Starwood Hot 2008 Annual Report

2009 PROXY STATEMENT & 2008 ANNUAL REPORT

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If we learned one thing in 2008, it was to expect the unex-pected, to prepare for the worst and to keep our nerve. Business trends deteriorated throughout the year and this negative momentum has continued into 2009. As part of our ongoing efforts to prepare for a worsening macro environ-ment, we began a rigorous cost-cutting program early in 2008, including a review of our spending with a focus on reducing costs, improving productivity and reinvesting against our growth priorities. I am pleased to report that we have been successful in this task. In fact, our cost discipline helped us achieve strong results in each quarter of 2008 despite a rapid deterioration in lodging demand. In 2009, we will con-tinue to focus on managing our costs without compromising our long-term growth plans for the company.

I would like to take this opportunity to thank Starwood’s talented team of Associates for delivering excellent results in 2008, despite the weakening environment and the Company’s focus on dramatically reducing overhead and property-level costs.

• We grew our managed and franchised revenues by over 5% despite flat worldwide RevPAR.

• We added a record 87 hotels to Starwood’s global platform, representing 10% gross unit additions dur-ing the year.

• We increased our guest satisfaction scores across all of our brands, including strong debuts for aloft and Element.

• We sold six assets for cash proceeds of $320 million.

• We realigned our corporate and divisional struc-tures, resulting in annual run-rate savings of over $100 million.

• We implemented top-down and bottom-up initiatives to significantly reduce property-level costs.

Looking ahead, the good news is that we remain strongly positioned for one of the most challenging demand environ-ments the lodging industry—and the global economy—has ever experienced. In addition to working toward the Five Essentials that will drive our success over the long term, we are continuing to reduce our cost base. Cost control enabled us to weather the deteriorating fundamentals that accelerated throughout 2008. To put the operating environment into perspective, worldwide owned RevPAR grew 5% in the first quarter, but declined 16% in the fourth quarter. While the severity and breadth of the slowdown surprised us, we were well ahead of the curve from a cost reduction perspective which helped drive our better than expected results.

Starwood’s efforts to reduce corporate overhead have created immediate savings as well as lasting changes to our way of doing business. We are using what we call Activity Value Analysis, or AVA, which is a rigorous process to address our

costs and lay the foundation for future growth. Through AVA, we eliminated costs by streamlining activities and removing overlaps in our organization.

Let me take a step back to explain why this was needed. Remember that Starwood came together in the late 1990s as a patchwork of organizations—a small lodging REIT acquired Westin, ITT/Sheraton, Vistana and, most recently, Le Meridien. This resulted in a large organization with multiple offices and duplicate functions. While Starwood has performed well in spite of its complex structure, we saw the opportunity to save even more money and become more agile. Equally important, we wanted to ensure our corporate structure was positioned to best support our properties and owners.

For example, through the AVA process we eliminated almost 100 positions in our North American Division alone. In addition to focusing on cost cutting, as we went through the process we also looked at identifying areas that could be strength-ened to better meet the needs of our owners. This resulted in reorganizing some parts of the owner relations team to improve communication and support.

We also centralized many activities such as legal functions, created a single service center for human resources, and are consolidating certain accounts payable and payroll functions in the United States. We also better aligned our development, architecture and design, and hotel opening teams to streamline the process from signing a contract to opening a property.

In total, the AVA process to date has generated a 30% reduction in personnel costs across many of our corporate and divisional functions. At Starwood’s Vacation Ownership business, we were able to reduce G&A by 45% and eliminate 35% of our sales force. In addition to the AVA process, our overhead cost reduction efforts also focused on compensa-tion. This included benchmarking most positions, allowing us to re-band jobs and make sweeping changes in equity compen-sation. Like many companies, we have also frozen salaries for 2009. As mentioned earlier, the net result will be a run-rate savings of $100 million, and this includes only those savings already implemented.

The second area of our cost cutting focused on the property level. We began two major initiatives in 2008—one is bottom-up and the other is top-down. Between them, we should be able to offset inflationary pressures, significantly helping our results in 2009. To be clear, this is before the impact of any variable cost savings associated with lower occupancy.

Our bottom-up approach is called ‘lean operations’ and involves using our talent to reduce work and waste. For example, we refined our staffing model to better match work demand, outsourced bakery and butcher positions, and expanded spans of control for managers and supervisors. The lean operations team is working closely with our Six Sigma team to implement these productivity enhancements across our hotels.

Dear Fellow Shareholders:

Starwood Hotels & Resorts Worldwide, Inc.

Our top-down approach is known as normative modeling, which employs analytics to ‘normalize’ hotel cost performance- based structural variables, such as room size and configura-tion, number of service elevators, and unionization. Normalizing further assists us in identifying top performing hotels and per-formance gaps. As with lean operations, best practices are then rolled out to under-performers. Examples of this include reducing the number of housekeepers per occupied room and simplifying food and beverage concepts. At the same time, we are working with our owners to share these savings across the managed and franchised system.

Procurement is the third area where we are reducing costs across the system. This includes introducing more categories to our buying programs, vendor consolidation, SKU rational-ization and improved compliance. These efforts have resulted in the ability to negotiate better contract terms for items such as food, flat screen TVs and laptops. Given our success from recent negotiations, we anticipate additional direct savings of $35 million in 2009.

While the current environment has created intense pressure for us to manage costs, controlling our costs is just one of four financial levers we have at our disposal to create share-holder value over the long-term. The other three levers are:

• Driving RevPAR premiums

• Growing our pipeline

• Unlocking real estate value

Our ability to pull these financial levers relies on our team’s execution against the five essentials of “The Starwood Journey.”

1. ‘Starwood Class Brands’ is our first essential, and our brand teams are hard at work on the innovations that will drive RevPAR outperformance and propel our pipeline.

2. The brand teams are also better aligned than ever with our Operations team as we work towards ‘Brilliant Execution,’ our second essential. Brilliant execution means consistently creating brand-relevant guest experiences while being vigilant on costs.

3. ‘Global Growth’ is our third essential, and we continue to grow our footprint around the world. We have roughly 100,000 rooms in our pipeline, and our brand and operations teams are aligned to open these hotels on-brand and ‘HOT,’ meaning on time, on budget and full.

4. ‘Great Talent’ is our fourth essential, and our Human Resources team is driving efforts to improve our ability to attract, retain, and develop talented people to operate our properties around the world. This is particularly important as we still plan to open 425 hotels over the coming years.

5. The fifth essential, generating ‘Market-Leading Returns,’ hinges on our ability to realize global growth, unlock real estate value, and carefully manage costs. While we are waiting for capital markets to recover, selective sales of real estate and prudent allocation of capital will advance our transformation to an asset-light model.

We have often described the branded global hotel fee business as one of the most attractive business models in the world—and we continue to believe this is true. The contracts are stable, capital-efficient and long-term. Fee growth is driven by three factors: RevPAR growth, unit additions, and incen-tive escalation.

We have made substantial progress over the last few years in growing our managed and franchised business and reducing the size of our owned portfolio. Today, 53% of our EBITDA contribution is from fee income, up from 18% five years ago. Our goal is to be over 80% fee-driven in the coming years. By itself, this focus on the fee business will result in a sustainable growth engine that throws off significant free cash flow. At the same time, our balance sheet holds more opportunities to generate cash, in the form of real estate at our owned hotels and inventory at the vacation ownership business.

Reducing the size of our owned portfolio and vacation own-ership business will take time. These initiatives—combined with the growth in our managed and franchised business—will result in an increasingly capital-efficient business model.

To summarize, we are prepared for a variety of potential sce-narios in 2009. We have been aggressive in our cost contain-ment efforts and dramatically scaled back our capital plans, but are prepared to do more if needed. We have been con-servative in our approach to managing our balance sheet and will explore all options to maintain maximum balance sheet flexibility and liquidity. Our efforts thus far have resulted in an increasingly efficient cost structure that should position us to not just survive this economic downturn but allow us to cap-italize on the upswing in the future. We continue to build, open, renovate and innovate for recovery and beyond, and remain focused on our long-term strategy to generate mar-ket-leading returns for our shareholders.

Thank you for your continued support.

Frits van PaasschenChief Executive Officer

Starwood Hotels & Resorts Worldwide, Inc.

Starwood Hotels & Resorts Worldwide, Inc.2009 Proxy Statement & 2008 Annual Report

2009NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

ANDPROXY STATEMENT

March 26, 2009

Dear Stockholder:

You are cordially invited to attend Starwood’s Annual Meeting of Stockholders, which is being held onWednesday, May 6, 2009, at 10:00 a.m. (local time), at the St. Regis Washington, D.C., 923 16th and K Streets,N.W., District of Columbia 20006.

At this year’s Annual Meeting, you will be asked to (i) elect eleven Directors and (ii) ratify the appointment ofErnst & Young LLP as Starwood’s independent registered public accounting firm for 2009.

As owners of Starwood, your vote is important. Whether or not you are able to attend the Annual Meeting inperson, it is important that your shares be represented. Please vote as soon as possible. Instructions on how to voteare contained herein.

We appreciate your continued support and interest in Starwood.

Very truly yours,

Frits van PaasschenChief Executive Officer

Bruce W. DuncanChairman of the Board

NOTICE OF 2009 ANNUAL MEETING OF STOCKHOLDERSOF

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.A Maryland Corporation

DATE: May 6, 2009

TIME: 10:00 a.m., local time

PLACE: St. Regis Washington, D.C.923 16th and K Streets, N.W.District of Columbia 20006

ITEMS OF BUSINESS: 1. To elect eleven Directors to serve until the next Annual Meeting ofStockholders and until their successors are duly elected and qualified.

2. To consider and vote upon the ratification of the appointment ofErnst & Young LLP as Starwood Hotels & Resorts Worldwide, Inc.’s (the“Company”) independent registered public accounting firm for the fiscal yearending December 31, 2009.

3. To transact such other business as may properly come before the meeting orany postponement or adjournment therof.

RECORD DATE: Holders of record of the Company’s stock at the close of business on March 12,2009 are entitled to vote at the meeting.

ANNUAL REPORT: The Company’s 2008 Annual Report on Form 10-K, which is not a part of the proxysoliciting material, is enclosed. The Annual Report may also be obtained from theCompany’s web site at www.starwoodhotels.com/corporate/investor_relations.html.Stockholders may also obtain, without charge, a copy of the Annual Report bycontacting Investor Relations at the Company’s headquarters.

PROXY VOTING: It is important that your shares be represented and voted at the meeting. You canauthorize a proxy to vote your shares by completing and returning the proxy cardsent to you. Most stockholders can authorize a proxy over the Internet or bytelephone. If Internet or telephone authorization is available to you, instructionsare printed on your proxy card. You can revoke a proxy at any time prior to itsexercise at the meeting by following the instructions in the accompanying proxystatement. Your promptness will assist us in avoiding additional solicitation costs.

Kenneth S. SiegelCorporate Secretary

March 26, 2009White Plains, New York

TABLE OF CONTENTS

WHO CAN HELP ANSWER YOUR QUESTIONS? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ii

THE ANNUAL MEETING AND VOTING — QUESTIONS AND ANSWERS . . . . . . . . . . . . . . . . . . . . 1

CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

ELECTION OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

COMPENSATION DISCUSSION & ANALYSIS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

COMPENSATION COMMITTEE REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

SUMMARY COMPENSATION TABLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

GRANTS OF PLAN-BASED AWARDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE AND GRANTS OFPLAN-BASED AWARDS SECTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

OPTION EXERCISES AND STOCK VESTED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

NONQUALIFIED DEFERRED COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL . . . . . . . . . . . . . . . . 36

DIRECTOR COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40AUDIT COMMITTEE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION . . . . . . . . . . . . . . . . 46

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

SOLICITATION COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

HOUSEHOLDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

WHO CAN HELP ANSWER YOUR QUESTIONS?

If you have any questions about the Annual Meeting, you should contact:

Starwood Hotels & Resorts Worldwide, Inc.1111 Westchester Avenue

White Plains, New York 10604Attention: Investor Relations

Phone Number: 1-914-640-8100

If you would like additional copies of this Proxy Statement or the Annual Report, or if you have questionsabout the Annual Meeting or need assistance in voting your shares, you should contact:

D.F. King & Co., Inc.48 Wall Street

New York, New York 10005Phone Number: 1-800-859-8511 (toll free)

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.1111 WESTCHESTER AVENUE

WHITE PLAINS, NY 10604

PROXY STATEMENTFOR

ANNUAL MEETING OF STOCKHOLDERSTO BE HELD May 6, 2009

THE ANNUAL MEETING AND VOTING — QUESTIONS AND ANSWERS

Why did I receive the Notice of Internet Availability of Proxy Materials or this Proxy Statement?

Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the “Company” or “Starwood”), hasmade these materials available to you on the Internet or, upon your request, has delivered printed versions of thesematerials to you by mail, in connection with the solicitation of proxies by the Board of Directors (the “Board”) foruse at the Company’s 2009 Annual Meeting of Stockholders (the “Annual Meeting”), and at any postponement oradjournment of the Annual Meeting. The Company is first making these materials available (and is mailing theNotice of Meeting and Internet Availability of Proxy Materials) on or about March 26, 2009. This Notice containsinstructions on how to access the Company’s proxy statement and 2008 Annual Report to Shareholders and voteonline. By furnishing this Notice, the Company is lowering the costs and reducing the environmental impact of itsAnnual Meeting.

The Company intends to start mailing a paper or electronic copy of its proxy statement and 2008 AnnualReport to those stockholders who have requested a paper or electronic copy on or about March 26, 2009.

When and where will the Annual Meeting be held?

The Annual Meeting will be held on May 6, 2009 at 10:00 a.m. (local time), at the St. Regis Washington, D.C.,923 16th and K Streets, N.W., District of Columbia 20006. If you plan to attend the Annual Meeting and have adisability or require special assistance, please contact the Company’s Investor Relations department at(914) 640-8100.

What proposals will be voted on at the Annual Meeting?

At the Annual Meeting, the stockholders of the Company will consider and vote upon:

1. The election of eleven Directors to serve until the next Annual Meeting of Stockholders and until theirsuccessors are duly elected and qualified.

2. The ratification of the appointment of Ernst & Young LLP (“Ernst & Young”) as the Company’sindependent registered public accounting firm for 2009.

3 Such other business as may properly come before the meeting or any adjournment or postponement thereof.

The Board is not aware of any matter that will be presented at the Annual Meeting that is not described above.If any other matter is presented at the Annual Meeting, the persons named as proxies on the enclosed proxy cardwill, in the absence of stockholder instructions to the contrary, vote the shares for which such persons have votingauthority in accordance with their discretion on any such matter.

Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materialsinstead of a full set of proxy materials?

Pursuant to the rules adopted by the Securities and Exchange Commission, we are providing access to ourproxy materials over the Internet. Accordingly, we sent a Notice of Internet Availability of Proxy Materials (the“Notice”) to our stockholders of record and beneficial owners as of the Record Date. All stockholders will have the

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ability to access the proxy materials on the web site referred to in the Notice or request to receive a printed set of theproxy materials. Instructions on how to access the proxy materials over the Internet or to request a printed copy maybe found on the Notice. In addition, stockholders may request to receive proxy materials in printed form by mail orelectronically by email on an ongoing basis.

How can I get electronic access to the proxy materials?

The Notice will provide you with instructions regarding how to:

• View our proxy materials for the Annual Meeting on the Internet; and

• Instruct us to send our future proxy materials to you electronically by email.

Choosing to receive your future proxy materials by email will save us the cost of printing and mailingdocuments to you and will reduce the impact of our annual stockholders’ meetings on the environment. If youchoose to receive future proxy materials by email, you will receive an email next year with instructions containing alink to those materials and a link to the proxy voting site. Your election to receive proxy materials by email willremain in effect until you terminate it.

Who is entitled to vote at the Annual Meeting?

If you were a stockholder of the Company at the close of business on March 12, 2009 (the “Record Date”), youare entitled to notice of, and to vote at, the Annual Meeting. You have one vote for each share of common stock ofthe Company (“Shares”) you held at the close of business on the Record Date on each matter that is properlysubmitted to a vote at the Annual Meeting, including Shares:

• Held directly in your name as the stockholder of record,

• Held for you in an account with a broker, bank or other nominee, and

• Credited to your account in the Company’s Savings and Retirement Plan (the “Savings Plan”).

On the Record Date there were 182,496,505 Shares outstanding and entitled to vote at the Annual Meeting andthere were 17,058 record holders of Shares. The Shares are the only outstanding class of voting securities of theCompany.

Who may attend the Annual Meeting?

Only stockholders of record, or their duly authorized proxies, may attend the Annual Meeting. Registrationand seating will begin at 9:00 a.m. To gain admittance, you must present valid picture identification, such as adriver’s license or passport. If you hold Shares in “street name” (through a broker or other nominee), you will alsoneed to bring a copy of a brokerage statement (in a name matching your photo identification) reflecting your stockownership as of the Record Date. If you are a representative of a corporate or institutional stockholder, you mustpresent valid photo identification along with proof that you are a representative of such stockholder.

Please note that cameras, recording devices and other electronic devices will not be permitted at the AnnualMeeting.

How many Shares must be present to hold the Annual Meeting?

The presence in person or by proxy of holders of a majority of the outstanding Shares entitled to vote at theAnnual Meeting constitutes a quorum for the transaction of business. Your Shares are counted as present at themeeting if you:

• are present in person at the Annual Meeting, or

• have properly executed and submitted a proxy card, or authorized a proxy over the telephone or the Internet,prior to the Annual Meeting.

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Abstentions and broker non-votes are counted for purposes of determining whether a quorum is present at theAnnual Meeting.

If a quorum is not present when the Annual Meeting is convened, or if for any other reason the presiding officerbelieves that the Annual Meeting should be adjourned, the Annual Meeting may be adjourned by the presidingofficer. If a motion is made to adjourn the Annual Meeting, the persons named as proxies on the enclosed proxy cardwill have discretion to vote on such adjournment all Shares for which such persons have voting authority.

What are broker non-votes?

If you have Shares that are held by a broker, you may give the broker voting instructions and the broker mustvote as you directed. If you do not give the broker any instructions, the broker may vote at its discretion on allroutine matters (i.e., election of Directors and the ratification of an independent registered public accounting firm).For non-routine matters, however, the broker may NOT vote using its discretion. This is referred to as a broker non-vote.

How are abstentions, withheld votes and broker non-votes counted?

Shares not voted due to withheld votes, abstentions or broker non-votes with respect to the election of aDirector or the ratification of the appointment of the independent registered public accounting firm will not haveany effect on the outcome of such matters.

How many votes are required to approve each proposal?

Directors will be elected by a plurality of the votes cast at the Annual Meeting, either in person or representedby properly authorized proxy. This means that the eleven nominees who receive the largest number of “FOR” votescast will be elected as Directors. Stockholders cannot cumulate votes in the election of Directors. See “Whathappens if a Director nominee does not receive a majority of the votes cast?” below for information concerning ourdirector resignation policy.

Ratification of the appointment of Ernst & Young as the Company’s independent registered public accountingfirm requires “FOR” votes from a majority of the votes cast at the Annual Meeting, either in person or representedby properly completed or authorized proxy. If a majority of the votes cast at the Annual Meeting vote “AGAINST”ratification of the appointment of Ernst & Young, the Board and the Audit Committee will reconsider itsappointment.

What happens if a Director nominee does not receive a majority of the votes cast?

Under our Bylaws, a Director nominee, running uncontested, who receives more “Withheld” than “For” votesis required to tender his or her resignation for consideration by the Board. The Corporate Governance andNominating Committee will recommend to the Board whether to accept or reject the resignation. The Board will acton the tendered resignation and publicly disclose its decision within 90 days following certification of the electionresults. The Director who tenders his or her resignation will not participate in the Board’s decision with respect tothat resignation.

How do I vote?

If you are a stockholder of record, you may vote in person at the Annual Meeting. We will give you a ballotwhen you arrive. If you do not wish to vote in person or if you will not be attending the Annual Meeting, you mayvote by proxy. You can vote by proxy over the Internet by following the instructions provided in the Notice, or, ifyou request printed copies of the proxy materials by mail, you can also authorize a proxy to vote by mail or bytelephone.

Each Share represented by a properly completed written proxy or properly authorized proxy by telephone orover the Internet will be voted at the Annual Meeting in accordance with the stockholder’s instructions specified inthe proxy, unless such proxy has been revoked. If no instructions are specified, such Shares will be voted FOR theelection of each of the nominees for Director, FOR ratification of the appointment of Ernst & Young as the

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Company’s independent registered public accounting firm for 2009 and in the discretion of the proxy holder on anyother business that may properly come before the meeting.

If you participate in the Savings Plan and have contributions invested in Shares, the proxy card will serve as avoting instruction for the trustee of the Savings Plan. You must return your proxy card to the transfer agent on orprior to May 1, 2009. If your proxy card is not received by the transfer agent by that date or if you sign and returnyour proxy card without instructions marked in the boxes, the trustee will vote your Shares in the same proportion asother Shares held in the Savings Plan for which the trustee received timely instructions unless contrary to ERISA(Employee Retirement Income Security Act).

How can I revoke a previously submitted proxy?

You may revoke your proxy and change your vote at any time before the final vote at the Annual Meeting. Youmay submit a proxy again on a later date on the Internet or by telephone (only your latest Internet or telephone proxysubmitted prior to the meeting will be counted), or by signing and returning a new proxy card with a later date, or byattending the meeting and voting in person. However, your attendance at the Annual Meeting will not automaticallyrevoke your proxy unless you vote at the meeting or specifically request in writing that your prior proxy be revoked.

What does it mean if I receive more than one proxy card?

If you receive more than one proxy card from the Company, it means your Shares are not all registered in thesame way (for example, some are held in your name and others are held jointly with a spouse) and are in more thanone account. Please sign and return all proxy cards you receive to ensure that all Shares held by you are voted.

How does the Board recommend that I vote?

The Board recommends that you vote FOR each of the Director nominees and FOR ratification of theappointment of Ernst & Young as the Company’s independent registered public accounting firm for 2009.

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CORPORATE GOVERNANCE

In addition to our charter and Bylaws, we have adopted Corporate Governance Guidelines, which are posted onour web site at www.starwoodhotels.com/corporate/investor_relations.html, to address significant corporate gov-ernance matters. The Guidelines provide a framework for the Company’s corporate governance and cover topicsincluding, but not limited to, Board and committee composition, Director share ownership guidelines, and Boardevaluations. The Corporate Governance and Nominating Committee is responsible for overseeing and reviewing theGuidelines and reporting and recommending to the Board any changes to the Guidelines.

The charters for the Company’s Audit Committee, Capital Committee, Compensation and Option Committeeand Corporate Governance and Nominating Committee are posted on its web site atwww.starwoodhotels.com/corporate/investor_relations.html.

The Company has adopted a Finance Code of Ethics applicable to its Chief Executive Officer, Chief FinancialOfficer, Corporate Controller, Corporate Treasurer, Senior Vice President-Taxes and persons performing similarfunctions. The Finance Code of Ethics is posted on the Company’s web site atwww.starwoodhotels.com/corporate/investor_relations.html. The Company intends to post amendments to, andwaivers from, the Finance Code of Ethics that require disclosure under applicable Securities and ExchangeCommission (the “SEC”) rules on its web site. In addition, the Company has a Code of Business Conduct and Ethics(the “Code of Conduct”) applicable to all employees and Directors that addresses legal and ethical issues employeesmay encounter in carrying out their duties and responsibilities. Subject to applicable law, employees are required toreport any conduct they believe to be a violation of the Code of Conduct. The Code of Conduct is posted on theCompany’s web site at www.starwoodhotels.com/corporate/investor_relations.html.

You may obtain a free copy of any of these posted documents by sending a letter to the Company’s InvestorRelations Department, 1111 Westchester Avenue, White Plains, New York 10604. Please note that the informationon the Company’s web site is not incorporated by reference in this Proxy Statement.

The Company has a Disclosure Committee, comprised of certain senior executives, to design, establish andmaintain the Company’s internal controls and other procedures with respect to the preparation of periodic reportsfiled with the SEC, earnings releases and other written information that the Company will disclose to the investmentcommunity (the “Disclosure Documents”). The Disclosure Committee evaluates the effectiveness of the Compa-ny’s disclosure controls and procedures on a regular basis and maintains written records of its meetings. TheCompany will continue to monitor developments in the law and stock exchange regulations and will adopt newprocedures consistent with new legislation or regulations.

In accordance with New York Stock Exchange (the “NYSE”) rules, the Board makes an annual determination asto the independence of the Directors and nominees for election as a Director. No Director will be deemed to beindependent unless the Board affirmatively determines that the Director has no material relationship with theCompany, directly or as an officer, stockholder or partner of an organization that has a relationship with the Company.A material relationship is one that impairs or inhibits — or has the potential to impair or inhibit — a director’s exerciseof critical and disinterested judgment on behalf of the Company and its stockholders. The Board observes all criteriafor independence established by the NYSE listing standards and other governing laws and regulations. In its annualreview of Director independence, the Board considers any commercial, banking, consulting, legal, accounting,charitable or other business relationships each Director may have with the Company. In addition, the Board consultswith the Company’s counsel to ensure that the Board’s determinations are consistent with all relevant securities andother laws and regulations regarding the definition of “independent director,” including but not limited to those setforth in pertinent listing standards of the NYSE in effect from time to time. As a result of its annual review, the Boardhas determined that all of the Directors, with the exception of Mr. van Paasschen, are independent directors. Mr. vanPaasschen is not independent because he is serving as the Chief Executive Officer of the Company.

