~~over asa ~~hotels~~period of 25 years and ~~resorts~~would be ~~which~~largely ~~are~~offset ~~managed~~by ormanagement ~~franchised~~fees received under these ~~brand~~contracts. ~~names~~Many inof the ~~exchange~~performance ~~for~~tests ~~fees.~~are ~~Also~~multi-year ~~included~~tests, are ~~earnings~~tied ~~and~~to ~~losses~~the ~~from~~results of a ~~the~~competitive ~~Company’s~~set ~~interest~~of inhotels, ~~unconsolidated~~and ~~joint~~have ~~ventures.~~exclusions for force majeure and acts of war and terrorism. The ~~vacation~~Company ~~ownership~~does ~~segment~~not ~~includes~~anticipate ~~the~~any ~~development,~~significant funding ~~ownership~~under ~~and~~the ~~operation~~performance ofguarantees ~~vacation~~in ~~ownership~~2004. ~~resorts~~In addition, ~~marketing~~the Company has agreed ~~and~~to ~~selling~~guarantee ~~VOIs~~certain ~~and~~performance ~~providing~~levels ~~financing~~at toa ~~customers~~managed ~~who~~property that has ~~purchase~~authorized ~~such~~VOI ~~interests~~sales and marketing. The exact amount and

20 The performance of the hotels and vacation ownership segments is evaluated primarily on operating profit before corporate selling, general and administrative expense, interest, gains on the sale of real estate, investments, restructuring and other special charges and income taxes. The Company does not allocate these items to its segments.

TheTable followingof table presents revenues, operating income, capital expenditures and assets for the Company’s reportable segments (in millions): Contents

				Three Months				Nine Months
				Ended				Ended
				September 30,				September 30,
				2003		2002		2003		2002
Revenues(a):
	Hotel			$	803	$	870	$	2,482	$	2,594
	Vacation Ownership				133		90		337		270
		Total		$	936	$	960	$	2,819	$	2,864
Operating income(b):
	Hotel			$	102	$	141	$	321	$	475
	Vacation Ownership				32		14		78		57
			Total	$	134	$	155	$	399	$	532
Capital expenditures:
	Hotel			$	53	$	62	$	137	$	144
	Vacation Ownership				10		21		40		31
	Corporate				6		12		18		30
			Total	$	69	$	95	$	195	$	205

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS — (Continued)

			September 30,		December 31,
			2003		2002
Assets:
	Hotel(c)		$	10,904	$	11,183
	Vacation Ownership			908		882
	Corporate			108		125
		Total	$	11,920	$	12,190

nature of the guarantee is currently under dispute. However, the Company does not believe that any payments under this guarantee will be significant. The Company does not anticipate losing a significant number of management or franchise contracts in 2004.

(a)	Balance excludes other revenues from managed and franchised properties of $204 million, $187 million for the three months ended September 30, 2003 and 2002, respectively, and $634 million and $589 million for the nine months ended September 30, 2003 and 2002, respectively.
(b)	The following costs are not allocated to the business segments in evaluating operating income:

Litigation. The Sheraton Corporation (“Sheraton Corp.”) (formerly ITT Sheraton Corporation), a subsidiary of the Company, is a defendant in certain litigation relating to Sheraton Corp.’s management of a hotel. The case is titled 2660 Woodley Road Joint Venture v. ITT Sheraton Corporation, Civil Action No. 97-450-JJF (U.S.D.C., D. Del.). In December 1999, following trial, the jury returned a verdict finding that Sheraton Corp. had violated its contractual obligations to the hotel owner and awarded contractual damages totaling $11 million. The jury also found for the plaintiff on certain common law and other claims and awarded compensatory and other damages of $2 million and punitive damages of $38 million. These amounts were fully reserved for as of December 31, 1999 through a charge to restructuring and other special charges, net. The jury found for Sheraton Corp. and rejected the plaintiff’s additional claims that Sheraton Corp. had violated the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and that Sheraton Corp. had engaged in fraud. Sheraton Corp. believes that the jury’s determination against it on liability issues was erroneous as a matter of law, and that the damage awards were excessive and not supported by the evidence. Sheraton Corp. sought to have the verdict set aside in the trial court. In response to Sheraton Corp.’s motion, the court, in January 2002, amended the judgment and reduced the punitive damages award from $38 million to approximately $17 million; the court also trebled the jury’s $750,000 award for Robinson-Patman Act violations to $2.25 million on the basis of the court’s interpretation of that statute. The amount of the judgment was then set at $31.4 million. Sheraton appealed to the United States Court of Appeals (the “Court”) and the plaintiff filed a Cross-Notice of Appeal. The appeal was signed in February 2003.

19 On May 25, 2004, the Court issued its decision. On the Robinson-Patman Act claim, the Court agreed with Sheraton Corp. that the plaintiff lacked antitrust standing. The Court further found that there was no basis for the $10 million portion of the award related to the breach of the contractual agency provision claim, and overturned that portion of the judgment. Finally, although the Court agreed with Sheraton Corp. that the jury had been misinstructed on a crucial point regarding liability for punitive damages, because of invited error that misinstruction could not form a basis for relief on appeal. The Court did, nonetheless, further reduce the award of punitive damages from approximately $17 million to approximately $2 million.

On June 15, 2004, both Sheraton Corp. and the plaintiffs filed petitions ~~STARWOOD~~for ~~HOTELS~~rehearing with the Court. The plaintiffs asked the Court to reconsider its overturning the $10 &million ~~RESORTS~~award ~~WORLDWIDE~~for breach of the agency provision. Sheraton Corp. argued that the Court had inadvertently included some contract damages in its computation of punitive damages, and that the Court should exclude those ~~INC~~damages and therefore reduce the punitive damages by an additional $375,000. Both petitions were denied by the Third Circuit on September 15, 2004, leaving the Court’s May 25, 2004 decision in tact. As a result of the petitions being denied, the Company reduced its reserve for this matter by approximately $37 million in the third quarter of 2004, resulting in a credit to restructuring and other special credits, net.

The Corporation, Sheraton Corp. and Sheraton Holding (“Company ~~AND~~Defendants”) ~~STARWOOD~~are ~~HOTELS~~defendants in certain litigations arising out of purported contracts allegedly requiring the purchase of telecommunication, video and power services from Intelnet International Corp. (“Intelnet”). The first suit was commenced in late 1997 by Intelnet in the Superior Court of New Jersey Law Division: Camden County, alleging that Sheraton Corp. violated what Intelnet claimed were Intelnet’s exclusive rights to provide telecommunications and other services to Sheraton Holding and its affiliates (“First Suit”). The complaint sought injunctive relief to enforce alleged exclusivity rights and unquantified monetary damages. The complaint was subsequently amended in November &1998 to seek specific monetary and unspecified punitive damages. ~~RESORTS~~Sheraton Holding and Sheraton Corp. served an answer denying Intelnet’s claims, and asserting counterclaims seeking damages and a declaration that the purported contracts at issue were unenforceable.

In June 1999, Intelnet commenced a second lawsuit in the Superior Court of ~~NOTES~~New TOJersey ~~FINANCIAL~~Law Division: Camden County, naming Boardwalk Regency Corp. ~~STATEMENTS —~~ (~~Continued~~formerly a subsidiary of the Corporation) and the Corporation (the “BRC Action”). The claims in this case are similar in nature to those made in the First Suit, and relate to an alleged

	Three Months						Nine Months
	Ended						Ended
	September 30,						September 30,
	2003			2002			2003			2002
Corporate selling, general and administrative	$	23		$	30		$	99		$	90
Restructuring and other special credits, net	$	(1	)	$	(2	)	$	(1	)	$	(5	)

(c)Table Includes assets held for sale of $72 million and $839 million at September 30, 2003 and December 31, 2002, respectively.Contents

~~Note~~STARWOOD 10HOTELS & RESORTS WORLDWIDE, INC. AND ~~Commitments~~STARWOOD ~~and~~HOTELS ~~Contingencies~~& RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

breach of a purported exclusive contract to provide certain services to the ~~Guaranteed~~Caesar’s ~~Loans~~Atlantic City Hotel and ~~Commitments~~Casino. The two suits have been consolidated and were in mediation until 2001. The mediation ended during the first half of 2001. In ~~limited~~late ~~cases~~2003, the Company ~~has made~~Defendants ~~loans~~filed toseveral ~~owners~~dispositive ofmotions oron various ~~partners~~grounds. inIn ~~hotel~~February 2004, orthe ~~resort~~court ~~ventures~~granted the Company Defendants’ motion for ~~which~~summary judgment dismissing Intelnet’s claims under one of the agreements ~~Company~~at ~~has~~issue. The court denied summary judgment on the claims under the principal contract at issue, but directed a ~~management~~trial orsolely ~~franchise~~on ~~agreement.~~the issue of ~~Loans~~whether ~~outstanding~~that ~~under~~contract ~~this~~was ~~program~~valid ~~totaled~~and ~~$146 million~~enforceable or fraudulently executed. A atnon-jury ~~September~~trial commenced in March 302004. At the conclusion of the evidentiary hearing, ~~2003~~the court found that the principal contract was not signed until after the allegedly breaching event. ~~Unfunded~~Accordingly, ~~loan~~the ~~commitments~~court dismissed all of the ~~aggregating~~claims ~~$34 million~~alleged ~~were~~by ~~outstanding~~Intelnet atagainst the Company Defendants under the principal ~~September~~contract. In June 302004, ~~2003,~~the court dismissed all of ~~which~~the ~~minimal~~remaining ~~amounts~~claims asserted ~~are~~against ~~expected~~the Company Defendants. The Company filed a motion for tosummary bejudgment ~~funded~~seeking dismissal of all claims pending in ~~2003~~the ~~and~~BRC ~~$16~~Action. On August ~~million~~24, is2004, ~~expected~~Intelnet agreed to besever and dismiss with prejudice the BRC ~~funded~~Action in ~~total.~~its ~~These~~entirety, ~~loans~~with ~~typically~~the condition that if its claims in the First Suit are ~~secured~~reinstated byon ~~pledges~~appeal, the BRC Action will be reinstated. On August 19, 2004, Intelnet filed a notice of appeal with respect to the First Suit. The ~~project~~Company ~~ownership~~has ~~interests~~accrued for the expected legal costs associated with the dispute and~~/or~~ ~~mortgages~~does onnot expect that the ~~projects~~resolution will have a material adverse effect on the consolidated results of operations, financial position or cash flows.

~~The~~In ~~Company~~November 2001, ~~participates in programs with unaffiliated lenders in which~~ the ~~Company~~Corporation, ~~may~~Sheraton ~~partially guarantee~~Corp., ~~loans~~and ~~made~~Sheraton ~~to facilitate third-party ownership of~~Holding ~~hotels~~commenced ~~that~~a ~~the~~separate ~~Company~~litigation ~~manages~~in ~~or franchises. At September 30, 2003,~~ the ~~Company~~United ~~was~~States aDistrict ~~guarantor~~Court for ~~loans~~the ~~that~~District ~~could reach a maximum~~ of ~~$144~~New ~~million relating to three projects: the St. Regis in Monarch Beach~~Jersey, ~~California,~~asserting ~~which opened~~claims inarising ~~mid-2001;~~under ~~the~~RICO ~~Westin~~as ~~Kierland~~well ~~Resort~~as ~~and Spa in~~fraud ~~Scottsdale,~~claims ~~Arizona,~~against ~~which opened in November 2002; and~~ the ~~Westin~~ inprincipals ~~Charlotte,~~of ~~North~~Intelnet. ~~Carolina,~~The ~~which~~case ~~opened~~was insubsequently ~~April 2003.~~dismissed Inby ~~connection with~~ the ~~loan~~court ~~guarantee~~on ~~for~~ the ~~Westin~~grounds ~~Charlotte, the~~that ~~Company~~it ~~also~~was ~~entered~~brought ~~into~~subsequent ~~a guarantee~~ to ~~fund~~the ~~working capital~~running ~~shortfalls for this resort through 2005. No significant~~of ~~fundings~~the ~~are~~statute ~~anticipated~~of ~~under this working capital guarantee~~limitations. ~~With~~ ~~respect~~An toappeal ~~the~~was ~~Westin~~filed ~~Kierland, the guarantee is joint~~ and ~~several~~ ~~with another equity partner. The Company does not anticipate any significant funding under these loan guarantees~~ in ~~2003,~~April 2004 asthe ~~all~~Court ~~projects are well capitalized. Furthermore, since each~~ of ~~these properties was funded with significant~~ ~~equity~~Appeals ~~financing~~affirmed ~~and~~the ~~subordinated~~District ~~debt financing, if the Company~~Court’s ~~loan~~dismissal ~~guarantees~~of ~~were to be called,~~ the ~~Company could take an equity position in these properties at values significantly below construction costs~~claims.

~~Surety~~In ~~bonds~~July 2000, ~~issued~~the onCompany ~~behalf~~filed ofsuit ~~the~~in ~~Company~~New asYork City against Aoki ofCorporation ~~September 30,~~(“Aoki”) ~~2003~~and ~~totaled~~certain ~~$75 million,~~other ~~the~~related and unrelated entities regarding ~~majority~~Starwood’s management of ~~which~~nine ~~were~~hotels ~~required~~in bythe ~~state~~United States and Canada owned by Aoki and/or ~~local~~such ~~governments~~other entities. Starwood is seeking to enforce the management agreements relating to ~~our~~these ~~vacation~~hotels ~~ownership~~and ~~operations~~the rights Starwood acquired in connection with the purchase of those agreements from Aoki in 1995. In addition, Starwood seeks monetary damages and byother ~~our~~relief for defendants’ ~~insurers~~fraud, tobreach ~~secure~~of ~~large~~contract, ~~deductible~~negligence, ~~insurance~~breach ~~programs~~of duty of good faith and fair dealing, and other alleged acts of wrongdoing.

In ~~order to secure management contracts~~October 2000, ~~the Company~~Aoki ~~may~~and ~~provide performance guarantees to third-party owners. Most of these performance guarantees allow~~ the ~~Company to~~other ~~terminate~~defendants ~~the~~in ~~contract rather than fund shortfalls if certain performance levels are not met. In limited cases,~~ the ~~Company~~lawsuit isdescribed ~~obliged~~above tofiled ~~fund~~an ~~shortfalls~~action in ~~performance~~New ~~levels.~~York Asstate ~~of September 30,~~court ~~2003,~~against ~~the~~Starwood ~~Company~~claiming ~~had seven management~~that ~~contracts~~policies ~~with~~and ~~performance~~practices ~~guarantees~~constitute ~~with~~breaches ~~possible cash outlays~~ of upits tocontractual ~~$74 million,~~and ~~$50 million of which, if~~fiduciary ~~required,~~duties ~~would~~with berespect ~~funded~~to ~~over~~fees ~~a period of 25 years~~ and ~~would~~ becost ~~largely~~allocations ~~offset~~relating byto ~~management fees received under these~~central ~~contracts. Many of the performance tests are multi-year tests~~reservations, ~~are~~ ~~tied to~~ the ~~results~~SPG ~~of a competitive set of hotels~~program, and ~~have exclusions~~marketing ~~for force majeure~~ and ~~acts~~sales ofinitiatives; ~~war and terrorism. The~~Starwood’s ~~Company~~purchasing ~~does~~practices, ~~not~~and ~~anticipate any significant funding under~~ the ~~performance~~ ~~guarantees~~receipt inof ~~2003.~~rebates; Incross-selling ~~addition,~~and ~~the~~other ~~Company has~~joint ~~agreed~~marketing toand ~~guarantee~~promotional ~~certain~~programs ~~performance~~undertaken ~~levels~~by atStarwood; ~~a managed hotel that has authorized VOI sales~~ and ~~marketing. The exact~~Starwood’s ~~amount~~management and ~~nature~~accounting ofpractices regarding the ~~guaranty is currently under dispute. However~~hotels, including the ~~Company does not believe that any payments under~~extent ~~this~~to ~~guaranty~~which ~~will~~Starwood beresponded ~~significant.~~to ~~Lastly,~~ the ~~Company~~owners’ ~~does~~prior ~~not anticipate~~demands ~~losing~~for ~~any~~information ~~significant management or franchise~~and ~~contracts in 2003~~documents.

20 During 2001 the parties to both lawsuits participated in a mediation, which resulted in a May 2002 settlement between Starwood and the owners of two of the hotels. On October 14, 2004, the remaining parties to both lawsuits executed a Stipulation of Settlement, which was approved by the Court. As a result, both actions have been dismissed.

Starwood Asia Pacific ~~STARWOOD~~Management ~~HOTELS~~Pte Ltd and Starwood Hotels and Resorts Worldwide, Inc. are Defendants in Suit No. &961 ~~RESORTS~~of ~~WORLDWIDE~~2002/C commenced by Asia Hotel Investments Ltd (“AHIL”) in the High Court of Singapore. In connection with its interest in the acquisition of a majority stake in a hotel in Bangkok, Thailand, AHIL considered Starwood as a potential ~~INC~~operator of the hotel and the parties signed a Confidentiality and Non-Circumvention Agreement (the “AHIL Agreement”) in December of 2001. The AHIL Agreement placed certain restrictions on Starwood’s dealings as they related to the hotel. AHIL proved unsuccessful in its acquisition attempt and Starwood was contacted by the successful bidder to manage the hotel as a Westin and a management contract was signed. AHIL is alleging that the new owner of the majority stake could not have completed the acquisition of that stake without an agreement by Starwood to operate the hotel as a Westin and that Starwood’s agreement to do so was in violation of the AHIL Agreement.

AHIL ~~AND~~brought ~~STARWOOD~~suit ~~HOTELS~~in the trial court in Singapore and claimed loss of profits of approximately US$54 &million. However, at the time of the trial AHIL reduced its claim to one of ~~RESORTS~~loss of chance and asked the court to assess damages. Starwood vigorously objected to such claims and put forth a two-fold defense claiming:

~~NOTES~~(a) TOthat ~~FINANCIAL STATEMENTS —~~ no breach had been committed; and (~~Continued~~b) that even if a breach had been committed, it was merely technical, that is as AHIL was unsuccessful in acquiring the majority stake in the hotel, AHIL’s loss, if any, was not caused by Starwood, but by its own inability to consummate the acquisition.

~~Litigation. From time to time in the course of general business activities, the Company becomes involved in legal disputes and proceedings.~~ The ~~Company does not expect the~~ ~~resolution~~trial ofjudge ~~these~~agreed ~~matters~~with toStarwood ~~have~~that ~~a material adverse affect on~~ the ~~financial~~breach ~~position~~was ormerely ~~on the results of operations and cash~~technical flows of the Company, except as disclosed in the Company’s Joint Annual Report on Form 10-K as amended by the Joint Annual Report on Form 10-K/ A for the year ended December 31, 2002 incorporated herein by reference. However, depending on the amount and ~~the~~awarded ~~timing,~~AHIL annominal ~~unfavorable resolution~~damages of ~~some~~ten orSingapore ~~all of these matters could materially affect the Company’s future results of operations or cash flows in a particular period~~dollars.

~~Note~~ AHIL appealed 11its case to the Court of Appeal (which is the highest court in the Singapore judicial system) and in a majority decision of 2:1 (with the Chief Justice strongly dissenting), AHIL’s appeal was allowed. ~~Debt~~The majority ruled that the matter should be sent for assessment of damages for the court to ascertain what chance AHIL had to acquire the majority stake in the hotel, and place a value on that chance.

No Indates ~~May~~have ~~2003,~~been fixed for the ~~Company~~hearing ~~sold~~of anthe ~~aggregate~~assessment ~~amount~~ of ~~$360 million~~damages, but ~~3.5%~~it ~~coupon~~is ~~convertible~~expected ~~senior~~to ~~notes~~take ~~due 2023~~place in the first half of 2005. ~~The~~Starwood believes ~~notes~~that ~~are~~the ~~convertible,~~numerous ~~subject~~obstacles toAHIL ~~certain~~faced ~~conditions,~~in its failed attempt ~~into~~to ~~7.2 million~~acquire ~~Shares~~the ~~based~~majority onstake ain ~~conversion~~the ~~price~~hotel ofwill make it difficult for ~~$50.00~~AHIL ~~per~~to ~~Share.~~prove ~~Gross~~that ~~proceeds~~it ~~received~~had ~~were~~a ~~used~~significant chance to ~~repay~~acquire asuch stake. ~~portion~~Accordingly, ofStarwood ~~the~~does ~~Company’s~~not ~~Senior~~expect ~~Credit~~the ~~Facility~~resolution ~~and~~of ~~for~~this matter ~~other~~will ~~operational~~have ~~purposes.~~a ~~Holders~~material ~~may~~adverse ~~first~~effect ~~present~~on ~~their notes~~the toconsolidated ~~the~~results ~~Company~~of operations, ~~for~~financial ~~repurchase~~position inor ~~May~~cash ~~2006~~flows.

~~During~~The Company is involved in various other legal matters that have arisen in the ~~second~~normal ~~quarter~~course of ~~2003~~business, ~~the~~some ~~Company successfully~~of ~~amended~~which ~~its~~include ~~Senior~~claims ~~Credit~~for ~~Facility~~substantial sums. ~~The~~Accruals ~~amendment adjusted~~have ~~the~~been ~~leverage~~recorded ~~coverage~~when ~~ratio~~the ~~for~~outcome ~~the~~is ~~second~~probable ~~quarter~~and ofcan be ~~2003~~reasonably ~~and~~estimated. ~~for~~While the ~~next~~ultimate ~~eight~~results ~~quarters~~of ~~(through~~claims ~~June 30,~~and litigation ~~2005).~~cannot Inbe ~~addition~~determined, the Company ~~modified~~does ~~its~~not ~~current~~expect ~~covenant~~that ~~on encumbered~~the ~~EBITDA~~resolution ~~(as~~of ~~defined)~~all legal ~~and~~matters ~~added~~will have a ~~restriction~~material adverse effect on ~~the level~~its consolidated results of ~~cash~~operations, ~~dividends.~~financial ~~The~~position ~~Company~~or ~~currently~~cash ~~expects~~flow. toHowever, bedepending inon the ~~compliance~~amount ~~with~~and the ~~amended~~timing, ~~covenants~~an ~~for~~unfavorable ~~the~~resolution ~~remainder~~of some or all of these matters could materially affect the Company’s future results of operations or ~~Senior~~cash ~~Credit~~flows ~~Facility~~in ~~term~~a particular period.

~~Note 12. Guarantor Subsidiary~~22

TheTable Company’s payment obligations under the Senior Credit Facility, the senior notes and both the convertible notes and convertible debt are fully and unconditionally guaranteed by Sheraton Holding, a wholly-owned subsidiary (the “Guarantor Subsidiary”). The obligation of the Guarantor Subsidiary under its guarantee of the senior credit facility, senior notes and the convertible notes and convertible debt is equal in right of payment to its obligations under the Sheraton Holding public debt. Contents

~~Presented~~STARWOOD ~~below~~HOTELS is& ~~condensed~~RESORTS ~~consolidating financial information for the Company (the “Parent”)~~WORLDWIDE, ~~the~~ ~~Guarantor Subsidiary and all other legal entities that are~~INC. ~~consolidated~~AND ~~into~~STARWOOD ~~the~~HOTELS ~~Company,~~& ~~including the Trust, but which~~RESORTS ~~are~~NOTES ~~not~~TO ~~the~~FINANCIAL ~~Guarantor~~STATEMENTS ~~Subsidiary~~— (~~the “Non-Guarantor Subsidiaries”~~Continued)~~. Investments in subsidiaries are accounted~~ ~~for by the Parent and the Guarantor Subsidiary on the equity~~ ~~method of accounting. Earnings of subsidiaries are, therefore,~~ ~~reflected in the Parent’s and Guarantor Subsidiary’s~~ ~~investments in subsidiaries’ accounts. The elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.~~

21Note 14. Guarantor Subsidiary

The Company’s payment obligations under the Senior Credit Facility, the ~~STARWOOD~~Senior ~~HOTELS &~~Notes ~~RESORTS~~and ~~WORLDWIDE~~the Notes (includes both convertible notes financings) are fully and unconditionally guaranteed by Sheraton Holding, a wholly-owned ~~INC~~subsidiary (the “Guarantor Subsidiary”). The obligation of the Guarantor Subsidiary under its guarantee of the Senior Credit Facility, Senior Notes and the Notes is equal in right of payment to its obligations under the public debt issued by Sheraton Holding.

Presented below is condensed consolidating financial information for the ~~AND~~Company ~~STARWOOD~~(the ~~HOTELS &~~“Parent”), the Guarantor Subsidiary and all other legal entities ~~RESORTS~~that are consolidated into the Company, including the Trust, but which are not the Guarantor Subsidiary (the “Non-Guarantor Subsidiaries”). Investments in subsidiaries are accounted for by the Parent and the Guarantor Subsidiary on the equity method of accounting. Earnings of subsidiaries are, therefore, reflected in the Parent’s and Guarantor Subsidiary’s investments in subsidiaries’ accounts. The elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.

The December 31, 2003 balance sheet provided below has been adjusted to ~~NOTES~~reflect TOan ~~FINANCIAL~~intercompany dividend made in 1998 from the Guarantor Subsidiary to ~~STATEMENTS~~the Parent of $3.1 —billion that had not been included in the balance sheet information prior to December ~~(Continued)~~31, 2003. Accordingly, the intercompany receivable and stockholders’ equity of the Guarantor Subsidiary has been reduced by $3.1 billion and the intercompany receivable and investment in subsidiaries has been increased by $3.1 billion on the Parent’s balance sheet. This reclassification had no impact on the December 31, 2003 consolidated balance sheet of the Company or the Non-Guarantor Subsidiaries, or the statements of income and cash flows of the Parent, Guarantor Subsidiaries, Non-Guarantor Subsidiaries or consolidated financial statements of the Company.

			Balance Sheet
			September 30, 2003
			(In millions)
									Non-
						Guarantor			Guarantor
			Parent			Subsidiary			Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
	Cash and cash equivalents		$	621		$	—		$	166	$	—		$	787
	Restricted cash			6			—			78		—			84
	Inventories			23			—			178		—			201
	Other current assets			127			4			390		—			521
		Total current assets		777			4			812		—			1,593
Intercompany				(6,516	)		(4,441	)		10,957		—			—
Investments in consolidated subsidiaries				11,731			9,903			—		(21,634	)		—
Plant, property and equipment, net				329			—			6,617		—			6,946
Assets held for sale				—			—			72		—			72
Goodwill and intangible assets, net				1,649			2			825		—			2,476
Other assets				165			37			631		—			833
			$	8,135		$	5,505		$	19,914	$	(21,634	)	$	11,920
Liabilities and stockholders’ equity
Current liabilities:
	Short-term borrowings and current maturities of long-term debt		$	28		$	250		$	164	$	—		$	442
	Other current liabilities			406			54			661		—			1,121
		Total current liabilities		434			304			825		—			1,563
Long-term debt				2,500			1,072			871		—			4,443
Deferred income taxes				809			—			111		—			920
Other liabilities				33			100			435		—			568
				3,776			1,476			2,242		—			7,494
Minority Interest				1			—			37		—			38
Exchangeable units and Class B preferred shares, at redemption value of $38.50				3			—			30		—			33
Commitments and contingencies
Total stockholders’ equity				4,355			4,029			17,605		(21,634	)		4,355
			$	8,135		$	5,505		$	19,914	$	(21,634	)	$	11,920

22 Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

AND STARWOOD HOTELS & RESORTS


	Balance Sheet
	September 30, 2004
	(In millions)
							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	52		$	—		$	179	$	—		$	231
Restricted cash		4			—			185		—			189
Inventories		22			—			298		—			320
Other current assets		100			3			512		—			615

Total current assets		178			3			1,174		—			1,355
Intercompany		(4,941	)		(8,023	)		12,964		—			—
Investments in consolidated subsidiaries		10,605			10,318			—		(20,923	)		—
Plant, property and equipment, net		304			—			6,640		—			6,944
Goodwill and intangible assets, net		1,673			2			834		—			2,509
Other assets		422			17			761		—			1,200

	$	8,241		$	2,317		$	22,373	$	(20,923)		$	12,008

Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	101		$	—		$	142	$	—		$	243
Other current liabilities		376			49			869		—			1,294

Total current liabilities		477			49			1,011		—			1,537
Long-term debt		2,374			1,061			823		—			4,258
Deferred income taxes		650			—			190		—			840
Other liabilities		52			80			523		—			655

		3,553			1,190			2,547		—			7,290
Minority interest		(3	)		—			30		—			27
Commitments and contingencies
Total stockholders’ equity		4,691			1,127			19,796		(20,923	)		4,691

	$	8,241		$	2,317		$	22,373	$	(20,923	)	$	12,008

24 ~~NOTES TO FINANCIAL STATEMENTS — (Continued)~~

			Balance Sheet
			December 31, 2002
			(In millions)
									Non-
						Guarantor			Guarantor
			Parent			Subsidiary			Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
	Cash and cash equivalents		$	3		$	1		$	104	$	—		$	108
	Restricted cash			4			—			104		—			108
	Inventories			29			—			185		—			214
	Other current assets			133			3			370		—			506
		Total current assets		169			4			763		—			936
Intercompany				(5,773	)		(4,280	)		10,053		—			—
Investments in consolidated subsidiaries				11,156			9,407			—		(20,563	)		—
Plant, property and equipment, net				360			—			6,551		—			6,911
Assets held for sale				1			—			838		—			839
Goodwill and intangible assets, net				1,726			2			842		—			2,570
Other assets				163			60			711		—			934
			$	7,802		$	5,193		$	19,758	$	(20,563	)	$	12,190
Liabilities and stockholders’ equity
Current liabilities:
	Short-term borrowings and current maturities of long-term debt		$	—		$	250		$	620	$	—		$	870
	Other current liabilities			422			33			805		—			1,260
		Total current liabilities		422			283			1,425		—			2,130
Long-term debt				2,462			1,074			913		—			4,449
Deferred income taxes				861			—			125		—			986
Other liabilities				54			149			335		—			538
				3,799			1,506			2,798		—			8,103
Minority interest				3			—			36		—			39
Exchangeable units and Class B preferred shares, at redemption value of $38.50				3			—			48		—			51
Commitments and contingencies
Total stockholders’ equity				3,997			3,687			16,876		(20,563	)		3,997
			$	7,802		$	5,193		$	19,758	$	(20,563	)	$	12,190

23STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.


	Balance Sheet
	December 31, 2003
	(In millions)
							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries		Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents	$	262		$	—		$	165	$	—		$	427
Restricted cash		13			—			68		—			81
Inventories		22			—			210		—			232
Other current assets		111			3			408		—			522

Total current assets		408			3			851		—			1,262
Intercompany		(4,743	)		(7,878	)		12,621		—			—
Investments in consolidated subsidiaries		10,009			10,017			—		(20,026	)		—
Plant, property and equipment, net		322			—			6,784		—			7,106
Goodwill and intangible assets, net		1,665			2			821		—			2,488
Other assets		369			34			635		—			1,038

	$	8,030		$	2,178		$	21,712	$	(20,026	)	$	11,894

Liabilities and stockholders’ equity
Current liabilities:
Short-term borrowings and current maturities of long-term debt	$	51		$	—		$	182	$	—		$	233
Other current liabilities		411			30			970		—			1,411

Total current liabilities		462			30			1,152		—			1,644
Long-term debt		2,470			1,067			856		—			4,393
Deferred income taxes		733			—			165		—			898
Other liabilities		40			86			448		—			574

		3,705			1,183			2,621		—			7,509
Minority interest		(2	)		—			30		—			28
Exchangeable units and Class B preferred shares, at redemption value of $38.50		1			—			30		—			31
Commitments and contingencies										—
Total stockholders’ equity		4,326			995			19,031		(20,026	)		4,326

	$	8,030		$	2,178		$	21,712	$	(20,026	)	$	11,894

25 ~~AND STARWOOD HOTELS & RESORTS~~

NOTESTable TOof FINANCIAL STATEMENTS — (Continued) Contents

		Statement of Income
		Three Months Ended September 30, 2003
		(In millions)
					Guarantor			Non-Guarantor
		Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Revenues
Owned, leased and consolidated joint venture hotels		$	257		$	—		$	478		$	—		$	735
Other hotel and leisure			12			—			263			(74	)		201
Equity earnings in consolidated subsidiaries			107			71			—			(178	)		—
			376			71			741			(252	)		936
Other revenues from managed and franchised properties			183			—			21			—			204
			559			71			762			(252	)		1,140
Costs and Expenses
Owned, leased and consolidated joint venture hotels			268			—			383			(74	)		577
Selling, general and administrative and other			41			1			101			—			143
Restructuring and other special credits, net			(1	)		—			—			—			(1	)
Depreciation and amortization			12			—			93			—			105
			320			1			577			(74	)		824
Other expenses from managed and franchised properties			183			—			21			—			204
			503			1			598			(74	)		1,028
Operating income			56			70			164			(178	)		112
Interest expense, net of interest income			(48	)		(91	)		70			—			(69	)
Loss on asset dispositions and impairments, net			—			—			(3	)		—			(3	)
			8			(21	)		231			(178	)		40
Income tax benefit			39			32			(64	)		—			7
Minority equity in net loss (income)			—			—			—			—			—
Income from continuing operations			47			11			167			(178	)		47
Discontinued operations:
	Loss from operations, net of taxes		—			—			—			—			—
	Gain on dispositions, net of taxes		1			—			1			(1	)		1
Net income		$	48		$	11		$	168		$	(179	)	$	48

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS — (Continued)


	Statement of Income
	Three Months Ended September 30, 2004
	(In millions)
							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Revenues
Owned, leased and consolidated joint venture hotels	$	260		$	—		$	551		$	—		$	811
Vacation ownership sales and services		—			—			175			—			175
Management fees, franchise fees and other income		26			—			154			(75	)		105
Other revenues from managed and franchised properties		220			—			25			—			245

		506			—			905			(75	)		1,336
Costs and Expenses
Owned, leased and consolidated joint venture hotels		266			—			426			(75	)		617
Vacation ownership		—			—			132			—			132
Selling, general, administrative and other		54			(1	)		21			—			74
Restructuring and other special credits, net		—			—			(37	)		—			(37	)
Depreciation and amortization		11			—			96			—			107
Other expenses from managed and franchised properties		220			—			25			—			245

		551			(1	)		663			(75	)		1,138
Operating income (loss)		(45	)		1			242			—			198
Gain on sale of VOI notes receivable		—			—			3			—			3
Equity earnings in consolidated subsidiaries		177			118			—			(295	)		—
Equity earnings from unconsolidated ventures, net		—			—			6			—			6
Interest expense, net of interest income		(50	)		(87	)		73			—			(64	)
Loss on asset dispositions and impairments, net		—			—			(4	)		—			(4	)

Income from continuing operations before taxes and minority equity		82			32			320			(295	)		139
Income tax benefit (expense)		23			30			(87	)		—			(34	)

Income from continuing operations		105			62			233			(295	)		105
Discontinued operations:
Gain on dispositions, net of taxes		2			2			2			(4	)		2

Net income	$	107		$	64		$	235		$	(299	)	$	107

26 ~~STARWOOD HOTELS & RESORTS WORLDWIDE, INC.~~

ANDTable STARWOODof HOTELS & RESORTS Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

			Statement of Income
		Statement of IncomeThree Months Ended September 30, 2003 (In millions)
			Three Months Ended September 30, 2002
										Non-
			(In millions)
						Guarantor				Guarantor
							Guarantor				Non-Guarantor
		Parent				Subsidiary				Subsidiaries				Eliminations				Consolidated
			Parent				Subsidiary				Subsidiaries				Eliminations				Consolidated
Revenues
Revenues
Owned, leased and consolidated joint venture hotels		$	257			$	—			$	478			$	—			$	735
Owned, leased and consolidated joint venture hotels			$	288			$	—			$	508			$	—			$	796
Vacation ownership sales and services			—				—				129				—				129
Other hotel and leisure				12				1				226				(75	)			164
Management fees, franchise fees and other income			12				—				130				(74	)			68
Equity earnings in consolidated subsidiaries				112				90				—				(202	)			—
Other revenues from managed and franchised properties			183				—				21				—				204
				412				91				734				(277	)			960
			452				—				758				(74	)			1,136
Other revenues from managed and franchised properties				169				—				18				—				187
Costs and Expenses
				581				91				752				(277	)			1,147
Owned, leased and consolidated joint venture hotels			268				—				383				(74	)			577
Costs and Expenses
Vacation ownership			—				—				98				—				98
Owned, leased and consolidated joint venture hotels				290				—				368				(75	)			583
Selling, general, administrative and other			41				1				3				—				45
Selling, general and administrative and other				37				—				86				—				123
Restructuring and other special credits, net			(1	)			—				—				—				(1	)
Restructuring and other special credits, net				—				—				(2	)			—				(2	)
Depreciation and amortization			12				—				92				—				104
Depreciation and amortization				14				—				115				—				129
Other expenses from managed and franchised properties			183				—				21				—				204
				341				—				567				(75	)			833
			503				1				597				(74	)			1,027
Other expenses from managed and franchised properties				169				—				18				—				187
Operating income			(51	)			(1	)			161				—				109
				510				—				585				(75	)			1,020
Gain on sale of VOI notes receivable			—				—				1				—				1
Operating income				71				91				167				(202	)			127
Equity earnings in consolidated subsidiaries			107				71				—				(178	)			—
Interest expense, net of interest income				(52	)			(92	)			67				—				(77	)
Equity earnings from unconsolidated ventures, net			—				—				2				—				2
Gain on asset dispositions and impairments, net				—				—				6				—				6
Interest expense, net of interest income			(48	)			(91	)			70				—				(69	)
				19				(1	)			240				(202	)			56
Loss on asset dispositions and impairments, net			—				—				(3	)			—				(3	)
Income tax expense				33				32				(68	)			—				(3	)
Income (loss) from continuing operations before taxes and minority equity			8				(21	)			231				(178	)			40
Minority equity in net loss (income)				1				—				(1	)			—				—
Income tax benefit (expense)			39				32				(64	)			—				7
Income from continuing operations			47	53			11	31			167	~~171~~			(178	~~(202~~)	)		47	53
Discontinued operations:
	Loss from operations, net of taxes			(1	)			(1	)			(1	)			2				(1	)
Gain on dispositions, net of taxes			1				—				1				(1	)			1
	Gain on dispositions, net of taxes			—				62				37				(99	)			—
Net income		$	48			$	11			$	168			$	(179	)		$	48
Net income			$	52			$	92			$	207			$	(299	)		$	52

2527

STARWOODTable HOTELS &of RESORTS WORLDWIDE, INC. Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

NOTES TO FINANCIAL STATEMENTS — (Continued)


	Statement of Income
	Nine Months Ended September 30, 2004
	(In millions)
							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Revenues
Owned, leased and consolidated joint venture hotels	$	777		$	—		$	1,671		$	—		$	2,448
Vacation ownership sales and services		—			—			443			—			443
Management fees, franchise fees and other income		76			—			441			(218	)		299
Other revenues from managed and franchised properties		664			—			72			—			736

		1,517			—			2,627			(218	)		3,926
Costs and Expenses
Owned, leased and consolidated joint venture hotels		798			—			1,284			(218	)		1,864
Vacation ownership		—			—			334			—			334
Selling, general, administrative and other		184			(2	)		62			—			244
Restructuring and other special credits, net		—			—			(37	)		—			(37	)
Depreciation and amortization		32			—			287			—			319
Other expenses from managed and franchised properties		664			—			72			—			736

		1,678			(2	)		2,002			(218	)		3,460
Operating income		(161	)		2			625			—			466
Gain on sale of VOI notes receivable		—			—			11			—			11
Equity earnings in consolidated subsidiaries		454			279			—			(733	)		—
Equity earnings from unconsolidated ventures, net		—			—			22			—			22
Interest expense, net of interest income		(149	)		(259	)		215			—			(193	)
Loss on asset dispositions and impairments, net		(2	)		—			(6	)		—			(8	)