In making this determination, the Board took into account that three of the non-employee Directors, Messrs.Aron and Daley and Ms. Galbreath, have no relationship with the Company except as a Director and stockholder ofthe Company and that the remaining seven non-employee Directors have relationships with the Company that areconsistent with the NYSE independence standards. With respect to Mr. Duncan, the Board considered the fact thatMr. Duncan served as Chief Executive Officer on an interim basis from April 1, 2007 to September 24, 2007 and

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received a salary and other benefits for his services. Prior to serving as Chief Executive Officer on an interim basis,the Board determined that Mr. Duncan was an independent director. Yahoo! Inc., Amazon.com, Inc., Gap, Inc.,Nike, Inc., Intel Corp. and American Express Company, where Messrs. Hippeau, Mr. Ryder, Youngblood andClarke and Ambassador Barshefsky are directors, respectively, are the only companies to transact business with theCompany over the past three years in which any of the Company’s independent directors served as a director,executive officer or is a partner, principal or greater than 10% stockholder. In the case of each of Yahoo! Inc.,Amazon.com, Inc., Gap, Inc., Nike, Inc. and Intel Corp., the combined annual payments from the Company to eachsuch entity and from each such entity to the Company has been less than .05% of the Company’s and/or each suchother entity’s annual consolidated revenues for each of the past three years. In the case of American ExpressCompany, with which the Company co-brands the American Express Starwood Preferred Guest credit card, thecombined annual payments from the Company to American Express Company and from American ExpressCompany to the Company has been less than 1% of American Express Company’s annual consolidated revenues foreach of the past three years and payments from American Express were less than 4% of the Company’s annualconsolidated revenues for 2008, less than 2% for 2007 and slightly more than 2% for 2006. Ambassador Barshefskyserves solely as a director of American Express and derives no personal benefit from these payments. Theserelationships are consistent with the NYSE independence standards. In addition, in the case of Mr. Quazzo, theBoard considered that in January 2008 a fund managed by Transwestern Investment Company, LLC purchased theoffice building in Phoenix where the Company maintains an office. The Company’s lease for the office space wasnegotiated and entered into prior to the acquisition with unaffiliated third parties at arms-length and was notamended in connection with the acquisition of the building by the fund. Mr. Quazzo has informed the Company thathe did not derive any direct personal benefit from the office space lease, although his compensation does depend, inpart, on Transwestern Investment Company, LLC’s results of operations.

Mr. Duncan, who was an independent Director prior to his interim appointment as Chief Executive Officer, hasserved as non-executive Chairman of the Board from May 2005 until March 31, 2007 when he was appointed ChiefExecutive Officer on an interim basis, and from September 24, 2007 to the present. As a result, prior to March 31,2007 and following September 24, 2007, the Board did not have a “lead” Director but Mr. Duncan, as Chairman, ranmeetings of the Board. During Mr. Duncan’s appointment as Chief Executive Officer on an interim basis, theChairman of the Corporate Governance and Nominating Committee served as the lead Director at the executivemeetings of the Board. Mr. Quazzo, an independent Director, served as the Chairman of the Corporate Governanceand Nominating Committee in 2008.

The Company has adopted a policy which requires the Audit Committee to approve the hiring of any current orformer employee (within the last 5 years) of the Company’s independent registered public accounting firm into anyposition (i) as a manager or higher, (ii) in its accounting or tax departments, (iii) where the hire would have directinvolvement in providing information for use in its financial reporting systems, or (iv) where the hire would be in apolicy setting position. When undertaking its review, the Audit Committee considers applicable laws, regulationsand related commentary regarding the definition of “independence” for independent registered public accountingfirms.

The Board has a policy under which Directors who are not employees of the Company or any of its subsidiariesmay not stand for re-election after reaching the age of 72. In addition, under this policy, Directors who areemployees of the Company must retire from the Board upon their retirement from the Company. Pursuant to theCorporate Governance Guidelines, the Board also has a policy that Directors who change their principal occupation(including through retirement) should voluntarily tender their resignation to the Board.

The Company expects all Directors to attend the Annual Meeting and believes that attendance at the AnnualMeeting is as important as attendance at meetings of the Board of Directors and its committees. In fact, theCompany typically schedules Board of Directors’ and committee meetings to coincide with the dates of its AnnualMeetings. However, from time to time, other commitments prevent all Directors from attending each meeting. AllDirectors who were Board members at the time attended the most recent annual meeting of stockholders, which washeld on April 30, 2008.

The Company has adopted a policy which permits stockholders and other interested parties to contact theBoard of Directors. If you are a stockholder or interested party and would like to contact the Board of Directors you

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may send a letter to the Board of Directors, c/o the Corporate Secretary, 1111 Westchester Avenue, White Plains,New York 10604 or online at www.hotethics.com. You should specify in the communication that you are astockholder or an interested party. If the correspondence contains complaints about Starwood’s accounting, internalor auditing matters or directed to the non-management directors, the Corporate Secretary will forward thatcorrespondence to a member of the Audit Committee. If the correspondence concerns other matters, the CorporateSecretary will forward the correspondence to the Director to whom it is addressed or otherwise as would beappropriate under the circumstances, attempt to handle the inquiry directly (for example where it is a request forinformation or a stock-related matter), or not forward the communication if it is primarily commercial in nature orrelates to an improper or irrelevant topic. At each regularly scheduled Board meeting, the Corporate Secretary orhis/her designee will present a summary of all such communications received since the last meeting that were notforwarded and shall make those communications available to the Directors upon request. This policy is also postedon the Company’s web site at www.starwoodhotels.com/corporate/investor_relations.html.

The Company indemnifies its Directors and officers to the fullest extent permitted by law so that they will befree from undue concern about personal liability in connection with their service to the Company. This is requiredunder the Company’s charter, and the Company has also signed agreements with each of those individualscontractually obligating it to provide this indemnification to them.

ELECTION OF DIRECTORS

Under the Company’s charter, each of the Company’s Directors is elected to serve until the next annualmeeting of stockholders and until his or her successor is duly elected and qualified. If a nominee is unavailable forelection, proxy holders and stockholders may vote for another nominee proposed by the Board or, as an alternative,the Board may reduce the number of Directors to be elected at the meeting. Each nominee has agreed to serve on theBoard if elected. Set forth below is information as of February 28, 2009 regarding the nominees for election, whichhas been confirmed by each of them for inclusion in this Proxy Statement.

Directors Nominated at the Annual Meeting will be Elected to Serve Until the 2010 Annual Meeting ofStockholders and Until his or her Successor is Duly Elected and Qualifies

Frits van Paasschen, 48, has been Chief Executive Officer of the Company since September 2007. FromMarch 2005 until September 2007, he served as President and CEO of Molson Coors Brewing Company’s largestdivision, Coors Brewing Company. Prior to joining Coors, from April 2004 until March 2005, Mr. van Paasschenworked independently through FPaasschen Consulting and Mercator Investments, evaluating, proposing, andnegotiating private equity transactions. Prior thereto, Mr. van Paasschen spent seven years at Nike, Inc., mostrecently as Corporate Vice President/General Manager, Europe, Middle East and Africa from 2000 to 2004. From1995 to 1997, Mr. van Paasschen served as Vice President, Finance and Planning at Disney Consumer Products andearlier in his career was a management consultant for eight years at McKinsey & Company and the BostonConsulting Group. Mr. van Paasschen has been a Director of the Company since September 2007.

Bruce W. Duncan, 57, has been President, Chief Executive Officer and Director of First Industrial RealtyTrust, Inc. since January 2009, prior to which time he was a private investor since January 2006. From April toSeptember 2007, Mr. Duncan served as Chief Executive Officer of the Company on an interim basis. He also hasbeen a senior advisor to Kohlberg Kravis & Roberts & Co. from July 2008 to January 2009. From May 2005 toDecember 2005, Mr. Duncan was Chief Executive Officer and Trustee of Equity Residential (“EQR”), a publiclytraded apartment company. From January 2003 to May 2005, he was President and Trustee of EQR. Mr. Duncan hasserved as a Director of the Company since April 1999, and was a Trustee of Starwood Hotels & Resorts, a real estateinvestment trust and former subsidiary of the Company (the “Trust”), since August 1995.

Adam M. Aron, 54, has been Chairman and Chief Executive Officer of World Leisure Partners, Inc., a leisure-related consultancy, since 2006. From 1996 through 2006, Mr. Aron served as Chairman and Chief ExecutiveOfficer of Vail Resorts, Inc., an owner and operator of ski resorts and hotels. Mr. Aron is a director of NorwegianCruise Line Limited and Prestige Cruise Holdings, Inc. Mr. Aron has been a Director of the Company since August2006.

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Charlene Barshefsky, 58, has been Senior International Partner at the law firm of WilmerHale, LLP,Washington, D.C. since September 2001. From March 1997 to January 2001, Ambassador Barshefsky was theUnited States Trade Representative, the chief trade negotiator and principal trade policy maker for the United Statesand a member of the President’s Cabinet. Ambassador Barshefsky is a director of The Estee Lauder Companies,Inc., American Express Company and Intel Corporation. Ambassador Barshefsky also serves on the Board ofDirectors of the Council on Foreign Relations and is a Trustee of the Howard Hughes Medical Institute. She hasbeen a Director of the Company, and was a Trustee of the Trust, since October 2001.

Thomas E. Clarke, 57, has been President of New Business Ventures of Nike, Inc., a designer, developer andmarketer of footwear, apparel and accessory products, since 2001. Dr. Clarke joined Nike, Inc. in 1980. He wasappointed Divisional Vice President in charge of marketing in 1987, Corporate Vice President in 1990, and servedas President and Chief Operating Officer from 1994 to 2000. Dr. Clarke previously held various positions with Nike,Inc. primarily in research, design, development and marketing. Dr. Clarke is also a director of Newell Rubbermaid,a global marketer of consumer and commercial products. Dr. Clarke has been a Director of the Company sinceApril, 2008.

Clayton C. Daley, Jr., 57, has spent his entire professional career with Procter & Gamble, joining the companyin 1974, and has held a number of key accounting and finance positions including Comptroller, U.S. Operations forProcter & Gamble USA; Vice President and Comptroller of Procter & Gamble International and Vice President andTreasurer. Mr. Daley was appointed to his current position as Chief Financial Officer, Procter & Gamble in 1998 andwas elected Vice Chair in 2007. Mr. Daley is a director of Boys Scouts of America, Dan Beard Council, and NucorCorporation. Mr. Daley has been a Director of the Company since November 2008.

Lizanne Galbreath, 51, has been Managing Partner of Galbreath & Company, a real estate investment firm,since 1999. From April 1997 to 1999, Ms. Galbreath was Managing Director of LaSalle Partners/Jones LangLaSalle where she also served as a Director. From 1984 to 1997, Ms. Galbreath served as a Managing Director thenChairman and Chief Executive Officer of The Galbreath Company, the predecessor entity of Galbreath & Company.Ms. Galbreath has been a Director of the Company, and was a Trustee of the Trust, since May 2005.

Eric Hippeau, 57, has been Managing Partner of Softbank Capital, a technology venture capital firm, sinceMarch 2000. Mr. Hippeau served as Chairman and Chief Executive Officer of Ziff-Davis Inc., an integrated mediaand marketing company, from 1993 to March 2000 and held various other positions with Ziff-Davis from 1989 to1993. Mr. Hippeau is a director of Yahoo! Inc. Mr. Hippeau has been a Director of the Company, and was a Trusteeof the Trust since April 1999.

Stephen R. Quazzo, 49, is the Chief Executive Officer and has been the Managing Director and co-founder ofTranswestern Investment Company, L.L.C., a real estate principal investment firm, since March 1996. From April1991 to March 1996, Mr. Quazzo was President of Equity Institutional Investors, Inc., a subsidiary of Equity GroupInvestments, Inc. Mr. Quazzo has been a Director of the Company since April 1999, and was a Trustee of the Trust,since August 1995.

Thomas O. Ryder, 64, retired as Chairman of the Board of The Reader’s Digest Association, Inc. in January2007, a position he had held since January 1, 2006. Mr. Ryder was Chairman of the Board and Chief ExecutiveOfficer of that company from April 1998 through December 31, 2005. Mr. Ryder was President, American ExpressTravel Related Services International, a division of American Express Company, which provides travel, financialand network services, from October 1995 to April 1998. In addition, he is a director of Amazon.com, Inc. andChairman of the Board of Virgin Mobile USA, Inc. Mr. Ryder has been a Director of the Company, and was aTrustee of the Trust, since April 2001.

Kneeland C. Youngblood, 53, is a founding partner of Pharos Capital Group, L.L.C., a private equity fundfocused on technology companies, business service companies and health care companies, since January 1998.From July 1985 to December 1997, he was in private medical practice. He is former Chairman of the Board of theAmerican Beacon Funds, a mutual fund company managed by AMR Investments, an investment affiliate ofAmerican Airlines. He is also a director of Burger King Holdings, Inc., Gap, Inc., and Energy Future Holdings(formerly TXU Corp.). Mr. Youngblood has been a Director of the Company, and was a Trustee of the Trust, sinceApril 2001.

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The Board unanimously recommends a vote FOR election of these nominees.

Board Meetings and Committees

The Board of Directors held 5 meetings during 2008. In addition to meetings of the full Board, Directorsattended meetings of individual Board committees. Each Director attended at least 75% of the total number ofmeetings of the full Board and committees on which he or she serves.

The Board has established Audit, Compensation and Option, Corporate Governance and Nominating, andCapital Committees, the principal functions of which are described below.

Audit Committee. The Audit Committee, which has been established in accordance with Section 3(a)(58)(A)of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is currently comprised of Messrs. Ryder(chairperson), Aron, Clarke, Daley and Youngblood, all of whom are “independent” Directors, as determined by theBoard in accordance with the NYSE listing requirements and applicable federal securities laws. The Board hasdetermined that each of Messrs. Ryder and Daley is an “audit committee financial expert” under federal securitieslaws and has adopted a written charter for the Audit Committee. The Audit Committee provides oversight regardingaccounting, auditing and financial reporting practices of the Company. The Audit Committee selects and engagesthe independent registered public accounting firm to serve as auditors with whom it discusses the scope and resultsof their audit. The Audit Committee also discusses with the independent registered public accounting firm and withmanagement, financial accounting and reporting principles, policies and practices and the adequacy of theCompany’s accounting, financial, operating and disclosure controls. The Audit Committee met 10 times during2008.

Compensation and Option Committee. Under the terms of its charter, the Compensation and OptionCommittee is required to consist of three or more members of the Board of Directors who meet the independencerequirements of the NYSE, are “non-employee directors” pursuant to SEC Rule 16b-3, and are “outside directors”for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended. The Compensation and OptionCommittee is currently comprised of Messrs. Aron (chairperson), Daley, Duncan, Youngblood and Ms. Galbreath,all of whom are “independent” Directors, as determined by the Board in accordance with the NYSE listingrequirements. The Compensation and Option Committee makes recommendations to the Board with respect to thesalaries and other compensation to be paid to the Company’s executive officers and other members of seniormanagement and administers the Company’s employee benefits plans, including the Company’s Long-TermIncentive Compensation Plans. The Compensation and Option Committee met 7 times during 2008.

Capital Committee. The Capital Committee is currently comprised of Ms. Galbreath (chairperson), andMessrs. Clarke, Hippeau and Quazzo. The Capital Committee was established in November 2005 to exercise someof the power of the Board relating to, among other things, capital plans and needs, mergers and acquisitions,divestitures and other significant corporate opportunities between meetings of the Board. The Capital Committeemet 6 times during 2008.

Corporate Governance and Nominating Committee. The Corporate Governance and Nominating Committeeis currently comprised of Messrs. Quazzo (chairperson), Duncan and Hippeau and Ambassador Barshefsky, all ofwhom are “independent” Directors, as determined by the Board in accordance with the NYSE listing requirements.The Corporate Governance and Nominating Committee was established in May 2004, combining the functions ofthe Corporate Governance Committee and the Nominating Committee, to oversee compliance with the Company’scorporate governance standards and to assist the Board in fulfilling its oversight responsibilities. The CorporateGovernance and Nominating Committee establishes, or assists in the establishment of, the Company’s governancepolicies (including policies that govern potential conflicts of interest) and monitors and advises the Company as tocompliance with those policies. The Corporate Governance and Nominating Committee reviews, analyzes, advisesand makes recommendations to the Board with respect to situations, opportunities, relationships and transactionsthat are governed by such policies, such as opportunities in which a Director or officer has a personal interest. Inaddition, the Corporate Governance and Nominating Committee is responsible for making recommendations forcandidates for the Board of Directors, taking into account nominations made by officers, Directors, employees andstockholders, recommending Directors for service on Board committees, developing and reviewing backgroundinformation for candidates, making recommendations to the Board for changes to the Corporate Governance

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Guidelines as they pertain to the nomination or qualifications of Directors or the size of the Board, if applicable. TheCorporate Governance and Nominating Committee met 10 times during 2008.

This year, Messrs. Clarke and Daley are standing for election by the stockholders for the first time. Mr. Clarkewas elected a Director by the Board in April 2008 and Mr. Daley was elected a Director by the Board in November2008. Mr. Clarke was recommended to the Board by the Chief Executive Officer, who believed that he would be avaluable addition to the Board based on his brand and marketing knowledge and experience. Mr. Daley wasrecommended by a search firm engaged by the Corporate Governance and Nominating Committee to recommendcandidates with a strong financial background and international operations experience. The Corporate Governanceand Nominating Committee conducted its own evaluation and interviewed Messrs. Clarke and Daley before makingits recommendation to nominate each of them.

There are no firm prerequisites to qualify as a candidate for the Board, although the Board seeks a diversegroup of candidates who possess the background, skills and expertise relevant to the business of the Company orcandidates that possess a particular geographical or international perspective. The Board looks for candidates withqualities that include strength of character, an inquiring and independent mind, practical wisdom and maturejudgment. The Board seeks to insure that at least 2/3 of the Directors are independent under the Company’sGovernance Guidelines (or at least a majority are independent under the rules of the NYSE), and that members ofthe Company’s Audit Committee meet the financial literacy requirements under the rules of the NYSE and at leastone of them qualifies as an “audit committee financial expert” under applicable federal securities laws. Annuallythe Corporate Governance and Nominating Committee reviews the qualifications and backgrounds of the Directors,the overall composition of the Board, and recommends to the full Board the slate of Directors to be recommendedfor nomination for election at the annual meeting of stockholders.

The Board does not believe that its members should be prohibited from serving on boards and/or committees ofother organizations, and the Board has not adopted any guidelines limiting such activities. However, the CorporateGovernance and Nominating Committee and the full Board will take into account the nature of and time involved ina Director’s service on other boards in evaluating the suitability of individual Directors and making its recom-mendations to Company stockholders. Service on boards and/or committees of other organizations should beconsistent with the Company’s conflict of interest policies.

The Corporate Governance and Nominating Committee may from time-to-time utilize the services of a searchfirm to help identify and evaluate candidates for Director who meet the qualifications outlined above.

The Corporate Governance and Nominating Committee will consider candidates nominated by stockholders.Under the Company’s current Bylaws, stockholder nominations must be made in writing, delivered or mailed byfirst class United States mail, postage prepaid, to the Corporate Secretary, 1111 Westchester Avenue, White Plains,New York 10604, and be received by the Corporate Secretary no later than the close of business on the 75th day norearlier than the close of business on the 100th day prior to the first anniversary of the preceding year’s annualmeeting. In accordance with the Company’s current Bylaws, such notice shall set forth as to each proposed nominee(i) the name, age and business address of each nominee proposed in such notice, and a statement as to thequalification of each nominee, (ii) the principal occupation or employment of each such nominee, (iii) the numberof Shares which are beneficially owned by each such nominee and by the nominating stockholder, and (iv) any otherinformation concerning the nominee that must be disclosed of nominees in proxy solicitations regulated byRegulation 14A of the Exchange Act, including, without limitation, such person’s written consent to being named inthe proxy statement as a nominee and to serving as a Director if elected. Although it has no formal policy regardingstockholder nominees, the Corporate Governance and Nominating Committee believes that stockholder nomineesshould be reviewed in substantially the same manner as other nominees.

The Company provides a comprehensive orientation for all new Directors. It includes a corporate overview,one-on-one meetings with senior management and an orientation meeting. In addition, all Directors are givenwritten materials providing information on the Company’s business.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires that the Company’s Directors and executive officers, and personswho own more than ten percent of the outstanding Shares, file with the SEC (and provide a copy to the Company)certain reports relating to their ownership of Shares.

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To the Company’s knowledge, based solely on a review of the copies of these reports furnished to the Companyfor the fiscal year ended December 31, 2008, and written representations that no other reports were required, allSection 16(a) filing requirements applicable to its Directors, executive officers and greater than 10 percentbeneficial owners were complied with for the most recent fiscal year.

RATIFICATION OF APPOINTMENT OF INDEPENDENTREGISTERED PUBLIC ACCOUNTING FIRM

The Board has appointed and is requesting ratification by stockholders of the appointment of Ernst & Young asthe Company’s independent registered public accounting firm. While not required by law, the Board is asking thestockholders to ratify the selection of Ernst & Young as a matter of good corporate practice. Representatives ofErnst & Young are expected to be present at the Annual Meeting, will have an opportunity to make a statement, ifthey desire to do so, and will be available to respond to appropriate questions. If the appointment of Ernst & Youngis not ratified, the Board and the Audit Committee will reconsider the selection of the independent registered publicaccounting firm.

The Board unanimously recommends a vote FOR ratification of the appointment of Ernst & Young as theCompany’s independent registered public accounting firm for 2009.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following tables show the number of Shares “beneficially owned” by (i) all persons known to theCompany to be the beneficial owners of more than 5% of the outstanding Shares at December 31, 2008 and (ii) eachof the Directors, nominees for Director and executive officers whose compensation is reported in this proxystatement (the “Named Executive Officers”), and (iii) Directors, nominees for Director, Named Executive Officersand executive officers (who are not Named Executive Officers) as a group, at January 31, 2009. “Beneficialownership” includes Shares a stockholder has the power to vote or the power to transfer, and also includes stockoptions and other derivative securities that were exercisable at that date, or as of that date will become exercisablewithin 60 days thereafter. Percentages are based upon the number of Shares outstanding at January 31, 2009, plus,where applicable, the number of Shares that the indicated person had a right to acquire within 60 days of such date.The information in the tables is based upon information provided by each Director and executive officer and, in thecase of the beneficial owners of more than 5% of the outstanding Shares, the information is based upon Schedules13G and 13D filed with the SEC.

Certain Beneficial Owners

Name and Address of Beneficial OwnerAmount and Nature ofBeneficial Ownership

Percentof Class

Morgan Stanley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,425,488 10.10%(1)1585 BroadwayNew York, New York 10036

EGI-SSE I, L.P . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,750,000 8.10%(2)Two North Riverside Plaza, Suite 600Chicago, IL 60606

Harris Associates Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,156,030 7.73%(3)Two North LaSalle Street, Suite 500Chicago, IL 60602

FMR LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,168,274 7.20%(4)82 Devonshire St.Boston, MA 02109

(1) Based on information contained in a Schedule 13G/A, dated February 17, 2009 (the “Morgan Stanley 13G”),filed with respect to the Company. Morgan Stanley filed the Morgan Stanley 13G solely in its capacity as theparent company of, and indirect beneficial owner of securities held by, certain of its operating units. MorganStanley beneficially owns an aggregate amount of 18,425,488 Shares. Morgan Stanley has sole voting power

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with respect to 11,372,688 Shares, shared voting over 909 Shares and sole dispositive power over18,425,488 Shares.

(2) Based on information contained in a Schedule 13D/A, dated December 31, 2008 (the “SSE 13D”), filed withrespect to the Company. SSE has shared voting power and shared dispositive power over 14,750,000 Shares. OnDecember 29, 2008, the Company and SSE entered into a confidentiality agreement to facilitate the sharing ofinformation between the Company and SSE. Pursuant to the agreement, SSE agreed to restrictions on its useand disclosure of the Company’s confidential information and limitations on its ability to effect a change incontrol of the Company.

(3) Based on information contained in a Schedule 13G, dated February 13, 2009 (the “Harris 13G”), filed withrespect to the Company, Harris Associates L.P. (“Harris”) has been granted the power to vote Shares incircumstances it determines to be appropriate in connection with assisting its advised clients to whom it rendersfinancial advice in the ordinary course of business, by either providing information or advice to the personshaving such power, or by exercising the power to vote. Harris has sole voting and sole dispositive power withrespect to 14,156,030 Shares.

(4) Based on information contained in a Schedule 13G/A, dated February 17, 2009 (the “FMR 13G”), filed withrespect to the Company, 12,568,601 Shares are held by Fidelity Management & Research Company(“Fidelity”), a wholly-owned subsidiary of FMR LLC (“FMR”); 119,630 Shares are held by Pyramis GlobalAdvisors, LLC, an indirect wholly-owned subsidiary of FMR; 268,515 Shares are held by Pyramis GlobalAdvisors Trust Company, an indirect wholly-owned subsidiary of FMR; 211,270 Shares are held by FidelityInternational Limited, a foreign based entity that provides investment advisory and management services tonon-U.S. investment companies (“FIL”) and 258 Shares are held by Strategic Advisers, Inc., a registeredinvestment adviser and wholly owned subsidiary of FMR. According to the FMR Schedule 13G, FMR andEdward C. Johnson 3rd, Chairman of FMR, each have sole dispositive power and sole voting power with respectto 12,568,601. FIL has sole power to vote and direct the voting of 202,170 Shares, no power to vote or direct thevoting of 9,100 Shares and the sole dispositive power with respect to 211,270 Shares. Through ownership ofvoting common stock and the execution of a certain stockholders’ voting agreement, members of the Edward C.Johnson 3rd family may be deemed, under the Investment Company Act of 1940, to form a controlling groupwith respect to FMR.

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Directors and Executive Officers of the Company

Name of Beneficial OwnerAmount and Nature ofBeneficial Ownership Percent of Class(1)

Adam M. Aron . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,225(3) (4)

Matthew Avril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,474(3) (4)

Charlene Barshefsky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,649(2)(3) (4)

Thomas E. Clarke . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,239(3) (4)

Clayton C. Daley, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,201(2)(3) (4)

Bruce W. Duncan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288,681(2)(3)(5) (4)

Lizanne Galbreath . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,092(2)(3) (4)

Eric Hippeau . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,247(2)(3) (4)

Philip P. McAveety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,330(3) (4)

Vasant Prabhu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409,350(3) (4)

Stephen R. Quazzo . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,287(3)(6) (4)

Thomas O. Ryder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,044(2)(3) (4)

Kenneth S. Siegel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 231,168(3) (4)

Simon Turner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 (4)

Frits van Paasschen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,692(3) (4)

Kneeland C. Youngblood . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,805(3) (4)

All Directors, Nominees for Directors and executive officers asa group (17 persons) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,441,764 (4)

(1) Based on the number of Shares outstanding on January 31, 2009 and Shares issuable upon exercise of optionsexercisable within 60 days from January 31, 2009.

(2) Amount includes the following number of “phantom” stock units received as a result of the following Directors’election to defer Directors’ Annual Fees: 17,509 for Mr. Hippeau; 12,463 for Mr. Ryder; 11,203 for Mr. Duncan;4,507 for Ms. Galbreath; 3,822 for Ambassador Barshefsky; and 142 for Mr. Daley.

(3) Includes Shares subject to presently exercisable options and options and restricted Shares that will becomeexercisable or vest within 60 days of January 31, 2009, as follows: 326,104 for Mr. Prabhu; 143,624 forMr. Siegel; 73,692 for Mr. Duncan; 66,512 for Mr. Avril; 6,330 for Mr. McAveety; 51,579 for Mr. Quazzo;52,738 for Mr. Hippeau; 41,692 for Mr. van Paasschen; 40,581 for Messrs. Ryder and Youngblood; 35,082 forAmbassador Barshefsky; 18,585 for Ms. Galbreath; 10,962 for Mr. Aron; 2,852 for Mr. Clarke; and 1,544 forMr. Daley.

(4) Less than 1%.

(5) Includes, 174,984 Shares held by the 2008 Locust Annuity Trust of which Mr. Duncan is a Trustee andbeneficiary, and 31,374 Shares held by The Bruce W. Duncan Revocable Trust of which Mr. Duncan is a Trusteeand beneficiary.

(6) Includes 26,311 Shares held by a trust of which Mr. Quazzo is settlor and over which he shares investmentcontrol, and 397 Shares owned by Mr. Quazzo’s wife in a Retirement Account.

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The following table provides information as of December 31, 2008 regarding Shares that may be issued underequity compensation plans maintained by the Company.

Equity Compensation Plan Information-December 31, 2008

Plan Category

Number of Securitiesto be Issued Upon

Exercise ofOutstanding Options,Warrants and Rights

(a)

Weighted-AverageExercise Price of

Outstanding Options,Warrants and Rights

(b)

Number of SecuritiesRemaining Available forFuture Issuance Under

Equity Compensation Plans(Excluding Securities

Reflected in Column (a))(c)

Equity compensation plans approved bysecurity holders. . . . . . . . . . . . . . . . . . 14,176,014 $25.05 69,726,066(1)

Equity compensation plans not approvedby security holders . . . . . . . . . . . . . . . — — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,176,014 $25.05 69,726,066

(1) Does not include deferred share units (that vest over three years and may be settled in Shares) that have beenissued pursuant to the Annual Incentive Plan for Certain Executives (“Executive AIP”). The Executive AIPdoes not limit the number of deferred share units that may be issued. This plan has been amended to provide fora termination date of May 26, 2009 to comply with new NYSE requirements. In addition, 10,540,472 Sharesremain available for issuance under our Employee Stock Purchase Plan, a stock purchase plan meeting therequirements of Section 423 of the Internal Revenue Code.

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EXECUTIVE COMPENSATION

I. COMPENSATION DISCUSSION AND ANALYSIS

Introduction

The Company’s compensation programs are designed to align compensation with its business objectives andperformance, enabling the Company to attract, retain, and reward executive officers and other key employees whocontribute to the Company’s long-term success and motivate executive officers to enhance long-term stockholdervalue. The Compensation Committee reviews and sets the Company’s overall compensation strategy for allemployees on an annual basis. In the course of this review, the Compensation Committee considers the Company’scurrent compensation programs and whether to modify them or introduce new programs or elements of compen-sation in order to better meet the Company’s overall compensation objectives.

During 2008, the Compensation Committee also reviewed some of the Company’s long-standing compen-sation practices and decided to make significant changes, most of which will become effective in 2009. Thesechanges include, among other things, (i) redesigning the compensation structure to achieve cost savings and aligntotal compensation with competitive market data, (ii) eliminating tax gross ups in new change in control agreementsentered into in 2008, (iii) eliminating the payout floor under the Company’s bonus plans for the 2009 performanceyear, (iv) structural changes for the 2009 performance year to align the individual performance portion of annualbonuses to the Company’s financial performance, and (v) freezing salaries for all bonus eligible associates incorporate and divisional offices, including the Named Executive Officers. In addition, for 2009 equity awards theCompensation Committee lowered the exchange ratio for 2009 equity grants from 3-to-1 to 2.5-to-1 for seniorexecutives electing to receive a larger portion of their equity awards in options instead of restricted stock, because ofthe lower stock price and leverage opportunity. These changes were designed to better align compensation with(i) the creation and preservation of shareholder value and (ii) the Company’s financial performance.

A. Overview of Starwood’s Executive Compensation Program

1. Program Objectives and Other Considerations

Objectives. As a consumer lifestyle company with a branded hotel portfolio at its core, the Companyoperates in a competitive, dynamic and challenging business environment. In step with this mission and environ-ment, the Company’s executive compensation program for our principal executive officer, principal financialofficer and the Named Executive Officers has the following key objectives:

• Attract and Retain: We seek to attract and retain talented executives from within and outside thehospitality industry who understand the importance of innovation, brand enhancement and consumerexperience. We are working to reinvent the hospitality industry, and one element of this endeavor is to bringin key talent from other industries. Therefore, overall program competitiveness must take these othermarkets into account.

• Motivate: We seek to motivate our executives to sustain high performance and achieve Company financialand strategic/operational goals over the course of business cycles and various market conditions.

• Align Interests: We endeavor to align the interests of stockholders and our executives by tying executivecompensation to the Company’s business results and stock performance. Moreover, we strive to keep theexecutive compensation program transparent, easily understood, in line with market practices and consistentwith high standards of good corporate governance.

What the Program Intends to Reward. Our executive compensation program is strongly weighted towardvariable compensation tied to Company results. Specifically, our compensation program for Named ExecutiveOfficers is designed to ensure the following:

• Alignment with Stockholders: A significant portion of Named Executive Officer compensation is deliveredin the form of equity, ensuring that long term compensation is strongly tied to stockholder returns.

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• Achievement of Company Financial Objectives: A portion of Named Executive Officer compensation istied directly to the Company’s financial performance.

• Achievement of Strategic/Operational Objectives. A portion of Named Executive Officer compensation istied to achievement of specific individual objectives that are directly aligned with execution of our businessstrategy. These objectives may be related to, among others, operational excellence, brand enhancement,innovation, growth, cost containment/efficiency, customer experience and/or teamwork.

• Overall Leadership and Stewardship of the Company: Leadership, teambuilding, and development offuture talent are key success factors for the Company and a portion of compensation for the NamedExecutive Officers is dependent on satisfaction of enumerated leadership competencies.

2. Roles and Responsibilities

Our Compensation and Option Committee (“Compensation Committee”) is responsible for, among otherthings, the establishment and review of compensation policies and programs for our executive officers and ensuringthat these executive officers are compensated in a manner consistent with the objectives and principles outlinedabove. It also monitors the Company’s executive succession plan, and reviews and monitors the Company’sperformance as it affects the Company’s employees and the overall compensation policies for the Company’semployees.

The Compensation Committee makes all compensation decisions for our Named Executive Officers. OurChief Executive Officer, together with the Chief Human Resources Officer, reviews the performance of each otherNamed Executive Officer and presents to the Compensation Committee his conclusions and recommendations,including salary adjustments and annual incentive compensation amounts (as described in more detail in subsectionB under the heading Incentive Compensation below). The Compensation Committee may exercise its discretion inmodifying any recommended salary adjustments or awards to these executives.

The role of the Company’s management is to provide reviews and recommendations for the CompensationCommittee’s consideration, and to manage operational aspects of the Company’s compensation programs, policiesand governance. Direct responsibilities include, but are not limited to, (i) providing an ongoing review of theeffectiveness of the compensation programs, including competitiveness, and alignment with the Company’sobjectives, (ii) recommending changes, if necessary, to ensure achievement of all program objectives and(iii) recommending pay levels, payout and/or awards for executive officers other than the Chief Executive Officer.Management also prepares tally sheets which describe and quantify all components of total compensation for ourNamed Executive Officers, including salary, annual incentive compensation, long-term incentive compensation,deferred compensation, outstanding equity awards, benefits, perquisites and potential severance and change-in-con-trol payments. The Compensation Committee reviews and considers these tally sheets in making compensationdecisions for our Named Executive Officers.

Management of the Company retained Towers Perrin in 2008 to perform a comprehensive review of thecompensation paid to all associates other than executive officers. Towers Perrin provided advice concerning thetotal compensation, including base salary, bonus opportunity and equity awards at these levels. As a result of thisreview, management fundamentally redesigned the compensation structure for such associates starting in 2009leading to significant cost savings and reduced overhead. Towers Perrin worked directly with management on thisproject and it was implemented by management with the approval of the Compensation Committee.

The Compensation Committee retained Pearl Meyer & Partners to assist in the review and determination ofcompensation awards to the Named Executive Officers (including the CEO) for the 2008 performance period. PearlMeyer & Partners worked with management and the Compensation Committee in reviewing the compensationstructure of the Company and of the companies in the peer group. Pearl Meyer & Partners does not provide any otherservices to the Company. The Compensation Committee approved Pearl Meyer & Partners’ equity programrecommendations and compensation awards for the 2008 performance period.

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B. Elements of Compensation

1. Primary Elements

The primary elements of the Company’s compensation program for our Named Executive Officers are:

• Base Salary

• Incentive Compensation

O Annual Incentive Compensation

O Long-Term Incentive Compensation

• Benefits and Perquisites

Mr. van Paasschen’s compensation structure was established in 2007 pursuant to his employment agreement.Mr. van Paasschen and the Company agreed to a compensation structure which was heavily geared towardsperformance and long term incentives, including equity awards in the form of restricted stock and stock options andrestrictions on selling equity awards for two years (other than to satisfy tax withholding obligations). As a result, inthe event of strong financial and individual performance, Mr. van Paasschen would benefit greatly in the form oflong term incentive compensation (stock options and restricted stock), but his compensation would be significantlylower if the Company did not perform well or if his employment with the Company was terminated after a shortperiod of time (due to the vesting requirements of the equity awards and generally no acceleration of equity awardsfor a termination with or without cause). For the other Named Executive Officers, pay is also structured to awardperformance but to a lesser degree in order to provide the Named Executive Officers with a minimum amount ofcompensation when the Company is unable to achieve its financial and strategic goals.

We describe each of the compensation elements below and explain why we pay each element and how wedetermine the amount of each element.

Base Salary. The Company believes it is essential to provide our Named Executive Officers with com-petitive base salaries that will enable the Company to continue to attract and retain critical senior executives fromwithin and outside the hospitality industry. In the case of Named Executive Officers other than the Chief ExecutiveOfficer, base salary typically accounts for approximately 20% of total compensation at target, i.e., total compen-sation excluding benefits and perquisites, and is generally targeted at the median of the Company’s peer group. Inthe case of Mr. van Paasschen, base salary for 2008 was limited to $1 million in order to keep this element of hiscompensation below the levels established by Section 162(m) of the Internal Revenue Code of 1986, as amended(the “Code”), which limits the deductibility of non-performance-based compensation above that amount. As aresult, base salary accounted for approximately 12.5% of total compensation at target for Mr. van Paasschen. Basesalary serves as a minimum level of compensation to Named Executive Officers in circumstances when achievingCompany financial and strategic/operational objectives becomes challenging and the level of incentive compen-sation is impacted. Salaries for Named Executive Officers are generally based on the responsibilities of eachposition and are reviewed annually against similar positions among a group of peer companies developed by theCompany and its advisors consisting of similarly-sized hotel and hospitality companies as well as other companiesrepresentative of markets in which the Company competes for key executive talent. See the BackgroundInformation on the Executive Compensation Program — Use of Peer Data section beginning on page 25 belowfor a list of the peer companies used in this analysis. The Company generally seeks to position base salaries of ourNamed Executive Officers at or near the market median for similar positions.

Incentive Compensation. Incentive compensation includes annual incentive awards under the Company’sAnnual Incentive Plan for Certain Executives (the “Executive Plan”) as well as long-term incentive compensation inthe form of equity awards under the Company’s 2004 Long-Term Incentive Plan (“LTIP”). Incentive compensationtypically accounts for approximately 80% of total compensation at target (87.5% for Mr. van Paasschen), withannual incentive compensation and long-term incentive compensation accounting for 20% and 60%, respectively(25% and 62.5% for Mr. van Paasschen, respectively). The Company’s emphasis on incentive compensation resultsin total compensation at target that is set at approximately the 65th percentile level relative to the Company’s peergroup, but that is highly dependent on performance. The Company believes that this structure allows it to provide

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each Named Executive Officer with substantial incentive compensation opportunities if performance objectives aremet. The Company believes that the allocation between base and incentive compensation is appropriate andbeneficial because:

• it promotes the Company’s competitive position by allowing it to provide Named Executive Officers withcompetitive compensation if targets are met;

• it targets and attracts highly motivated and talented executives within and outside the hospitality industry;

• it aligns senior management’s interests with those of stockholders;

• it promotes achievement of business and individual performance objectives; and

• it provides long-term incentives for Named Executive Officers to remain in the Company’s employ.

Annual Incentive Compensation. Annual incentives are a key part of the Company’s executivecompensation program. The incentives directly link the achievement of Company financial and strategic/operational performance objectives to executive pay. Annual incentives also provide a complementary balanceto equity incentives (discussed below). Each Named Executive Officer has an annual opportunity to receive anaward under the stockholder-approved Executive Plan. If and when earned, awards are typically paid to NamedExecutive Officers partly in cash and, unless the Compensation Committee otherwise elects, partly as deferredequity awards in the form of deferred stock units (under the Executive Plan). The deferred stock units vest overa three-year period. See additional detail regarding these deferred equity awards in the Long-Term IncentiveCompensation section below.

Minimum Thresholds.

For the Named Executive Officers, the annual incentive award for 2008 was paid under the ExecutivePlan. Each year, the Compensation Committee establishes in advance a threshold level of earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”) that the Company must achieve in order for anybonus to be paid under the Executive Plan for that year (the “EP Threshold”). The Executive Plan also specifiesa maximum bonus amount, in dollars, that may be paid to any executive for any 12-month performance period.When the threshold is established at the beginning of a year, the achievement of the threshold is consideredsubstantially uncertain for purposes of Section 162(m) of the Code, which is one of the requirements forcompensation paid under the Executive Plan to be deductible as performance-based compensation underSection 162(m). For 2008, the EP Threshold was $637,500,000.

Generally, a Named Executive Officer will receive payment of an award under the Executive Plan only ifhe remains employed by the Company on the award payment date. However, pro rata awards may be paid at thediscretion of the Compensation Committee in the event of death, disability, retirement or other termination ofemployment. To determine the actual bonus to be paid for a year, if the threshold is met and subject to themaximum described above, the Compensation Committee also establishes specific annual Company financialand strategic/operational performance targets and a related target bonus amount for each executive. Thesefinancial and strategic/operational targets are described below.

Additional Criteria.

If the EP Threshold under the Executive Plan is met for a year, the Company financial and strategic/operational goals referenced above are then used to determine a Named Executive Officer’s actual bonus, asfollows:

Financial Goals.

The Company financial goals for Named Executive Officers under the Executive Plan consist of operatingincome and earnings per share targets, with each criteria accounting for half of the financial goal portion of theannual bonus. As the Company generally sets target incentive award opportunities above market median, theCompany financial and strategic/operational goals to achieve such award levels are considered stretch butachievable, representing above-market performance. Consistent with maintaining these high standards and

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subject to achieving the EP Threshold, the Compensation Committee retains the ability to consider whether anadjustment of the financial goals for any year is necessitated by exceptional circumstances, e.g., an unan-ticipated and material downturn in the business cycle that triggers, in response, an increased focus by theCompensation Committee on the Company’s performance relative to the industry. This ability is intended to benarrowly and infrequently used and would, if applicable, be detailed in the proxy.

Performance against the financial targets determined 60% of Mr. van Paasschen’s total target opportunityand 50% of the total target opportunities for the other Named Executive Officers. Subject to achieving the EPThreshold, actual incentives paid to Named Executive Officers for financial performance may range from 0%to 200% of the pre-determined target bonus for this category of performance. For Named Executive Officers,the Company performance portion is based 50% on earnings per share and 50% on operating income of theCompany, provided that Mr. Avril’s Company financial portion was pro-rated based on his services for SVO,the Company’s vacation ownership subsidiary, prior to his promotion in September 2008. From Januarythrough September, the Company financial performance portion is based on 50% on earnings per share and50% on the net income for SVO.

Once the EP Threshold is achieved, a minimum amount is generally paid on a component of the“Financial Goals” portion of the annual bonus subject to the Compensation Committee applying its discretionto reduce awards. Further, once a certain level of performance is achieved, the bonus payout for the applicablemetric is limited to 200% (i.e., the “performance maximum”). The table below sets forth for each metric theperformance levels for 2008 which would have resulted in 100% payout (i.e. “target”), the performanceminimum level that would have resulted in a 50% payout and the performance maximum level that would haveresulted in a 200% payout. In addition, the table sets forth the mid-points of performance and payout betweenthe performance minimum to target and from target to performance maximum:

Minimum(50%)

Mid-point(75%)

Target(100%)

Mid-point(150%)

Maximum(200%)

Earnings per Share . . . . . . $ 1.98 $ 2.23 $ 2.48 $ 2.79 $ 3.10Company Operating

Income . . . . . . . . . . . . . $720,200,000 $810,300,000 $900,300,000 $1,012,800,000 $1,125,400,000SVO Net Income . . . . . . . $ 92,000,000 $103,500,000 $115,000,000 $ 138,000,000 $ 161,000,000

For the 2008 performance period, EBITDA (which exceeded the EP Threshold) for purposes ofdetermining bonuses was $1,157,000,000. Actual results for earnings per share, Company operating incomeand SVO net income were $2.36, $819,300,000 and $85,000,000, respectively. Using the metrics describedabove resulted in a payout at 82% of target for the Company performance portion of bonuses for the 2008performance period for the Named Executive Officers other than Mr. Avril. For Mr. Avril, the financialperformance component was paid at 68% of target (61% attributable to SVO for eight months and 82%attributable to corporate for four months).

Strategic/Operational Goals.

The strategic/operational performance goals for Named Executive Officers under the Executive Planconsists of “Big 5” and leadership competency objectives that link individual contributions to execution of ourbusiness strategy and major financial and operating goals. “Big 5” refers to each executive’s specificdeliverables within the Company’s critical performance categories — operational excellence, brand enhance-ment, innovation, growth, and customer experience. As part of a structured process that cascades downthroughout the Company, these objectives are developed at the beginning of the year, and they integrate andalign an executive with the Company’s strategic and operational plan. Achievement of “Big 5” objectivestypically accounts for 80% of the strategic/operational performance evaluation, and achievement of leadershipcompetency objectives typically accounts for 20% of such evaluation. The portion of annual incentive awardsattributable to strategic/operational/talent management performance represents 40% of Mr. van Paasschen’stotal target opportunity and 50% of the total target opportunities for the other Named Executive Officers.Actual incentives paid to Named Executive Officers for strategic/operational performance may range from 0%to 175% of the pre-determined target amount for this category of performance. The evaluation process for Mr.

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van Paasschen and the other Named Executive Officers with respect to each executive’s strategic/operationalgoals is described below.

Mr. van Paasschen’s accomplishments for the 2008 performance year included the following:

• Successfully continued the Company’s focus on building world class brands by launching the Aloft andElement brands with 19 Aloft and Element hotel openings in 2008, sustaining the Sheraton revitalizationplan and increasing guest satisfaction scores across all brands

• Achieved strong financial results despite the economic environment and re-evaluated and redeveloped thestrategy for the Company’s vacation ownership business

• Led the streamlining of the Company’s operations, including a major reorganization to eliminate dual rolesand overlaps within the organization resulting in significant and ongoing cost savings and sponsored a seachange strategy for U.S. benefits programs leading to cost savings

• Continued the strong growth in the Company’s hotel portfolio by opening 87 hotels and signing agreementsfor an additional 147 hotels

• Developed strong relationships at key levels throughout the Company resulting in increased employeesatisfaction scores and positive changes to the Company’s culture despite the volatile economic climate

In light of Mr. van Paasschen’s accomplishments and impact on the Company, the CompensationCommittee awarded him a bonus of $1,820,000 for 2008, representing 91% of target.

Mr. Prabhu’s accomplishments for the 2008 performance year included the following:

• Managed through a difficult and fast changing environment, delivering strong financial results

• Successfully delivered a company income tax rate and property tax rate on the Company’s owned hotelsbelow budget and the target set

• Successfully negotiated a settlement with the IRS leading to an expected refund of over $220 million

• Ensured adequate liquidity to fund operations at optimal cost by issuing public debt and amending creditfacilities prior to the global credit crisis and devised strategies to repatriate offshore cash

• Completed major IT initiatives, including the migration to a new reservation system

In light of Mr. Prabhu’s accomplishments, he received a “meets expectations” performance rating andwas awarded 100% of his individual bonus target. Combined with the 82% financial performance component,Mr. Prabhu’s 2008 bonus was 91% of target.

Mr. Siegel’s individual accomplishments for the 2008 performance year included the following:

• Led a restructuring of the worldwide legal organization resulting in a consolidation of functions within theUnited States and an overall 28% reduction in costs

• Designed a comprehensive environmental sustainability program utilizing cost effective initiatives anddesigned the framework for a comprehensive Corporate Social Responsibility program to be implementedby 2010

• Reduced outside legal fees 25% on a global basis and implemented new guidelines for the retention ofoutside legal counsel, resulting in significant fee discounts

• Played a significant role in on-boarding new members of senior management team and facilitated a seamlesstransition of the Human Resources function

• Successfully managed the legal department in handling development transactions and internal restructuringswith minimum use of outside counsel

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In light of Mr. Siegel’s accomplishments, he received a “meets expectations” performance rating and wasawarded 100% of his individual bonus target. Combined with the 82% financial performance component,Mr. Siegel’s 2008 bonus was 91% of target.

Mr. Avril’s accomplishments for the 2008 performance year included the following:

• Led a major restructuring and cost containment effort at the Company’s vacation ownership subsidiary,resulting in significant cash savings and a reduction in the scope of business

• Assumed responsibility for the global hotel group and enhanced relationships with key owners

• Assumed overall responsibility for the vacation ownership business following the departure of the formerCEO of SVO and continued best practices and positive culture despite the difficult economic environment

• Played a key role in various initiatives on revenue management, reducing overlap across functions andreducing costs in the operations area

• Effectively developed succession planning and enhanced the group dynamic with direct reports

In light of Mr. Avril’s accomplishments in 2008, he received a “meets expectations” performance ratingand was awarded 80% of his individual bonus target. Combined with the 68% financial performancecomponent (pro-rated for service as President of SVO from January through September), Mr. Avril’s 2008bonus was 74% of target.

Mr. McAveety’s accomplishments for the 2008 performance year included the following:

• Completed a review of the brand management function and led a major restructuring of the group andintegrated various functions to drive effectiveness and efficiency

• Created a brand design and a brand business service function and aligned the international divisions onstructure and approach to create a sense of a single brand team

• Focused the brand leadership teams on best practices and prioritized strategic initiatives and approaches

• Delivered efficiencies in brand management resulting in significant cost savings

In light of Mr. McAveety’s accomplishments in 2008, he received a “meets expectations” performancerating and was awarded 100% of his individual bonus target. Combined with the 82% financial performancecomponent, Mr. McAveety’s 2008 bonus was 91% of target (pro-rated for his March 2008 start date).

Mr. Turner joined the Company in May 2008. Pursuant to his employment agreement, Mr. Turner wasentitled to at least a pro-rated target bonus for 2008. The Compensation Committee awarded Mr. Turner theminimum amount permitted under his employment agreement and did not exercise its discretion to awardamounts in excess of the minimum.

Overall, the Compensation Committee paid the majority of the Named Executive Officers individualbonuses that were at target for their individual performance, resulting in overall bonuses that were below targetwhen combined with the Company financial performance portion. These decisions were made in considerationof the strong individual performance of each of the Named Executive Officers despite the difficult economicclimate and multiple changes at the senior executive level resulting in changing roles and responsibilities.

Conclusion.

Viewed on a combined basis once minimum performance is attained, the annual incentive paymentsattributable to both Company financial and strategic/operational performance range from 0% — 187.5% oftarget for the Named Executive Officers, other than the Chief Executive Officer.

Equity awards are generally granted in February of each year following the announcement of theCompany’s earnings for the previous year. Performance reviews and bonus awards for the prior operating yearare made at that time. In determining the equity awards granted in 2008, the Compensation Committeeconsidered and took into account the Company’s performance and the individual performance of each Named

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Executive Officer in 2007 as well as the expected performance of the Company for 2008 at the time of grant. Inaddition, the Compensation Committee considers structural changes to the equity program and the fact that theCompensation Committee targets the median of the peer group for base salary but targets total compensation atthe 65% percentile resulting in larger long-term incentive awards. Messrs. McAveety and Turner received signon grants in 2008 following the commencement of their employment. In addition, in connection with hispromotion to President, Hotel Group, Mr. Avril received an additional promotion grant in 2008 reflecting hisincreased role and responsibilities. Based on the factors set forth above, including the Company’s performanceand individual performance of each Named Executive Officer in 2007, the Compensation Committee believesthat equity award grants in 2008 were appropriate.

Total compensation for this group is evaluated against the peer group identified in this proxy statement.Evaluated on this basis, the Compensation Committee believes the actual cash and equity compensationdelivered for the 2008 performance year was appropriate in light of the Company’s overall performance andindividual executive performance.

In its review of the overall compensation strategy and program in 2008, the Compensation Committeemade several key changes, most of which will be effective for the 2009 performance year. The CompensationCommittee changed its philosophy on tax gross ups in change in control agreements and eliminated gross upsfor arrangements put in place in 2008 with senior executives. For the 2009 performance year, the Compen-sation Committee also eliminated the minimum payout on the Company financial performance portion byestablishing minimum performance measures that must be achieved for any bonus to be paid, made structuralchanges to align the individual performance portion of annual bonuses to the Company’s financial perfor-mance and lowered the ratio for determining the number of options to be granted from 3-to-1 to 2.5-to-1. Inaddition, the Company froze salaries for all bonus eligible associates in corporate and divisional offices,including the Named Executive Officers. These changes were designed to better align compensation with(i) the creation and preservation of shareholder value and (ii) the Company’s financial performance.

Evaluation Process for Strategic/Operational and Other Goals.