Income from continuing operations before taxes and minority equity		142			22			867			(733	)		298
Income tax benefit (expense)		115			90			(246	)		—			(41	)
Minority equity in net loss		1			—			—			—			1

Income from continuing operations		258			112			621			(733	)		258
Discontinued operations:
Gain on dispositions, net of taxes		37			36			36			(72	)		37

Net income	$	295		$	148		$	657		$	(805	)	$	295

		Statement of Income
		Nine Months Ended September 30, 2003
		(In millions)
					Guarantor			Non-Guarantor
		Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Revenues
Owned, leased and consolidated joint venture hotels		$	824		$	—		$	1,464		$	—		$	2,288
Other hotel and leisure			38			1			720			(228	)		531
Equity earnings in consolidated subsidiaries			238			233			—			(471	)		—
			1,100			234			2,184			(699	)		2,819
Other revenues from managed and franchised properties			576			—			58			—			634
			1,676			234			2,242			(699	)		3,453
Costs and Expenses
Owned, leased and consolidated joint venture hotels			859			—			1,150			(228	)		1,781
Selling, general and administrative and other			159			1			251			—			411
Restructuring and other special credits, net			(1	)		—			—			—			(1	)
Depreciation and amortization			39			—			288			—			327
			1,056			1			1,689			(228	)		2,518
Other expenses from managed and franchised properties			576			—			58			—			634
			1,632			1			1,747			(228	)		3,152
Operating income			44			233			495			(471	)		301
Interest expense, net of interest income			(134	)		(271	)		186			—			(219	)
Loss on asset dispositions and impairments, net			(1	)		—			(178	)		—			(179	)
			(91	)		(38	)		503			(471	)		(97	)
Income tax benefit			107			94			(88	)		—			113
Minority equity in net loss (income)			1			—			—			—			1
Income from continuing operations			17			56			415			(471	)		17
Discontinued operations:
	Loss from operations, net of taxes		(1	)		(1	)		(1	)		2			(1	)
	Gain on dispositions, net of taxes		206			203			174			(377	)		206
Net income		$	222		$	258		$	588		$	(846	)	$	222

26 Table of Contents

STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

AND STARWOOD HOTELS & RESORTS


	Statement of Income
	Nine Months Ended September 30, 2003
	(In millions)
							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Revenues
Owned, leased and consolidated joint venture hotels	$	824		$	—		$	1,464		$	—		$	2,288
Vacation ownership sales and services		—			—			327			—			327
Management fees, franchise fees and other income		37			—			375			(228	)		184
Other revenues from managed and franchised properties		576			—			58			—			634

		1,437			—			2,224			(228	)		3,433
Costs and Expenses
Owned, leased and consolidated joint venture hotels		859			—			1,150			(228	)		1,781
Vacation ownership		—			—			252			—			252
Selling, general, administrative and other		159			1			(1	)		—			159
Restructuring and other special credits, net		(1	)		—			—			—			(1	)
Depreciation and amortization		38			—			285			—			323
Other expenses from managed and franchised properties		576			—			58			—			634

		1,631			1			1,744			(228	)		3,148
Operating income		(194	)		(1	)		480			—			285
Gain on sale of VOI notes receivable		—			—			6			—			6
Equity earnings in consolidated subsidiaries		238			233			—			(471	)		—
Equity earnings from unconsolidated ventures, net		—			1			9			—			10
Interest expense, net of interest income		(134	)		(271	)		186			—			(219	)
Loss on asset dispositions and impairments, net		(1	)		—			(178	)		—			(179	)

Income (loss) from continuing operations before taxes and minority equity		(91	)		(38	)		503			(471	)		(97	)
Income tax benefit (expense)		107			94			(88	)		—			113
Minority equity in net loss		1			—			—			—			1

Income from continuing operations		17			56			415			(471	)		17
Discontinued operations:
Loss from operations, net of taxes		(1	)		(1	)		(1	)		2			(1	)
Gain on dispositions, net of taxes		206			203			174			(377	)		206

Net income	$	222		$	258		$	588		$	(846	)	$	222

29 ~~NOTES TO FINANCIAL STATEMENTS — (Continued)~~

		Statement of Income
		Nine Months Ended September 30, 2002
		(In millions)
					Guarantor			Non-Guarantor
		Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Revenues
Owned, leased and consolidated joint venture hotels		$	880		$	—		$	1,506		$	—		$	2,386
Other hotel and leisure			42			1			694			(259	)		478
Equity earnings in consolidated subsidiaries			383			281			—			(664	)		—
			1,305			282			2,200			(923	)		2,864
Other revenues from managed and franchised properties			533			—			56			—			589
			1,838			282			2,256			(923	)		3,453
Costs and Expenses
Owned, leased and consolidated joint venture hotels			911			—			1,087			(259	)		1,739
Selling, general and administrative and other			138			—			180			—			318
Restructuring and other special credits, net			(4	)		—			(1	)		—			(5	)
Depreciation and amortization			38			—			327			—			365
			1,083			—			1,593			(259	)		2,417
Other expenses from managed and franchised properties			533			—			56			—			589
			1,616			—			1,649			(259	)		3,006
Operating income			222			282			607			(664	)		447
Interest expense, net of interest income			(177	)		(270	)		187			—			(260	)
Gain on asset dispositions and impairments, net			—			—			2			—			2
			45			12			796			(664	)		189
Income tax expense			116			94			(237	)		—			(27	)
Minority equity in net loss (income)			1			—			(1	)		—			—
Income from continuing operations			162			106			558			(664	)		162
Discontinued operations:
	Loss from operations, net of taxes		(2	)		(2	)		(2	)		4			(2	)
	Gain on dispositions, net of taxes		104			62			37			(99	)		104
Net income		$	264		$	166		$	593		$	(759	)	$	264

27STARWOOD HOTELS & RESORTS WORLDWIDE, INC. AND STARWOOD HOTELS & RESORTS NOTES TO FINANCIAL STATEMENTS — (Continued)

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.


	Statement of Cash Flows
	Nine Months Ended September 30, 2004
	(In millions)
							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income	$	295		$	148		$	657		$	(805	)	$	295
Exclude:
Discontinued operations		(37	)		(36	)		(36	)		72			(37	)

Income from continuing operations		258			112			621			(733	)		258
Adjustments to income from continuing operations, changes in working capital and other		(400	)		(121	)		(94	)		733			118

Cash from (used for) continuing operations		(142	)		(9	)		527			—			376
Cash from discontinued operations		1			—			—			—			1

Cash from (used for) operating activities		(141	)		(9	)		527			—			377

Investing Activities
Purchases of plant, property and equipment		(32	)		—			(176	)		—			(208	)
Proceeds from asset sales		—			—			18			—			18
Acquisitions, net of acquired cash		—			—			(65	)		—			(65	)
Investments		(22	)		—			(34	)		—			(56	)
Other, net		(9	)		—			(4	)		—			(13	)

Cash used for investing activities		(63	)		—			(261	)		—			(324	)

Financing Activities
Revolving credit facility and short-term borrowings, net		1			—			(12	)		—			(11	)
Long-term debt issued		300			—			—			—			300
Long-term debt repaid		(336	)		—			(52	)		—			(388	)
Distributions paid		—			—			(172	)		—			(172	)
Proceeds from employee stock option exercises		251			—			—			—			251
Share repurchases		(232	)		—			—			—			(232	)
Other, net		10			9			(18	)		—			1

Cash from (used for) financing activities		(6	)		9			(254	)		—			(251	)

Exchange rate effect on cash and cash equivalents		—			—			2			—			2

Increase (decrease) in cash and cash equivalents		(210	)		—			14			—			(196	)
Cash and cash equivalents-beginning of period		262			—			165			—			427

Cash and cash equivalents-end of period	$	52		$	—		$	179		$	—		$	231

30 ~~AND STARWOOD HOTELS & RESORTS~~

NOTESTable TOof FINANCIAL STATEMENTS — (Continued) Contents

		Statement of Cash Flows
		Nine Months Ended September 20, 2003
		(In millions)
					Guarantor			Non-Guarantor
		Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income		$	222		$	258		$	588		$	(846	)	$	222
Exclude:
Discontinued operations			(205	)		(202	)		(173	)		375			(205	)
Income from continuing operations			17			56			415			(471	)		17
Adjustments to income from continuing operations and changes in working capital			287			(51	)		(208	)		471			499
Cash from continuing operations			304			5			207			—			516
Cash from discontinued operations			—			—			10			—			10
	Cash from operating activities		304			5			217			—			526
Investing Activities
Purchases of plant, property and equipment			(21	)		—			(174	)		—			(195	)
Proceeds from asset sales			—			—			1,034			—			1,034
Acquisitions and investments			—			—			(7	)		—			(7	)
Other, net			2			—			—			—			2
	Cash from (used for) investing activities		(19	)		—			853			—			834
Financing Activities
Revolving credit facility and short-term borrowings, net			(60	)		—			(261	)		—			(321	)
Long-term debt issued			360			—			86			—			446
Long-term debt repaid			—			—			(654	)		—			(654	)
Distributions paid			—			—			(170	)		—			(170	)
Other, net			33			(6	)		(18	)		—			9
	Cash from (used for) financing activities		333			(6	)		(1,017	)		—			(690	)
Exchange rate effect on cash and cash equivalents			—			—			9			—			9
Increase (decrease) in cash and cash equivalents			618			(1	)		62			—			679
Cash and cash equivalents-beginning of period			3			1			104			—			108
Cash and cash equivalents-end of period		$	621		$	—		$	166		$	—		$	787

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS — (Continued)


	Statement of Cash Flows
	Nine Months Ended September 30, 2003
	(In millions)
							Non-
				Guarantor			Guarantor
	Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income	$	222		$	258		$	588		$	(846	)	$	222
Exclude:
Discontinued operations		(205	)		(202	)		(173	)		375			(205	)

Income from continuing operations		17			56			415			(471	)		17
Adjustment to income from continuing operations, changes in working capital and other		280			(56	)		(211	)		471			484

Cash from continuing operations		297			—			204			—			501
Cash from discontinued operations		—			—			10			—			10

Cash from operating activities		297			—			214			—			511

Investing Activities
Purchases of plant, property and equipment		(21	)		—			(171	)		—			(192	)
Proceeds from asset sales		—			—			1,034			—			1,034
Acquisitions, investments and other		2			—			(7	)		—			(5	)

Cash from (used for) investing activities		(19	)		—			856			—			837

Financing Activities
Revolving credit facility and short-term repayments, net		(60	)		—			(261	)		—			(321	)
Long-term debt issued		360			—			86			—			446
Long-term debt repaid		—			—			(654	)		—			(654	)
Distributions paid		—			—			(170	)		—			(170	)
Other, net		40			(1	)		(18	)		—			21

Cash from (used for) financing activities		340			(1	)		(1,017	)		—			(678	)

Exchange rate effect on cash and cash equivalents		—			—			9			—			9

Increase (decrease) in cash and cash equivalents		618			(1	)		62			—			679
Cash and cash equivalents-beginning of period		3			1			104			—			108

Cash and cash equivalents-end of period	$	621		$	—		$	166		$	—		$	787

31 ~~STARWOOD HOTELS & RESORTS WORLDWIDE, INC.~~

ANDTable STARWOODof HOTELS & RESORTS Contents

~~NOTES~~Item TO2. ~~FINANCIAL STATEMENTS — (Continued)~~ Management’s Discussion and Analysis of Financial Condition and Results of Operations.

		Statement of Cash Flows
		Nine Months Ended September 30, 2002
		(In millions)
					Guarantor			Non-Guarantor
		Parent			Subsidiary			Subsidiaries			Eliminations			Consolidated
Operating Activities
Net income		$	264		$	166		$	593		$	(759	)	$	264
Exclude:
Discontinued operations			(102	)		60			35			(95	)		(102	)
Income from continuing operations			162			226			628			(854	)		162
Adjustments to income from continuing operations and changes in working capital			211			(250	)		(428	)		854			387
Cash from continuing operations			373			(24	)		200			—			549
Cash from discontinued operations			—			—			12			—			12
	Cash from (used for) operating activities		373			(24	)		212			—			561
Investing Activities
Purchases of plant, property and equipment			(33	)		—			(172	)		—			(205	)
Proceeds from asset sales, net			3			—			15			—			18
Acquisitions and investments			—			—			(43	)		—			(43	)
Other, net			(2	)		—			5			—			3
	Cash used for investing activities		(32	)		—			(195	)		—			(227	)
Financing Activities
Revolving credit facility and short-term borrowings, net			(161	)		—			(47	)		—			(208	)
Long-term debt issued			1,500			—			164			—			1,664
Long-term debt repaid			(1,752	)		—			(74	)		—			(1,826	)
Distributions paid			—			—			(40	)		—			(40	)
Other, net			67			24			—			—			91
	Cash from (used for) financing activities		(346	)		24			3			—			(319	)
Exchange rate effect on cash and cash equivalents			—			—			8			—			8
Increase (decrease) in cash and cash equivalents			(5	)		—			28			—			23
Cash and cash equivalents-beginning of period			7			—			100			—			107
Cash and cash equivalents-end of period		$	2		$	—		$	128			—		$	130

Forward-Looking Statements

29 This report includes “forward-looking” statements, as that term is defined in the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules, regulations and releases. Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “expect,” “should,” “believe,” “plan,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, general economic conditions, our financial and business prospects, our capital requirements, our financing prospects, and those disclosed as risks in other reports filed by us with the Securities and Exchange Commission, including those described in Part I of our most recently filed Annual Report on Form 10-K. We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we disclaim any obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.

~~Item~~RESULTS 2.OF ~~Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of ~~Forward~~Operations (“MD&A”) discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment, goodwill and intangible assets, income taxes, financing operations, frequent guest program liability, self-~~Looking~~insurance ~~Statements~~claims payable, restructuring costs, retirement benefits and contingencies and litigation.

~~Certain~~We ~~statements~~base ~~contained~~our inestimates ~~this~~and ~~report constitute~~judgments ~~forward-looking~~on ~~statements~~historical ~~within~~experience ~~the~~and ~~meaning of the~~on ~~Private~~various Securities Litigation Reform Act of 1995. Such forward-looking statements may include, but are not limited to, statements relating to the Company’s objectives, strategies and plans, and all statements (other ~~than~~factors ~~statements of historical fact)~~ that ~~address actions, events or circumstances that the Company or its management expects, believes or intends will occur in the future. Forward-looking statements~~ are ~~not guarantees~~believed ~~of future performance and involve risks and uncertainties that could cause actual results~~ to ~~differ materially~~be ~~from~~reasonable ~~historical~~under ~~results or those anticipated at~~ the ~~time the forward-looking statements are made~~circumstances, ~~including, without limitation, risks and uncertainties associated with~~ the ~~following:~~ ~~general~~results ~~real estate, travel and national and international economic conditions, including the duration and the severity~~ of ~~the~~which ~~current~~form ~~global economic downturn,~~ the ~~hospitality~~ ~~industry’s~~basis ~~pace of recovery from the continuing war on terrorism and the situation in the Middle East; traveler fear of exposure to contagious disease; the continued ability of the Trust to qualify~~ for ~~taxation~~making asjudgments ~~a REIT; Starwood’s~~about ~~ability to attract and retain personnel; identification, completion, terms and timing of future acquisitions and dispositions;~~ the ~~availability~~carrying ~~and~~value ~~terms~~ of ~~capital~~assets ~~for acquisitions~~ and ~~for~~liabilities ~~renovations;~~that ~~execution~~are ofnot ~~hotel~~readily ~~renovation~~available ~~and~~from expansion programs; the ability to maintain existing management or franchise agreements and to obtain new agreements on favorable terms; competition within the hotel and leisure industry; the impact of internet reservation channels, our reliance on technology, relationships with our customers, the cycliclity of the real estate business and the hotel and leisure business; foreign exchange fluctuations and exchange control restrictions; political, geopolitical and financial conditions and uncertainties in countries in which Starwood owns or operates properties; changes in current laws, rules or regulations of governmental or other ~~regulatory~~sources. ~~bodies;~~Actual ~~risks associated~~results ~~with~~may ~~Starwood’s~~differ ~~level~~from ofthese ~~indebtedness~~estimates ~~and its~~under ~~ability~~different toassumptions ~~refinance its indebtedness;~~ and ~~the other risks and uncertainties set forth in the annual, quarterly and current reports and proxy statements of the Trust and the Corporation~~conditions. ~~The Company undertakes no obligation to publicly update or~~ ~~revise any forward-looking statement, whether as a result of new~~ ~~information, future events or otherwise.~~

~~RESULTS~~CRITICAL OFACCOUNTING ~~OPERATIONS~~POLICIES

~~Management’s~~We ~~Discussion~~believe ~~and Analysis of Financial Condition and Results of Operations discusses~~ the ~~Company’s~~ ~~consolidated~~following ~~financial~~to ~~statements,~~be ~~which~~our ~~have been~~critical ~~prepared in accordance with~~ accounting ~~principles generally~~policies: ~~accepted in the United States. The preparation of these~~ ~~consolidated financial statements requires management to make~~ estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment (including assets held for sale), goodwill and intangible assets, income taxes, financing operations, frequent guest program liability, self-insurance claims payable, restructuring costs, retirement benefits and contingencies and litigation.

~~Management~~Revenue ~~bases~~Recognition. ~~its~~Our ~~estimates~~revenues ~~and~~are ~~judgments~~primarily onderived from the ~~historical~~following ~~experience~~sources: (1) hotel and onresort ~~various~~revenues ~~other~~at ~~factors~~our ~~that~~owned, ~~are~~leased and ~~believed~~consolidated tojoint beventure ~~reasonable~~properties; ~~under~~(2) management ~~the~~and ~~circumstances,~~franchise ~~the~~fees; ~~results~~(3) ofvacation ~~which~~ownership ~~form~~revenues; ~~the~~(4) revenues ~~basis~~from ~~for~~managed ~~making~~and ~~judgments~~franchised properties; ~~about~~and ~~the~~(5) other ~~carrying value~~revenues ofwhich ~~assets~~are ~~and~~ancillary ~~liabilities~~to ~~that~~our operations. Generally, revenues are ~~not~~recognized ~~readily~~when ~~available from~~the ~~other~~services ~~sources.~~have ~~Actual~~been ~~results~~rendered. ~~may~~The following ~~differ~~is ~~from~~a ~~these estimates~~description ~~under~~of ~~different~~the ~~assumptions~~composition ~~and~~of ~~conditions.~~our revenues:

~~The~~• ~~Company~~Owned, ~~believes~~Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel operations, including the ~~following~~rental toof berooms ~~its critical~~and ~~accounting~~food ~~policies:~~ and beverage sales from owned, leased or consolidated joint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have been rendered. These revenues are impacted by global economic conditions affecting the travel and hospitality industry as well as relative market share of the local competitive set of hotels. Revenue per available room (“REVPAR”) is a leading indicator of revenue trends at owned, leased and consolidated joint venture hotels as it measures the period-over-period growth in rooms revenue for comparable properties.

32 Revenue Recognition. The Company’s revenues are primarily derived from the following sources: (1) hotel and resort revenues at the Company’s owned, leased and consolidated joint venture properties; (2) management and franchise fees; (3) vacation ownership revenues; and (4) other revenues which are

30 Table of Contents

~~ancillary~~• toManagement and Franchise Fees — Represents fees earned on hotels managed worldwide, usually under long-term contracts, and franchise fees received in connection with the ~~Company~~franchise of our Sheraton, Westin, Four Points by Sheraton and Luxury Collection brand names. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property’s ~~operations~~profitability. ~~Generally~~ For any time during the year, ~~revenues~~when the provisions of our management contracts allow receipt of incentive fees upon termination, incentive fees are recognized ~~when~~for the ~~services~~fees ~~have~~due ~~been rendered~~and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. ~~The~~Therefore, ~~following~~during isperiods aprior ~~description~~to year-end, the incentive fees recorded may not be indicative of the ~~composition~~eventual incentive fees that will be recognized at year-end as conditions and incentive hurdle calculations may not be final. Franchise fees are generally based on a percentage of hotel room revenues. ~~for~~As with hotel revenues discussed above, these revenue sources are affected by conditions impacting the ~~Company:~~ travel and hospitality industry as well as competition from other hotel management and franchise companies.