Other Named Executive Officers. With oversight and input from the Compensation Committee, theChief Executive Officer, together with the Chief Human Resources Officer, conducts a formal performancereview process each year during which he evaluates how each other Named Executive Officer performedagainst the officer’s strategic/operational performance goals for the prior year. The Chief Executive Officerconducts this evaluation through the Performance Management Process (“PMP”), which results in a PMPrating for each executive. This PMP rating corresponds to a payout range under the Executive Plan determinedannually by the Compensation Committee for that rating. As noted, for 2008 the portion of the Executive Planpayouts based on PMP ratings could range from 0% to 175% of target. Where necessary to preserve thecompetitive position of the Company’s compensation scale, the Chief Executive Officer may recommend amarket adjustment to the base amount that is subjected to this percentage. At the conclusion of his review, theChief Executive Officer submits his recommendations to the Compensation Committee for final review andapproval. In determining the actual award payable to a Named Executive Officer under the Executive Plan, theCompensation Committee reviews the Chief Executive Officer’s evaluation and makes a final determination asto how the executive performed against his strategic/operational goals for the year. The CompensationCommittee also determines, based on management’s report, the extent to which the Company’s financialperformance goals were achieved and whether the Company achieved the applicable minimum threshold(s)required to pay awards. The Chief Executive Officer also meets in executive session with the Board ofDirectors to inform the Board of his performance assessments regarding the Named Executive Officers and thebasis for the compensation recommendations he presented to the Compensation Committee.

Annual Incentive awards made to our Named Executive Officers under the Executive Plan with respect to2008 performance are reflected in the Summary Compensation Table on page 29 and described in theaccompanying narrative.

Long-Term Incentive Compensation. Like the annual incentives described above, long-term incentivesare a key part of the Company’s executive compensation program. Long-term incentives are strongly tied to

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returns achieved by stockholders, providing a direct link between the interests of stockholders and the NamedExecutive Officers. Long-term incentive compensation for our Named Executive Officers consists primarily ofequity compensation awards granted annually under the Company’s LTIP and secondarily of the portion of theExecutive Plan and Executive AIP awards that are deferred in the form of deferred stock units and shares ofrestricted stock, respectively. Taken together, approximately 60-65% of total compensation at target is equity-based long term incentive compensation.

The Compensation Committee generally grants awards under the LTIP annually to all other Named ExecutiveOfficers that are a combination of stock options and restricted stock awards. In 2008 we used a grant approach inwhich the award is articulated as a dollar value. Under this approach, an overall award value, in dollars, wasdetermined for each executive based upon our compensation strategy and competitive market positioning. Wegenerally targeted the value of these awards so that total compensation at target is set at the 65th percentile of ourpeer group, though individual awards may have been higher or lower based on individual performance (determinedas described in the Executive AIP assessment above). The number of restricted stock shares is calculated bydividing 75% of the award value by the fair market value of the Company’s stock on the grant date. The number ofstock options has generally been determined by dividing the remaining 25% of the award value by the fair marketvalue of the Company’s stock on the grant date and multiplying the result by three. In light of the stock price andleverage opportunity, the Compensation Committee reduced this ratio to 2.5 for equity awards made in 2009. TheNamed Executive Officers are able to elect a greater portion of options (up to 100% options).

The exercise price for each stock option is equal to fair market value of the Company’s common stock onthe option grant date. See the section entitled Equity Grant Practices on page 27 below for a description ofthe manner in which we determine fair market value for this purpose. Currently, most stock options vest in 25%increments annually starting with the first anniversary from the date of grant. For stock options granted in2008, awards granted to associates who are retirement eligible, as defined in the LTIP, vest in 16 equalquarterly periods. Unexercised, stock options expire 8 years from the date of grant, or earlier in the event oftermination of employment. Stock options provide compensation only when vested and only if the Company’sstock price appreciates and exceeds the exercise price of the option. Therefore, during business downturns,option awards may not represent any economic value to an executive.

Restricted stock units and restricted stock provide some measure of mitigation of business cyclicalitywhile maintaining a direct tie to share price. The Company seeks to enhance the link to stockholderperformance by building a strong retention incentive into the equity program. Consequently, for 2008 grants,75% of restricted stock units and awards vest on the third anniversary of the date of grant and the remaining25% vests on the fourth anniversary of the date of grant. For restricted stock granted in 2008, awards granted toassociates who are retirement eligible, as defined in the LTIP, vest in sixteen equal quarterly periods. Thisdelayed vesting places an executive’s long-term compensation at risk to share price performance for asignificant portion of the business cycle, while encouraging long-term retention of executives.

As mentioned above, Named Executive Officers have a mandatory deferral of 25% of their awards underthe Executive Plan in the form of deferred stock units, unless reduced in the discretion of the CompensationCommittee. As such, the awards combine performance-based compensation with a further link to stockholderinterests. First, amounts must be earned based on annual Company financial and strategic/operationalperformance under the Executive Plan. Second, these already earned amounts are put at risk through avesting schedule. Vesting occurs in installments for employment over a three-year period. Third, these earnedamounts become subject to share price performance. Primarily in consideration of this vesting risk beingapplied to already earned compensation (but also taking into account the enhanced stockholder alignment thatresults from being subject to share performance), the deferred amount is increased by 33% of value. TheCompensation Committee has the discretion to accelerate vesting or pay out deferred amounts in cash (withoutinterest and without the percentage increase in value) in a limited number of termination circumstances (e.g.,involuntary terminations or retirements).

Mr. van Paasschen agreed not to sell any Company stock awards or shares received on exercise of options(except as may be withheld for taxes) for the first two years of his employment and thereafter only inconsultation with the Board of Directors.

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Benefits and Perquisites. Base salary and incentive compensation are supplemented by benefits andperquisites.

Current Benefits. The Company provides employee benefits that are consistent with local practices andcompetitive markets, including group health benefits, life and disability insurance, medical and dependent careflexible spending accounts and a pre-tax premium payment arrangement. Each of these benefits is provided toa broad group of employees within the Company and our Named Executive Officers participate in thearrangements on the same basis as other employees.

Perquisites. As reflected in the Summary Compensation Table below, the Company provides certainlimited perquisites to select Named Executive Officers when necessary to provide an appropriate compen-sation package to those Named Executive Officers, particularly in connection with enabling the executives andtheir families to smoothly transition from previous positions which may require relocation.

For example, Mr. van Paasschen’s employment agreement provides that the Company will provide Mr.van Paasschen with up to a $500,000 credit (based on the Standard Industry Fare Level formula) for personaluse of the Company’s aircraft during the first 12 months of his employment with the Company, $495,086 ofwhich was used. Mr. van Paasschen and his immediate family had access to a Company owned or leasedairplane on an “as available” basis for personal travel, i.e., assuming such plane was not needed for businesspurposes, with an obligation to reimburse for personal use based upon the Company’s operating cost, subject tothe credit described above.

The Company also reimburses Named Executive Officers generally for travel expenses and other out-of-pocket costs incurred with respect to attendance by their spouses at one meeting of the Board each year.

Retirement Benefits. The Company maintains a tax-qualified retirement savings plan pursuant to Codesection 401(k) for a broadly-defined group of eligible employees that includes the Company’s NamedExecutive Officers. Eligible employees may contribute a portion of their eligible compensation to the plan on abefore-tax basis, subject to certain limitations prescribed by the Code. Prior to 2008, the Company matched100% of the first 2% of eligible compensation and 50% of the next 2% of eligible compensation that an eligibleemployee contributes. Beginning in 2008, the Company matched 100% of the first 1% of eligible compen-sation and 50% of the next 6% of eligible compensation that an eligible employee contributes. These matchingcontributions, as adjusted for related investment returns, become fully vested upon the eligible employee’scompletion of three years of service with the Company. Our Named Executive Officers, in addition to certainother eligible employees, were permitted to make additional deferrals of base pay and regular annual incentiveawards under our nonqualified deferred compensation plan. This plan is discussed in further detail under theheading Nonqualified Deferred Compensation on page 35.

2. Change of Control Arrangements

Following the consummation of the sale of 33 hotels to Host Hotels & Resorts and the related return of capitalto stockholders, the Board reviewed the change of control arrangements then in place with the Named ExecutiveOfficers and decided to enter into new change of control agreements with the Named Executive Officers at that time,which included Messrs. Prabhu and Siegel. On March 25, 2005, the Company adopted a policy proscribing certainterms of severance agreements triggered upon a change in control of the Company. Pursuant to the policy, theCompany is required to seek stockholder approval of severance agreements with executive officers that provideBenefits (as defined in the policy) in excess of 2.99 times base salary plus such officer’s most recent bonus.

In connection with the hiring of Messrs. McAveety and Turner and the promotion of Mr. Avril, the Companyentered into change of control arrangements with them that were similar to the arrangements in place for the otherNamed Executive Officers (other than the CEO). The arrangements with Messrs. McAveety, Turner and Avril,however, do not provide for a tax gross up if the benefits payable thereunder are subject to the 280G excise tax.Instead, the benefits provided are reduced until the point that the executive would be better off paying the excise taxrather than reducing benefits.

The Company also included change of control arrangements in Mr. van Paasschen’s employment agreement.These change of control arrangements are described in more detail beginning on page 36 under the heading entitled

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Potential Payments Upon Termination or Change of Control. The Change of Control Severance Agreements areintended to promote stability and continuity of senior management. The Company believes that the provision ofseverance pay to these Named Executive Officers upon a change of control aligns their interests with those ofstockholders. In addition, for executive officers hired in 2008, the Company changed its policy on providing taxgross-ups in change in control agreements. As a result, the change in control arrangements with Messrs. Avril,McAveety and Turner provide that the benefits are to be reduced until the executive is better off paying the excisetax rather than reducing benefits. By making severance pay available, the Company is able to mitigate executiveconcern over employment termination in the event of a change of control that benefits stockholders. In addition, theacceleration of equity compensation vesting in connection with a change of control provides these NamedExecutive Officers with protection against equity forfeiture due to termination and ample incentive to achieveCompany goals, including facilitating a sale of the Company at the highest possible price per share, which wouldbenefit both stockholders and executives. In addition, the Company acknowledges that seeking a new seniorposition is a long and time consuming process. Lastly, each severance agreement permits the executive to maintaincertain benefits for a period of two years following termination and to receive outplacement services. The aggregateeffect of our change of control provisions is intended to focus executives on maximizing value to stockholders. Inaddition, should a change of control occur, benefits will be paid after a “double trigger” event as described inPotential Payments Upon Termination or Change in Control. Benefit levels have been set to be competitive withpeer group practices.

In connection with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A), theCompany amended the employment arrangements with each of the Named Executive Officers (including the CEO).These amendments made several technical changes designed to make the employment arrangements with suchofficers comply with Section 409A and the final regulations issued thereunder, and generally affect the timing, butnot the amount of compensation of such officers under specified circumstances.

3. Additional Severance Arrangements

On August 14, 2007, the Company entered into a letter agreement with Mr. Siegel. The letter agreementprovided for the acceleration of 50% of Mr. Siegel’s then unvested restricted stock and options in the event hisemployment was terminated without cause or by the executive for good reason within two years of the hiring of anew Chief Executive Officer. The purpose of the letter agreement was to support retention, stability and continuityand succession planning and to provide assurance to a key executive in a time of uncertainty regarding theCompany’s chief executive officer position. The special severance will expire on August 14, 2009.

In addition, the Company entered into a letter agreement with Mr. Prabhu clarifying that his severanceincluded the acceleration of 50% of unvested restricted stock and options in the event that his employment wasterminated without cause or by him for good reason. The clarification formally documented Mr. Prabhu’s existingseverance arrangements as part of his employment by the Company.

C. Background Information on the Executive Compensation Program

1. Use of Peer Data

In determining competitive compensation levels, the Compensation Committee reviews data from severalmajor compensation consulting firms that reflects compensation practices for executives in comparable positions ina peer group consisting of companies in the hotel and hospitality industries and companies with similar revenues inother industries relevant to key talent recruitment needs. The executive team and Compensation Committee reviewthe peer group bi-annually to ensure it represents a relevant market perspective. The Compensation Committeeutilizes the peer group for a broad set of comparative purposes, including levels of total compensation, pay mix,incentive plan and equity usage and other terms of employment. The Compensation Committee also reviewsCompany performance against the performance of companies in this peer group. The Company believes that byconducting the competitive analysis using a broad peer group, which includes companies outside the hospitalityindustry, it is able to attract and retain talented executives from outside the hospitality industry. The Company’sexperience has proven that key executives with diversified experience prove to be major contributors to itscontinued growth and success.

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Accordingly, the Company was able to attract and retain:

• Frits van Paasschen, the Company’s Chief Executive Officer, who has over 20 years of experience withconsumer-focused, global lifestyle brands, most recently serving with Coors Brewing Company, as Pres-ident and Chief Executive Officer, and prior to that, Nike, Inc.

• Vasant M. Prabhu, the Company’s Executive Vice President and Chief Financial Officer, who prior to joiningthe Company served as Executive Vice President and Chief Financial Officer of Safeway Inc., a food anddrug retailer; President of Information and Media Group for The McGraw Hill Companies, and Senior VicePresident of Finance and Chief Financial Officer for Pepsi Cola International.

• Kenneth S. Siegel, the Company’s Chief Administrative Officer, General Counsel and Secretary, who priorto joining the Company served as Senior Vice President and General Counsel of Gartner, Inc., a provider ofresearch and analysis on information technology industries and was a partner in the law firms of Baker &Botts LLP and O’Sullivan Graev & Karabell LLP.

• Philip P. McAveety, the Company’s Chief Brand Officer, who prior to joining the Company served as GlobalBrand Director of Camper, a fashion company and Vice President, Brand Marketing, Europe, Middle Eastand Africa at Nike, Inc.

• Simon Turner, the Company’s President, Global Development Group, who prior to joining the Companyspent over ten years as a principal of Hotel Capital Advisers, Inc., a hotel investment advisory firm andserved on the Board of Directors of Four Season Hotels, Inc.

The peer group approved by the Compensation Committee for 2008 is set out below. We expect that it will benecessary to update the list periodically.

Avon Products MGM Mirage

Carnival Corp. Nike Inc.

Colgate Palmolive Corporation Simon Property Group Inc.

Estee Lauder Cos. Inc. Staples Inc.

Federal Express Corp. Starbucks Corp.

Host Hotels & Resorts Williams Sonoma Inc.

Kellogg Corporation Walt Disney Co.

Limited Brands Inc. Wyndham Worldwide Corporation

Marriott International, Inc. Yum Brands Inc.

McDonald’s Corp.

In performing its competitive analysis, the Compensation Committee typically reviews:

• base pay;

• target and actual total cash compensation, consisting of salary and target and actual bonus awards in prioryears; and

• direct total compensation consisting of salary, target and actual bonus awards, and the value of option andrestricted stock/restricted stock unit awards.

During 2008, compensation paid to the Company’s Named Executive Officers was compared to peer groupdata reported in 2008 proxy statements, as provided by compensation consulting firms and reflecting 2007compensation. The Company’s Named Executive Officer compensation data taken into account for this comparisonincluded 2008 salary, Executive AIP bonuses paid in 2009 for 2008 performance and equity grants awarded in 2008.

The competitive position of the Company’s compensation based on total cash (salary and bonus) ranged fromthe median to the lower quartile while the competitive position of its compensation based on total compensation attarget, which includes the equity grants, ranged from the median to the upper quartile.

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2. Tax and Accounting Considerations

Tax. Section 162(m) of the Code generally disallows a federal income tax deduction to public companies forcompensation in excess of $1,000,000 paid to the chief executive officer and the four other most highlycompensated executive officers. Qualified performance-based compensation is not subject to the deduction limitif certain requirements are met. The Company believes that compensation paid under the Executive Plan meetsthese requirements and is generally fully deductible for federal income tax purposes. In designing the Company’scompensation programs, the Compensation Committee carefully considers the effect of this provision together withother factors relevant to its business needs. Therefore, in certain circumstances the Company may approvecompensation that does not meet these requirements in order to advance the long-term interests of its stockholders.At the same time, the Company has historically taken, and intends to continue taking, reasonably practicable stepsto minimize the impact of Section 162(m). Accordingly, the Compensation Committee has determined that each ofthe Named Executive Officers will participate under the Executive Plan for 2008.

On October 22, 2004, the American Jobs Creation Act of 2004 was signed into law, adding Section 409A to theCode and thereby changing the tax rules applicable to nonqualified deferred compensation arrangements effectiveJanuary 1, 2005. While final Section 409A regulations were not effective until January 1, 2009, the Companybelieves it was operating in good faith compliance with Section 409A and the interpretive guidance thereunder. Thecompany entered into amendments to the employments arrangements with its senior officers, including the CEOand Named Executive Officers, and amended its bonus and compensation plans in December 2008 to meet therequirements of these regulations. A more detailed discussion of the Company’s nonqualified deferred compen-sation plan is provided on page 35 under the heading Nonqualified Deferred Compensation.

Accounting. Beginning on January 1, 2006, the Company began accounting for awards under its LTIP inaccordance with the requirements of FASB Statement 123(R) (“SFAS 123(R)”).

3. Share Ownership Guidelines

In 2007, the Company adopted share ownership guidelines for our executive officers, including the NamedExecutive Officers. Pursuant to the guidelines, the Named Executive Officers, including the Chief ExecutiveOfficer, are required to hold that number of Shares having a market value equal to or greater than a multiple of eachexecutive’s base salary. For the Chief Executive Officer, the multiple is five (5) times base salary and for the otherNamed Executive Officers, the multiple is four (4) times base salary. A retention requirement of 35% is applied torestricted Shares upon vesting (net shares after tax withholding) and Shares obtained from option exercises until theexecutive meets the target, or if an executive falls out of compliance. Shares owned, stock equivalents (vested/unvested units), and unvested restricted stock (pre-tax) count towards meeting ownership targets. However, stockoptions do not count towards meeting the target. Officers have five years from the date of hire or the date they firstbecome subject to the policy to meet the ownership requirements.

4. Equity Grant Practices

Determination of Option Exercise Prices. The Compensation Committee grants stock options with anexercise price equal to the fair market value of a share of our common stock on the grant date. Under the LTIP, thefair market value of our common stock on a particular date is determined as the average of the high and low tradingprices of a share of the stock on the New York Stock Exchange on that date.

Timing of Equity Grants. The Compensation Committee generally makes annual equity compensationgrants to Named Executive Officers at its first regularly scheduled meeting that occurs after the release of theCompany’s earnings for the prior year (typically in February). The timing of this meeting is determined based onfactors unrelated to the pricing of equity grants.

The Compensation Committee approves equity compensation awards to a newly hired Executive Officer at thetime that the Board meets to approve the executive’s employment package. Generally, the date on which the Boardapproves the employment package becomes the grant date of the newly-hired Executive Officer’s equity com-pensation awards. However, if the Company and the new Executive Officer will enter into an employmentagreement regarding the employment relationship, the Company requires the Executive Officer to sign his

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employment agreement shortly following the date of Board approval of the employment package; the later of thedate on which the Executive Officer signs his employment agreement or the date that the Executive Officer beginsemployment becomes the grant date of these equity compensation awards.

The Company’s policy is that the grant date of equity compensation awards is always on or shortly after thedate the Compensation Committee approves the grants.

Although, as discussed above, annual grants are generally made in February, under unusual circumstancesgrants may be made at other times during the year. For example, the economic downturn at the beginning of thecurrent decade as well as the September 11 terrorist attacks and aftermath had a significant negative impact on theCompany (and the hospitality industry generally) and its stock price. This severely weakened the retention aspect ofthe Company’s equity awards outstanding at the time, particularly in the case of outstanding option awards,virtually all of which had exercise prices above the then-current trading price of the Company’s common stock. Torespond to this concern, the Company made the 2003 option grants in December 2002 with the intention of keepingexecutives focused on business results (including the Company’s stock price), restoring financial motivation tosucceed and retaining the Company’s top performers.

II. COMPENSATION COMMITTEE REPORT

The Compensation and Option Committee of the Board of Directors (the “Board”) of Starwood Hotels &Resorts Worldwide, Inc. (the “Company”) has reviewed and discussed the Compensation Discussion and Analysisrequired by Item 402(b) of Regulation S-K with management and, based on such review and discussions,recommended to the Board that the Compensation Discussion and Analysis be included in the Company’s ProxyStatement for the 2009 Annual Meeting of Stockholders.

COMPENSATION AND OPTION COMMITTEE

Adam M. Aron, ChairmanClayton C. Daley, Jr.Bruce W. DuncanLizanne GalbreathKneeland C. Youngblood

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III. SUMMARY COMPENSATION TABLE

Name and principal Position YearSalary

($)Bonus

($)

Stockawards($)(1)

Optionawards($)(2)

Non-equityincentive plancompensation

($)(3)

All othercompensation

($)(4)Total

($)

Frits van Paasschen, . . . . . . . . . . 2008 1,000,000 — 2,135,643 699,695 1,365,000 522,538 5,722,876Chief Executive Officer 2007 270,833 1,500,000 568,350 89,315 403,800 347,402 3,179,700since September 24, 2007

Vasant Prabhu, . . . . . . . . . . . . . 2008 638,054 — 1,435,616 887,864 437,249 93,380 3,492,163Executive Vice 2007 617,927 — 1,497,164 890,260 550,809 85,896 3,642,056President and Chief 2006 578,667 — 1,216,698 1,136,806 567,840 29,674 3,529,685Financial Officer

Kenneth S. Siegel, . . . . . . . . . . . . 2008 612,539 — 1,590,852 763,025 419,764 102,515 3,488,695Chief Administrative 2007 583,232 — 1,618,424 829,762 585,037 51,908 3,668,363Officer, General Counsel andSecretary

2006 496,000 — 1,117,399 992,287 505,440 23,586 3,134,712

Matthew Avril . . . . . . . . . . . . . . 2008 601,896 — 1,394,115 480,665 402,375 188,103 3,067,154President, Hotel Groupsince September 2008

Philip McAveety . . . . . . . . . . . . . 2008 376,894 494,000 337,810 91,427 255,937 134,530 1,690,598Chief Brand Officer sinceMarch 2008

Simon Turner . . . . . . . . . . . . . . 2008 407,197 500,000 — 406,913 312,500 30,013 1,656,623President, GlobalDevelopment Group sinceMay 2008

(1) Represents the expense recognized for financial statement reporting purposes with respect to 2008 for the fairvalue of restricted stock and restricted stock units granted in 2008 as well as in prior years, in accordance withSFAS 123(R). Pursuant to SEC rules, the amounts shown exclude the impact of estimated forfeitures related toservice-based vesting conditions. For additional information, refer to Note 21 of the Company’s financialstatements filed with the SEC as part of the Form 10-K for the year ended December 31, 2008. These amountsreflect the Company’s accounting expense for these awards and do not correspond to the actual value that willbe recognized by the Named Executive Officers. See the Grants of Plan-Based Awards Table on page 31 forinformation on awards granted in 2008.

(2) Represents the expense recognized for financial statement reporting purposes with respect to 2008 for the fairvalue of stock options granted in 2008 as well as in prior years, in accordance with SFAS 123(R). Pursuant toSEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vestingconditions. For additional information, refer to Note 21 of the Company’s financial statements filed with theSEC as part of the Form 10-K for the year ended December 31, 2008. These amounts reflect the Company’saccounting expense for these awards and do not correspond to the actual value that will be recognized by theNamed Executive Officers. See the Grants of Plan-Based Awards Table on page 31 for information on awardsgranted in 2008.

(3) Represents cash awards paid in March 2009, 2008 and 2007 with respect to 2008, 2007 and 2006, respectively,performance under the Executive Plan (for each of the Named Executive Officers for 2008 and 2007performance) and the Annual Incentive Plan (for Messrs. Prabhu and Siegel for 2006 performance), asdiscussed under the Annual Incentive Compensation section beginning on page 18. Cash incentive awardsexclude the following amounts that were deferred into deferred stock units (Executive Plan) or shares ofrestricted stock (Executive AIP) and increased by 33% in accordance with the Executive Plan and ExecutiveAIP:

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Name 2008 Amount Deferred 2007 Amount Deferred 2006 Amount Deferred

van Paasschen . . . . . . . . . . . . . . 455,000 134,600 —

Prabhu . . . . . . . . . . . . . . . . . . . . 145,750 183,603 189,280

Siegel . . . . . . . . . . . . . . . . . . . . 139,922 195,013 168,480

Avril . . . . . . . . . . . . . . . . . . . . . 134,125 — —

McAveety . . . . . . . . . . . . . . . . . 85,313 — —

Turner . . . . . . . . . . . . . . . . . . . . 104,167 — —

(4) Pursuant to SEC rules, perquisites and personal benefits are not reported for any Named Executive Officer forwhom such amounts were less than $10,000 in the aggregate for 2008, 2007 and 2006 but must be identified bytype for each Named Executive Officer for whom such amounts were equal to or greater than $10,000 in theaggregate. In that regard, the All Other Compensation column of the Summary Compensation Table includesperquisites and other personal benefits consisting of the following: annual physical examinations, COBRApremiums paid by the Company, Company contributions to the Company’s tax-qualified 401(k) plan, dividendson restricted stock, life insurance premiums, legal fees paid by the Company, spousal accompaniment while onbusiness travel, and tax and financial planning services. SEC rules require specification of the cost of anyperquisite or personal benefit when this cost exceeds $25,000. This applies to Mr. van Paasschen’s personaltravel (discussed below). These amounts are included in the All Other Compensation column.

The net aggregate incremental cost to the Company of Mr. van Paasschen’s personal use of the Company-owned plane and chartered aircraft was $329,480 in 2008 and $165,606 in 2007, which amounts were coveredby his credit. For 2007, also includes relocation benefits which had an aggregate cost of $132,275 and thereimbursement of $44,556 for legal fees incurred in connection with the negotiation of his employmentagreement. These amounts are included in the All Other Compensation column.

The cost of the Company-owned plane includes the cost of fuel, ground services and landing fees, navigationand telecommunications, catering and aircraft supplies, crew expenses, aircraft cleaning and an allocable shareof maintenance. Pursuant to SEC rules, the following table specifies the value for each element of All OtherCompensation not specified above other than perquisites and personal benefits that is valued in excess of$10,000.

Name

DividendEquivalents on

Restricted Stock($) (2008)

Relocation($) (2008)

DividendEquivalents on

Restricted Stock($) (2007)

van Paasschen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 165,328 —

Prabhu . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,917 — 63,530

Siegel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,538 — 24,199

Avril . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,728 — —

McAveety . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 111,861 —

(5) Mr. Avril became an executive officer in September 2008 upon his promotion to President, Hotel Group.

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IV. GRANTS OF PLAN-BASED AWARDS

Name(a)

GrantDate (or

year withrespect tonon-equity

incentive planaward) (b)

CompensationCommitteeApproval

date(c)

Threshold($) (d)

Target($) (e)

Maximum($) (f)

All OtherStock

Awards:Number ofShares ofStock or

Units(#) (g)

All OtherOption

Awards:Number ofSecurities

UnderlyingOptions

(#) (2) (h)

Exerciseor BasePrice ofOptionAwards

($/Sh) (i)

Grant DateFair Value

of Stockand Option

Awards($) (3) (j)

Estimated Future Payouts UnderNon-Equity Incentive Plan Awards(1)

van Paasschen . . 2/28/2008 2/14/2008 102,870 48.61 1,742,402

3/03/2008 (4) 3,778(4) 179,0212008 0 2,000,000 9,000,000(8)

Prabhu . . . . . . 2/28/2008 2/14/2008 78,696 48.61 1,332,945

2/28/2008 2/14/2008 26,232(6) 1,275,006

3/03/2008 (4) 5,153(4) 244,1752008 160,165 640,658 1,201,234

Siegel . . . . . . . . 2/28/2008 2/14/2008 30,861 48.61 522,721

2/28/2008 2/14/2008 30,861(6) 1,499,999

3/03/2008 (4) 5,474(4) 259,3852008 153,757 615,029 1,153,198

Avril . . . . . . . . 2/28/2008 2/14/2008 22,220 48.61 376,360

2/28/2008 2/14/2008 22,220(6) 1,080,003

3/03/2008 (5) 3,551(5) 168,264

9/02/2008 8/27/2008 40,344(6) 1,499,9902008 181,250 725,000 1,359,375

McAveety . . . . . 4/01/2008 2/01/2008 25,319 53.32 487,501

4/01/2008 2/01/2008 25,319(7) 1,350,0092008 93,750 375,000 703,125

Turner . . . . . . . 5/07/2008 4/29/2008 135,224(7) 53.25 2,497,8982008 104,167 416,667 781,251(9)

(1) Represents the potential values of the awards granted to the Named Executive Officers under the Executive Planif the threshold, target and maximum goals are satisfied for all applicable performance measures. See detaileddiscussion of these awards in section V. below.

(2) The options generally vest in equal installments on the first, second, third and fourth anniversary of their grant.

(3) Represents the fair value of the awards disclosed in columns (g) and (h) on their respective grant dates. Forrestricted stock and restricted stock units, fair value is calculated in accordance with SFAS 123(R) using theaverage of the high and low price of the Company’s stock on the grant date. For stock options, fair value iscalculated in accordance with SFAS 123(R) using a lattice valuation model. For additional information, refer toNote 21 of the Company’s financial statements filed with the SEC as part of the Form 10-K for the year endedDecember 31, 2008. There can be no assurance that these amounts will correspond to the actual value that willbe recognized by the Named Executive Officers.

(4) On March 3, 2008, in accordance with the Executive Plan, 25% of Messrs. van Paasschen, Siegel, and Prabhu’sannual bonus with respect to 2007 performance was credited to a deferred stock unit account on the Company’sbalance sheet, which number of shares was increased by 33%. These deferred stock units vest in equalinstallments on the first, second and third fiscal year-ends following the date of grant, and vested units aredistributed on the earlier of (i) the third fiscal year-end or (ii) a termination of employment. Dividends are paidto the Named Executive Officers in amounts equal to those paid to holders of shares of Company stock. Noseparate Compensation Committee approval was required for these shares, which are provided by plan terms.

(5) On March 3, 2008, in accordance with the Annual Incentive Plan, 25% of Mr. Avril’s annual bonus with respectto 2007 performance was deferred into restricted stock, which number of shares was increased by 33%. Theserestricted shares vest in equal installments on the first and second anniversary of the date of grant. Dividends arepaid to the Named Executive Officers in amounts equal to those paid to holders of shares of Company stock. Noseparate Compensation Committee approval was required for these shares, which are provided by plan terms.

(6) These awards generally vest 75% on the third anniversary and 25% on the fourth anniversary of their grant date.Mr. Avril’s September 2, 2008 award vests 100% on the third anniversary of the grant date.

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(7) Upon the commencement of Messrs. McAveety and Turner’s employment with the Company, each onereceived equity awards in accordance with his employment agreement. The options vest in equal installmentson the first, second, third and fourth anniversaries of their grant. The restricted stock granted to Mr. McAveetygenerally vests on the third anniversary of the grant date.

(8) Represents the maximum amount payable to any participant under the terms of the Executive Plan.

(9) Mr. Turner’s bonus opportunity is pro-rated based on his May 2008 start date.

V. NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE AND GRANTS OF PLAN-BASED AWARDS SECTION

We describe below the Executive Plan awards granted to our Named Executive Officers for 2008. Theseawards are reflected in both the Summary Compensation Table on page 29 and the Grants of Plan-Based Awardssection on page 31.

Mr. Turner received an incentive award in March 2009 relating to his 2008 performance. Under the terms of hisemployment agreement, Mr. Turner was entitled to receive at least a pro-rata target bonus. The Committee awardedthe minimum amount pursuant to the employment agreement and did not exercise any discretion with respectthereto.

Each of the other Named Executive Officers received an award in March 2009 relating to his 2008performance. The table below presents for each such Named Executive Officer his salary, target as both apercentage of salary and a dollar amount, actual award, the portion of the award that is deferred into restricted stockunits and the 33% increase in his restricted stock units.

NameSalary

($)

AwardTarget

Relativeto Salary

(%)

AwardTarget

($)

ActualAward

($)

Award Deferredinto Restricted

Stock/RestrictedStock Units

($)

IncreasedAward

Deferred intoRestricted

Stock/RestrictedStock Units

($)

van Paasschen . . . . . . . . 1,000,000 200% 2,000,000 1,820,000 455,000 605,150

Prabhu . . . . . . . . . . . . . 640,658 100% 640,658 582,999 145,750 193,848

Siegel . . . . . . . . . . . . . . . 615,039 100% 615,039 559,686 139,922 186,096

Avril . . . . . . . . . . . . . . . 725,000 100% 725,000 536,500 134,125 178,386

McAveety . . . . . . . . . . . . 500,000 75% 281,250 341,250 85,313 113,466

Turner . . . . . . . . . . . . . . 625,000 100% 416,667(1) 416,667 104,167 138,542

(1) Amount reflected has been adjusted to reflect pro-rata portion of bonus given Mr. Turner’s start date with theCompany.

The following factors contributed to the Compensation Committee’s determination of the 2008 Executive AIPawards for these Named Executive Officers:

• the Company’s 2008 financial performance as measured by operating income and earnings per share;

• the 2008 PMP ratings assigned to such executives; and

• the bonuses paid to executive officers performing comparable functions in peer companies.

VI. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR -END

The following table provides information on the current holdings of stock options and stock awards by theNamed Executive Officers. This table includes unexercised and unvested stock options, unvested restricted stockand unvested restricted stock units. Each equity grant is shown separately for each Named Executive Officer. The

32

market value of the stock awards is based on the closing price of Company stock on December 31, 2008, which was$17.90.

NameGrantDate

Number ofSecurities

UnderlyingUnexercised

Options-Exercisable

(#)(1)(2)

Number ofSecurities

UnderlyingUnexercised

OptionsUnexercisable

(#)(1)(2)

OptionExercise

Price($)(1)

OptionExpiration

Date

Number ofShares or

Units of StockThat Have

Not Vested (#)(1)

Market valueof shares

or Units ofStock ThatHave Not

Vested($)

Option awards Stock awards

van Paasschen . . . . . . . . . . . . . . . 9/24/2007 15,974 47,921 58.69 9/24/2015

2/28/2008 0 102,870 48.61 2/28/2016

9/24/2007 63,895(3) 1,143,721

3/03/2008 2,518(4) 45,072

Prabhu. . . . . . . . . . . . . . . . . . . . 2/02/2004 122,300 0 29.02 2/02/2012

2/18/2004 24,440 0 31.71 2/18/2012

2/10/2005 61,864 20,621 48.39 2/10/2013

2/07/2006 39,957 39,956 48.80 2/07/2014

2/28/2007 8,635 25,903 65.15 2/28/2015

2/28/2008 0 78,696 48.61 2/28/2016

2/07/2006 30,736(3) 550,174

2/28/2007 34,538(3) 618,230

3/01/2007 1,945(5) 34,816

2/28/2008 26,232(3) 469,553

3/03/2008 3,435(4) 61,487

Siegel . . . . . . . . . . . . . . . . . . . . . 2/18/2004 30,550 0 31.71 2/18/2012

2/10/2005 22,912 22,912 48.39 2/10/2013

2/07/2006 21,132 42,264 48.80 2/07/2014

2/28/2007 8,635 25,903 65.15 2/28/2015

2/28/2008 0 30,861 48.61 2/28/2016

2/07/2006 32,274(3) 577,705

2/28/2007 34,538(3) 618,230

3/01/2007 1,731(5) 30,985

2/28/2008 30,861(3) 552,412

3/03/2008 3,649(4) 65,317

Avril . . . . . . . . . . . . . . . . . . . . . 2/10/2005 9,929 9,928 48.39 2/10/2013

2/07/2006 15,369 30,738 48.80 2/07/2014

2/28/2007 5,181 15,542 65.15 2/28/2015

2/28/2008 0 22,220 48.61 2/28/2016

2/07/2006 20,491(3) 366,789

2/28/2007 20,723(3) 370,942

3/01/2007 1,695(5) 30,341

2/28/2008 22,220(3) 397,738

3/03/2008 3,551(5) 63,563

9/02/2008 40,344(3) 722,158

McAveety . . . . . . . . . . . . . . . . . . 4/01/2008 0 25,319 53.32 4/01/2016

4/01/2008 25,319(3) 453,210

Turner . . . . . . . . . . . . . . . . . . . . 5/07/2008 0 135,224 53.25 5/07/2016

(1) In connection with the Host Transaction, Starwood’s stockholders received 0.6122 Host shares and $0.503 incash for each of their Class B Shares. Holders of Starwood employee stock options and restricted stock did notreceive this consideration while the market price of the Company’s publicly traded shares was reduced to reflect

33

the payment of this consideration directly to the holders of the Class B Shares. In order to preserve the value ofthe Company’s restricted stock and options immediately before and after the Host Transaction, the Companyincreased the number of shares of restricted stock and adjusted its stock options to reduce the strike price andincrease the number of stock options using the intrinsic value method based on the Company’s stock priceimmediately before and after the transaction. The stock and option information above reflects the number ofshares and options granted and the option exercise prices after these adjustments were made.

(2) These options generally vest in equal installments on the first, second, third and fourth anniversary of theirgrant.

(3) These shares of restricted stock or restricted stock units granted prior to 2007 generally vest upon the thirdanniversary of their grant date. For awards granted in 2007, the restricted stock or restricted stock unitsgenerally vest 50% on each of the third and fourth anniversaries of their grant date. For awards granted in 2008,the restricted stock or restricted stock units generally vest 75% on the third anniversary and 25% on the fourthanniversary of the date of grant, provided that Mr. Avril’s September 2, 2008 award and Mr. McAveety’sApril 1, 2008 award will vest on the third anniversary of the grant date.

(4) These deferred restricted stock units vest in equal installments on the first, second and third fiscal year-endsfollowing the date of grant, subject to acceleration in the event certain performance criteria are met.

(5) These shares of restricted stock generally vest in equal installments on the first and second anniversary of theirgrant.

VII. OPTION EXERCISES AND STOCK VESTED

The following table discloses, for each Named Executive Officer, (i) shares of Company stock acquiredpursuant to exercise of stock options during 2008, (ii) shares of restricted Company stock that vested in 2008, and(iii) shares of Company stock acquired in 2008 on account of vesting of restricted stock units. The table alsodiscloses the value realized by the Named Executive Officer for each such event, calculated prior to the deduction ofany applicable withholding taxes and brokerage commissions.

Name

Number ofShares

Acquired UponExercise

(#)

Value Realizedon Exercise

($)

Number of SharesAcquired Upon

Vesting(#)

Value Realizedon Vesting

($)

Option AwardsStock Awards

van Paasschen . . . . . . . . . . . . . . — — — —

Prabhu . . . . . . . . . . . . . . . . . . . . — — 31,409 1,436,540

Siegel . . . . . . . . . . . . . . . . . . . . . — — 34,055 1,555,801

Avril . . . . . . . . . . . . . . . . . . . . . . 13,686 254,356 65,626 3,291,009

McAveety . . . . . . . . . . . . . . . . . . — — — —

Turner . . . . . . . . . . . . . . . . . . . . — — — —

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VIII. NONQUALIFIED DEFERRED COMPENSATION

The Company’s Deferred Compensation Plan (the “Plan”) permits eligible executives, including our NamedExecutive Officers, to defer up to 100% of their Executive Plan or Executive AIP bonus, as applicable, and up to75% of their base salary for a calendar year. The Company does not contribute to the Plan. Mr. van Paasschen madedeferrals under the Plan in 2008 but no other Named Executive Officer did.

Name

ExecutiveContributions in

Last FY($)

RegistrantContributions

in Last FY($)

AggregateEarnings

in Last FY($)

AggregateWithdrawals/Distributions

($)

AggregateBalance atLast FYE

($)

van Paasschen . . . . . . . . . . 500,000 — (128,686) — 371,314

Prabhu . . . . . . . . . . . . . . . . — — — — —

Siegel . . . . . . . . . . . . . . . . . — — — — —

Avril . . . . . . . . . . . . . . . . . . — — — — —

McAveety . . . . . . . . . . . . . . — — — — —

Turner . . . . . . . . . . . . . . . . — — — — —

Deferral elections are made in December for base salary paid in pay periods beginning in the followingcalendar year. Deferral elections are made in June for annual incentive awards that are earned for performance inthat calendar year but paid in March of the following year. Deferral elections are irrevocable.

Elections as to the time and form of payment are made at the same time as the corresponding deferral election.A participant may elect to receive payment on February 1 of a calendar year while still employed or either 6 or12 months following employment termination. Payment will be made immediately in the event a participantterminates employment on account of death, disability or on account of certain changes in control. A participantmay elect to receive payment of his account balance in either a lump sum or in annual installments, so long as theaccount balance exceeds $50,000; otherwise payment will be made in a lump sum.

If a participant elects an in-service distribution, the participant may change the scheduled distribution date orform of payment so long as the change is made at least 12 months in advance of the scheduled distribution date. Anysuch change must provide that distribution will commence at least five years later than the scheduled distributiondate. If a participant elects to receive distribution upon employment termination, that election and the corre-sponding form of payment election are irrevocable. Withdrawals for hardship that results from an unforeseeableemergency are available, but no other unscheduled withdrawals are permitted.

35

The Plan uses the investment funds listed below as potential indices for calculating investment returns on aparticipant’s Plan account balance. The deferrals the participant directs for investment into these funds are adjustedbased on a deemed investment in the applicable funds. The participant does not actually own the investments that heselects. The Company may, but is not required to, make identical investments pursuant to a variable universal lifeinsurance product. When it does, participants have no direct interest in this life insurance.

Name of Investment Fund

1-Year AnnualizedRate of Return(as of 2/28/09)

Nationwide NVIT Money Market — Class V. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.19%

PIMCO VIT Total Return — Admin Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.94%

Fidelity VIP High Income — Service Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �19.01%

Nationwide NVIT Inv Dest Moderate — Class 2 . . . . . . . . . . . . . . . . . . . . . . . . . . �28.74%

T. Rowe Price Equity Income — Class II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �46.97%

Dreyfus Stock Index — Initial Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �43.63%

Dreyfus VIF Appreciation — Initial Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �36.42%

Fidelity VIP II Contrafund — Service Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �46.44%

Fidelity VIP Growth — Service Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �48.97%

Nationwide NVIT Mid Cap Index — Class I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �42.48%

Oppenheimer Mid Cap VA — Non-Service Shares . . . . . . . . . . . . . . . . . . . . . . . . . �49.50%

Dreyfus IP Small Cap Stock Index — Service Shares . . . . . . . . . . . . . . . . . . . . . . . �42.57%

Fidelity VIP Overseas — Service Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �50.85%

AIM V.I. International Growth — Series I Shares. . . . . . . . . . . . . . . . . . . . . . . . . . �42.54%

IX. POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL

The Company provides certain benefits to our Named Executive Officers in the event of employmenttermination, both in connection with a change in control and otherwise. These benefits are in addition to benefitsavailable generally to salaried employees, such as distributions under the Company’s tax-qualified retirementsavings plan, disability insurance benefits and life insurance benefits. These benefits are described below.

A. Termination Before Change in Control: Involuntary Other than for Cause, Voluntary for GoodReason, Death or Disability

Pursuant to Mr. van Paaschen’s employment agreement, if Mr. van Paasschen’s employment is terminated bythe Company other than for cause or by Mr. van Paasschen for good reason, the Company will pay Mr. vanPaasschen as a severance benefit (i) two times the sum of his base salary and target annual bonus, (ii) a pro ratedtarget bonus for the year of termination and (iii) Mr. van Paasschen’s sign on restricted stock unit award(25,558 units) would be payable. None of the other equity awards granted to Mr. van Paasschen would beaccelerated. If Mr. van Paasschen’s employment were terminated because of his death or permanent disability,Mr. van Paasschen (or his estate) would be entitled to receive a pro rated target bonus for the year of termination andall of his equity awards would accelerate and vest.

Pursuant to Mr. Avril’s employment agreement, if Mr. Avril’s employment is terminated by the Companywithout cause, he will receive severance benefits of twelve months of base salary and the Company will continue toprovide medical benefits coverage for up to twelve months after the date of termination. In addition, Mr. Avril willalso be entitled to acceleration of all of his restricted stock and options that were granted prior to August 19, 2008,but no acceleration for equity awards granted on or after August 19, 2008.

Pursuant to his employment agreement, if Mr. Prabhu’s employment is terminated by the Company withoutcause or by Mr. Prabhu voluntarily with good reason, he will receive severance benefits equal to one year’s basesalary and he will be reimbursed for COBRA expenses minus his last level of contribution for up to twelve monthsfollowing termination. In addition, the Company will accelerate the vesting of 50% of Mr. Prabhu’s unvested

36

restricted stock and options. The Company entered into a letter agreement on August 14, 2007 confirming the termsof the agreement as it relates to the acceleration of 50% of Mr. Prabhu’s unvested restricted stock and options.

Pursuant to Mr. Siegel’s employment agreement, in the event Mr. Siegel’s employment is terminated by theCompany without cause, Mr. Siegel will receive severance benefits of twelve months of base salary plus 100% of histarget annual incentive and the Company will continue to provide medical benefits coverage for up to twelve monthsafter the date of termination. Pursuant to a letter agreement entered into on August 14, 2007, Mr. Siegel will also beentitled to acceleration of 50% of his then unvested restricted stock and options if he is terminated without causeprior to September 24, 2009.

Pursuant to Mr. McAveety’s employment agreement, if Mr. McAveety’s employment is terminated by theCompany other than for cause, he will receive severance benefits of twelve months base salary and the Companywill continue to provide medical benefits coverage for up to twelve months after the date of termination. In addition,the Company will pay the reasonable costs of relocation costs should Mr. McAveety relocate to Europe within oneyear of the termination of his employment

Pursuant to Mr. Turner’s employment agreement, if Mr. Turner’s employment is terminated by the Companyother than for cause or by Mr. Turner for good reason, he will receive severance benefits of twelve months basesalary and the Company will continue to provide medical benefits coverage for up to twelve months after the date oftermination.

B. Termination in the Event of Change in Control

On August 2, 2006, the Company and each of Messrs. Prabhu and Siegel entered into severance agreements.Each severance agreement provides for a term of three years, with an automatic one-year extension until either theexecutive or the Company notifies the other that such party does not wish to extend the agreement. If a Change inControl (as described below) occurs, the agreement will continue for at least 24 months following the date of suchChange in Control.

Each agreement provides that if, following a Change in Control, the executive’s employment is terminatedwithout Cause (as defined in the agreement) or with Good Reason (as defined in the agreement), the executivewould receive the following in addition to the items described in A. above:

• two times the sum of his base salary plus the average of the annual bonuses earned by the executive in thethree fiscal years ending immediately prior to the fiscal year in which the termination occurs;

• continued medical benefits for two years, reduced to the extent benefits of the same type are received by ormade available to the executive from another employer;

• a lump sum amount, in cash, equal to the sum of (A) any unpaid incentive compensation which had beenallocated or awarded to the executive for any measuring period preceding termination under any annual orlong-term incentive plan and which, as of the date of termination, is contingent only upon the continuedemployment of the executive until a subsequent date, and (B) the aggregate value of all contingent incentivecompensation awards allocated or awarded to the executive for all then uncompleted periods under anysuch plan that the executive would have earned on the last day of the performance award period, assumingthe achievement, at the target level, of the individual and corporate performance goals established withrespect to such award;

• immediate vesting of stock options and restricted stock held by the executive under any stock option orincentive plan maintained by the Company;

• outplacement services suitable to the executive’s position for a period of two years or, if earlier, until thefirst acceptance by the executive of an offer of employment, the cost of which will not exceed 20% of theexecutive’s base salary;

• a lump sum payment of the executive’s deferred compensation paid in accordance with Section 409Adistribution rules; and

37

• immediate vesting of all unvested 401(k) contributions in the executive’s 401(k) account or payment by theCompany of an amount equal to any such unvested amounts that are forfeited by reason of the executive’stermination of employment.

In addition, to the extent that any executive becomes subject to the “golden parachute” excise tax imposedunder Section 4999 of the Code, the executive would receive a gross-up payment in an amount sufficient to offsetthe effects of such excise tax.

Under the severance agreements, a “Change in Control” is deemed to occur upon any of the following events:

• any person becomes the beneficial owner of securities of the Company (not including in the securitiesbeneficially owned by such person any securities acquired directly from the Company or its affiliates)representing 25% or more of the combined voting power of the Company;

• a majority of the Directors cease to serve on the Company’s Board in connection with a successful hostileproxy contest;

• a merger or consolidation of the Company or any direct or indirect subsidiary of the Company with anyother corporation, other than:

O a merger or consolidation in which securities of the Company would represent at least 70% of the votingpower of the surviving entity; or

O a merger or consolidation effected to implement a recapitalization of the Company in which no personbecomes the beneficial owner of 25% or more of the voting power of the Company; or

• approval of a plan of liquidation or dissolution by the stockholders or the consummation of a sale of all orsubstantially all of the Company’s assets, other than a sale to an entity in which the Company’s stockholderswould hold at least 70% of the voting power in substantially the same proportions as their ownership of theCompany immediately prior to such sale. However, a “Change in Control” does not include a transaction inwhich Company stockholders continue to hold substantially the same proportionate ownership in the entitywhich would own all or substantially all of the Company’s assets following such transaction.

Each of Messrs. Avril, McAveety and Turner entered into similar change in control agreements in connectionwith their employment with the Company, provided that no tax gross-up is provided if such payments becomesubject to the excise tax. If such payments are subject to the excise tax, the benefits under the agreement will bereduced until the point where the executive is better off paying the excise tax rather than reducing the benefits.

Mr. van Paasschen’s employment agreement provides that he would be entitled to the following benefits if hisemployment were terminated without cause or he resigned with good reason following a Change in Control:

• two times the sum of his base salary plus the average of the annual bonuses earned in the three fiscal yearsending immediately prior to the fiscal year in which the termination occurs;

• a lump sum amount, in cash, equal to the sum of (A) any unpaid incentive compensation which had beenallocated or awarded for any measuring period preceding termination under any annual or long-termincentive plan and which, as of the date of termination, is contingent only upon his continued employmentuntil a subsequent date, and (B) the aggregate value of all contingent incentive compensation awardsallocated or awarded to him for all then uncompleted periods under any such plan that he would haveearned on the last day of the performance award period, assuming the achievement, at the target level, of theindividual and corporate performance goals established with respect to such award;

• immediate vesting of stock options and restricted stock held under any stock option or incentive planmaintained by the Company;

• a lump sum payment of his deferred compensation paid in accordance with Section 409A distributionrules; and

38

• immediate vesting of all unvested 401(k) contributions in his 401(k) account or payment by the Companyof an amount equal to any such unvested amounts that are forfeited by reason of his termination ofemployment.

In addition, to the extent that Mr. van Paasschen becomes subject to the “golden parachute” excise tax imposedunder Section 4999 of the Code, he would receive a gross-up payment in an amount sufficient to offset the effects ofsuch excise tax.

In December 2008, the Company amended the employment arrangements and change in control agreementswith each of the Named Executive Officers. The amendments were technical in nature and were designed to meetthe guidelines of 409A of the Code. The amendments did not change any of the amounts payable to the NamedExecutive Officers.

C. Estimated Payments Upon Termination

The tables below reflect the estimated amounts payable to the Named Executive Officers in the event theiremployment with the Company had terminated on December 31, 2008 under various circumstances, and includesamounts earned through that date. The actual amounts that would become payable in the event of an actualemployment termination can only be determined at the time of such termination.

1. Involuntary Termination without Cause or Voluntary Termination for Good Reason

The following table discloses the amounts that would have become payable on account of an involuntarytermination without cause or a voluntary termination for good reason outside of the change in control context.

Name

SeverancePay($)

MedicalBenefits

($)

Vesting ofRestricted Stock

($)

Vesting ofStock Options

($)Total

($)

van Paasschen . . . . . . . . . . . . . 8,000,000 0 457,4880 0 8,457,488

Prabhu . . . . . . . . . . . . . . . . . . 640,658 23,952 867,130 0 1,531,740

Siegel(1) . . . . . . . . . . . . . . . . . 1,230,078 19,699 922,324 0 2,172,101

Avril(1) . . . . . . . . . . . . . . . . . . 725,000 18,288 1,229,372 0 1,972,660

McAveety(1) . . . . . . . . . . . . . . 500,000 18,912 0 0 518,912(2)

Turner . . . . . . . . . . . . . . . . . . . 625,000 24,888 0 0 649,888

(1) Messrs. Siegel, Avril and McAveety’s employment agreements provide for payments in the event of involuntarytermination other than for cause but do not provide for payments in the event of voluntary termination for goodreason.

(2) In addition, the Company would pay the reasonable costs of relocating Mr. McAveety to Europe if he decides toreturn to Europe within one year of his termination of employment.

2. Termination on Account of Death or Disability

The following table discloses the amounts that would have become payable on account of a termination ofemployment by death or disability.