• ~~Owned,~~Vacation ~~Leased~~Ownership ~~and Consolidated Joint Ventures~~ — ~~Represents~~We recognize revenue ~~primarily derived~~ from ~~hotel~~Vacation ~~operations,~~Ownership ~~including~~Interests ~~the~~(“VOIs”) ~~rental of rooms and food and beverage~~ sales, ~~from a worldwide network of owned, leased or consolidated joint venture hotels~~ and ~~resorts operated primarily under the Company’s proprietary brand names including St~~financings. ~~Regis,~~Such ~~The~~revenues ~~Luxury~~are ~~Collection,~~impacted ~~Sheraton, Westin, W and Four Points~~ by ~~Sheraton.~~the ~~Revenue~~state isof ~~recognized~~the ~~when~~global ~~rooms~~economies ~~are occupied~~ and ~~services have been rendered. • Management and Franchise Fees — Represents fees earned on hotels managed worldwide~~, ~~usually~~in ~~under long-term contracts with the hotel owner~~particular, ~~and franchise fees received in connection with~~ the ~~franchise of the Company’s Sheraton, Westin, Four Points by Sheraton and Luxury Collection brand names~~U.S. ~~Management fees are comprised of a base fee~~economy, ~~which~~as iswell ~~generally~~as ~~based~~interest onrates ~~a percentage of gross revenues,~~ and another ~~incentive~~economic ~~fee,~~conditions ~~which~~affecting ~~is generally based on~~ the ~~property’s~~lending ~~profitability~~market. ~~Base~~We ~~fee~~determine ~~revenues are recognized when earned in accordance with~~ the ~~terms~~portion of ~~the~~revenues ~~contract.~~to ~~For~~recognize ~~any~~for ~~time~~sales ~~during~~accounted ~~the year, incentive fees are recognized~~ for ~~the~~under ~~fees due and earned as if~~ the ~~contract~~percentage ~~was terminated at that date, exclusive~~ of ~~any~~completion ~~termination~~method ~~fees due or payable. Franchise fees are generally~~ based on ajudgments ~~percentage of hotel room revenues~~ and ~~are~~estimates ~~recognized~~including intotal ~~accordance~~projected ~~with~~costs ~~SFAS~~to Nocomplete. 45Additionally, ~~“Accounting~~we ~~for~~record ~~Franchise~~reserves ~~Fee~~against ~~Revenue,”~~these asrevenues ~~the~~based ~~fees~~on ~~are~~expected ~~earned~~default ~~and become due from the franchisee~~levels. ~~Management~~Changes ~~and franchise fees are recognized~~ in ~~other~~costs ~~hotel~~could ~~and~~lead ~~leisure~~to ~~revenues~~adjustments into the ~~consolidated~~percentage ~~statements~~ of ~~income.~~completion •status ~~Vacation Ownership — The Company recognizes revenue from VOI sales in accordance with SFAS No. 66, “Accounting for Sales~~ of ~~Real Estate.” The Company recognizes sales when~~ a ~~minimum~~project, ofwhich ~~10%~~may ofresult ~~the~~in ~~purchase~~differences ~~price~~in ~~for~~ the ~~VOI~~timing ~~has~~and ~~been~~amount ~~received in cash, the period~~ of ~~cancellation~~revenues ~~with~~recognized ~~refund~~from ~~has~~the ~~expired~~projects. ~~and~~We ~~receivables~~ are ~~deemed~~developing ~~collectible.~~high ~~For~~end ~~sales~~VOI ~~that~~projects doadjacent ~~not~~to ~~qualify~~or ~~for full revenue recognition~~ as ~~the~~part ~~project~~of ~~has~~some ~~progressed~~of ~~beyond~~our ~~the~~luxury ~~preliminary stages but has not yet reached completion~~resorts, ~~all~~resulting ~~revenue and profit are initially deferred and recognized~~ in ~~earnings through the percentage~~cross-~~of-completion~~selling ~~method.~~opportunities ~~Vacation ownership revenues are recognized in other hotel~~ and ~~leisure~~an ~~revenues~~audience ~~in the consolidated statements~~ of ~~income.~~higher-end ~~From~~purchasers, ~~time~~yielding toboth ~~time,~~higher ~~the~~revenues ~~Company~~and ~~may~~reduced ~~also~~risks ~~securitize~~associated orwith ~~sell~~financing ~~its~~these VOI ~~receivables. These securitizations are accounted for as~~ sales ~~transactions under the guidance of SFAS No~~. ~~140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities – replacement of FASB Statement No. 125”.~~

~~Assets~~• ~~Held~~Revenues ~~for~~From ~~Sale. The~~Managed ~~Company~~and ~~considers~~Franchised ~~properties to~~Properties be— ~~assets~~These ~~held~~revenues ~~for~~represent ~~sale~~reimbursements ~~when~~of ~~management~~costs ~~approves~~incurred ~~and~~on ~~commits to~~behalf aof ~~formal~~managed ~~plan~~hotel toproperties ~~actively~~and ~~market a property for sale or a signed sales contract exists~~franchisees. ~~Upon~~These ~~designation~~costs asrelate anprimarily ~~asset~~to ~~held for~~payroll ~~sale,~~costs ~~the Company records the carrying value of each property~~ at ~~the~~managed ~~lower~~properties ofwhere ~~its~~we ~~carrying~~are ~~value or its estimated fair value, less estimated costs to sell, and~~ the ~~Company stops recording depreciation expense~~employer. ~~Any~~Since ~~gain realized in connection with~~ the ~~sale~~reimbursements ofare ~~properties~~made ~~for~~based ~~which~~upon the ~~Company~~costs ~~has significant~~incurred ~~continuing~~with ~~involvement~~no ~~(such~~added asmargin, ~~through~~these arevenues ~~management or franchise agreement) is deferred~~ and ~~recognized~~corresponding ~~over~~expenses ~~the~~have ~~life of~~no ~~the~~effect ~~associated~~on ~~involvement~~our ~~(e.g.,~~operating ~~the~~income ~~initial~~and ~~term~~our ofnet ~~the related agreement)~~income.

Frequent Guest Program. Starwood Preferred Guest (“SPG”) is ~~the~~our ~~Company’s~~ frequent guest incentive marketing program. SPG members earn points based on ~~their~~ spending at ~~the~~our ~~Company’s~~ properties, as incentives to first time buyers of VOIs and, to a ~~lesser~~ lesser degree, through participation in affiliated partners’ programs~~, such as those offered by airlines~~. Points can be redeemed at most ~~Company~~of our owned, leased, managed and franchised properties. The cost of operating the program, including the estimated cost of award redemption, is charged to hotel and vacation ownership properties based on members’ qualifying expenditures. Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.

~~SPG~~We, isthrough ~~provided~~the asservices aof ~~marketing~~third-party ~~program~~actuarial toanalysts, determine the ~~Company’s~~fair ~~properties,~~value ~~including~~of asthe ~~incentives~~future toredemption ~~first~~obligation ~~time buyers~~based ofon ~~VOIs.~~statistical ~~The~~formulas which ~~cost~~project the timing of ~~operating~~future ~~the~~point ~~program~~redemption based on historical experience, including an estimate of the “breakage” for points that will never ~~estimated~~be ~~cost~~redeemed, and an estimate of ~~award~~the ~~redemption,~~points isthat ~~charged~~will toeventually ~~properties~~be redeemed. ~~based~~Actual onexpenditures ~~members’~~for ~~qualifying~~SPG ~~expenditures~~may differ from the actuarially determined liability. ~~Revenue~~The istotal actuarially determined liability as of September 30, 2004 ~~recognized~~and byDecember 31, ~~participating~~2003 ~~hotels~~is $242 million and ~~resorts~~$201 million, ~~when~~respectively. A 10% reduction in the “breakage” of points ~~are~~would result in an increase of $35 ~~redeemed~~million ~~for~~to ~~hotel~~the ~~stays~~liability at September 30, 2004.

~~The~~Long-Lived ~~Company,~~Assets. ~~through~~We continually evaluate the ~~services~~carrying value of ~~third~~our long-~~party~~lived assets for impairment by comparing the expected undiscounted future ~~actuarial~~cash ~~analysts,~~flows ~~determines~~of the ~~fair~~assets to the net book value of the assets. If the expected undiscounted future cash flows are less than the net book value of the assets, ~~redemption~~the ~~obligation~~excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based onupon ~~statistical~~discounted ~~formulas~~cash ~~which~~flows of the assets ~~project~~at a rate deemed reasonable for the ~~timing~~type of ~~future~~asset ~~point~~and ~~redemption~~prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. We evaluate the carrying value of our long-lived assets based on our plans, at the time, for such assets and such qualitative ~~historical~~factors ~~experience~~as future development in the surrounding area, status of expected local competition and projected incremental income from renovations. Changes to our plans, including a decision to dispose of or change the intended use of an asset, ~~estimate~~can have a material impact on the carrying value of the asset. When a decision is made to sell an asset, we do not record that asset as held for sale until all the criteria in Statement of Financial Accounting Standards (“~~breakage~~SFAS”) No. 144, “Accounting for ~~points~~the ~~that~~Impairment ~~will~~or ~~never~~Disposal beof ~~redeemed~~Long-Lived Assets,” have been met and we have received a non-refundable deposit.

3133

andTable an estimate of the points that will eventually be redeemed. These factors determine the required liability for outstanding points. The Company’s management and franchise agreements require that the Company be reimbursed currently for the costs of operating the program, including marketing, promotion, communications with, and performing member services for the SPG members. Actual expenditures for SPG may differ from the actuarially determined liability. Contents

Insurance Retention. Through our captive insurance company, we provide ~~The~~insurance ~~liability~~coverage for ~~the~~workers’ ~~SPG~~compensation, ~~program~~property isand ~~included~~general liability claims arising at hotel properties owned or managed by us who elect to participate in our insurance programs through policies ~~other~~written ~~long-term~~directly ~~liabilities~~and through reinsurance arrangements. Estimated insurance claims payable represent expected settlement of outstanding claims and ~~accrued~~a provision ~~expenses~~for incosts ~~the~~that have been incurred but not reported. These estimates ~~accompanying~~are ~~consolidated~~based ~~balance~~on ~~sheets~~our assessment of potential liability using an analysis of available information including pending claims, historical experience and current cost trends. The ~~total~~amount ~~actuarially determined~~of the ultimate liability asmay vary from these estimates. Estimated costs of these self-insurance programs are accrued based on the analysis of third-party actuaries. Total self-insurance reserves at September 30, ~~2003~~2004 and December 31, ~~2002~~2003 iswere $~~195~~108 million and $~~175~~96 million, respectively.

~~Asset Valuations~~Legal Contingencies. ~~The~~We ~~Company continually~~are ~~evaluates~~subject ~~the~~to ~~carrying~~various ~~value~~legal proceedings and claims, the outcomes of ~~its~~which ~~assets~~are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss ~~impairment.~~contingency ~~Asset~~should ~~impairment~~be ~~analysis~~accrued by a charge to income if it is ~~conducted~~probable onthat ~~the~~an ~~following~~asset ~~classes~~has been impaired or a liability has been incurred and the amount of ~~assets:~~the loss ~~(1) long~~can ~~lived~~be ~~assets~~reasonably estimated. We evaluate, among other factors, the degree ~~(including~~of ~~assets~~probability ~~held~~of ~~for~~an ~~sale);~~unfavorable ~~(2) investments;~~outcome and the ability to make a reasonable ~~(3) goodwill~~estimate ~~and~~of ~~intangible~~the ~~assets~~amount of loss. Changes in these factors could materially impact our financial position or our results of operations.

• Income ~~Long~~Taxes. ~~Lived~~We ~~Assets~~provide —for ~~The~~income ~~expected~~taxes ~~undiscounted~~in ~~future~~accordance ~~cash~~with ~~flows~~SFAS ofNo. 109, ~~the~~“Accounting ~~assets~~for ~~are~~Income ~~compared~~Taxes”. toThe ~~the~~objectives ~~net book value~~ of ~~the~~accounting ~~assets.~~for Ifincome taxes ~~the expected undiscounted future cash flows~~ are ~~less~~to ~~than~~recognize the ~~net~~amount ~~book value~~ of ~~the~~taxes ~~assets,~~payable ~~the~~or ~~excess~~refundable offor the ~~net book value over the estimated fair value is charged to~~ current ~~earnings.~~year ~~Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset~~ and ~~prevailing~~deferred ~~market~~tax ~~conditions,~~liabilities ~~appraisals~~ and, ~~if appropriate, current estimated net sales proceeds from pending offers. The Company evaluates the carrying value of its long-lived~~ assets ~~based on its plans, at the time,~~ for ~~such assets. Changes to~~ the ~~Company’s~~future ~~plans,~~tax consequences ~~including a decision to dispose~~ of anevents ~~asset,~~that ~~can~~ have abeen ~~material~~recognized ~~impact~~in onan ~~the carrying value of the asset, the Company~~entity’s financial statements ~~position~~or ~~and~~tax ~~the Company’s results from operations~~returns. •Judgment ~~Investments — The Company also assesses the carrying value of its long-term investments. The fair market value of investments~~ is ~~based~~required onin ~~the~~assessing ~~market prices for~~ the ~~last~~future ~~day~~tax consequences of ~~the~~events ~~accounting~~that ~~period~~have ifbeen ~~the~~recognized ~~investment~~in ~~trades~~our onfinancial ~~quoted~~statements ~~exchanges. For non-traded investments, fair value is estimated based on the underlying value of the investment, which is dependent on the performance of the companies~~ or tax ~~ventures in which the Company has invested, as well as the volatility inherent in external markets for these types of investments~~returns.

InRESULTS ~~assessing~~OF potential impairment for these investments, the Company will consider these factors as well as forecasted financial performance of its investees. If these forecasts are not met, the Company may have to record impairment charges. The fair value of investments, which is based on market prices or the value of the underlying collateral, exceeds the carrying value of investments at September 30, 2003 and December 31, 2002.OPERATIONS

• The ~~Goodwill~~following ~~and~~discussion ~~Intangible~~presents ~~Assets~~an –analysis ~~Goodwill and intangible assets arise in connection with acquisitions, including the acquisition~~ of ~~management~~results ~~contracts. The Company has ceased amortizing goodwill in connection with the adoption~~ of ~~SFAS~~our No. 142 “Goodwill and Other Intangible Assets”. Intangible assets with finite lives continue to amortize on a straight-line basis over their respective useful lives. The Company reviews all goodwill and intangible assets with indefinite lives operations for ~~impairment by comparisons of fair value to net book value annually, or upon~~ the ~~occurrence~~three ofand anine ~~trigger~~months ~~event.~~ended ~~Impairments~~September 30, ~~excluding~~2004 ~~those~~and ~~in the year of adoption, are recognized in operating results~~2003. ~~Intangibles with finite lives are assessed for impairment on a basis consistent with the analysis conducted for long-lived assets described above.~~

~~Beneficial~~We ~~and~~derive ~~Retained~~the ~~Interests. The~~majority ~~Company~~of ~~periodically~~our ~~sells notes~~revenues ~~receivable~~and ~~originated~~operating byincome ~~its~~from ~~vacation~~our owned, ~~ownership~~leased ~~business in~~and ~~connection~~consolidated ~~with~~joint ~~the~~venture ~~sale~~hotels and a significant portion of ~~VOIs.~~these ~~The~~results ~~Company~~are ~~retains interests~~driven inby ~~the~~these ~~assets~~hotels ~~transferred~~in toNorth ~~qualified~~America. ~~and~~Total revenues ~~non-qualified~~generated ~~special~~from ~~purpose~~our ~~entities,~~hotels ~~which~~in ~~are~~North ~~accounted~~America for as ~~over-collateralizations~~the three and ~~interest~~nine ~~only~~months ~~strips~~ending ~~(“Beneficial~~September 30, or2004 ~~Retained~~were ~~Interests”).~~$581 million ~~These~~and ~~Beneficial or~~$1.781 billion, ~~Retained~~respectively, ~~Interests~~and ~~are~~$528 million ~~treated~~and as$1.698 billion, ~~“trading”~~respectively, for ~~transactions~~ ~~prior~~the tosame ~~2002~~periods ~~and~~of ~~“available-for-sale”~~2003 (our ~~for~~worldwide ~~transactions~~owned, ~~thereafter~~leased ~~under~~and ~~the~~consolidated ~~provisions~~joint ofventure ~~SFAS~~revenues were $811 Nomillion, $2.448 ~~115~~billion, ~~“Accounting~~$735 million ~~for~~and ~~Certain~~$2.288 billion, ~~Investments~~for inthe ~~Debt and~~same ~~Equity Securities~~periods, respectively).” The ~~Company~~following ~~reports~~represents ~~changes in~~ the ~~fair~~ ~~values~~geographical breakdown of ~~these~~our owned, ~~Beneficial~~leased orand ~~Retained~~consolidated ~~Interests~~joint ~~through the~~venture ~~accompanying~~revenues ~~consolidated~~in ~~statements~~North ofAmerica ~~income~~by metropolitan area for ~~trading securities~~the three and ~~through~~nine ~~the~~months ~~accompanying~~ended ~~consolidated~~September 30, ~~statements~~2004 (with ofcomparable ~~comprehensive~~data ~~income~~ for ~~available-for-sale securities. The~~2003): ~~Company had~~


Top Ten Metropolitan Areas as a % Owned North America Revenues for the Three
Months Ended September 30, 2004 with Comparable Data for 2003
Metropolitan Area	2004 Revenues			2003 Revenues
New York, NY		18.5	%		16.8	%
Boston, MA		11.0	%		10.1	%
San Diego, CA		5.4	%		6.3	%
Los Angeles – Long Beach, CA		5.0	%		4.9	%
Atlanta, GA		4.4	%		4.7	%
Seattle, WA		4.4	%		5.0	%
Toronto, Canada		4.1	%		3.3	%
Maui, HI		4.0	%		3.8	%
Chicago, IL		3.3	%		3.6	%
Poconos, PA		3.1	%		3.3	%
All Other		36.8	%		38.2	%

Total		100	%		100	%

34 ~~Beneficial and Retained Interests of $49 million and $47 million at September 30, 2003 and December 31, 2002, respectively.~~

LegalTable Contingencies. The Company is subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. Disclosure of a contingency is required if there is at least a reasonable possibility that a significant loss has been incurred. The Company evaluates, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact the Company’s financial position or its results of operations. Contents

Income Taxes. SFAS No. 109, “Accounting for Income Taxes,” establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the Company’s financial position or its results of operations.


Top Ten Metropolitan Areas as a % Owned North America Revenues for the Nine
Months Ended September 30, 2004 with Comparable Data for 2003
Metropolitan Area	2004 Revenues			2003 Revenues
New York, NY		18.1	%		15.5	%
Boston, MA		9.4	%		9.1	%
San Diego, CA		5.4	%		5.9	%
Phoenix, AZ		5.0	%		5.0	%
Los Angeles – Long Beach, CA		4.9	%		4.5	%
Atlanta, GA		4.5	%		4.8	%
Seattle, WA		3.9	%		3.9	%
Toronto, Canada		3.8	%		3.0	%
Maui, HI		3.6	%		3.2	%
Houston, TX		2.8	%		2.6	%
All Other		38.6	%		42.5	%

Total		100	%		100	%

~~The~~A ~~Company’s~~leading ~~operating~~indicator ~~results~~ for the ~~nine months~~performance ~~ended~~of ~~September 30~~our owned, ~~2003~~leased ~~were~~and ~~significantly impacted~~consolidated byjoint ~~the~~venture ~~weakened~~hotels ~~worldwide~~is ~~economic environment~~REVPAR, ~~the~~as ~~aftermath~~it ~~of the~~measures ~~war in Iraq, and~~ the ~~Severe~~period-over-period ~~Acute~~growth ~~Respiratory Syndrome (“SARS”) epidemic, all of which resulted~~ in ~~a dramatic~~ ~~slowdown~~rooms inrevenue ~~business~~for ~~and~~comparable ~~international travel~~properties. ~~The~~This ~~decrease~~is ~~in business~~particularly ~~transient~~the ~~demand,~~case ~~when~~in ~~compared to~~ the ~~nine months~~ ~~ended~~United ~~September 30,~~States ~~2002,~~where ~~had~~there anis ~~adverse~~no impact on ~~the Company’s~~this ~~majority~~measure ~~owned~~from ~~hotels,~~foreign ~~many of which are located~~exchange ~~in major urban markets~~rates.