Name

SeverancePay($)

MedicalBenefits

($)

Vesting ofRestricted Stock

($)

Vesting ofStock Options

($)Total

($)

van Paasschen . . . . . . . . . . . . . 2,000,000 0 1,668,835 0 3,668,835

Prabhu . . . . . . . . . . . . . . . . . . 640,658 23,952 1,734,259 0 2,398,869

Siegel . . . . . . . . . . . . . . . . . . . . 1,230,078 19,699 1,844,649 0 3,094,426

Avril . . . . . . . . . . . . . . . . . . . . 725,000 18,288 1,951,530 0 2,694,818

McAveety . . . . . . . . . . . . . . . . 500,000 18,912 453,210 0 972,122

Turner . . . . . . . . . . . . . . . . . . . 625,000 24,888 0 0 649,888

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3. Change in Control

The following table discloses the amounts that would have become payable on account of an involuntarytermination without cause following a change in control or a voluntary termination with good reason following achange in control.

Name

SeverancePay($)

MedicalBenefits

($)

Vesting ofRestricted Stock

($)

Vesting ofStock

Options($)

Outplace-ment

($)

401(k)Payment

($)

TaxGross Up

($)Total

($)

van Paasschen(1) . . . . . . . . . 8,000,000 0 1,668,835 0 0 0 3,724,544 13,393,379

Prabhu . . . . . . . . . . . . . . . . 3,390,798 47,904 1,734,259 0 128,132 0 0 5,301,093

Siegel . . . . . . . . . . . . . . . . . 3,405,217 39,398 1,844,649 0 123,006 0 0 5,412,270

Avril . . . . . . . . . . . . . . . . . 3,332,730 36,576 1,951,530 0 145,000 0 n/a 5,465,836

McAveety . . . . . . . . . . . . . . 2,250,000 37,824 453,210 0 100,000 0 n/a 2,741,034

Turner . . . . . . . . . . . . . . . . 3,125,000 49,776 0 0 125,000 0 n/a 3,299,776

(1) If the amount of severance pay and other benefits payable on change in control is greater than three times certainbase period taxable compensation for Mr. van Paasschen, a 20% excise tax is imposed on the excess amount ofsuch severance pay and other benefits. Because of Mr. van Paasschen’s recent hire, his base period taxablecompensation does not reflect the total compensation paid to him, artificially increasing the excise tax thatwould apply on a change in control and, correspondingly, the tax gross-up payment due under the estimate.

X. DIRECTOR COMPENSATION

The Company uses a combination of cash and stock-based awards to attract and retain qualified candidates toserve on the Board. In setting Director compensation, the Company considers the significant amount of time thatmembers of the Board spend in fulfilling their duties to the Company as well as the skill level required by theCompany or its Directors. The current compensation structure is described below.

Under the Company’s Director share ownership guidelines, each Director is required to acquire Shares (ordeferred compensation stock equivalents) that have a market price equal to two times the annual Director’s fees paidto such Director. New Directors are given a period of three years to satisfy this requirement.

Company employees who serve as members of the Board receive no fees for their services in this capacity.Non-employee members of the Board (“Non-Employee Directors”) receive compensation for their services asdescribed below.

A. Annual Fees

Each Non-Employee Director receives an annual fee in the amount of $80,000, payable in four equalinstallments of Shares issued under our LTIP. The number of Shares to be issued is based on the fair market value ofa Share on the previous December 31.

A Non-Employee Director may elect to receive up to one-half of the annual fee in cash and to defer (at anannual interest rate of LIBOR plus 11⁄2% for deferred cash amounts) any or all of the annual fee payable in cash.Deferred cash amounts are payable in accordance with the Director’s advance election. A Non-Employee Directoris also permitted to elect to defer to a deferred unit account any or all of the annual fee payable in shares of Companystock. Deferred stock amounts are payable in accordance with the Non-Employee Director’s advance election.

Non-Employee Directors serving as members of the Audit Committee received an additional annual fee incash of $10,000 ($25,000 for the chairman of the Audit Committee). The chairperson of each other committee of theBoard received an additional annual fee in cash of $10,000. For 2008, the Chairman of the Board received anadditional retainer of $150,000, payable quarterly in Shares.

In addition, the Board established the following special committees in 2007-2008: (1) Search Committee,(2) Special Committee, and (3) Transition Committee. In 2008, each member of the Search Committee and SpecialCommittee received an additional fee of $20,000 ($25,000 for each Chairperson), and each member of the

40

Transition Committee received an additional fee of $10,000. The members of these special committees were able toelect to receive such fees in cash or stock. For Directors electing stock, the number of shares awarded wasdetermined by dividing the amount by the Fair Market Value (as defined in the LTIP) on the date of grant. Thesespecial committee shares generally vest upon the earlier of (i) the third anniversary of the grant date and (ii) the datesuch person ceases to be a Director of the Company.

B. Attendance Fees

Non-Employee Directors do not receive fees for attendance at meetings. However, the Company reimbursesNon-Employee Directors for expenses they incurred related to 2008 meeting attendance, including attendance byspouses at one meeting each year.

C. Equity grant

In 2008, each Non-Employee Director received an annual equity grant (made at the same time as the annualgrant is made to other employees) under our LTIP with a value of $100,000. The equity grant was delivered 50% instock units and 50% in stock options. The number of stock units is determined by dividing the value ($50,000) by theaverage of the high and low price on the date of grant. The number of options is determined by dividing the value($50,000) by the average of the high and low price on the date of grant (also the exercise price) and multiplying bythree. For the 2009 grant, the ratio was lowered to 2.5-to-1. The options are fully vested and exercisable upon grantand are scheduled to expire eight years after the grant date. The restricted stock awarded pursuant to the annual grantgenerally vests upon the earlier of (i) the third anniversary of the grant date and (ii) the date such person ceases to bea Director of the Company.

D. Starwood Preferred Guest Program Points and Rooms

In 2008, each Non-Employee Director other than Mr. Daley received an annual grant of 750,000 StarwoodPreferred Guest (“SPG”) Points to encourage them to visit and personally evaluate our properties. Mr. Daleyreceived a grant of 375,000 SPG Points in light of his November 2008 election to the Board.

E. Other Compensation

In 2008, the Company made available to the Chairman of the Board administrative assistant services and healthinsurance coverage on terms comparable to those available to Starwood executives until the Chairman turns70 years old and thereafter on terms available to Company retirees (including required contributions). TheCompany also reimburses Non-Employee Directors for travel expenses, other out-of-pocket costs they incur whenattending meetings and, for one meeting per year, expenses related to attendance by spouses.

We have summarized the compensation paid by the Company to our Non-Employee Directors in 2008 in thetable below.

Name of Director

Fees earnedor Paid in Cash

($) (1)

StockAwards (2)(3)

($)

OptionAwards (4)

($)

All Othercompensation (5)

($)Total

($)

Adam M. Aron . . . . . . . . . . . . 20,000 94,077 48,939 11,250 174,266

Charlene Barshefsky . . . . . . . . 20,000 94,077 48,939 15,431 178,447

Jean-Marc Chapus . . . . . . . . . 25,000 40,713 48,939 11,250 125,902

Thomas E. Clarke . . . . . . . . . . 37,500 41,218 48,753 11,250 138,721

Clayton C. Daley, Jr. . . . . . . . . 6,196 6,762 14,756 N/A 27,714

Bruce W. Duncan . . . . . . . . . . 35,000 222,499 48,939 102,246 408,684

Lizanne Galbreath . . . . . . . . . . 15,000 94,077 48,939 15,595 173,611

Eric Hippeau . . . . . . . . . . . . . . 40,000 94,077 48,939 30,986 214,002

Stephen R. Quazzo . . . . . . . . . 55,000 94,077 48,939 11,250 209,266

Thomas O. Ryder . . . . . . . . . . 55,000 94,077 48,939 24,699 222,715

Kneeland C. Youngblood . . . . . 50,000 54,043 48,939 18,750 171,732

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(1) The following Directors elected to receive stock awards in lieu of cash fees for service on special committees ofthe Board: Ms. Barshefsky and Mr. Chapus, $20,000; Mr. Duncan, $35,000; Mr. Hippeau, $40,000; Mr.Quazzo, $45,000; and Mr. Ryder, $30,000. The grant date fair value of these stock awards is set forth below:

Director Grant DateNumber of Shares of

Stock/Units Grant Date Fair Value ($)

Ms. Barshefsky and Mr. Chapus . . . . . . . 2/28/2008 411 19,977Mr. Duncan. . . . . . . . . . . . . . . . . . . . . . . 2/28/2008 720 34,996Mr. Hippeau . . . . . . . . . . . . . . . . . . . . . . 2/28/2008 822 39,953Mr. Quazzo . . . . . . . . . . . . . . . . . . . . . . . 2/28/2008 925 44,960Mr. Ryder . . . . . . . . . . . . . . . . . . . . . . . . 2/28/2008 617 29,989

(2) As of December 31, 2008, each Director has the following aggregate number of Shares (deferred or otherwise)outstanding: Mr. Aron, 34,292; Ambassador Barshefsky, 13,007; Mr. Chapus, 0; Mr. Clarke, 2,338; Mr. Daley,5,657; Mr. Duncan, 238,838; Ms. Galbreath, 5,536; Mr. Hippeau, 19,360; Mr. Quazzo, 28,265; Mr. Ryder, 14,109;Mr. Youngblood, 7,253.

(3) Represents the expense recognized for financial statement reporting purposes with respect to 2008 for the fairvalue of restricted stock and restricted stock units granted in 2008, in accordance with SFAS 123(R). Pursuant toSEC rules, the amounts shown exclude the impact of estimated forfeitures related to service-based vestingconditions. For additional information, refer to Note 21 of the Company’s financial statements filed with theSEC as part of the Form 10-K for the year ended December 31, 2008. These amounts reflect the Company’saccounting expense for these awards and do not correspond to the actual value that will be recognized by theDirectors. The grant date fair value of each stock award is set forth below:

Director Grant DateNumber of Shares of

Stock/Units Grant Date Fair Value ($)

Adam M. Aron . . . . . . . . . . . . . . . . . . . 2/28/2008 1,029 50,0153/31/2008 458 20,0176/30/2008 458 20,0179/30/2008 458 20,017

12/31/2008 458 20,017Charlene Barshefsky . . . . . . . . . . . . . . . 2/28/2008 1,029 50,015

3/31/2008 458 20,0176/30/2008 458 20,0179/30/2008 458 20,017

12/31/2008 458 20,017Jean-Marc Chapus . . . . . . . . . . . . . . . . . 2/28/2008 1,029 50,015

3/31/2008 458 20,0176/30/2008 153 6,687

Thomas E. Clarke . . . . . . . . . . . . . . . . . 4/30/2008 951 50,0236/30/2008 229 10,0089/30/2008 229 10,008

12/31/2008 229 10,008Clayton C. Daley, Jr. . . . . . . . . . . . . . . 11/5/2008 515 10,872

12/31/2008 142 6,206

42

Director Grant DateNumber of Shares of

Stock/Units Grant Date Fair Value ($)

Bruce W. Duncan . . . . . . . . . . . . . . . . . 2/28/2008 1,029 50,0153/31/2008 458 20,0173/31/2008 858 37,4996/30/2008 458 20,0176/30/2008 858 37,4999/30/2008 458 20,0179/30/2008 858 37,499

12/31/2008 458 20,01712/31/2008 858 37,499

Lizanne Galbreath . . . . . . . . . . . . . . . . . 2/28/2008 1,029 50,0153/31/2008 458 20,0176/30/2008 458 20,0179/30/2008 458 20,017

12/31/2008 458 20,017Eric Hippeau . . . . . . . . . . . . . . . . . . . . . 2/28/2008 1,029 50,015

3/31/2008 458 20,0176/30/2008 458 20,0179/30/2008 458 20,017

12/31/2008 458 20,017Stephen R. Quazzo . . . . . . . . . . . . . . . . 2/28/2008 1,029 50,015

3/31/2008 458 20,0176/30/2008 458 20,0179/30/2008 458 20,017

12/31/2008 458 20,017Thomas O. Ryder . . . . . . . . . . . . . . . . . 2/28/2008 1,029 50,015

3/31/2008 458 20,0176/30/2008 458 20,0179/30/2008 458 20,017

12/31/2008 458 20,017Kneeland C. Youngblood . . . . . . . . . . . . 2/28/2008 1,029 50,015

3/31/2008 229 10,0086/30/2008 229 10,0089/30/2008 229 10,008

12/31/2008 229 10,008

(4) Represents the expense recognized for financial statement reporting purposes with respect to 2008 for the fairvalue of stock options granted in 2008, in accordance with SFAS 123(R). Pursuant to SEC rules, the amountsshown exclude the impact of estimated forfeitures related to service-based vesting conditions. For additionalinformation, refer to Note 21 of the Company’s financial statements filed with the SEC as part of the Form 10-Kfor the year ended December 31, 2008. These amounts reflect the Company’s accounting expense for theseawards and do not correspond to the actual value that will be recognized by the Directors. As of December 31,2008, each Director has the following aggregate number of stock options outstanding: Mr. Aron, 10,962;Ambassador Barshefsky, 35,082; Mr. Chapus, 35,082; Mr. Clarke, 2,852; Mr. Daley, 1,544; Mr. Duncan,95,804; Ms. Galbreath, 18,585; Mr. Hippeau, 52,738; Mr. Quazzo, 51,579; Mr. Ryder, 40,581; Mr. Youngblood,40,581. All Directors other than Messrs. Clarke and Daley (who were not Directors at the time) received a grantof 3,087 options on February 28, 2008 with a grant date fair value of $48,939. Mr. Clarke received a grant of2,852 options on April 30, 2008 with a grant date fair value of $48,753 and Mr. Daley received a grant of 1,544options on November 5, 2008 with a grant date fair value of $14,756.

43

(5) We reimburse Non-Employee Directors for travel expenses, other out-of-pocket costs they incur whenattending meetings and, for one meeting per year, attendance by spouses. In addition, in 2008 Non-EmployeeDirectors received 750,000 SPG Points valued at $11,250 (Mr. Youngblood’s account was credited with a largeramount to correct a mistake with the number of points granted in 2007 and Mr. Daley’s account was creditedwith 375,000 SPG Points in light of his November 2008 election to the Board) and the cost of an administrativeassistant for the Chairman of the Board. Non-Employee Directors also receive interest on deferred dividends.Pursuant to SEC rules, perquisites and personal benefits are not reported for any Director for whom suchamounts were less than $10,000 in the aggregate for 2008 but must be identified by type for each NamedExecutive Officer for whom such amounts were equal to or greater than $10,000 in the aggregate. SEC rules donot require specification of the value of any type of perquisite or personal benefit provided to the Non-Employee Directors because no such value exceeded $25,000.

Pursuant to SEC rules, the following table specifies the value for each other element of All Other Compen-sation that is valued in excess of $10,000 and not disclosed above.

Name

Deferred Dividends onRestricted Stock Units

($) 2008

AdministrativeAssistant($) 2008

Duncan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,620 67,689

Hippeau . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,758 —

Ryder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,217 —

44

AUDIT COMMITTEE REPORT

The information contained in this Audit Committee Report shall not be deemed to be “soliciting material” or“filed” or “incorporated by reference” in future filings with the SEC, or subject to the liabilities of Section 18 of theExchange Act, except to the extent that the Company specifically incorporates it by reference into a document filedunder the Securities Act of 1933, as amended, or the Exchange Act.

The Audit Committee (the “Audit Committee”) of the Board of Directors (the “Board”) of Starwood Hotels &Resorts Worldwide, Inc. (the “Company”), which is comprised entirely of “independent” Directors, as determinedby the Board in accordance with the New York Stock Exchange (“NYSE”) listing requirements and applicablefederal securities laws, serves as an independent and objective party to assist the Board in fulfilling its oversightresponsibilities including, but not limited to, (i) monitoring the quality and integrity of the Company’s financialstatements, (ii) monitoring compliance with legal and regulatory requirements, (iii) assessing the qualifications andindependence of the independent registered public accounting firm and (iv) establishing and monitoring theCompany’s systems of internal controls regarding finance, accounting and legal compliance. The Audit Committeeoperates under a written charter which meets the requirements of applicable federal securities laws and the NYSErequirements.

In the first quarter of 2009, the Audit Committee reviewed and discussed the audited financial statements forthe year ended December 31, 2008 with management, the Company’s internal auditors and the independentregistered public accounting firm, Ernst & Young LLP. The Audit Committee also discussed with the independentregistered public accounting firm matters relating to its independence, including a review of audit and non-auditfees and the written disclosures and letter from Ernst & Young LLP to the Audit Committee pursuant to theStatement on Auditing Standards No. 61 Communications with Audit Committees, as amended, as adopted by thePublic Company Accounting Oversight Board in Rule 3200T regarding the independent accountants’ communi-cations with the Audit Committee concerning independence.

Based on the reviews and discussions referred to above, the Audit Committee recommended to the Board ofDirectors that the financial statements referred to above be included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2008.

Audit Committee of the Board of Directors

Thomas O. Ryder (chairman)Adam M. AronThomas E. ClarkeClayton C. Daley, Jr.Kneeland C. Youngblood

Audit Fees

The aggregate amounts paid by the Company for the fiscal years ended December 31, 2008 and 2007 to theCompany’s principal accounting firm, Ernst & Young, are as follows (in millions):

2008 2007

Audit Fees(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.9 $5.0Audit-Related Fees(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.9 $0.9Tax Fees(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.4 $0.3

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6.2 $6.2

(1) Audit fees include the fees paid for the annual audit, the review of quarterly financial statements and assistancewith regulatory and statutory filings, the audit of the Company’s internal controls over financial reporting withthe objective of obtaining reasonable assurance about whether effective internal controls over financialreporting were maintained in all material respects and for the attestation of management’s report on theeffectiveness of internal controls over financial reporting.

45

(2) Audit-related fees include fees for audits of employee benefit plans, statutory audits required by local laws,audit and accounting consultation and other attest services.

(3) Tax fees include fees for the preparation and review of certain foreign tax returns.

Pre-Approval of Services

The Audit Committee pre-approves all services, including both audit and non-audit services, provided by theCompany’s independent registered public accounting firm. For audit services (including statutory audit engage-ments as required under local country laws), the independent registered public accounting firm provides the AuditCommittee with an engagement letter outlining the scope of the audit services proposed to be performed during theyear. The engagement letter must be formally accepted by the Audit Committee before any audit commences. Theindependent registered public accounting firm also submits an audit services fee proposal, which also must beapproved by the Audit Committee before the audit commences. The Audit Committee may delegate authority toone of its members to pre-approve all audit/non-audit services by the independent registered public accounting firm,as long as these approvals are presented to the full Audit Committee at its next regularly scheduled meeting.

Management submits to the Audit Committee all non-audit services that it recommends the independentregistered public accounting firm be engaged to provide and an estimate of the fees to be paid for each. Managementand the independent registered public accounting firm must each confirm to the Audit Committee that theperformance of the non-audit services on the list would not compromise the independence of the registered publicaccounting firm and would be permissible under all applicable legal requirements. The Audit Committee mustapprove both the list of non-audit services and the budget for each such service before commencement of the work.Management and the independent registered public accounting firm report to the Audit Committee at each of itsregular meetings as to the non-audit services actually provided by the independent registered public accounting firmand the approximate fees incurred by the Company for those services.

All audit and permissible non-audit services provided by Ernst & Young to the Company for the fiscal yearsended December 31, 2008 and 2007 were pre-approved by the Audit Committee or the Board of Directors.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

All members of the Compensation Committee during fiscal year 2008 were independent Directors, and nomember was an employee or former employee. No Compensation Committee member had any relationshiprequiring disclosure under “Certain Relationships and Related Transactions,” below. During fiscal year 2008, noneof our executive officers served on the compensation committee (or its equivalent) or board of Directors of anotherentity whose executive officer served on our Compensation Committee.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Policies of the Board of Directors of the Company

The Corporate Governance and Nominating Committee (the “Committee”) is charged with establishing andreviewing (on a periodic basis) the Company’s Corporate Opportunity Policy pursuant to which each Director andexecutive officer is required to submit to the Committee any opportunity that such person reasonably believes (1) iswithin the Company’s existing line of business or (2) is one in which the Company either has an existing interest or areasonable expectancy of an interest, and (3) the Company is reasonably capable of pursuing. The CorporateOpportunity Policy is a written policy that provides that the Committee should consider all relevant facts andcircumstances to determine whether it should (i) reject the proposed transaction on behalf of Company; (ii) concludethat the proposed transaction is appropriate and suggest that the Company pursue it on the terms presented or ondifferent terms, and in the case of a Corporate Opportunity suggest that the Company pursue the CorporateOpportunity on its own, with the party who brought the proposed transaction to the Company’s attention or withanother third party; or (iii) ask the full Board to consider the proposed transaction so the Board may then take eitherof the actions described in (i) or (ii) above, and, at the Committee’s option, in connection with (iii), makerecommendations to the Board. Any person bringing a proposed transaction to the Committee is obligated to

46

provide any and all information available to the Committee and to recuse himself from any vote or otherdeliberation.

OTHER MATTERS

The Board is not aware of any matters not referred to in this proxy statement that will be presented for action atthe Annual Meeting. If any other matters properly come before the Annual Meeting, it is the intention of the personsnamed in the enclosed proxy to vote the Shares represented thereby in accordance with their discretion.

SOLICITATION COSTS

The Company will pay the cost of soliciting proxies for the Annual Meeting, including the cost of mailing. Thesolicitation is being made by mail and may also be made by telephone or in person using the services of a number ofregular employees of the Company at nominal cost. The Company will reimburse banks, brokerage firms and othercustodians, nominees and fiduciaries for expenses incurred in sending proxy materials to beneficial owners ofShares. The Company has engaged D.F. King & Co., Inc. to solicit proxies and to assist with the distribution ofproxy materials for a fee of $17,000 plus reasonable out-of-pocket expenses.

HOUSEHOLDING

The SEC allows us to deliver a single proxy statement and annual report to an address shared by two or more ofour stockholders. This delivery method, referred to as “householding,” can result in significant cost savings for us.In order to take advantage of this opportunity, the Company and banks and brokerage firms that hold your shareshave delivered only one proxy statement and annual report to multiple stockholders who share an address unless oneor more of the stockholders has provided contrary instructions. The Company will deliver promptly, upon written ororal request, a separate copy of the proxy statement and annual report to a stockholder at a shared address to which asingle copy of the documents was delivered. A stockholder who wishes to receive a separate copy of the proxystatement and annual report, now or in the future, may obtain one, without charge, by addressing a request toInvestor Relations, Starwood Hotels & Resorts Worldwide, Inc., 1111 Westchester Avenue, White Plains, NY10604 or by calling (914) 640-8100. You may also obtain a copy of the proxy statement and annual report from theinvestor relations page on the Company’s web site (www.starwoodhotels.com/corporate/investor — rela-tions.html). Stockholders of record sharing an address who are receiving multiple copies of proxy materialsand annual reports and wish to receive a single copy of such materials in the future should submit their request bycontacting us in the same manner. If you are the beneficial owner, but not the record holder, of the Company’s sharesand wish to receive only one copy of the proxy statement and annual report in the future, you will need to contactyour broker, bank or other nominee to request that only a single copy of each document be mailed to all stockholdersat the shared address in the future.

47

STOCKHOLDER PROPOSALS FOR NEXT ANNUAL MEETING

If you want to make a proposal for consideration at next year’s Annual Meeting and have it included in theCompany’s proxy materials, the Company must receive your proposal by November 26, 2009, and the proposalmust comply with the rules of the SEC.

If you want to make a proposal or nominate a Director for consideration at next year’s Annual Meeting withouthaving the proposal included in the Company’s proxy materials, you must comply with the current advance noticeprovisions and other requirements set forth in the Company’s Bylaws, including that the Company must receiveyour proposal on or after January 26, 2010 and on or prior to February 20, 2010, with certain exceptions if the date ofthe Annual Meeting is advanced by more than 30 days or delayed by more than 60 days from the anniversary date ofthe 2009 Annual Meeting.

If the Company does not receive your proposal or nomination by the appropriate deadline, then it may not bebrought before the 2010 Annual Meeting.

The fact that the Company may not insist upon compliance with these requirements should not be construed asa waiver by the Company of its right to do so at any time in the future.

You should address your proposals or nominations to the Corporate Secretary, Starwood Hotels & ResortsWorldwide, Inc., 1111 Westchester Avenue, White Plains, New York 10604.

By Order of the Board of DirectorsSTARWOOD HOTELS & RESORTSWORLDWIDE, INC.

Kenneth S. SiegelCorporate Secretary

March 26, 2009

48

General Directions ToThe St. Regis Washington, D.C.

From 95 South (Richmond)

• Follow I 395 N, cross bridge into District of Columbia and stay in left lane.

• Follow route US-1 N toward downtown.

• Stay straight to go onto 14th Street.

• Turn left on I Street.

• Turn right on 16th Street — the hotel is located on the right.

From Dulles International Airport (IAD)

• Take Dulles Access Road to Route 66 East (14 miles).

• Take the Roosevelt Bridge and stay in right lane which will become Constitution Avenue.

• Turn left on 17th Street.

• Turn right on H Street.

• Turn left on 16th Street — the hotel is located on the right.

From Union Station

• Take Mass Avenue NW to 16th Street.

• Go around circle to take 16th Street.

• Stay on 16th Street for two blocks — the hotel is located on the left.

From National Reagan Airport (DCA)

• Take George Washington Parkway North to 395 N.

• Cross bridge and stay in left lane which will become 14th Street.

• Continue to I Street NW and turn left.

• Follow to 16th Street.

• Turn right on 16th Street — the hotel is located on the right.

From 95 North (Baltimore-New York)

• Take route 50 West (New York Avenue) to 9th Street NW and turn left.

• Go down two blocks and turn right on New York Avenue again.

• Go two blocks (past 10th Street), stay in right lane, which will become I Street.

• Follow to 16th Street and turn right — the hotel is located on the right.

49

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UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-K

¥ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended December 31, 2008

ORn TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period from to

Commission File Number: 1-7959

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.(Exact name of Registrant as specified in its charter)

Maryland(State or other jurisdiction

of incorporation or organization)

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

1111 Westchester AvenueWhite Plains, NY 10604

(Address of principal executiveoffices, including zip code)

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

including area code)

Securities Registered Pursuant to Section 12(b) of the Act:Title of Each Class Name of Each Exchange on Which Registered

Common Stock, par value $0.01 per share New York Stock ExchangeSecurities Registered Pursuant to Section 12(g) of the Act:

NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes ¥ No n

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

Note: Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the ExchangeAct from their obligations under those Sections.

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smallerreporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):Large accelerated filer ¥ Accelerated filer n Non-accelerated filer n

(Do not check if a smaller reporting company)Smaller reporting company n

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

As of June 30, 2008, the aggregate market value of the Registrant’s voting and non-voting common equity (for purposes of this AnnualReport only, includes all Shares other than those held by the Registrant’s Directors and executive officers) was $7,447,019,328.

As of February 20, 2009, the Corporation had outstanding 182,443,016 shares of common stock.For information concerning ownership of Shares, see the Proxy Statement for the Company’s Annual Meeting of Stockholders that is

currently scheduled for May 6, 2009 (the “Proxy Statement”), which is incorporated by reference under various Items of this Annual Report.

Document Incorporated by Reference:Document Where Incorporated

Proxy Statement Part III (Items 11, 12, 13 and 14)

TABLE OF CONTENTS

Page

PART IForward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

PART IIItem 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases

of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . 28Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . 42

Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . 44

Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

PART IIIItem 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . . . 50

Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

PART IVItem 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

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This Annual Report is filed by Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the“Corporation”). Unless the context otherwise requires, all references to the Corporation include those entitiesowned or controlled by the Corporation, including SLC Operating Limited Partnership, a Delaware limitedpartnership (the “Operating Partnership”), which prior to April 10, 2006 included Starwood Hotels & Resorts, aMaryland real estate investment trust (the “Trust”), which was sold in the Host Transaction (defined below); allreferences to the Trust include the Trust and those entities owned or controlled by the Trust, including SLT RealtyLimited Partnership, a Delaware limited partnership (the “Realty Partnership”); and all references to “we”, “us”,“our”, “Starwood”, or the “Company” refer to the Corporation, the Trust and its respective subsidiaries, collectivelythrough April 7, 2006. Until April 7, 2006, the shares of common stock, par value $0.01 per share, of theCorporation (“Corporation Shares”) and the Class B shares of beneficial interest, par value $0.01 per share, of theTrust (“Class B Shares”) were attached and traded together and were held or transferred only in units consisting ofone Corporation Share and one Class B Share (a “Share”). On April 7, 2006, in connection with a transaction (the“Host Transaction”) with Host Hotels & Resorts, Inc., its subsidiary Host Marriot L.P. and certain other subsidiariesof Host Hotels & Resorts, Inc. (collectively, “Host”), the Shares were depaired and the Corporation Shares becametransferable separately from the Class B Shares. As a result of the depairing, the Corporation Shares trade aloneunder the symbol “HOT” on the New York Stock Exchange (“NYSE”). As of April 10, 2006, neither Shares norClass B Shares are listed or traded on the NYSE.

PART I

Forward-Looking Statements

This Annual Report contains statements that constitute forward-looking statements within the meaning of thePrivate Securities Litigation Reform Act of 1995. Such statements appear in several places in this Annual Report,including, without limitation, the section of Item 1. Business, captioned “Business Strategy” and Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations. Such forward-lookingstatements may include statements regarding the intent, belief or current expectations of Starwood, its Directors orits officers with respect to the matters discussed in this Annual Report. All forward-looking statements involve risksand uncertainties that could cause actual results to differ materially from those projected in the forward-lookingstatements including, without limitation, the risks and uncertainties set forth below. Starwood undertakes noobligation to publicly update or revise any forward-looking statements to reflect current or future events orcircumstances.

Item 1. Business.

General

We are one of the world’s largest hotel and leisure companies. We conduct our hotel and leisure business bothdirectly and through our subsidiaries. Our brand names include the following:

St. Regis» (luxury full-service hotels, resorts and residences) are for connoisseurs who desire the finestexpressions of luxury. They provide flawless and bespoke service to high-end leisure and business travelers.St. Regis hotels are located in the ultimate locations within the world’s most desired destinations, importantemerging markets and yet to be discovered paradises, and they typically have individual design characteristics tocapture the distinctive personality of each location.

The Luxury Collection» (luxury full-service hotels and resorts) is a group of unique hotels and resortsoffering exceptional service to an elite clientele. From legendary palaces and remote retreats to timeless modernclassics, these remarkable hotels and resorts enable the most discerning traveler to collect a world of unique,authentic and enriching experiences indigenous to each destination that capture the sense of both luxury and place.They are distinguished by magnificent decor, spectacular settings and impeccable service.

W» (luxury and upscale full service hotels, retreats and residences) feature world class design, world classrestaurants and “on trend” bars and lounges and its signature Whatever\Whenever» service standard. It’s a sensorymultiplex that not only indulges the senses, it delivers an emotional experience. Whether it’s “behind the scenes”

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access at Whappenings, or our cutting edge music, lighting and scent programs, W hotels delivers an experienceunmatched in the hotel segment.

Westin» (luxury and upscale full-service hotels, resorts and residences) is a lifestyle brand competing in theupper upscale sector in nearly 30 countries around the globe. Each hotel offers renewing experiences that inspireguests to be at their best. First impressions at any Westin hotel are fueled by signature sensory experiences of light,music, white tea scent and botanicals. Westin revolutionized the industry with its famous Heavenly Bed» andHeavenly Bath» and launched a multi-million dollar retail program featuring these products. Westin is the firstglobal brand to offer in-room spa treatments at every hotel and the first to go smoke-free in North America. The newWestin Superfoods» menu is the latest way we bring renewal to guests, with foods considered best for providingdisease-fighting and health-enhancing benefits due to their high nutrient and antioxidant content.

Le Méridien» (luxury and upscale full-service hotels, resorts and residences) is a European-inspired brandwith a French accent. Each of its hotels, whether city, airport or resort has a distinctive character driven by itsindividuality and the Le Méridien brand values. With its underlying passion for food, art and style and its classic yetstylish design, Le Méridien offers a unique experience at some of the world’s top travel destinations.

Sheraton» (luxury and upscale full-service hotels, resorts and residences) is our largest brand serving theneeds of luxury and upscale business and leisure travelers worldwide. We offer the entire spectrum of comfort. Fromfull-service hotels in major cities to luxurious resorts by the water, Sheraton can be found in the most sought-aftercities and resort destinations around the world. Every guest at Sheraton hotels and resorts feels a warm andwelcoming connection, the feeling you have when you walk into a place and your favorite song is playing — a senseof comfort and belonging. Our most recent innovation, the Link@SheratonSM with Microsoft, encourages hotelguests to come out of their rooms to enjoy the energy and social opportunities of traveling. At Sheraton, we help ourguests connect to what matters most to them, the office, home and the best spots in town.

Four Points» (select-service hotels) delights the self-sufficient traveler with a new kind of comfort,approachable style and spirited, can-do service — all at the honest value our guests deserve. Our guests starttheir day feeling energized and finish up relaxed and free to enjoy little indulgences that make their time away fromhome special.

Aloft(SM) (select-service hotels), a brand introduced in 2005 with the first hotel opened in 2008, provides newheights, an oasis where you least expect it, a spirited neighborhood outpost, a haven at the side of the road. Bringinga cozy harmony of modern elements to the classic American on-the-road tradition, Aloft offers a sassy, refreshing,ultra effortless alternative for both the business and leisure traveler. Fresh, fun, and fulfilling, Aloft is an experienceto be discovered and rediscovered, destination after destination, as you ease on down the road.

Element(SM) (extended stay hotels), a brand introduced in 2006 with the first hotel opened in 2008, providesa modern, upscale and intuitively designed hotel experience that allows guests to live well and feel in control.Inspired by Westin, Element hotels promote balance through a thoughtful, upscale environment. Decidedly modernwith an emphasis on nature, Element is intuitively constructed with an efficient use of space that encourages gueststo stay connected, feel alive, and thrive while they are away. Primarily all Element hotels are LEED certified,depicting the importance of the environment in today’s world.

Through our brands, we are well represented in most major markets around the world. Our operations arereported in two business segments, hotels and vacation ownership and residential operations.

Our revenue and earnings are derived primarily from hotel operations, which include management and otherfees earned from hotels we manage pursuant to management contracts, the receipt of franchise and other fees andthe operation of our owned hotels.

Our hotel business emphasizes the global operation of hotels and resorts primarily in the luxury and upscalesegment of the lodging industry. We seek to acquire interests in, or management or franchise rights with respect toproperties in this segment. At December 31, 2008, our hotel portfolio included owned, leased, managed andfranchised hotels totaling 942 hotels with approximately 285,000 rooms in approximately 100 countries, and iscomprised of 69 hotels that we own or lease or in which we have a majority equity interest, 436 hotels managed by

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us on behalf of third-party owners (including entities in which we have a minority equity interest) and 437 hotels forwhich we receive franchise fees.

Our revenues and earnings are also derived from the development, ownership and operation of vacationownership resorts, marketing and selling vacation ownership interests (“VOIs”) in the resorts and providingfinancing to customers who purchase such interests. Generally these resorts are marketed under the brand namesdescribed above. Additionally, our revenues and earnings are derived from the development, marketing and sellingof residential units at mixed use hotel projects owned by us as well as fees earned from the marketing and selling ofresidential units at mixed use hotel projects developed by third-party owners of hotels operated under our brands. AtDecember 31, 2008, we had 26 owned vacation ownership resorts and residential properties, including sites held fordevelopment, in the United States, Mexico, and the Bahamas.

Due to the global economic crisis and its impact on the long-term growth outlook for the timeshare industry,during the fourth quarter of 2008 we evaluated all of our existing vacation ownership projects, as well as land heldfor future vacation ownership projects. We have thereby decided not to pursue or continue development of severalprojects, the most significant of which are two projects in Mexico and the Caribbean.

The Corporation was incorporated in 1980 under the laws of Maryland. Sheraton Hotels & Resorts and WestinHotels & Resorts, Starwood’s largest brands, have been serving guests for more than 60 years. Starwood VacationOwnership (and its predecessor, Vistana, Inc.) has been selling VOIs for more than 20 years.

Our principal executive offices are located at 1111 Westchester Avenue, White Plains, New York 10604, andour telephone number is (914) 640-8100.

For a discussion of our revenues, profits, assets and geographical segments, see the notes to financialstatements of this Annual Report. For additional information concerning our business, see Item 2 Properties, of thisAnnual Report.

Competitive Strengths

Management believes that the following factors contribute to our position as a leader in the lodging andvacation ownership industry and provide a foundation for our business strategy:

Brand Strength. We have assumed a leadership position in markets worldwide based on our superior globaldistribution, coupled with strong brands and brand recognition. Our upscale and luxury brands continue to capturemarket share from our competitors by aggressively cultivating new customers while maintaining loyalty among theworld’s most active travelers. The strength of our brands is evidenced, in part, by the superior ratings received fromour hotel guests and from industry publications.

Frequent Guest Program. Our loyalty program, Starwood Preferred Guest» (“SPG”), made headlines whenit launched in 1999 with a breakthrough policy of no blackout dates and no capacity controls, allowing members toredeem free nights anytime, anywhere. Since then, the program has grown to include more than 47 million membersand continues to be cited for its hassle-free award redemption, outstanding customer service, dedicated memberwebsite and innovative promotions and benefits for elite members. The program yields repeat guest business byuniting a world of distinctive hotels and rewarding customers with the rewards and recognition they want — frompoints that can be used for free hotel stays, indulgent experiences and airline miles with 33 participating airlines.

Significant Presence in Top Markets. Our luxury and upscale hotel and resort assets are well positionedthroughout the world. These assets are primarily located in major cities and resort areas that management believeshave historically demonstrated a strong breadth, depth and growing demand for luxury and upscale hotels andresorts, in which the supply of sites suitable for hotel development has been limited and in which development ofsuch sites is relatively expensive.

Premier and Distinctive Properties. We operate a distinguished and diversified group of hotel propertiesthroughout the world, including the St. Regis in New York, New York; The Phoenician in Scottsdale, Arizona; theHotel Gritti Palace in Venice, Italy; and the St. Regis in Beijing, China. These are among the leading hotels in theindustry and are at the forefront of providing the highest quality and service. Our properties are consistently

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recognized as the best of the best by readers of Condé Nast Traveler, who are among the world’s most sophisticatedand discerning group of travelers.

Scale. As one of the largest hotel and leisure companies focusing on the luxury and upscale full-servicelodging market, we have the scale to support our core marketing and reservation functions. We also believe that ourscale will contribute to lower our cost of operations through purchasing economies in areas such as insurance,energy, telecommunications, technology, employee benefits, food and beverage, furniture, fixtures and equipmentand operating supplies. We feel we are well-positioned for further significant growth based on the number of hotelsand rooms in our system. We currently have approximately half of the base of rooms compared to our majorcompetitors, and as a result, as we increase our room count, our economies of scale should provide a favorableimpact to our operations given our existing cost structure.

Diversification of Cash Flow and Assets. Management believes that the diversity of our brands, marketsegments served, revenue sources and geographic locations provide a broad base from which to enhance revenueand profits and to strengthen our global brands. This diversity limits our exposure to any particular lodging orvacation ownership asset, brand or geographic region.

While we focus on the luxury and upscale portion of the full-service lodging, vacation ownership andresidential markets, our brands cater to a diverse group of sub-markets within this market. For example, the St.Regis hotels cater to high-end hotel and resort clientele while Four Points by Sheraton hotels deliver extensiveamenities and services at more affordable rates. The Aloft brand will provide a youthful alternative to the“commodity lodging” of currently existing brands in the select-service market segment, and the Element brand willprovide modern, upscale hotels for extended stay travel.

We derive our cash flow from multiple sources within our hotel and vacation ownership and residentialsegments, including owned hotels’ operations, management and franchise fees and the sale of VOIs, residentialunits and residential branding fees. These operations are in geographically diverse locations around the world. Thefollowing tables reflect our hotel and vacation ownership and residential properties by type of revenue source andgeographical presence by major geographic area as of December 31, 2008:

Number ofProperties Rooms

Managed and unconsolidated joint venture hotels . . . . . . . . . . . . . . . . . . . . . . 436 149,900

Franchised hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 437 111,300

Owned hotels(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 23,600

Vacation ownership resorts and residential properties . . . . . . . . . . . . . . . . . . . 26 7,200

Total properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968 292,000

(a) Includes wholly owned, majority owned and leased hotels.

Number ofProperties Rooms

North America (and Caribbean) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 169,600

Europe, Africa and the Middle East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 62,000

Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 47,700

Latin America. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 12,700

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 968 292,000

Business Segment and Geographical Information

Incorporated by reference in Note 24. Business Segment and Geographical Information, in the consolidatedfinancial statements set forth in Part II, Item 8. Financial Statements and Supplementary Data.

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Business Strategy

We have implemented a strategy of reducing our investment in owned real estate and increasing our focus onthe management and franchise business. In furtherance of this strategy, since 2006, we have sold 56 hotels forapproximately $5 billion, including 33 properties to Host in 2006, for approximately $4.1 billion in stock, cash anddebt assumption. As a result, our primary business objective is to maximize earnings and cash flow by increasing thenumber of our hotel management contracts and franchise agreements; developing vacation ownership resorts andselling VOIs; and investing in real estate assets where there is a strategic rationale for doing so, which may includeselectively acquiring interests in additional assets and disposing of non-core hotels (including hotels where thereturn on invested capital is not adequate) and “trophy” assets that may be sold at significant premiums. We plan tomeet these objectives by leveraging our global assets, broad customer base and other resources and by takingadvantage of our scale to reduce costs. The implementation of our strategy and financial planning are impacted bythe uncertainty relating to geopolitical and economic environments around the world and their consequent impacton travel in their respective regions and the rest of the world.

Growth Opportunities. Management has identified several growth opportunities with a goal of enhancingour operating performance and profitability, including:

• Continuing to build our brands to appeal to upscale business travelers and other customers seeking full-service hotels in major markets by establishing emotional connections to our brands by offering signatureexperiences at our properties. We plan to accomplish this in the following ways: (i) by continuing ourtradition of innovation started with the Heavenly Bed» and Heavenly Bath», the Westin Heavenly Spa, theSuperfoods» menu, the Sheraton Sweet SleeperSM Bed, the Sheraton Service Promise SM and the Four Pointsby Sheraton Four Comfort Bed (SM), (ii) with such ideas as Westin being the first major brand to go “smoke-free” in North America, Aloft’s “see green” program created to introduce and promote ecologically friendlyprograms and services; our newest innovation, the Link@Sheraton(SM); and (iii) by placing Bliss» Spas,RemèdeSM Spas and their branded amenities, including the Sheraton Shine» by Bliss bath product line, andupscale restaurants in certain of our branded hotels;

• Expanding our branded hotels to further our strategy of strengthening brand identity;

• Continuing to expand our role as a third-party manager of hotels and resorts. This allows us to expand thepresence of our lodging brands and gain additional cash flow generally with modest capital commitment;

• Franchising certain of our brands to third-party operators, including the roll out of our new brands, Aloft andElement, and licensing certain of our brands to third parties in connection with luxury residential condo-miniums, thereby expanding our market presence, enhancing the exposure of our hotel brands and providingadditional income through franchise and license fees;

• Expanding our internet presence and sales capabilities to increase revenue and improve customer service;

• Continuing to grow our frequent guest program, thereby increasing occupancy rates while providing ourcustomers with benefits based upon loyalty to our hotels, vacation ownership resorts and branded residentialprojects;

• Enhancing our marketing efforts by integrating our proprietary customer databases, so as to sell additionalproducts and services to existing customers, improve occupancy rates and create additional marketingopportunities;

• Increasing operating efficiencies through increased use of technology;

• Optimizing use of our real estate assets to improve ancillary revenue, such as restaurant, beverage andparking revenue from our hotels and resorts;

• Establishing relationships with third parties to enable us to provide attractive restaurants, programs and otheramenities at our branded properties such as our partnering with Jean Georges Vongerichten and his world-class restaurant concepts, the opening of Adour with Alaine Ducasse at the St. Regis New York andestablishing the LM 100, a group of cultural innovators and artists who will offer their creativity and developoriginal and interactive programs for Le Méridien hotels; and

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• Leveraging the Bliss and Remède product lines and distribution channels, most recently unveiling ourSheraton Shine» by Bliss bath product line.

We intend to explore opportunities to expand and diversify our hotel portfolio through internal development,minority investments and selective acquisitions of properties domestically and internationally that meet some or allof the following criteria:

• Luxury and upscale hotels and resorts in major metropolitan areas and business centers;

• Hotels or brands which would enable us to provide a wider range of amenities and services to customers orprovide attractive geographic distribution;

• Major tourist hotels, destination resorts or conference centers that have favorable demographic trends andare located in markets with significant barriers to entry or with major room demand generators such as officeor retail complexes, airports, tourist attractions or universities;

• Undervalued hotels whose performance can be increased by re-branding to one of our hotel brands, theintroduction of better and more efficient management techniques and practices and/or the injection of capitalfor renovating, expanding or repositioning the property; and

• Portfolios of hotels or hotel companies that exhibit some or all of the criteria listed above, where thepurchase of several hotels in one transaction enables us to obtain favorable pricing or obtain attractive assetsthat would otherwise not be available or realize cost reductions on operating the hotels by incorporatingthem into the Starwood system.

We may also selectively choose to develop and construct desirable hotels and resorts to help us meet ourstrategic goals, such as the construction of a dual hotel campus in Lexington, Massachusetts featuring both an Alofthotel and an Element hotel.

Competition

The hotel industry is highly competitive. Competition is generally based on quality and consistency of room,restaurant and meeting facilities and services, attractiveness of locations, availability of a global distributionsystem, price, the ability to earn and redeem loyalty program points and other factors. Management believes that wecompete favorably in these areas. Our properties compete with other hotels and resorts in their geographic markets,including facilities owned by local interests and facilities owned by national and international chains. Our principalcompetitors include other hotel operating companies, national and international hotel brands, and ownershipcompanies (including hotel REITs).

We encounter strong competition as a hotel, residential, resort and vacation ownership operator and developer.While some of our competitors are private management firms, several are large national and international chainsthat own and operate their own hotels, as well as manage hotels for third-party owners and develop and sell VOIs,under a variety of brands that compete directly with our brands. Our vacation ownership and residential businessdepends on our ability to obtain land for development of our vacation ownership and residential products and toutilize land already owned by us but used in hotel operations. Changes in the general availability of suitable land orthe cost of acquiring or developing such land could adversely impact the profitability of our vacation ownership andresidential business.

Environmental Matters

We are subject to certain requirements and potential liabilities under various federal, state and localenvironmental laws, ordinances and regulations (“Environmental Laws”). For example, a current or previousowner or operator of real property may become liable for the costs of removal or remediation of hazardous or toxicsubstances on, under or in such property. Such laws often impose liability without regard to whether the owner oroperator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence ofhazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrowusing such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastesmay be liable for the costs of removal or remediation of such wastes at the treatment, storage or disposal facility,

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regardless of whether such facility is owned or operated by such person. We use certain substances and generatecertain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and we from time totime have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historicuses of certain of our current or former properties or our treatment, storage or disposal of wastes at facilities ownedby others. Other Environmental Laws require abatement or removal of certain asbestos-containing materials(“ACMs”) (limited quantities of which are present in various building materials such as spray-on insulation, floorcoverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event ofdamage or demolition, or certain renovations or remodeling. These laws also govern emissions of and exposure toasbestos fibers in the air. Environmental Laws also regulate polychlorinated biphenyls (“PCBs”), which may bepresent in electrical equipment. A number of our hotels have underground storage tanks (“USTs”) and equipmentcontaining chlorofluorocarbons (“CFCs”); the operation and subsequent removal or upgrading of certain USTs andthe use of equipment containing CFCs also are regulated by Environmental Laws. In connection with ourownership, operation and management of our properties, we could be held liable for costs of remedial or otheraction with respect to PCBs, USTs or CFCs.

Environmental Laws are not the only source of environmental liability. Under the common law, owners andoperators of real property may face liability for personal injury or property damage because of various environ-mental conditions such as alleged exposure to hazardous or toxic substances (including, but not limited to, ACMs,PCBs and CFCs), poor indoor air quality, radon or poor drinking water quality.

Although we have incurred and expect to incur remediation and various environmental-related costs during theordinary course of operations, management anticipates that such costs will not have a material adverse effect on ouroperations or financial condition.

Seasonality and Diversification

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

Comparability of Owned Hotel Results

We continually update and renovate our owned, leased and consolidated joint venture hotels. While under-going renovation, these hotels are generally not operating at full capacity and, as such, these renovations cannegatively impact our owned hotel revenues and operating income. Other events, such as the occurrence of naturaldisasters may cause a full or partial closure or sale of a hotel, and such events can negatively impact our revenuesand operating income. Finally as we pursue our strategy of reducing our investment in owned real estate assets, thesale of such assets can significantly reduce our revenues and operating income.

Regulation and Licensing of Gaming Facilities

We have a minority interest in the gaming operations of the Planet Hollywood Hotel & Casino, a SheratonResort in Las Vegas, Nevada and we and certain of our affiliates and officers have obtained from the NevadaGaming Authorities (herein defined) the various registrations, approvals, permits and licenses required to engage inthese gaming activities in Nevada. The casino gaming licenses are not transferable and must be renewedperiodically by the payment of various gaming license fees and taxes. The gaming authorities may deny anapplication for licensing for any cause which they deem reasonable and may find an officer or key employeeunsuitable for licensing or unsuitable to continue having a relationship with us in which case all relationships withsuch person would be required to be severed. In addition, the gaming authorities may require us to terminate theemployment of any person who refuses to file the appropriate applications or disclosures.

The ownership and/or operation of casino gaming facilities in the United States where permitted are subject tofederal, state and local regulations which under federal law, govern, among other things, the ownership, possession,manufacture, distribution and transportation in interstate commerce of gaming devices, and the recording andreporting of currency transactions, respectively. Our Nevada casino gaming operations are subject to the NevadaGaming Control Act and the regulations promulgated thereunder (the “Nevada Act”), and the licensing and

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regulatory control of the Nevada Gaming Commission (the “Nevada Commission”) and the Nevada State GamingControl Board (the “Nevada Board”), as well as certain county government agencies (collectively referred to as the“Nevada Gaming Authorities”).

If it were determined that applicable laws or regulations were violated, the gaming licenses, registrations andapprovals held by us and our affiliates and officers could be limited, conditioned, suspended or revoked and we andthe persons involved could be subject to substantial fines for each separate violation. Furthermore, a supervisorcould be appointed by the Nevada Commission to operate the gaming property and, under certain circumstances,earnings generated during the supervisor’s appointment (except for reasonable rental value of the affected gamingproperty) could be forfeited to the State of Nevada. Any suspension or revocation of the licenses, registrations orapprovals, or the appointment of a supervisor, would not have a material adverse effect on us given the limitednature and extent of the investment by us in casino gaming.

We are also required to submit certain financial and operating reports to the Nevada Commission. Further,certain loans, leases, sales of securities and similar financing transactions by us must be reported to or approved bythe Nevada Commission. We have a Nevada “shelf” approval for certain public offerings that expires in November2010.

The Nevada Gaming Authorities may investigate and require a finding of suitability of any holder of any classof our voting securities at any time. Nevada law requires any person who acquires more than 5 percent of any classof our voting securities to report the acquisition to the Nevada Commission and we also must report the acquisitionwithin ten days of becoming aware of this fact. Any person who becomes a beneficial owner of more than 10 percentof any class of our voting securities must apply for finding of suitability by the Nevada Commission within 30 daysafter the Nevada Board Chairman mails a written notice requiring such filing. The applicant must pay the costs andfees incurred by the Nevada Board in connection with the investigation.

Under certain circumstances, an “institutional investor,” as defined by the Nevada Act, that acquires more than10 percent but no more than 19 percent of our voting securities may apply to the Nevada Commission for a waiver ofsuch finding of shareholder suitability requirements if such institutional investor holds the voting securities forinvestment purposes only. An institutional investor will not be deemed to hold voting securities for investmentpurposes unless the voting securities were acquired and are held in the ordinary course of business as an institutionalinvestor and not for the purpose of causing, directly or indirectly, the election of a majority of the members of eitherour Board of Directors, any change in our corporate charter, bylaws, management, policies or operations or any ofour casino gaming operations, or any other action which the Nevada Commission finds to be inconsistent withholding our voting securities for investment purposes only. The Nevada Commission also may in its discretionrequire the holder of any debt security of a registered company to file an application, be investigated and be foundsuitable to own such debt security.