~~However,~~Three inMonths ~~the~~Ended ~~third quarter of 2003~~September 30, ~~transient travel~~2004 inCompared ~~North~~with ~~America,~~Three ~~where~~Months ~~the~~Ended ~~Company has its highest concentration of owned hotels~~September 30, ~~began to increase when compared~~2003 ~~to 2002, more than offsetting the continued weakeness in group~~ ~~travel.~~

~~Three~~Continuing ~~Months Ended September 30, 2003~~Operations ~~Compared with Three Months Ended September 30,~~ ~~2002~~

Revenues. Total revenues, including other revenues from managed and franchised properties, were $1.~~140~~336 billion, aan ~~decrease~~increase of $7200 million when ~~compared~~ compared to ~~2002~~2003 levels. ~~Total~~Revenues ~~revenues,~~reflect ~~excluding~~a ~~other~~10.3% increase in revenues from ~~managed~~our ~~and~~owned, ~~franchised~~leased ~~properties~~and ~~(“Total~~consolidated ~~Revenues”), declined~~joint ~~2.5%~~venture hotels to $~~936~~811 million for the three months ended September 30, ~~2003~~2004 when compared to $~~960~~735 million in ~~the~~ the corresponding period inof ~~2002.~~2003, ~~Total~~an ~~Revenues~~increase ~~reflect~~of a$37 million ~~7.7%~~in management fees, ~~decrease~~franchise infees ~~revenues~~and ~~from~~other income to $105 million for the ~~Company’s~~three ~~owned~~months ended September 30, ~~leased~~2004 ~~and~~when compared to $68 million in the corresponding period of ~~consolidated~~2003, ~~joint~~an ~~venture~~increase ~~hotels~~of $46 million in vacation ownership revenues to $~~735~~175 million for the three months ended September 30, ~~2003~~2004 when compared to $~~796~~129 million in the corresponding period of ~~2002,~~2003 ~~offset~~and by an increase of $3741 million in other revenues ~~hotel~~from managed and ~~leisure revenues~~franchised properties to $~~201~~245 million for the three months ended September 30, ~~2003~~2004 when compared to $~~164~~204 million in ~~the~~ the corresponding period of ~~2002~~2003.

The ~~decrease~~increase in revenues from owned, leased and consolidated joint venture hotels is due ~~primarily~~in tolarge ~~the absence~~part ofto ~~substantially all of~~ the ~~revenues~~continued ~~generated~~economic byrecovery, 15particularly ~~non-strategic~~its ~~domestic~~effect ~~hotels~~on ~~and~~the ~~four~~hospitality ~~hotels~~industry. inThe ~~Costa~~war ~~Smeralda, Italy,~~in ~~which~~Iraq ~~were for the most part, sold~~ in ~~the~~2003 ~~first~~and ~~half of~~the ~~2003.~~weakened ~~Revenues~~worldwide ~~from~~economic ~~these~~environment ~~hotels~~negatively inimpacted the third quarter ~~of 2003~~ ~~were~~2003 ~~$5 million as compared to $94 million in the third quarter of 2002~~results. Revenues at ~~the~~our ~~Company’s~~ hotels owned during both periods (“Same-Store Owned Hotels”) (~~140~~139 hotels for the three months ended September 30, ~~2003 and~~2004 ~~2002~~and 2003, excluding 25 17 hotels sold or closed inor ~~2003~~without comparable results in 2004 and ~~2002~~2003) increased 410.96% to $~~724~~792 million for the three months ended September 30, ~~2003~~2004 when compared to $~~690~~716 million in the same period of ~~2002~~2003 due primarily to an increase in ~~revenue per available room (“~~REVPAR”). REVPAR at ~~the Company’s~~our Same-Store Owned Hotels increased 4 12.43% to $99111.43 15 for the three months ended September 30, ~~2003~~2004 when compared to to the corresponding ~~2002~~2003 period. The increase in REVPAR was ~~primarily~~ attributed to increases in occupancy rates to 6871.75% in the three months ended September 30, 2004 ~~2003~~ when compared to 65 68.67% in the same period in ~~2002~~2003, ~~slightly~~and ~~offset~~increases ~~by decreases~~ in average daily rate (“ADR”) at these Same-Store Owned Hotels to $155.55 for the three months ended September 30, 2004 compared to $144.8106 for the corresponding 2003 period. REVPAR at Same-Store Owned Hotels in North America increased 12.1% for the three months ended September 30, 2004 when compared to the same period of 2003 due to increased transient and group travel business for the period. REVPAR at our international Same-Store Owned Hotels, increased by 12.8% for the three months ended September 30, 2004 when compared to the same period of 2003, with Europe, where we have our biggest concentration of international owned hotels, increasing 11.5%. REVPAR

3335

$145.23Table for the corresponding 2002 period. REVPAR at Same-Store Owned Hotels in North America increased 3.2% for the three months ended September 30, 2003 when compared to the same period of 2002 due to increased transient business which more than offset the decline in group travel for the period. REVPAR at the Company’s international Same-Store Owned Hotels, increased by 7.8% for the three months ended September 30, 2003 when compared to the same period of 2002. REVPAR for Same-Store Owned Hotels in Europe, where the Company has its biggest concentration of international owned hotels, decreased 5.7% excluding the favorable effect of foreign currency translation. Contents

~~The increase in other hotel and leisure revenues,~~ for ~~the~~Same-Store ~~three~~Owned ~~months~~Hotels ~~ended~~internationally ~~September 30,~~increased ~~2003~~5.4% ~~when~~excluding ~~compared to~~ the ~~same period in 2002, resulted from the increase in~~ ~~vacation~~favorable ~~ownership~~effects ~~revenues~~ of ~~47.9%~~foreign tocurrency ~~$133 million~~translation. ~~in 2003~~REVPAR ~~compared~~for toSame-Store ~~$90 million~~Owned Hotels in ~~2002.~~Europe ~~Contract sales of VOI inventory~~ increased 262.5% inexcluding the ~~three~~favorable ~~months~~effect ~~ended September 30, 2003 when compared to the same period in 2002, primarily as a result~~ of ~~sales at the Westin~~foreign ~~Ka’anapali~~currency ~~Ocean Resort Villas in Maui, Hawaii~~translation. ~~There were~~ ~~no sales of vacation ownership receivables during the three~~ ~~months ended September 30, 2003. In the three months ended~~ September 30, 2002, the Company recognized a gain on sale of vacation ownership receivables of $3 million. Other hotel and leisure revenues also includes the Company’s share of costs associated with construction remediation efforts at an unconsolidated joint venture totaling $3 million and $5 million, respectively, for the three months ended September 30, 2003 and 2002.

~~Other~~The ~~revenues~~increase ~~and~~in ~~expenses~~vacation ~~from~~ownership ~~managed~~sales and services is primarily due to ~~franchised~~the ~~properties~~increase ~~were~~in the sales of VOIs of 36.0% to $~~204~~151 million ~~and~~in 2004 compared to $~~187~~111 million in 2003. These increases represent increased sales volume as well as the revenue recognition from progressing and completed projects accounted for under the ~~three~~percentage ~~months~~of ~~ended~~completion ~~September 30,~~accounting methodology as required by ~~2003~~generally ~~and~~accepted ~~2002~~accounting principles, ~~respectively~~primarily at The St. ~~These~~Regis ~~revenues~~in ~~represent~~Aspen, ~~reimbursements~~Colorado ofand ~~costs~~the ~~incurred~~Westin onKa’anapali ~~behalf~~Ocean Resort Villas in Maui, Hawaii. Contract sales of ~~managed~~VOI ~~hotel~~inventory, which represents vacation ownership revenues ~~properties~~before ~~and~~adjustments ~~franchisees.~~for ~~These~~percentage ~~costs~~of ~~relate~~completion ~~primarily~~accounting toand rescissions and ~~payroll~~excluding ~~costs~~fractional sales at ~~managed~~the ~~properties~~St. ~~where~~Regis ~~the~~Aspen ~~Company~~described isbelow, ~~the~~increased ~~employer~~30.6% ~~Since~~in the ~~reimbursements~~three ~~are~~months ~~made~~ended ~~based~~September 30, ~~upon~~2004 when compared to the ~~costs~~same ~~incurred~~period ~~with~~in no2003, ~~added~~primarily ~~margin~~as a result of increased sales at the Westin Ka’anapali Ocean Resort Villas in Maui, ~~these~~Hawaii ~~revenues~~and the Westin Kierland Resort and ~~corresponding~~Spa in Scottsdale, Arizona. In May 2004, we began selling fractional units ~~expenses~~at ~~have~~The noSt. ~~effect~~Regis onin Aspen, Colorado. We are in the ~~Company’s~~process ~~operating~~of ~~income~~converting 98 guest rooms at this hotel into 25 fractional units, which will be sold in four ~~net~~week ~~income~~intervals, orand ~~profit~~20 ~~margins~~new hotel rooms. The fractional project is expected to be completed towards the end of 2004.

~~Operating~~The ~~Income. Total~~increase ~~Company~~in ~~operating~~management ~~income (which~~fees, ~~includes~~franchise ~~$1 million~~fees ~~of restructuring~~ and other ~~special~~ ~~credits~~income ~~and $3 million~~ of ~~construction remediation costs at an unconsolidated joint venture in 2003 and~~ $~~2 million of restructuring and other special credits,~~37 $5 million ofwas ~~construction~~primarily ~~remediation~~due ~~costs at an unconsolidated joint venture and $3 million of foreign exchange losses related~~ to the ~~devaluation~~inclusion of ~~the~~revenues ~~Argentine~~from ~~Peso in 2002) was $112 million in~~ the ~~three~~Bliss ~~months~~spas ~~ended~~and ~~September 30~~product sales, ~~2003~~which ~~compared~~were toacquired ~~$127 million~~at inthe ~~2002. Excluding~~beginning ~~depreciation and amortization~~ of ~~$105 million and $129 million for the three months ended September 30~~2004, ~~2003~~ and ~~2002, respectively, operating~~ income ~~decreased 15.2% or~~earned ~~$39 million~~on ~~to $217 million for~~ the ~~three~~Le ~~months~~Meridien ~~ended September 30,~~Hotels ~~2003 when compared to $256 million in the same period in 2002, primarily due to the decline in operating income at the Company’s owned, leased~~ and ~~consolidated~~ ~~joint~~Resorts ~~venture hotels resulting from the absence of substantially all of the lost operating income from the sold properties discussed above~~Ltd. ~~Operating~~(“Le ~~income~~Meridien”) atdebt ~~the~~participation ~~Company’s~~acquired ~~owned,~~by ~~leased~~us ~~and consolidated joint venture hotels was $102 million~~ in ~~the~~late ~~three months ended September~~December ~~30,~~ 2003 ~~compared to $141 million in the same period of 2002~~. ~~Operating income from the sold properties was breakeven in 2003 compared to an operating income of $32 million in 2002. Despite the increased revenues at Same-Store Owned Hotels~~Additionally, ~~operating~~management ~~income at these hotels in North America was negatively impacted by increased property taxes~~ and ~~insurance costs, including workers compensation and~~franchise ~~health~~fees ~~insurance. Operating income for the vacation ownership segment~~ increased to $3213 million ~~in the three months ended September 30, 2003 compared to $14 million in 2002 primarily~~ due to ~~the~~strong ~~significant~~top ~~increase~~line ~~in sales, and resulting operating income at the Westin Ka’anapali Ocean Resort Villas in Maui, Hawaii~~growth.

~~Restructuring~~Other revenues and ~~Other~~expenses ~~Special~~from ~~Credits.~~managed and franchised properties ~~During~~increased to $245 million from $204 million for the ~~third~~three ~~quarter~~months ofended September 30, 2004 and 2003, ~~the~~respectively. ~~Company~~These ~~recorded~~revenues ~~a $1 million~~represent ~~reversal~~reimbursements of ~~other~~costs ~~special~~incurred ~~charges~~on ~~related~~behalf toof ~~the~~managed ~~collections~~hotel ofproperties and ~~receivables~~franchisees ~~which~~and ~~were~~relate ~~previously~~primarily ~~deemed~~to ~~uncollectible.~~payroll ~~During the~~costs ~~third~~at ~~quarter~~managed ofproperties ~~2002,~~where we are the ~~Company~~employer. ~~recorded~~Since ~~a $2 million~~the ~~reversal~~reimbursements ofare ~~other~~made ~~special~~based ~~charges~~upon ~~primarily~~the costs ~~related~~incurred towith ~~its~~no ~~investment~~added inmargin, athese ~~certain~~revenues ~~e-business~~and ~~venture~~corresponding expenses have ~~previously~~no ~~deemed~~effect ~~impaired~~on our operating income and our net income.

Operating Income. Our total operating income was $198 million in the ~~Depreciation~~three ~~and~~months ~~Amortization~~ended September 30, 2004 compared to $109 million in 2003. ~~Depreciation~~Excluding ~~expense~~depreciation ~~decreased~~ and amortization of $23107 million and $104 million for the three months ended September 30, 2004 and 2003, respectively, operating income increased 43.2% or $92 million to $~~100~~305 million ~~during~~for the three months ended September 30, ~~2003~~2004 when compared to $~~123~~213 million in the ~~corresponding~~same period ofin 2003, ~~2002.~~primarily ~~Additional~~due ~~depreciation expense~~to ~~resulting~~the ~~from~~improved ~~capital~~owned ~~expenditures~~hotel atperformance ~~the~~and vacation ~~Company’s~~ownership ~~owned,~~sales ~~leased~~discussed ~~and~~above.

34 Operating income at our hotel segment was $157 million in the three months ended September 30, 2004 compared to $102 million in the same period of 2003. The increase is primarily due to the continued economic recovery. Operating income for the vacation ownership segment was $41 million in the three months ended September 30, 2004 compared to $28 million for the same period in 2003 primarily due to the significant increase in income from the sales of VOIs and the percentage of completion accounting methodology discussed above.

~~consolidated~~ Restructuring ~~joint~~and ~~venture~~Other ~~hotels~~Special inCredits, ~~the~~Net. ~~past 12 months~~During ~~was more than offset by~~ the ~~reduced~~three ~~depreciation~~months ~~expense~~ended ~~from fully depreciated furniture~~September 30, ~~fixtures and equipment~~2004, aswe ~~the~~reversed ~~Company~~a ~~reached~~$37 million ~~the~~reserve ~~five~~previously ~~year anniversary of~~recorded ~~the~~through ~~merger~~restructuring ~~with ITT Corporation in February 2003~~ and ~~the classification~~other ofspecial ~~the~~charges 18due ~~non-core~~to ~~domestic~~a ~~hotels~~favorable ~~and~~judgment ~~the four~~in ~~Costa~~a ~~Smeralda~~litigation ~~hotels~~matter. ~~and~~During the ~~Hotel~~three ~~Principe~~months diended ~~Savoia in Milan, Italy (“Principe”) as held for sale effective March~~September 3130, 2003 ~~(as discussed earlier~~, ~~most of these hotels~~we ~~were~~recorded ~~later~~a ~~sold).~~net ~~Amortization~~reversal ~~was~~of $51 million inof ~~the~~other ~~three months~~special ~~ended~~charges ~~September 30,~~related ~~2003 compared~~ to ~~$6 million~~the incollections ~~the~~of ~~corresponding~~receivables ~~period~~which ofwere ~~2002~~previously deemed uncollectible.

~~Net~~Depreciation ~~Interest~~and ~~Expense~~Amortization. ~~Interest~~ Depreciation expense, ~~which~~increased ~~is net of interest income of~~ $23 million to ~~and~~ $0103 million induring the three months ended September 30, ~~2003~~2004 ~~and~~compared ~~2002,~~to ~~respectively, and discontinued operations allocations of~~ $4100 million ~~for~~in the ~~three~~corresponding ~~months~~period ~~ended~~of ~~September 30, 2002,~~2003 ~~decreased~~due to ~~$69 million~~capital ~~from~~expenditures ~~$77 million. This~~at ~~decrease~~our ~~was~~owned, ~~due~~leased ~~primarily~~and toconsolidated ~~the~~joint ~~paydown~~venture ofhotels ~~debt~~in ~~with $1.1 billion of proceeds from~~ the ~~domestic~~past ~~and Italian~~12 months. ~~hotel~~Amortization ~~sales~~expense ~~discussed~~was ~~previously~~$4 million ~~of as well as lower interest rates~~ in ~~2003~~both ~~compared to~~ the ~~third~~three ~~quarter~~months ofended ~~2002. The Company’s weighted average interest rate was 5.50% at~~ September 30, ~~2003~~2004 ~~versus~~and 52003.~~81% at September 30, 2002.~~

~~Gain~~Net ~~(Loss)~~Interest ~~On Asset Dispositions and Impairments, Net~~Expense. ~~During~~Interest ~~the~~expense ~~first half~~decreased ofto ~~2003, the Company recorded an impairment charge of approximately~~ $~~174~~64 million ~~(pre-tax)~~for ~~to write down a~~the ~~portfolio~~three ofmonths 18ended ~~non-core domestic hotels~~September 30, ~~including~~2004 ~~several non-proprietary~~compared ~~branded hotels~~ to ~~fair~~$69 million ~~value~~in ~~less selling costs~~the ~~due~~corresponding toperiod ~~the~~of ~~Company’s~~2003. ~~plan~~This todecrease ~~dispose~~was ofdue ~~these~~primarily ~~assets subject~~ to, inthe ~~most cases, franchise agreements. The Company~~lower ~~completed~~debt ~~the~~balances ~~sale of 15 of these hotels~~ in ~~late~~2004 ~~June~~compared ~~and throughout~~to the third quarter of 2003 ~~and,~~as ina ~~October~~result ~~2003, completed the sale~~ of ~~one additional hotel. The Company expects to close on~~ the ~~two remaining properties later in 2003. An~~ ~~additional~~paydown ~~impairment charge~~ of ~~$3 million~~a ~~was~~portion ~~recorded in the third quarter~~ of ~~2003 primarily related to post closing adjustments to~~ the ~~sale~~Sheraton ~~prices~~Holding ofPublic ~~these~~debt ~~hotels.~~and ~~During~~ the ~~third quarter of 2002, the Company recorded a $6~~Series ~~million gain on~~B ~~sale~~Convertible ~~related~~Senior ~~primarily~~Notes toand the ~~sale~~amortization of ~~its~~deferred ~~investment~~gains inrecorded ~~Interval~~as a ~~International.~~

36 Discontinued Operations. For the three months ended September 30, 2002, loss from discontinued operations represents the results of the Principe net of $4 million of allocated interest expense. The Company sold the Principe in June 2003, with no continuing involvement, resulting in a gain on sale of $193 million (pre-tax). An additional $1 million pre-tax gain was recorded in the third quarter of 2003 related to post-closing adjustments to the Principe sale, as well as the after tax reversal of certain reserves relating to the Company’s former gaming business disposed of in 1999. The Company believes these reserves are no longer required.

IncomeTable Tax Expense. The effective income tax rate for continuing operations for the third quarter of 2003 excluding special items was a benefit of 9.3% compared to a tax rate of 2.0% in the corresponding quarter in 2002. The Company’s effective income tax rate excluding special items is determined by the level and composition of pre-tax income subject to varying foreign, state and local taxes and other items. The effective income tax rate for the quarter ended September 30, 2003 is lower than the prior year due to the combination of the lower than expected pre-tax earnings for 2003 and the level of the Company’s 2003 dividend, which at this time, is expected to be consistent with the $0.84 per Share annual dividend paid for 2002. Including the net tax benefits on special items primarily related to asset dispositions and impairment charges and taxes on construction remediation costs in the three months ended September 30, 2003 and asset dispositions and impairment charges and restructuring and other special credits in the same period of 2002, the effective income tax rate for continuing operations was a benefit of 19.3% in the third quarter of 2003 as compared to a tax rate of 4.7% in the third quarter of 2002. Contents

35result of interest rate swap terminations completed in early March 2004, offset in part by slightly higher interest rates. Our weighted average interest rate was 5.67% at September 30, 2004 versus 5.50% at September 30, 2003.

Loss On Asset Dispositions and Impairments, Net. We recorded $4 million ~~Nine~~of ~~Months~~losses ~~Ended~~on asset dispositions and impairments in the three months ended September 30, ~~2003~~2004. These losses reflect impairment charges primarily ~~Compared~~associated with ~~Nine~~our ~~Months~~investment ~~Ended~~in ~~September 30,~~a joint venture that owns a hotel managed by ~~2002~~us.

~~Revenues. Total~~During ~~revenues,~~the ~~including~~third ~~other revenues~~quarter ~~from~~of ~~managed and franchised properties~~2003, ~~were $3.453 billion,~~we ~~flat~~recorded ~~with~~an ~~2002~~additional ~~levels. Total revenues,~~impairment ~~excluding~~charge ~~other~~of ~~revenues~~approximately ~~from managed and franchised properties (“Total Revenues”), declined to~~ $~~2.819~~3 ~~billion for~~million ~~the nine months ended September 30, 2003 when compared~~ to ~~$2.864 billion~~write indown ~~the~~a ~~corresponding~~portfolio ~~period~~of in18 ~~2002.~~North ~~Total~~American ~~Revenues~~hotels, ~~reflect~~including aseveral ~~4.1%~~non-proprietary ~~decrease~~branded inhotels, ~~revenues~~to ~~from the~~fair ~~Company’s~~value ~~owned,~~less ~~leased~~selling ~~and~~costs ~~consolidated~~due ~~joint venture hotels~~ to ~~$2.288 billion~~our ~~for~~plan ~~the~~to ~~nine~~dispose ~~months~~of ~~ended September 30,~~these ~~2003~~assets ~~when~~subject ~~compared~~ to ~~$2.386 billion in~~ ~~the~~management ~~corresponding~~and/or ~~period~~franchise ofagreements. ~~2002,~~An ~~offset~~initial byimpairment ancharge ~~increase~~ of $53 174 million in(pre-tax) ~~other~~was ~~hotel~~recorded ~~and~~during ~~leisure~~the ~~revenues~~first ~~to $531 million~~half ~~for~~of ~~the~~2003. ~~nine~~We ~~months~~disposed ~~ended September 30,~~of ~~2003~~16 ~~when~~of ~~compared~~these tohotels ~~$478 million~~later in ~~the corresponding period of 2002~~2003.

~~The~~Discontinued decrease in revenues from owned, leased and consolidated joint venture hotels is due primarily to the absence of significant revenues generated by 15 non-strategic domestic hotels and four hotels in Costa Smeralda, Italy, which were, for the most part, sold during the first half of 2003Operations. ~~Revenues~~ ~~from~~For ~~these hotels in~~ the ~~nine~~three months ended ~~September 30,~~ ~~2003 were $105 million, a decrease of $92 million as compared to $197 million in the same period of 2002. Revenues at the Company’s Same-Store Owned Hotels (140 hotels for the nine months ended~~ September 30, ~~2003~~ 2004 and ~~2002, excluding 25 hotels sold or closed in~~ 2003 ~~and 2002) increased by 0.5% to $2.170 billion for the nine months ended September 30~~, ~~2003~~we ~~when~~recorded ~~compared to the same period of 2002 due primarily to~~ a ~~slight increase in occupancy rates at these hotels to 64.7% in the nine months ended September 30, 2003 when compared to 64.5% in the same period in 2002, offset by a slight decrease in ADR to~~ $~~149.83 for the nine months ended September~~3 ~~30,~~million ~~2003~~and ~~compared to~~ $151.04 for the corresponding 2002 period. REVPAR at the Company’s Same-Store Owned Hotels decreased 0.5% to $96.91 for the nine months ended September 30, 2003 when compared to the corresponding 2002 period. REVPAR at Same-Store Owned Hotels in North America decreased 1~~.8% for the nine months ended September~~ 30million, ~~2003 when compared to the same period of 2002. As discussed above~~respectively, ~~the~~pre-tax ~~decrease in REVPAR and revenues~~gain ~~from~~on ~~owned,~~dispositions leased and consolidated joint venture hotels in North America was primarily due to the decline in business transient demand as a result of the weakened global economies and the war in Iraq and its aftermath as well as the impact of SARS and particularly the World Health Organization’s travel advisory related to Toronto where the Company owns two Sheraton hotels, as well as the severe winter weather in the Northeast United States in February 2003 which significantly restricted travel in these regions. REVPAR at the Company’s international Samepost-~~Store~~closing ~~Owned~~adjustments ~~Hotels, which increased by 3.6%~~ for the ~~nine~~sale ~~months ended September 30, 2003 when compared to the same period~~ of ~~2002, was also impacted by weakened global economies,~~ the ~~situation in the Middle East and the SARS~~Hotel ~~epidemic,~~Principe ~~but~~di ~~was~~Savoia ~~offset by net favorable effects of foreign currency translation~~(“Principe”). ~~REVPAR~~We ~~for~~sold ~~Same-Store~~the ~~Owned~~Principe ~~Hotels~~ in ~~Europe,~~ ~~where~~June 2003 ~~the~~with ~~Company has its biggest concentration of~~no ~~international~~continuing ~~owned hotels, decreased 11~~involvement.~~0% excluding the~~ ~~favorable effect of foreign currency translation.~~

~~The~~Income ~~increase~~Tax inExpense. ~~other~~The ~~hotel~~effective ~~and~~income ~~leisure~~tax ~~revenues,~~rate for continuing operations for the ~~nine~~third ~~months~~quarter ~~ended~~of ~~September 30,~~2004 ~~2003~~was ~~when~~24.0% compared to ~~the~~a ~~same~~tax ~~period~~benefit ~~in 2002, resulted from the increase in vacation ownership revenues~~ of 25 19.13% ~~to $337 million~~ in ~~2003~~ ~~compared~~the tocorresponding ~~$270 million~~quarter in ~~2002~~2003. ~~Contract~~Our ~~sales~~effective ~~of VOI~~income ~~inventory~~tax ~~increased~~rate ~~18.7%~~is determined inby the ~~nine~~level ~~months~~and ~~ended September 30,~~composition ~~2003~~of ~~when~~pre-tax ~~compared~~income subject to ~~the same period in~~varying ~~2002~~foreign, ~~primarily~~state asand alocal ~~result~~taxes ofand ~~sales~~other atitems. Excluding the ~~Westin~~tax impact of ~~Ka’anapali~~the ~~Ocean~~restructuring ~~Resort~~and ~~Villas~~other inspecial ~~Maui~~credits, ~~Hawaii.~~the ~~Gains~~loss on ~~sales~~ ofasset ~~receivables~~dispositions ~~totaled $6 million~~ and ~~$13 million~~impairments, inand ~~the~~other ~~nine~~non-recurring ~~months ended September 30~~items, ~~2003~~ ~~and~~our ~~2002,~~effective ~~respectively.~~income ~~The~~tax ~~increases~~rate inwould be ~~vacation~~19.5% ~~ownership revenues~~for ~~were~~the ~~offset~~third inquarter ~~part~~of by2004 ~~reduced~~as ~~interest~~compared ~~income~~to ~~and~~a ~~the Company’s~~tax ~~share~~benefit of ~~construction~~9.3% ~~remediation costs at an~~in ~~unconsolidated~~corresponding ~~joint~~quarter ~~venture~~in 2003.

~~Other~~Nine ~~revenues~~Months ~~and~~Ended ~~expenses from managed and franchised properties were $634 million and $589 million for the nine months ended~~ September 30, ~~2003~~ ~~and~~2004 ~~2002,~~Compared respectively. These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where the Company is the employer. Since the reimbursements are made based upon the costs incurred with noNine ~~added~~Months ~~margin,~~Ended ~~these revenues and corresponding expenses have no effect on the Company’s operating income~~September 30, ~~net~~ ~~income or profit margins.~~2003

~~Operating~~Continuing ~~Income.~~Operations ~~Total Company operating income~~ ~~(which includes $1 million of restructuring and other~~ ~~special credits and $3 million of construction remediation~~ ~~costs at an unconsolidated joint venture in~~

36 Revenues. Total revenues, including other revenues from managed and franchised properties, were $3.926 billion, an increase of $493 million when compared to 2003 levels. Revenues reflect a 7.0% increase in revenues from our owned, leased and consolidated joint venture hotels to $2.448 billion for the nine months ended September 30, 2004 when compared to $2.288 billion in the corresponding period of 2003, an increase of $115 million in management fees, franchise fees and other income to $299 million for the nine months ended September 30, 2004 when compared to $184 million in the corresponding period of 2003, an increase of $116 million in vacation ownership revenues to $443 million for the nine months ended September 30, 2004 when compared to $327 million in the corresponding period of 2003 and an increase of $102 million in other revenues from managed and franchised properties to $736 million for the nine months ended September 30, 2004 when compared to $634 million in the corresponding period of 2003.

~~2003~~ The ~~and~~increase ~~$5 million~~in ofrevenues ~~restructuring~~from owned, leased and ~~other~~ ~~special~~consolidated ~~credits~~joint ofventure hotels ~~$5 million~~is ofdue ~~construction remediation~~in ~~costs~~large atpart anto ~~unconsolidated~~the ~~joint~~continued ~~venture~~economic ~~and~~recovery, particularly ~~$30 million~~its ofeffect ~~foreign~~on ~~exchange~~the ~~gains~~hospitality ~~related~~industry. toThe ~~the devaluation~~war ofin Iraq, the ~~Argentine~~Severe ~~Peso~~Acute Respiratory inSyndrome ~~2002~~(“SARS”) ~~was~~epidemic ~~$301 million~~and the weakened worldwide economic environment in 2003 negatively impacted the results for the nine months ended September 30, 2003. ~~compared~~These toimproved results were offset, in part, by the ~~$447 million~~absence in ~~2002.~~2004 ~~Excluding~~of ~~depreciation~~the revenues generated by 16 non-strategic domestic hotels and four hotels in Costa Smeralda, Italy, which were for the most part, sold in ~~amortization~~the first half of ~~$327 million~~2003. ~~and~~Revenues from these hotels in the first nine months of 2003 were $~~365~~110 million. Revenues at our hotels owned during both periods (“Same-Store Owned Hotels”) (139 hotels for the nine months ended September 30, 2004 ~~2003~~ and ~~2002~~2003, ~~respectively,~~ ~~operating~~excluding ~~income~~25 ~~decreased~~hotels ~~22.7%~~sold or closed or without comparable results ~~$184 million~~in 2004 and 2003) increased 11.9% to $~~628~~2.403 ~~million~~billion for the nine months ended September 30, ~~2003~~2004 when compared to $~~812~~2.147 ~~million~~billion in the same period inof ~~2002,~~2003 due primarily ~~due~~ to ~~the~~an ~~decline~~increase in ~~operating income~~REVPAR. REVPAR at ~~the~~our ~~Company’s~~Same-Store ~~owned,~~Owned ~~leased~~Hotels increased ~~and~~13.7% ~~consolidated joint~~to ~~venture~~$109.56 ~~hotels~~for asthe anine ~~result~~months ofended ~~the~~September 30, ~~weakened~~2004 ~~global~~when ~~economies,~~compared to the ~~war~~corresponding in2003 ~~Iraq~~period. ~~and~~The ~~its~~increase ~~aftermath~~in ~~and~~REVPAR ~~the SARS~~was ~~epidemic~~attributed ~~and~~to ~~the~~increases ~~lost~~in ~~operating~~occupancy ~~income~~rates ~~from~~to ~~the sold hotels discussed above~~68.9% Inin ~~North America, where~~ the ~~Company~~nine ~~has~~months ~~its~~ended ~~largest concentration of owned hotels~~September 30, ~~the~~2004 ~~Company’s~~when ~~hotels were~~compared ~~also~~to ~~adversely~~64.7% ~~impacted~~in by the ~~severe~~same ~~winter~~period ~~storm~~ in ~~the~~2003, and ~~Northeast~~increases ~~United States~~ in ~~February~~ADR ~~2003,~~at ~~increased~~these ~~energy~~Same-Store ~~and insurance~~Owned ~~costs~~Hotels ~~and~~to ~~reduced~~$159.04 ~~cancellation~~for ~~and~~the ~~telecommunication~~nine ~~fees~~months inended ~~2003~~September 30, ~~when~~2004 compared to ~~2002,~~$148.91 infor ~~addition to~~ the ~~geopolitical~~ ~~climate~~corresponding ~~discussed previously~~2003 period. ~~Additional contributions~~REVPAR toat ~~the~~Same-Store ~~decline~~Owned Hotels in ~~operating~~North ~~income~~America ~~were~~increased ~~the~~12.5% for ~~increase~~the innine ~~selling,~~months ~~general~~ended ~~and~~September 30, ~~administrative~~2004 ~~expenses~~when ~~which is~~compared ~~due in part~~ to the ~~nonrecurring~~same ~~Argentina~~period ~~foreign exchange~~of ~~gains~~2003 indue ~~2002~~to ~~of $30 million,~~ increased ~~costs~~transient ~~associated with international pension~~ and ~~retirement~~group ~~plans~~travel ~~and~~business ~~the~~for ~~Sheraton “Let’s Spend~~ the ~~Night Together” advertising campaign~~period. REVPAR ~~Operating~~at ~~income~~our ~~for~~international ~~the~~Same-Store ~~vacation~~Owned ~~ownership~~Hotels, ~~segment~~ increased 36by 17.80% tofor ~~$78 million in~~ the nine months ended September 30, ~~2003~~2004 when compared to ~~$57 million in 2002, primarily due to~~ the ~~significant~~same ~~increase~~period inof ~~sales and~~2003, ~~resulting~~with ~~operating~~Europe, ~~income~~where atwe ~~the~~have ~~Westin~~our ~~Ka’anapali~~biggest ~~Ocean Resort~~concentration ~~Villas~~of ininternational ~~Maui, Hawaii.~~owned

37 Restructuring and Other Special Credits. During the nine months ended September 30, 2003, the Company recorded a $1 million reversal of other special charges related to the collections of receivables which were previously deemed uncollectible. During the nine months ended September 30, 2002, the Company recorded a $5 million reversal of other special charges primarily related to sales of the Company’s investments in certain e-business ventures previously deemed impaired and the collection of receivables which were previously deemed uncollectible.

DepreciationTable and Amortization. Depreciation expense decreased by $40 million to $309 million during the nine months ended September 30, 2003 compared to $349 million in the corresponding period of 2002. Additional depreciation expense resulting from capital expenditures at the Company’s owned, leased and consolidated joint venture hotels in the past 12 months was more than offset by the reduced depreciation expense from fully depreciated furniture, fixtures and equipment, as the Company reached the five year anniversary of the merger with ITT Corporation in February 2003 and the classification of the 18 non-core domestic hotels, the four Costa Smeralda hotels held for sale effective March 31, 2003 (as discussed earlier, most of these hotels were later sold). Amortization expense increased to $18 million in the nine months ended September 30, 2003 compared to $16 million in the corresponding period of 2002 due primarily to the amortization of intangible assets associated with new hotel management contracts. Contents

~~Net~~hotels, ~~Interest~~increasing ~~Expense~~14. ~~Interest~~7%. ~~expense,~~REVPAR ~~which is net of interest income of $3 and $1 million~~ for ~~the~~Same-Store ~~nine~~Owned ~~months ended~~Hotels ~~September 30, 2003 and 2002, respectively, and~~internationally ~~discontinued~~increased ~~operations allocations of $~~7 ~~million~~.3% ~~and $11 million~~excluding ~~for~~ the ~~nine months~~favorable ~~ended September 30,~~effects ~~2003~~of ~~and~~foreign ~~2002,~~currency ~~decreased to $219 million from $260 million~~translation. ~~This decrease was due primarily to the~~ ~~paydown~~REVPAR offor ~~debt~~Same-Store ~~with~~Owned ~~proceeds~~Hotels ~~from~~in ~~the~~Europe ~~domestic~~increased ~~and Italian hotel sales discussed previously of $1~~4.1 ~~billion,~~% asexcluding ~~well as $29 million of early debt extinguishment charges recorded in~~ the ~~second quarter of 2002 and lower interest rates~~ infavorable ~~2003~~effect ~~compared to 2002 and the impact~~ of ~~certain~~foreign ~~financing transactions,~~currency ~~including the issuance of debt in April 2002 and May 2003~~translation. ~~The Company’s weighted average interest rate was~~ ~~5.50% at September 30, 2003 versus 5.81% at~~ ~~September 30, 2002.~~

~~Gain~~The ~~(Loss)~~increase Onin ~~Asset~~vacation ~~Dispositions~~ownership sales and ~~Impairments,~~ ~~Net.~~services ~~During~~is ~~2003,~~primarily ~~the~~due to ~~Company~~the ~~recorded~~increase ~~charges~~in the sales of ~~approximately~~VOIs of 36.9% to $~~177~~371 million ~~(pre-tax)~~ in 2004 compared to $271 million ~~write~~in ~~down~~2003. aThese ~~portfolio~~increases ofrepresent ~~18 non-core~~increased ~~domestic~~sales volume as well ~~hotels,~~as ~~including~~the ~~several~~revenue ~~non-proprietary~~recognition ~~branded~~from ~~hotels~~progressing toand ~~fair~~completed projects accounted ~~value~~for ~~less~~under ~~selling~~the ~~costs~~percentage ~~due~~of tocompletion accounting methodology as required by generally accepted accounting principles primarily at the ~~Company~~Westin Ka’sanapali Ocean ~~plan~~Resort ~~to dispose~~Villas ofin ~~these~~Maui, ~~assets~~Hawaii, ~~subject~~The toSt. Regis in Aspen, Colorado, the Westin Kierland Resort and Spa in ~~most~~Scottsdale, ~~cases~~Arizona, ~~franchise~~and the Sheraton Vistana ~~agreements~~Villages in Orlando, Florida. ~~For~~Contract sales of VOI inventory, which represents vacation ownership revenues before adjustments for percentage of completion accounting and rescissions and excluding fractional sales at the ~~most~~St. Regis ~~part~~Aspen described below, increased 46.5% in the ~~Company~~nine ~~completed~~months ended September 30, 2004 when compared to the ~~sale~~same period in 2003, primarily as a result of 15increased ofsales ~~these~~at ~~hotels~~the Westin Ka’anapali Ocean Resort Villas in ~~late~~Maui, ~~June~~Hawaii, the Westin Kierland Resort and ~~early~~Spa ~~July~~in ofScottsdale, ~~2003~~Arizona, and the Sheraton Vistana Villages in Orlando, Florida. In May 2004, we began selling fractional units at The St. Regis in Aspen, Colorado. We are in the process of converting ~~October~~98 ~~2003~~guest rooms at this hotel into 25 fractional units, which will be sold ~~one~~in four ~~additional~~week intervals, and 20 new hotel rooms. The ~~Company~~fractional ~~expects~~project tois ~~close~~expected ~~the~~to ~~sale~~be ofcompleted towards the ~~remaining~~end ~~two~~of ~~properties later in 2003~~2004. ~~During~~

37 The increase in management fees, franchise fees and other income of $115 million was primarily due to the inclusion of revenues from the Bliss spas and product sales, which were acquired at the beginning of 2004, and income earned on the Le Meridien debt participation acquired by us in late December 2003. Additionally, management and franchise fees increased $47 million due to strong top line growth.

~~the~~ Other ~~nine months~~revenues ~~ended~~and ~~September 30, 2003,~~expenses ~~the~~from ~~Company~~managed ~~also~~and ~~recorded~~franchised aproperties increased to $9736 million ~~gain~~from on$634 million for the ~~sale~~ ofnine amonths ~~51%~~ended ~~interest~~September 30, in2004 ~~undeveloped~~and ~~land in Costa Smeralda in Sardinia~~2003, ~~Italy,~~respectively. ~~which~~These ~~was~~revenues ~~offset~~represent byreimbursements ~~an $8 million~~of ~~write-down~~costs ofincurred ~~the~~on ~~value~~behalf of amanaged hotel ~~which~~properties ~~was~~and ~~formerly~~franchisees ~~operated together with one of the hotels sold in July 2003~~ and ~~is now~~relate ~~closed~~primarily ~~and~~to ~~under~~payroll ~~review~~costs ~~for~~at ~~alternative~~managed ~~uses.~~properties ~~During~~where ~~the nine months~~we ~~ended~~are ~~September 30, 2002,~~ the ~~Company~~employer. ~~recorded~~Since ~~$2 million~~the ofreimbursements ~~net~~are ~~gains~~made onbased ~~asset~~upon ~~dispositions, related primarily to~~ the ~~sale~~costs ofincurred ~~its~~with ~~investment~~no ~~in Interval~~added ~~International~~margin, ~~partially~~these ~~offset~~revenues byand ~~impairment~~corresponding ~~charges~~expenses tohave ~~reduce the~~no ~~carrying~~effect ~~value~~on ofour operating ~~one~~income ofand ~~its~~our ~~hotels~~net ~~to fair value, which was subsequently sold~~income.

~~Discontinued~~Operating ~~Operations~~Income. ~~Loss~~ ~~from~~Our ~~discontinued~~total ~~operations represents~~operating ~~the~~income ~~results~~was of$466 million in the ~~Principe~~nine months ended September 30, ~~net~~2004 ofcompared to $7285 million in 2003. Excluding depreciation and amortization of $11319 million, ~~respectively,~~and $323 million for the nine ~~months~~ months ended September 30, ~~2003~~2004 and ~~2002 of allocated interest expense. The Company sold the Principe in June~~ 2003, ~~with~~respectively, nooperating income ~~continuing~~increased ~~involvement~~29.1% ~~The~~or ~~gain~~$177 million onto ~~dispositions~~$785 million for the nine months ended September 30, ~~2003~~2004 ~~consists~~when of compared to $~~194~~608 million ~~(pre-tax)~~in ofthe ~~gains~~same ~~recorded~~period in ~~connection with~~2003, ~~the~~primarily ~~sale~~due ofto the ~~Principe~~improved onowned ~~June 30,~~hotel ~~2003~~performance and ~~the~~vacation ~~reversal~~ownership ofsales ~~$52 million~~discussed ~~(pre~~above, offset by certain non-~~tax)~~recurring ofincreases ~~accruals~~in ~~relating~~selling, general, toand ~~the~~administrative costs, including certain legal settlement costs, ~~Company’s~~costs ~~former~~associated ~~gaming~~with ~~business~~our ~~disposed~~World ofConference in ~~1999,~~January 2004 ~~which was~~(we ~~completed~~did not have a conference in ~~June~~the ~~2000.~~prior ~~The~~year) ~~Company~~and ~~believes~~accrual, ~~that~~not ~~these~~payment, for separation payments ~~accruals~~for ~~are~~our noChairman ~~longer~~provided ~~required~~for in his employment agreement.

~~The~~Operating income at our hotel segment was $~~104~~473 million ~~gain~~in ~~on dispositions for~~ the nine months ended September 30, ~~2002,~~2004 ~~primarily~~compared ~~relates~~ to ~~Internal~~$315 million ~~Revenue~~in ~~Service~~the ~~regulations~~same ~~issued~~period inof ~~2002~~2003. The improved operating results at our owned, ~~which~~leased and consolidated joint ~~allowed~~venture ~~the~~hotels ~~Company~~more tothan ~~recognize~~offset athe ~~tax~~absence ~~benefit~~of ~~from~~operating aincome ~~loss~~from on the ~~1999~~hotels sold ~~sale~~in of2003 as discussed above, as well as the ~~Company’s~~increased ~~gaming~~food ~~business.~~and ~~The~~beverage, energy, ~~tax~~property taxes and insurance costs, including workers compensation and ~~loss~~health ~~was~~insurance. ~~previously~~Operating ~~disallowed~~income ~~under~~for the ~~old~~vacation ~~regulations.~~ownership ~~The~~segment was $101 ~~remaining~~million ~~gain~~in ~~resulted~~the ~~from~~nine anmonths ~~adjustment~~ended September 30, 2004 compared to ~~the~~$67 million ~~Company’s~~for ~~tax~~the ~~basis~~same period in ~~its~~2003 ~~World~~primarily ~~Directories~~due ~~subsidiary,~~to ~~which~~the ~~was~~significant increase in income ~~disposed~~from the sales of inVOIs ~~early~~and ~~1998~~the percentage of completion accounting methodology discussed above.

~~Income~~Restructuring ~~Tax~~and ~~Expense. The~~Other ~~effective~~Special ~~income~~Credits, ~~tax~~Net. ~~rate~~During ~~for continuing operations for~~ the nine months ~~ended~~ ended September 30, ~~2003~~2004, ~~excluding~~we ~~special~~reversed ~~items was~~ a ~~benefit~~$37 million ~~of 5.0%~~reserve ~~compared~~previously ~~to a tax rate of 14.9% in the corresponding period~~recorded inthrough ~~2002.~~restructuring ~~The~~and ~~Company’s~~other ~~effective income tax rate excluding~~ special ~~items~~charges isdue ~~determined by the level and composition of pre-tax income subject~~ to ~~varying~~a ~~foreign,~~favorable ~~state~~judgment ~~and local taxes~~in ~~and~~a ~~other~~litigation ~~items~~matter. ~~The~~During ~~effective income tax rate for~~ the nine months ended September 30, 2003, ~~is significantly~~we ~~lower~~recorded ~~than~~a ~~the~~net ~~prior~~reversal ~~year due to the combination~~ of ~~the~~$1 million ~~lower than expected pre-tax earnings for 2003 and the level~~ of ~~the Company’s~~other ~~2003 dividend, which at this time, is expected to be consistent with the $0.84 per Share annual dividend paid for 2002. Including the net tax benefit on~~ special ~~items primarily related to asset dispositions and impairment~~ charges ~~as well as various adjustments~~ related to the ~~successful settlement of~~ ~~certain~~collections ~~tax matters in 2003 and the taxes on the Argentine foreign exchange gains offset by tax benefits on the early extinguishment~~ of ~~debt~~receivables inwhich ~~the~~were ~~same~~previously ~~period~~deemed ~~of 2002, the effective income tax rate for continuing operations was a benefit of 116~~uncollectible.~~7% for the nine months ended September 30, 2003 as~~ ~~compared to a tax rate of 14.1% for the corresponding period in~~ ~~2002.~~

38 ~~Seasonality and Diversification~~

TheTable hotelof and leisure industry is seasonal in nature; however, the periods during which the Company’s properties experience higher hotel revenue activities vary from property to property and depend principally upon location. The Company’s revenues historically have generally been lower in the first quarter than in the second, third or fourth quarters. Contents

Depreciation and Amortization. Depreciation expense decreased $3 million ~~Same~~to $306 million during the nine months ended September 30, 2004 compared to $309 million in the corresponding period of 2003. Additional depreciation expense resulting from capital expenditures at our owned, leased and consolidated joint venture hotels in the past 12 months was more than offset by the reduced depreciation expense from fully depreciated furniture, fixtures and equipment, as we reached the five year anniversary of the merger with ITT Corporation in February 2003 and the classification of 18 non-~~Store~~core ~~Owned~~domestic hotels ~~Hotels~~(16 ~~Results~~of which were subsequently sold) and the four Costa Smeralda hotels and the Principe as held for sale effective March 31, 2003. Amortization expense decreased to $13 million in the nine months ended September 30, 2004 compared to $14 million in the corresponding period of 2003.

Net Interest Expense. Interest expense, which is net of discontinued ~~Starwood~~operations ~~continually~~allocations ~~updates~~of ~~and~~$7 million ~~renovates~~for ~~its~~the nine months ended September 30, ~~owned~~2003, ~~leased~~decreased ~~and~~to ~~consolidated~~$193 million ~~joint~~from ~~venture hotels~~$219 million. ~~While~~This decrease was due ~~undergoing~~primarily ~~major~~to ~~renovation,~~the ~~these~~lower ~~hotels~~debt ~~are~~balances ~~generally~~in ~~not operating~~2004 atcompared ~~full~~to ~~capacity~~the ~~and,~~same period of 2003 as ~~such,~~a ~~these~~result ~~renovations~~of ~~can negatively~~the ~~impact~~paydown ~~Starwood’s~~of ~~hotel~~debt ~~revenues.~~in ~~Starwood expects~~2003 towith ~~continue~~the ~~renovating~~proceeds ~~its~~from ~~owned~~asset sales, ~~leased~~the ~~and consolidated~~paydown ~~joint~~of ~~venture~~a ~~hotels~~portion asof itthe ~~pursues~~Series B ~~its~~Convertible ~~brand~~Senior ~~and~~Notes in May ~~quality~~2004, ~~strategies.~~and Inthe ~~addition,~~amortization ~~several~~of ~~owned~~deferred ~~hotels~~gains ~~are located~~recorded inas ~~regions~~a ~~which~~result ~~are~~of ~~seasonal~~interest rate ~~and~~swap ~~therefore~~terminations completed in early March 2004, ~~these~~offset in part by ~~hotels~~slightly dohigher ~~not~~interest ~~operate~~rates. Our weighted average interest rate was 5.67% at September 30, ~~full~~2004 ~~capacity~~versus ~~throughout~~5.50% ~~the~~at ~~year~~September 30, 2003.

~~The~~Loss ~~following~~On ~~table~~Asset ~~summarizes~~Dispositions ~~REVPAR~~and Impairments, ~~ADR~~Net. ~~and~~We recorded $8 million ~~occupancy~~of ~~for~~losses ~~the~~on ~~Company’s~~asset ~~Same-Store~~dispositions ~~Owned~~and ~~Hotels~~impairments ~~for~~in the ~~three~~ ~~and~~ nine months ended September 30, ~~2003~~2004. ~~and~~These ~~2002.~~losses reflect impairment charges primarily ~~The~~associated ~~results~~with ~~for~~our ~~the~~investment ~~three~~in a joint venture that owns a hotel managed by us and ~~nine~~the renovation of a portion of one of our owned hotels, the W New York, for a Bliss spa.

38 During the nine months ended September 30, 2003, we recorded an impairment charge of approximately $177 million (pre-tax) to write down the portfolio of 18 North American hotels, including several non-proprietary branded hotels, to fair value less selling costs due to our plan to dispose of these assets subject to management and/or franchise agreements. We disposed of 16 of these hotels later in 2003. We also recorded a $9 million gain on the sale of a 51% interest in undeveloped land in Costa Smeralda in Sardinia, Italy, which was offset by an $8 million write-down of the value of a hotel which was formerly managed together with one of the hotels sold in July 2003 and is now closed and under review for alternative use.

Discontinued Operations. For the nine months ended September 30, ~~2003~~2004, the ~~and~~gain ~~2002 represent~~on ~~results~~dispositions ~~for~~includes ~~140~~$34 ~~owned~~million of gains related to the favorable resolution of certain tax matters, ~~leased~~a $3 million pre-tax gain related to post-closing adjustments for the sale of the Principe, and ~~consolidated~~the reversal of $1 ~~joint~~million ~~venture~~of ~~hotels~~accruals ~~(excluding~~relating 25to ~~hotels~~our ~~sold~~former orgaming ~~closed~~business disposed of in ~~2003~~1999 ~~and~~as ~~2002)~~the underlying contingencies have been resolved.

	Three Months Ended
	September 30,
	2003			2002			Variance
Worldwide (140 hotels with approximately 50,000 rooms)
REVPAR	$	99.43		$	95.25			4.4	%
ADR	$	144.81		$	145.23			(0.3	%)
Occupancy		68.7	%		65.6	%		3.1
North America (95 hotels with approximately 37,000 rooms)
REVPAR	$	98.81		$	95.75			3.2	%
ADR	$	138.20		$	140.81			(1.9	%)
Occupancy		71.5	%		68.0	%		3.5
International (45 hotels with approximately 13,000 rooms)
REVPAR	$	101.16		$	93.84			7.8	%
ADR	$	166.90		$	159.95			4.3	%
Occupancy		60.6	%		58.7	%		1.9

For the nine months ended September 30, 2003, loss from discontinued operations represents the results of the Principe net of $7 million of allocated interest expense. We sold the Principe in June 2003, with no continuing involvement. The gain on dispositions for the nine months ended September 30, 2003 consists of $194 million (pre-tax) of gains recorded in connection with the sale of the Principe on June 30, 2003 and of the reversal of $52 million (pre-tax) of accruals relating to our former gaming business disposed of in 1999. We believe that these accruals are no longer required as the related contingencies have been resolved.

	Nine Months Ended
	September 30,
	2003			2002			Variance
Worldwide (140 hotels with approximately 50,000 rooms)
REVPAR	$	96.91		$	97.38			(0.5	%)
ADR	$	149.83		$	151.04			(0.8	%)
Occupancy		64.7	%		64.5	%		0.2
North America (95 hotels with approximately 37,000 rooms)
REVPAR	$	97.30		$	99.09			(1.8	%)
ADR	$	145.43		$	149.85			(2.9	%)
Occupancy		66.9	%		66.1	%		0.8
International (45 hotels with approximately 13,000 rooms)
REVPAR	$	95.79		$	92.45			3.6	%
ADR	$	164.30		$	154.86			6.1	%
Occupancy		58.3	%		59.7	%		(1.4	)

Income Tax Expense. The effective income tax rate for continuing operations for the first nine months of 2004 was 13.6% compared to a tax benefit of 116.7% in the corresponding period of 2003. Our effective income tax rate is determined by the level and composition of pre-tax income subject to varying foreign, state and local taxes and other items. The effective tax rate for the nine months ended September 30, 2004 includes a $12 million benefit as a result of certain changes to the federal tax rules. The effective tax rate for the nine months ended September 30, 2003 includes a $28 million benefit related to various tax matters that were successfully settled during 2003. Excluding these benefits and the tax impact of the restructuring and other special credits, the loss on asset dispositions and impairments, and other non-recurring items, our effective income tax rate would be 15.5% for the nine months ended September 30, 2004 as compared to a tax benefit of 5.0% in the corresponding period of 2003.

~~The~~Seasonality ~~following is a reconciliation of total revenues from owned, leased~~ and ~~consolidated joint venture~~Diversification ~~hotels to systemwide revenues (in millions):~~

	Three Months				Nine Months
	Ended				Ended
	September 30,				September 30,
	2003		2002		2003		2002
Revenues from owned, leased and consolidated joint venture hotels	$	735	$	796	$	2,288	$	2,386
Revenues generated at managed hotels		1,352		1,201		3,815		3,583
Systemwide revenues	$	2,087	$	1,997	$	6,103	$	5,969

The hotel and leisure industry is seasonal in nature; however, the periods during which our properties experience higher hotel revenue activities vary from property to property and depend principally upon location. Our revenues historically have generally been lower in the first quarter than in the second, third or fourth quarters.

39 The Company considers systemwide revenues to be a meaningful indicator of its performance, as it measures the growth in revenues of all properties operated by the Company. The Company’s growth profitability is in part driven by such overall revenue growth.

39 Table of Contents

~~LIQUIDITY~~Same-Store ~~AND~~Owned ~~CAPITAL~~Hotels ~~RESOURCES~~Results

We continually update and renovate our owned, leased and consolidated ~~Cash~~joint ~~Flow~~venture ~~Provided~~hotels. byWhile ~~Operating~~undergoing major renovation, these hotels are ~~Activities~~generally not operating at full capacity and, as such, these renovations can negatively impact our hotel revenues. We expect to continue renovating our owned, leased and consolidated joint venture hotels as we pursue our brand and quality strategies. In addition, several owned hotels are located in regions which are seasonal and therefore, these hotels do not operate at full capacity throughout the year.

~~Cash~~The ~~flow~~following ~~from~~tables ~~operating~~summarize ~~activities~~REVPAR, isADR ~~the principal~~and ~~source~~occupancy offor ~~cash~~our Same-Store ~~used~~Owned toHotels ~~fund~~for the ~~Company’s operating~~three ~~expenses,~~and ~~interest~~nine ~~payments~~months onended ~~debt~~September 30, ~~maintenance~~2004 ~~capital expenditures~~ and ~~distribution payments by the Trust~~2003. ~~Despite~~ ~~the~~The ~~weakened~~results ~~global~~for ~~economies,~~ the ~~impact~~three ~~of the war in Iraq~~ and ~~the~~nine ~~lead-up~~months toended itSeptember 30, ~~the Company anticipates that cash~~2004 ~~flow~~and ~~provided~~2003 byrepresent ~~operating~~results ~~activities~~for ~~will~~139 beowned, ~~sufficient~~leased ~~to service~~and ~~these~~consolidated ~~cash~~joint ~~requirements. In 2002, the Company shifted~~venture ~~from~~hotels a(excluding ~~quarterly~~25 ~~distribution~~hotels tosold anor ~~annual~~closed ~~distribution.~~or ~~The Company~~without ~~believes~~comparable ~~that~~results ~~existing borrowing availability together~~in ~~with~~2004 ~~capacity from additional borrowings~~ and ~~cash from operations will be adequate to meet all funding requirements for the foreseeable future~~2003).

Cash Flow from Investing Activities


	Three Months Ended
	September 30,
	2004			2003			Variance
Worldwide (139 hotels with approximately 50,000 rooms)
REVPAR	$	111.15		$	98.98			12.3	%
ADR	$	155.55		$	144.06			8.0	%
Occupancy		71.5	%		68.7	%		2.8
North America (94 hotels with approximately 37,000 rooms)
REVPAR	$	110.11		$	98.20			12.1	%
ADR	$	148.85		$	137.18			8.5	%
Occupancy		74.0	%		71.6	%		2.4
International (45 hotels with approximately 13,000 rooms)
REVPAR	$	114.06		$	101.16			12.8	%
ADR	$	177.06		$	166.90			6.1	%
Occupancy		64.4	%		60.6	%		3.8

In limited cases, the Company has made loans to owners of or partners in hotel or resort ventures for which the Company has a management or franchise agreement. Loans outstanding under this program totaled $146 million at September 30, 2003. The Company evaluates these loans for impairment, and at September 30, 2003, believes these loans are collectible. Unfunded loan commitments aggregating $34 million were outstanding at September 30, 2003, of which minimal amounts are expected to be funded in 2003 and $16 million is expected to be funded in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects.


	Nine Months Ended
	September 30,
	2004			2003			Variance
Worldwide (139 hotels with approximately 50,000 rooms)
REVPAR	$	109.56		$	96.38			13.7	%
ADR	$	159.04		$	148.91			6.8	%
Occupancy		68.9	%		64.7	%		4.2
North America (94 hotels with approximately 37,000 rooms)
REVPAR	$	108.67		$	96.58			12.5	%
ADR	$	152.89		$	144.19			6.0	%
Occupancy		71.1	%		67.0	%		4.1
International (45 hotels with approximately 13,000 rooms)
REVPAR	$	112.09		$	95.79			17.0	%
ADR	$	178.68		$	164.30			8.8	%
Occupancy		62.7	%		58.3	%		4.4

~~The~~LIQUIDITY ~~Company~~AND ~~participates~~CAPITAL ~~in programs with~~RESOURCES ~~unaffiliated lenders in which the Company may partially~~ ~~guarantee loans made to facilitate third-party ownership of~~ ~~hotels that the Company manages or franchises. As of~~ September 30, 2003, the Company was a guarantor for loans which could reach a maximum of $144 million relating to three projects: the St. Regis in Monarch Beach, California, which opened in mid-2001; the Westin Kierland Resort and Spa in Scottsdale, Arizona, which opened in November 2002; and the Westin in Charlotte, North Carolina, which opened in April 2003. In connection with the loan guarantee for the Westin Charlotte, the Company also entered into a guarantee to fund working capital shortfalls for this resort through 2005. No significant fundings are anticipated under this working capital guarantee. With respect to the Westin Kierland, the guarantee is joint and several with another equity partner. The Company does not anticipate any funding under these loan guarantees in 2003, as all projects are well capitalized. Furthermore, since each of these properties was funded with significant equity and subordinated debt financing, if the Company’s loan guarantees were to be called, the Company could take an equity position in these properties at values significantly below construction costs.

~~Surety~~Cash ~~bonds~~From ~~issued~~Operating ~~on behalf of the Company as~~Activities ~~of September 30, 2003 totaled $75 million, the~~ ~~majority of which were required by state or local governments~~ ~~relating to our vacation ownership operations and by our insurers to secure large deductible insurance programs.~~

InCash ~~order~~flow tofrom ~~secure~~operating ~~management~~activities ~~and~~is ~~franchise contracts,~~ the ~~Company~~principal ~~may~~source ~~provide performance guarantees to third-party owners. Most~~ of ~~these~~cash ~~performance guarantees allow~~used ~~the Company~~ to ~~terminate the contract rather than~~ fund ~~shortfalls~~ ifour ~~certain~~operating ~~performance levels are not met. In limited cases~~expenses, ~~the~~interest ~~Company~~payments ison ~~obliged to fund shortfalls in performance levels. As of September 30~~debt, ~~2003,~~maintenance ~~the Company had seven~~capital ~~management~~expenditures ~~contracts with performance guarantees with possible cash outlays of up to $74 million, $50 million of which, if required, would be funded over a period of 25 years~~ and ~~would~~distribution bepayments ~~largely offset~~ by ~~management fees received under these contracts. Many of~~ the ~~performance tests are multi-year tests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure and acts of war and terrorism~~Trust. ~~The~~We ~~Company does not~~ anticipate ~~any~~that cash ~~significant~~flow ~~funding~~provided ~~under~~by ~~the~~operating ~~performance~~activities ~~guarantees~~will inbe ~~2003.~~sufficient ~~In addition, the Company has agreed~~ to ~~guarantee~~service ~~certain performance~~these ~~levels at a managed hotel that has authorized VOI~~cash ~~sales and marketing~~requirements. ~~The~~We ~~exact~~believe ~~amount~~that ~~and~~existing ~~nature~~borrowing ofavailability ~~the~~together ~~guaranty~~with iscapacity ~~currently~~from ~~under~~additional ~~dispute.~~borrowings ~~However,~~and ~~the~~cash ~~Company~~from ~~does~~operations ~~not believe that any payments under this guaranty~~ will be ~~significant.~~ ~~Lastly, the Company does not anticipate losing a~~adequate ~~significant number of management or franchise contracts in 2003.~~

TheTable Companyof had the following contractual obligations outstanding as September 30, 2003 (in millions): Contents

			Due in Less		Due in		Due in		Due After
	Total		Than 1 Year		1-3 Years		4-5 Years		5 Years
Long-term debt	$	4,883	$	442	$	1,123	$	1,245	$	2,073
Capital lease obligations		2		—		—		—		2
Operating lease obligations		912		63		108		99		642
Unconditional purchase obligations(1)		128		59		53		12		4
Other long-term obligations		6		3		3		—		—
Total contractual obligations	$	5,931	$	567	$	1,287	$	1,356	$	2,721

to meet all funding requirements for our operating expenses, principal and interest payments on debt, maintenance capital expenditures and distribution payments by the Trust in the foreseeable future.

~~(1)~~ Provisions ~~Included~~of incertain ~~these~~of ~~balances~~our ~~are~~secured ~~commitments~~debt require that ~~may~~cash reserves be maintained. ~~satisfied~~Additional bycash reserves are required if aggregate operations of the ~~Company’s~~related ~~managed~~hotels fall below a specified level. Additional cash reserves for certain debt became required in late 2003 following a difficult period in the hospitality industry, resulting from the war in Iraq and ~~franchised~~the ~~properties~~worldwide economic downturn. As of September 30, 2004, $7 million and $97 million of restricted cash is included in restricted cash and other assets, respectively, in our consolidated balance sheet related to these required cash reserves. As of December 31, 2003, $13 million was included in restricted cash in our consolidated balance sheet related to these required cash reserves. The additional cash reserves, which are expected to continue to accrue and remain restricted through the end of 2005, are not expected to have a material impact on our liquidity. Once aggregate hotel operations meet the specified levels over the required time period, the additional cash reserves, plus accrued interest, will be released to us.

In addition, state and local regulations governing sales of VOIs allow the ~~The~~purchaser ~~Company~~of ~~had~~such a VOI to rescind the ~~following~~sale ~~commercial~~subsequent to its completion for a ~~commitments~~pre-specified ~~outstanding~~number asof days or until a certificate of occupancy is obtained. As such, cash collected from such sales during the rescission period is also classified as restricted cash in our consolidated balance sheets. At September 30, 2004 and December 31, 2003, ~~(in~~we have $171 million and ~~millions):~~$56 million, respectively, of such restricted cash.

			Amount of Commitment Expiration Per Period
			Less Than						After 5
	Total		1 Year		1-3 Years		4-5 Years		Years
Standby letters of credit	$	131	$	121	$	$10	$	—	$	—
Hotel loan guarantees		144		69		45		—		30
Other commercial commitments		—		—		—		—		—
Total commercial commitments	$	275	$	190	$	55	$	—	$	30

Cash Used For Investing Activities

~~The~~On ~~Company~~December 30, ~~intends~~2003, totogether ~~finance~~with ~~the~~Lehman Brothers, we announced the acquisition of ~~additional~~ ~~hotel~~all ~~properties~~of ~~(including~~the ~~equity~~outstanding ~~investments~~senior debt (approximately $1.3 billion), ~~hotel~~at ~~renovations~~a discount, ~~VOI~~of ~~construction,~~Le ~~capital~~Meridien. ~~improvements,~~Our approximate $200 million investment is ~~technology~~represented ~~spend~~by ~~and~~a ~~other~~high ~~core~~yield ~~business~~junior ~~acquisitions~~participation ~~and~~interest. As part of this ~~investments~~investment, ~~and~~we ~~provide~~entered ~~for~~into ~~general~~an ~~corporate~~agreement ~~purposes~~with ~~through~~Lehman Brothers whereby they ~~its~~would ~~credit~~negotiate ~~facilities~~with ~~described~~us ~~below,~~on ~~through~~an ~~the~~exclusive ~~net~~basis ~~proceeds~~towards a recapitalization of Le ~~from~~Meridien. ~~dispositions~~The ~~and~~exclusivity ~~when~~period ~~market~~expired ~~conditions~~in ~~warrant~~early April 2004 although negotiations with Lehman Brothers are continuing. While negotiations are continuing, ~~through~~there can be no assurance that transaction agreements will be entered into or a transaction consummated and if consummated what the ~~issuance~~terms of such ~~additional~~a ~~equity~~transaction orwould ~~debt securities~~be.

~~The~~In ~~Company~~January 2004, ~~periodically~~we ~~reviews~~acquired ~~its business with~~ a ~~view~~95% tointerest ~~identifying~~in ~~properties~~Bliss orWorld ~~other~~LLC ~~assets that we~~which ~~believe~~operates ~~either~~three ~~are~~stand ~~non-core,~~alone nospas ~~longer~~(two ~~complement our business, are~~ in ~~markets~~New which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. The Company is focused on restructuring and enhancing real estate returns and monetizing investments. In the first nine months of 2003York, ~~the~~New ~~Company~~York ~~completed the sales of the Principe~~ and aone ~~portfolio~~in ~~of assets including four hotels~~London, a ~~marina~~England) and ~~shipyard,~~ a ~~golf~~beauty ~~club~~products ~~and~~business awith ~~51%~~distribution ~~interest~~through in its ~~undeveloped~~ ~~land assets in Costa Smeralda in Sardinia, Italy~~own ~~(“Sardinia~~internet ~~Assets”),~~site ~~for 275 million Euro~~ and ~~290 million~~ ~~Euro,~~catalogue ~~respectively~~as ~~(aggregate~~well ~~of $655 million based on exchange rates~~ as ofthrough ~~the~~third ~~respective sale~~party ~~dates).~~retail ~~Also at the end of the first quarter of 2003, the Company approved a plan to sell a portfolio of 18 non-core domestic hotels~~stores. ~~In the first nine months of 2003, the Company~~The ~~sold~~aggregate 15purchase ofprice ~~these~~for ~~non-core domestic hotels and, in October 2003, completed~~ the ~~sale~~acquired ofinterest ~~one~~was ~~additional hotel. The cash proceeds from these 2003 sales were~~ approximately $~~1.1 billion, the~~25 ~~majority~~million ofand ~~which~~ was ~~used~~funded tofrom ~~paydown~~available ~~debt~~cash. ~~The Company expects~~ ~~to close on the two remaining properties later in 2003. There~~ ~~can be no assurance, however, that the Company will be able to~~ ~~complete the remaining dispositions on commercially reasonable terms or at all.~~

~~The~~In ~~Company~~the ~~has~~fourth quarter of 2003, we commenced a tender offer to acquire any ~~purchase~~and all of the outstanding limited partnership units of Westin Hotels LPLimited Partnership, athe ~~public~~entity ~~limited partnership~~ that indirectly owns the ~~751-room~~ Westin Michigan Avenue Hotel in Chicago, Illinois. The tender offer is ~~subject~~expired toon ~~various~~February 20, ~~conditions~~2004 ~~including that a majority of~~and ~~the~~approximately 34,000 units ~~are~~were tendered. ~~The~~to ~~offer~~us ~~price~~and isaccepted ~~$625~~for ~~per unit with 135~~payment,~~600~~ representing ~~units~~approximately ~~outstanding.~~25% Ifof the ~~Company~~outstanding ~~is successful in acquiring all the~~ units,. ~~the~~The ~~aggregate~~ purchase price ~~for the~~of ~~units would be~~ approximately $8527 million. Inwas ~~addition,~~funded ~~the Company~~from ~~would~~available ~~assume approximately $25 million of third-party debt and $34 million of~~ cash ~~and cash equivalents associated with the partnership as of September 30, 2003~~.

41 In March 2004, we acquired the 413-room Sheraton Kauai Resort on Poipu Beach in Kauai, Hawaii. The purchase price for the property was approximately $40 million and was funded from available cash. Prior to the acquisition, we managed the property for the former owner.

In limited cases, we have made loans to owners of or partners in hotel or ~~Cash~~resort ~~Used~~ventures for ~~Financing~~which ~~Activities~~we have a management or franchise agreement. Loans outstanding under this program totaled $162 million at September 30, 2004. We evaluate these loans for impairment, and at September 30, 2004, believe these loans are collectible. Unfunded loan commitments aggregating $61 million were outstanding at September 30, 2004, none of which are expected to be funded in 2004 but $46 million are expected to be funded in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. We also have $58 million of equity and other potential contributions associated with managed or joint venture properties, $18 million of which is expected to be funded in 2004.

InWe ~~May~~participate ~~2003,~~in ~~the~~programs ~~Company~~with ~~sold~~unaffiliated anlenders ~~aggregate~~in ~~amount~~which we may ofpartially ~~$360 million~~guarantee ~~3.5%~~loans ~~coupon~~made ~~convertible~~to ~~senior~~facilitate ~~notes~~third-party ~~due~~ownership of hotels ~~2023~~that we manage or franchise. ~~The~~As ~~notes~~of ~~are~~September 30, ~~convertible~~2004, ~~subject~~we towere ~~certain~~a ~~conditions,~~guarantor for ~~into~~loans ~~7.2 million~~which ~~Shares~~could ~~based~~reach on a ~~conversion~~maximum ~~price~~ of $~~50.00~~114 million ~~per~~relating ~~Share.~~to ~~Gross~~three ~~proceeds~~hotels opened ~~received~~in ~~were~~the ~~used~~past tothree ~~repay~~years: athe St. Regis in Monarch Beach, California, ~~portion~~which ofopened ~~the~~in ~~Company’s~~mid-2001; ~~Senior~~the ~~Credit~~Westin ~~Facility~~Kierland Resort and ~~for~~Spa in Scottsdale, ~~other~~Arizona, ~~operational~~which ~~purposes.~~opened ~~Holders~~in ~~may~~November 2002; ~~first~~and ~~present~~the ~~their~~Westin in Charlotte, North ~~notes~~Carolina, towhich opened in April 2003. In connection with the ~~Company~~loan guarantee for ~~repurchase~~the inWestin ~~May~~Charlotte, ~~2006.~~we also entered into a

41 In October 2002, the Company refinanced its previous senior credit facility with a new four-year $1.3 billion facility, comprised of a $1.0 billion revolving facility and a $300 million term loan, each maturing in 2006, with a one-year extension option, and an initial interest rate of LIBOR + 1.625% (the “Senior Credit Facility”). The proceeds of the new Senior Credit Facility were used to pay off all amounts owed under the Company’s previous senior credit facility, which was due to mature in February 2003. The Company incurred approximately $1 million in charges in connection with this early extinguishment of debt.

DuringTable the second quarter of 2003, the Company successfully amended its Senior Credit Facility. The amendment adjusted the leverage coverage ratio for the second quarter of 2003 and for the next eight quarters (through June 30, 2005). In addition, the Company modified its current covenant on encumbered EBITDA (as defined) and added a restriction on the level of cash dividends. The Company currently expects to be in compliance with the amended covenants for the remainder of the Senior Credit Facility term. Contents

Inguarantee ~~September~~to ~~2002,~~fund ~~the~~working ~~Company~~capital ~~terminated~~shortfalls ~~certain fair~~for ~~value~~this ~~swaps,~~resort ~~resulting~~through in2005. aNo significant ~~$78 million~~fundings ~~cash~~are ~~payment to~~anticipated ~~the~~under ~~Company.~~this ~~These~~working ~~proceeds~~capital ~~were~~guarantee. ~~used~~We do tonot ~~pay~~anticipate ~~down~~any ~~the previous~~funding ~~revolving~~under ~~credit~~the ~~facility~~remaining ~~and~~loan ~~will~~guarantees ~~result~~ in a2004, ~~decrease~~as toall ~~the~~projects ~~interest~~are ~~expense~~well oncapitalized. ~~the~~Furthermore, ~~hedged~~since ~~debt~~each ~~through~~of ~~its~~these ~~maturity~~properties inwas ~~2007.~~funded Inwith ~~order~~significant toequity ~~retain~~and ~~its~~subordinated ~~fixed~~debt ~~versus~~financing, ~~floating~~if ~~rate~~our ~~debt~~loan ~~position,~~guarantees ~~the~~were ~~Company~~to ~~immediately~~be ~~entered~~called, ~~into~~we ~~five~~could ~~new~~take ~~fair value~~an ~~swaps~~equity onposition ~~the~~in ~~same~~these properties ~~underlying~~at ~~debt~~values assignificantly ~~the~~below ~~terminated~~construction ~~swaps.~~costs

InAdditionally, ~~April~~during ~~2002~~the second quarter of 2004, we entered into a long-term management contract to manage the ~~Company~~Westin ~~sold~~Boston, ~~$1.5 billion~~Seaport Hotel in ofBoston, ~~senior~~Massachusetts, ~~notes~~which is under construction and scheduled to open in 2006. ~~two~~In ~~tranches~~connection —with this agreement, we will provide up to $~~700~~28 million in ~~principal~~mezzanine ~~amount~~loans ($13 million of ~~7 3/8%~~which ~~senior~~has ~~notes~~been ~~due~~funded) ~~2007~~as ~~and~~well as various ~~$800 million~~guarantees, including a principal ~~amount~~repayment ofguarantee ~~7 7/8%~~for ~~senior~~the ~~notes~~term of the ~~due~~senior ~~2012~~debt (~~the~~four ~~“Senior~~years ~~Notes~~with ~~Offering”~~a one-year extension option)., ~~The~~which ~~Company~~is capped at ~~used~~$40 million, ~~the~~and ~~proceeds~~a todebt ~~repay~~service ~~all~~guarantee during the term of ~~its~~the senior ~~secured notes~~debt ~~facility~~which ~~and~~is alimited ~~portion~~to ofthe ~~its~~interest ~~previous~~expense ~~senior~~on ~~credit~~the ~~facility.~~amounts drawn under such debt Inand ~~connection~~principal ~~with~~amortization. ~~the~~Any ~~repayment~~payments ofunder the debt service guarantee, attributable to principal, will reduce the ~~Company~~cap ~~incurred~~under the principal repayment ~~charges~~guarantee. The fair value of ~~approximately~~these guarantees of $293 million ~~including~~is reflected in ~~approximately~~other ~~$23~~liabilities in our accompanying balance sheet as of September ~~million~~30, 2004. In addition, we have issued a completion guarantee for this approximate $200 million project. In the ~~early~~event ~~termination~~the ofcompletion guarantee is called on, we would ~~interest~~have ~~rate~~recourse ~~swap~~to ~~agreements~~a ~~associated~~guaranteed ~~with~~maximum ~~repaid~~price ~~debt~~contract from the general contractor, performance bonds from all major trade contractors and a payment ~~$6 million~~bond ~~related~~from the general contractor. we would only be required to perform under the ~~write-off~~completion guaranty in the event of ~~deferred~~a ~~financing~~default by the general contractor ~~costs~~that ~~and~~is ~~termination~~not ~~fees~~cured ~~for~~by the ~~early~~contractor ~~extinguishment~~or ofthe ~~debt~~applicable bonds. We do not anticipate that we would be required to perform under these guarantees.

~~The~~Surety ~~Company~~bonds ~~maintains~~issued ~~non-U.S.-dollar-denominated debt,~~on ~~which~~our ~~provides~~behalf aas ~~hedge~~ of ~~the Company’s international net assets and operations but also exposes its debt balance to fluctuations in foreign currency exchange rates. At~~ September 30, ~~2003,~~2004 ~~the~~totaled ~~effect of changes in foreign currency exchange rates was a net increase in debt of approximately~~ $~~36 million when compared to~~34 ~~December 31~~million, ~~2002. The Company’s debt balance is also affected by changes in interest rates as a result of~~ the ~~Company’s~~ ~~fair~~majority ~~value swaps. The fair market value~~ of ~~the fair~~which ~~value~~were ~~swaps~~required isby ~~recorded~~state ~~as an asset~~ or ~~liability~~local ~~and as the~~governments ~~fair~~relating ~~value swaps are deemed~~ to beour ~~effective,~~vacation anownership ~~adjustment~~operations ~~is recorded against the corresponding debt. At September 30, 2003~~ and ~~December 31,~~by ~~2002,~~our ~~the~~insurers ~~Company’s debt included an increase of approximately $71 million and $75 million, respectively, related~~ to ~~the unamortized gain~~secure onlarge ~~terminated~~deductible ~~fair~~insurance ~~value swaps and the fair market value of current fair value swaps~~programs.

~~Starwood~~To ~~has~~secure amanagement ~~substantial~~contracts, ~~amount~~we ofmay ~~indebtedness and~~provide ~~had~~performance ~~working~~guarantees ~~capital~~to third-party ofowners. ~~$30 million~~Most ~~at September 30,~~of ~~2003.~~these Aperformance ~~portion~~guarantees ofallow the ~~proceeds~~owner ~~from~~to terminate the contract if we elect not to fund shortfalls if certain ~~sales~~performance oflevels ~~the~~are ~~Principe~~not ~~and~~met. ~~Sardinia~~In ~~Assets~~limited ~~were~~cases, ~~used~~we are obliged to ~~repay~~fund shortfalls in performance levels through the issuances of loans. As of ~~450~~September ~~million~~30, ~~Euro~~2004, ~~debt~~we ~~scheduled~~have to8 ~~mature~~management incontracts ~~June~~with ~~2003,~~performance asguarantees

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