Any beneficial owner of our voting securities who fails or refuses to apply for a finding of suitability or alicense within 30 days after being ordered to do so by the Nevada Commission or by the Chairman of the NevadaBoard may be found unsuitable. Any person found unsuitable who holds, directly or indirectly, any beneficialownership of our debt or equity voting securities beyond such periods or periods of time as may be prescribed by theNevada Commission may be guilty of a gross misdemeanor. We could be subject to disciplinary action if, withoutprior approval of the Nevada Commission, and after receipt of notice that a person is unsuitable to be an equity ordebt security holder or to have any other relationship with us, we either (i) pay to the unsuitable person any dividend,interest or any distribution whatsoever; (ii) recognize any voting right by such unsuitable person in connection withsuch securities; (iii) pay the unsuitable person remuneration in any form; (iv) make any payment to the unsuitableperson by way of principal, redemption, conversion, exchange, liquidation or similar transaction; or, (v) fail topursue all lawful efforts to require such unsuitable person to relinquish his securities including, if necessary, theimmediate purchase of such securities for cash at fair market value.

Regulations of the Nevada Commission provide that control of a registered publicly traded corporation cannotbe changed through merger, consolidation, acquisition or assets, management or consulting agreements, or anyform of takeover without the prior approval of the Nevada Commission. Persons seeking approval to control aregistered publicly traded corporation must satisfy the Nevada Commission as to a variety of stringent standardsprior to assuming control of such corporation. The failure of a person to obtain such approval prior to assuming

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control over the registered publicly traded corporation may constitute grounds for finding such person unsuitable.Such regulations may impact the timing of consummating any such transaction.

Regulations of the Nevada Commission also prohibit certain repurchases of securities by registered publiclytraded corporations without the prior approval of the Nevada Commission. Transactions covered by theseregulations are generally aimed at discouraging repurchases of securities at a premium over market price fromcertain holders of more than 3 percent of the outstanding securities of the registered publicly traded corporation.The regulations of the Nevada Commission also require approval for a “plan of recapitalization.” Generally a plan ofrecapitalization is a plan proposed by the management of a registered publicly traded corporation that containsrecommended action in response to a proposed corporate acquisition opposed by management of the corporation ifsuch acquisition would require the prior approval of the Nevada Commission.

Any person who is licensed, required to be licensed, registered, required to be registered, or is under commoncontrol with such persons (collectively “Licensees”), and who proposes to become involved in a gaming operationoutside the State of Nevada is required to deposit with the Nevada Board, and thereafter maintain, a revolving fundin the amount of $10,000 to pay the expenses of investigation by the Nevada Board of the Licensees’ participation insuch foreign gaming. The revolving fund is subject to an increase or decrease in the discretion of the NevadaCommission. Once such revolving fund is established, the Licensees may engage in gaming activities outside theState of Nevada without seeking the approval of the Nevada Commission provided (i) such activities are lawful inthe jurisdiction where they are to be conducted; and (ii) the Licensees comply with certain reporting requirementsimposed by the Nevada Act. Licensees are subject to disciplinary action by the Nevada Commission if they(i) knowingly violate any laws of the foreign jurisdiction pertaining to the foreign gaming operation; (ii) fail toconduct the foreign gaming operation in accordance with the standards of honesty and integrity required of Nevadagaming operations; (iii) engage in activities that are harmful to the State of Nevada or its ability to collect gamingtaxes and fees; or, (iv) employ a person in the foreign operation who has been denied a license or finding ofsuitability in Nevada on the ground of personal unsuitability. We also manage gaming operations at the SheratonCairo Hotel, Towers & Casino in Gaza, Egypt.

Employees

At December 31, 2008, approximately 145,000 people were employed at our corporate offices, owned andmanaged hotels and vacation ownership resorts, of whom approximately 36% were employed in the United States.At December 31, 2008, approximately 37% of the U.S.-based employees were covered by various collectivebargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employmentand orderly settlement of labor disputes. Generally, labor relations have been maintained in a normal andsatisfactory manner, and management believes that our employee relations are satisfactory.

Where You Can Find More Information

We file annual, quarterly and special reports, proxy statements and other information with the Securities &Exchange Commission (“SEC”). Our SEC filings are available to the public over the Internet at the SEC’s web siteat http://www.sec.gov. Our SEC filings are also available on our website at http://www.starwoodhotels.com/corporate/investor relations.html as soon as reasonably practicable after they are filed with or furnished to the SEC.You may also read and copy any document we file with the SEC at its public reference rooms in Washington, D.C.Please call the SEC at (800) SEC-0330 for further information on the public reference rooms. Our filings with theSEC are also available at the New York Stock Exchange. For more information on obtaining copies of our publicfilings at the New York Stock Exchange, you should call (212) 656-5060. You may also obtain a copy of our filingsfree of charge by calling Investor Relations at (914) 640-8165.

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Item 1A. Risk Factors.

Risks Relating to Hotel, Resort, Vacation Ownership and Residential Operations

We Are Subject to All the Operating Risks Common to the Hotel and Vacation Ownership and ResidentialIndustries. Operating risks common to the hotel and vacation ownership and residential industries include:

• changes in general economic conditions, including the severity and duration of the current downturn in theUS and global economies;

• impact of war and terrorist activity (including threatened terrorist activity) and heightened travel securitymeasures instituted in response thereto;

• domestic and international political and geopolitical conditions;

• travelers’ fears of exposures to contagious diseases;

• decreases in the demand for transient rooms and related lodging services, including a reduction in businesstravel as a result of general economic conditions;

• decreases in demand or increases in supply for vacation ownership interests;

• the impact of internet intermediaries on pricing and our increasing reliance on technology;

• cyclical over-building in the hotel and vacation ownership industries;

• restrictive changes in zoning and similar land use laws and regulations or in health, safety and environmentallaws, rules and regulations and other governmental and regulatory action;

• changes in travel patterns;

• changes in operating costs including, but not limited to, energy, labor costs (including the impact ofunionization), food costs, workers’ compensation and health-care related costs, insurance and unanticipatedcosts such as acts of nature and their consequences;

• the costs and administrative burdens associated with compliance with applicable laws and regulations,including, among others, franchising, timeshare, privacy, licensing labor and employment, and regulationsunder the Office of Foreign Control and the Foreign Corrupt Practices Act.

• disputes with owners of properties, including condominium hotels, franchisees and homeowner associationswhich may result in litigation;

• the availability and cost of capital to allow us and potential hotel owners and franchisees to fundconstruction, renovations and investments;

• foreign exchange fluctuations;

• the financial condition of third-party property owners, project developers and franchisees, which may impactour ability to recover indemnity payments that may be owed to us and their ability to fund amounts requiredunder development, management and franchise agreements and in most cases our recourse is limited to theequity value said party has in the property; and

• the financial condition of the airline industry and the impact on air travel.

We are also impacted by our relationships with owners and franchisees. Our hotel management contracts aretypically long-term arrangements, but most allow the hotel owner to replace us in certain circumstances, such as thebankruptcy of the hotel owner or franchisee, the failure to meet certain financial or performance criteria and incertain cases, upon a sale of the property. Our ability to meet these financial and performance criteria is subject to,among other things, the risks described in this section. Additionally, our operating results would be adverselyaffected if we could not maintain existing management, franchise or representation agreements or obtain newagreements on as favorable terms as the existing agreements.

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We utilize our brands in connection with the residential portions of certain properties that we develop andlicense our brands to third parties to use in a similar manner for a fee. Residential properties using our brands couldbecome less attractive due to changes in mortgage rates and the availability of mortgage financing generally, marketabsorption or oversupply in a particular market. As a result, we and our third party licensees may not be able to sellthese residences for a profit or at the prices that we or they have anticipated.

The Current Slowdown in the Lodging Industry and the Global Economy Generally Will Continue to ImpactOur Financial Results and Growth. The present economic slowdown and the uncertainty over its breadth, depthand duration has had a negative impact on the hotel and vacation ownership and residential industries. Manyeconomists have reported that the U.S. and many European countries are in a recession. Substantial increases in airand ground travel costs and decreases in airline capacity have reduced demand for our hotel rooms and interval andfractional timeshare products. Accordingly, our financial results have been impacted by the economic slowdownand both our future financial results and growth could be further harmed if the economic slowdown continues for asignificant period or becomes worse. In addition, as a result of the impact on the lodging industry, we may berequired to pay out on certain performance and other guarantees that are contained in our third party contracts.

Moreover, businesses participating in the Troubled Asset Relief Program (TARP) face restrictions on theability to travel and hold conferences or events at resorts and luxury hotels. The negative publicity associated withsuch companies holding large events has also resulted in cancelations and reduced bookings. New or revisedregulations on businesses participating in the TARP and the negative publicity associated with conferences andevents could continue to impact our financial results.

We Must Compete for Customers. The hotel, vacation ownership and residential industries are highlycompetitive. Our properties compete for customers with other hotel and resort properties, and, with respect to ourvacation ownership resorts and residential projects, with owners reselling their VOIs, including fractional own-ership, or apartments. Some of our competitors may have substantially greater marketing and financial resourcesthan we do, and they may improve their facilities, reduce their prices or expand or improve their marketingprograms in ways that adversely affect our operating results.

We Must Compete for Management and Franchise Agreements. Our present growth strategy for devel-opment of additional lodging facilities entails entering into and maintaining various arrangements with propertyowners. We compete with other hotel companies for management and franchise agreements. The terms of ourmanagement agreements, franchise agreements, and leases for each of our lodging facilities are influenced bycontract terms offered by our competitors, among other things. We cannot assure you that any of our currentarrangements will continue or that we will be able to enter into future collaborations, renew agreements, or enterinto new agreements in the future on terms that are as favorable to us as those that exist today. In connection withentering into management or franchise agreements, we may be required to make investments in or guarantee theobligations of third parties or guarantee minimum income to third parties.

Any Failure to Protect Our Trademarks Could Have a Negative Impact on the Value of Our Brand Namesand Adversely Affect Our Business. We believe our trademarks are an important component of our business. Werely on trademark laws to protect our proprietary rights. The success of our business depends in part upon ourcontinued ability to use our trademarks to increase brand awareness and further develop our brand in both domesticand international markets. Monitoring the unauthorized use of our intellectual property is difficult. Litigation hasbeen and may continue to be necessary to enforce our intellectual property rights or to determine the validity andscope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion ofresources, may result in counterclaims or other claims against us and could significantly harm our results ofoperations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent asdo the laws of the United States. From time to time, we apply to have certain trademarks registered. There is noguarantee that such trademark registrations will be granted. We cannot assure you that all of the steps we have takento protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of ourtrademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand andits market acceptance, competitive advantages or goodwill, which could adversely affect our business.

Significant Owners of Our Properties May Concentrate Risks. Generally there has not been a concentrationof ownership of hotels operated under our brands by any single owner. Following the acquisition of the Le Méridien

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brand business and the Host Transaction, single ownership groups own significant numbers of hotels operated by us.While the risks associated with such ownership are no different than exist generally (i.e., the financial position of theowner, the overall state of the relationship with the owner and their participation in optional programs and theimpact on cost efficiencies if they choose not to participate), they are more concentrated.

The Hotel Industry Is Seasonal in Nature. The hotel industry is seasonal in nature; however, the periodsduring which we experience higher revenue vary from property to property and depend principally upon location.Our revenue historically has been lower in the first quarter than in the second, third or fourth quarters.

Third Party Internet Reservation Channels May Negatively Impact Our Bookings. Some of our hotelrooms are booked through third party internet travel intermediaries such as Travelocity.com», Expedia.com» andPriceline.com». As the percentage of internet bookings increases, these intermediaries may be able to obtain highercommissions, reduced room rates or other significant contract concessions from us. Moreover, some of theseinternet travel intermediaries are attempting to commoditize hotel rooms by increasing the importance of price andgeneral indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. Theseagencies hope that consumers will eventually develop brand loyalties to their reservations system rather than to ourlodging brands. Although we expect to derive most of our business from traditional channels and our websites, if theamount of sales made through internet intermediaries increases significantly, our business and profitability may besignificantly harmed.

We Place Significant Reliance on Technology. The hospitality industry continues to demand the use ofsophisticated technology and systems including technology utilized for property management, brand assurance andcompliance, procurement, reservation systems, operation of our customer loyalty program, distribution and guestamenities. These technologies can be expected to require refinements, including to comply with legal requirementssuch as privacy regulations and requirements established by third parties such as the payment card industry, andthere is the risk that advanced new technologies will be introduced. Further, the development and maintenance ofthese technologies may require significant capital. There can be no assurance that as various systems andtechnologies become outdated or new technology is required we will be able to replace or introduce them asquickly as our competition or within budgeted costs and timeframes for such technology. Further, there can be noassurance that we will achieve the benefits that may have been anticipated from any new technology or system.

Our Businesses Are Capital Intensive. For our owned, managed and franchised properties to remainattractive and competitive, the property owners and we have to spend money periodically to keep the properties wellmaintained, modernized and refurbished. This creates an ongoing need for cash and, to the extent the propertyowners and we cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwiseobtained. In addition, to maintain our vacation ownership business and residential projects, we need to spend moneyto develop new units. Events over the past few months, including the failures and near failures of financial servicescompanies and the decrease in liquidity and available capital have negatively impacted the capital markets for hoteland real estate investments. Accordingly, our financial results have been impacted by the cost and availability offunds and the carrying cost of VOI and residential inventory.

Real Estate Investments Are Subject to Numerous Risks. We are subject to the risks that generally relate toinvestments in real property because we own and lease hotels and resorts. The investment returns available fromequity investments in real estate depend in large part on the amount of income earned and capital appreciationgenerated by the related properties, and the expenses incurred. In addition, a variety of other factors affect incomefrom properties and real estate values, including governmental regulations, insurance, zoning, tax and eminentdomain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning ortax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovatehotels. When interest rates increase, the cost of acquiring, developing, expanding or renovating real propertyincreases and real property values may decrease as the number of potential buyers decreases. Similarly, as financingbecomes less available, it becomes more difficult both to acquire and to sell real property. Finally, under eminentdomain laws, governments can take real property. Sometimes this taking is for less compensation than the ownerbelieves the property is worth. Any of these factors could have a material adverse impact on our results of operationsor financial condition. In addition, equity real estate investments are difficult to sell quickly and we may not be ableto adjust our portfolio of owned properties quickly in response to economic or other conditions. If our properties do

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not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, ourincome will be adversely affected.

Hotel and Resort Development Is Subject to Timing, Budgeting and Other Risks. We intend to develophotel and resort properties, including VOIs and residential components of hotel properties, as suitable opportunitiesarise, taking into consideration the general economic climate. In addition, the owners and developers of new-buildproperties that we have entered into management or franchise agreements with are subject to these same risks whichmay impact the amount and timing of fees we had expected to collect from those properties. New projectdevelopment has a number of risks, including risks associated with:

• construction delays or cost overruns that may increase project costs;

• receipt of zoning, occupancy and other required governmental permits and authorizations;

• development costs incurred for projects that are not pursued to completion;

• so-called acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

• defects in design or construction that may result in additional costs to remedy or require all or a portion of aproperty to be closed during the period required to rectify the situation;

• ability to raise capital; and

• governmental restrictions on the nature or size of a project or timing of completion.

We cannot assure you that any development project, including sites held for development of vacationownership resorts, will in fact be developed, and if developed, the time period or the budget of such developmentmay be greater than initially contemplated and the actual number of units or rooms constructed may be less thaninitially contemplated.

Environmental Regulations. Environmental laws, ordinances and regulations of various federal, state, localand foreign governments regulate our properties and could make us liable for the costs of removing or cleaning uphazardous or toxic substances on, under, or in property we currently own or operate or that we previously owned oroperated. These laws could impose liability without regard to whether we knew of, or were responsible for, thepresence of hazardous or toxic substances. The presence of hazardous or toxic substances, or the failure to properlyclean up such substances when present, could jeopardize our ability to develop, use, sell or rent the real property orto borrow using the real property as collateral. If we arrange for the disposal or treatment of hazardous or toxicwastes, we could be liable for the costs of removing or cleaning up wastes at the disposal or treatment facility, evenif we never owned or operated that facility. Other laws, ordinances and regulations could require us to manage, abateor remove lead or asbestos containing materials. Similarly, the operation and closure of storage tanks are oftenregulated by federal, state, local and foreign laws. Certain laws, ordinances and regulations, particularly thosegoverning the management or preservation of wetlands, coastal zones and threatened or endangered species, couldlimit our ability to develop, use, sell or rent our real property.

In addition, existing environmental laws and regulations may be revised or new laws and regulations related toglobal climate change, air quality, or other environmental and health concerns may be adopted or become applicableto the Company. For example, legislative proposals that would impose mandatory requirements on greenhouse gasemissions continue to be considered in Congress. Some states are also considering or have undertaken actions toregulate and reduce greenhouse gas emissions. New or revised laws and regulations or new interpretations ofexisting laws and regulations, such as those related to climate change, could affect the operation of our hotels and/orresult in significant additional expense and operating restrictions on us. The cost impact of such legislation,regulation, or new interpretations would depend upon the specific requirements enacted and cannot be determinedat this time.

International Operations Are Subject to Special Political and Monetary Risks. We have significantinternational operations which as of December 31, 2008 included 254 owned, managed or franchised propertiesin Europe, Africa and the Middle East (including 17 properties with majority ownership); 59 owned, managed orfranchised properties in Latin America (including 10 properties with majority ownership); and 143 owned,managed or franchised properties in the Asia Pacific region (including 4 properties with majority ownership).

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International operations generally are subject to various political, geopolitical, and other risks that are not present inU.S. operations. These risks include the risk of war, terrorism, civil unrest, expropriation and nationalization as wellas the impact in cases in which there are inconsistencies between U.S. law and the laws of an internationaljurisdiction. In addition, some international jurisdictions restrict the repatriation of non-U.S. earnings. Various otherinternational jurisdictions have laws limiting the ability of non-U.S. entities to pay dividends and remit earnings toaffiliated companies unless specified conditions have been met. In addition, sales in international jurisdictionstypically are made in local currencies, which subject us to risks associated with currency fluctuations. Currencydevaluations and unfavorable changes in international monetary and tax policies could have a material adverseeffect on our profitability and financing plans, as could other changes in the international regulatory climate andinternational economic conditions. Other than Italy, where our risks are heightened due to the 6 properties weowned as of December 31, 2008, our international properties are geographically diversified and are not concentratedin any particular region.

Risks Relating to Operations in Syria

During fiscal 2008, Starwood subsidiaries generated approximately $4 million of revenue from managementand other fees from hotels located in Syria, a country that the United States has identified as a state sponsor ofterrorism. This amount constitutes significantly less than 1% of our worldwide annual revenues. The United Statesdoes not prohibit U.S. investments in, or the exportation of services to, Syria, and our activities in that country are infull compliance with U.S. and local law. However, the United States has imposed limited sanctions as a result ofSyria’s support for terrorist groups and its interference with Lebanon’s sovereignty, including a prohibition on theexportation of U.S.-origin goods to Syria and the operation of government-owned Syrian air carriers in the UnitedStates except in limited circumstances. The United States may impose further sanctions against Syria at any time forforeign policy reasons. If so, our activities in Syria may be adversely affected, depending on the nature of anyfurther sanctions that might be imposed. In addition, our activities in Syria may reduce demand for our stock amongcertain investors.

Debt Financing

As a result of our debt obligations, we are subject to: (i) the risk that cash flow from operations will beinsufficient to meet required payments of principal and interest, (ii) restrictive covenants, including covenantsrelating to certain financial ratios and (iii) interest rate risk. Although we anticipate that we will be able to repay orrefinance our existing indebtedness and any other indebtedness when it matures, there can be no assurance that wewill be able to do so or that the terms of such refinancings will be favorable. Our leverage may have importantconsequences including the following: (i) our ability to obtain additional financing for acquisitions, workingcapital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be availableon terms favorable to us and (ii) a substantial decrease in operating cash flow, EBITDA (as defined in our creditagreements) or a substantial increase in our expenses could make it difficult for us to meet our debt servicerequirements and restrictive covenants and force us to sell assets and/or modify our operations.

In order to fund new hotel investments, as well as refurbish and improve existing hotels, both we and currentand potential hotel owners must have access to capital. The availability of funds for new investments andmaintenance of existing hotels depends in large measure on capital markets and liquidity factors over whichwe have little control. Recent events have made the capital markets increasingly volatile. As a result, many currentand prospective hotel owners are finding hotel financing to be increasingly expensive and difficult to obtain. Delays,increased costs and other impediments to restructuring such projects may affect our ability to realize fees, recoverloans and guarantee advances, or realize equity investments from such projects. Our ability to recover loans andguarantee advances from hotel operations or from owners through the proceeds of hotel sales, refinancing of debt orotherwise may also affect our ability to raise new capital. In addition, downgrades of our public debt ratings byrating agencies could increase our cost of capital. A breach of a covenant could result in an event of default, that, ifnot cured or waived, could result in an acceleration of all or a substantial portion of our debt. For a more detaileddescription of the covenants imposed by our credit agreements, see Item 7, Management’s Discussion and Analysisof Financial Condition and Results of Operations — Liquidity and Capital Resources — Cash Used for FinancingActivities in this Annual Report.

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Volatility in the Credit Markets Will Continue to Adversely Impact Our Ability to Sell the Loans That OurVacation Ownership Business Generates. Our vacation ownership business provides financing to purchasers ofour vacation ownership and fractional units, and we attempt to sell interests in those loans in the securities markets.Increased volatility in the credit markets will likely continue to impact the timing and volume of the timeshare loansthat we are able to sell. Market conditions over the past year and further volatility and deterioration during the lastfew months may delay or even prevent 2009 sales until the markets stabilize, or prevent us from selling our vacationownership notes entirely. Although we expect to realize the economic value of our vacation ownership noteportfolio even if future note sales are temporarily or indefinitely delayed, such delays could reduce or postponefuture gains and could result in either increased borrowings to provide capital to replace anticipated proceeds fromsuch sales or reduced spending in order to maintain our leverage and return targets.

Risks Relating to So-Called Acts of God, Terrorist Activity and War

Our financial and operating performance may be adversely affected by so-called acts of God, such as naturaldisasters, in locations where we own and/or operate significant properties and areas of the world from which wedraw a large number of customers. Similarly, wars (including the potential for war), terrorist activity (includingthreats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty have causedin the past, and may cause in the future, our results to differ materially from anticipated results.

Some Potential Losses are Not Covered by Insurance

We carry insurance coverage for general liability, property, business interruption and other risks with respect toour owned and leased properties and we make available insurance programs for owners of properties we manage.These policies offer coverage terms and conditions that we believe are usual and customary for our industry.Generally, our “all-risk” property policies provide that coverage is available on a per occurrence basis and that, foreach occurrence, there is a limit as well as various sub-limits on the amount of insurance proceeds we will receive inexcess of applicable deductibles. In addition, there may be overall limits under the policies. Sub-limits exist forcertain types of claims such as service interruption, debris removal, expediting costs or landscaping replacement,and the dollar amounts of these sub-limits are significantly lower than the dollar amounts of the overall coveragelimit. Our property policies also provide that for the coverage of critical earthquake (California and Mexico),hurricane and flood, all of the claims from each of our properties resulting from a particular insurable event must becombined together for purposes of evaluating whether the annual aggregate limits and sub-limits contained in ourpolicies have been exceeded and any such claims will also be combined with the claims of owners of managedhotels that participate in our insurance program for the same purpose. Therefore, if insurable events occur that affectmore than one of our owned hotels and/or managed hotels owned by third parties that participate in our insuranceprogram, the claims from each affected hotel will be added together to determine whether the per occurrence limit,annual aggregate limit or sub-limits, depending on the type of claim, have been reached and if the limits orsub-limits are exceeded each affected hotel will only receive a proportional share of the amount of insuranceproceeds provided for under the policy. In addition, under those circumstances, claims by third party owners willreduce the coverage available for our owned and leased properties.

In addition, there are also other risks including but not limited to war, certain forms of terrorism such asnuclear, biological or chemical terrorism, political risks, some environmental hazards and/or acts of God that maybe deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or may be tooexpensive to justify insuring against.

We may also encounter challenges with an insurance provider regarding whether it will pay a particular claimthat we believe to be covered under our policy. Should an uninsured loss or a loss in excess of insured limits occur,we could lose all or a portion of the capital we have invested in a hotel or resort, as well as the anticipated futurerevenue from the hotel or resort. In that event, we might nevertheless remain obligated for any mortgage debt orother financial obligations related to the property.

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Acquisitions/Dispositions and New Brands

We will consider corporate as well as property acquisitions and investments that complement our business. Inmany cases, we will be competing for these opportunities with third parties who may have substantially greaterfinancial resources or different or lower acceptable financial metrics than we do. There can be no assurance that wewill be able to identify acquisition or investment candidates or complete transactions on commercially reasonableterms or at all. If transactions are consummated, there can be no assurance that any anticipated benefits will actuallybe realized. Similarly, there can be no assurance that we will be able to obtain additional financing for acquisitionsor investments, or that the ability to obtain such financing will not be restricted by the terms of our debt agreements.

We periodically review our business to identify properties or other assets that we believe either are non-core,no longer complement our business, are in markets which may not benefit us as much as other markets during aneconomic recovery or could be sold at significant premiums. We are focused on restructuring and enhancing realestate returns and monetizing investments and from time to time, may attempt to sell these identified properties andassets. There can be no assurance, however, that we will be able to complete dispositions on commerciallyreasonable terms or at all or that any anticipated benefits will actually be received.

We have developed and launched two new hotel brands, Aloft and Element, and may develop and launchadditional brands in the future. There can be no assurance regarding the level of acceptance of these brands in thedevelopment and consumer marketplaces, that the cost incurred in developing the brands will be recovered or thatthe anticipated benefits from these new brands will be realized.

Investing Through Partnerships or Joint Ventures Decreases Our Ability to Manage Risk

In addition to acquiring or developing hotels and resorts or acquiring companies that complement our businessdirectly, we have from time to time invested, and expect to continue to invest, as a co-venturer. Joint venturers oftenhave shared control over the operation of the joint venture assets. Therefore, joint venture investments may involverisks such as the possibility that the co-venturer in an investment might become bankrupt or not have the financialresources to meet its obligations, or have economic or business interests or goals that are inconsistent with ourbusiness interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to ourpolicies or objectives. Consequently, actions by a co-venturer might subject hotels and resorts owned by the jointventure to additional risk. Further, we may be unable to take action without the approval of our joint venturepartners. Alternatively, our joint venture partners could take actions binding on the joint venture without ourconsent. Additionally, should a joint venture partner become bankrupt, we could become liable for our partner’sshare of joint venture liabilities.

Our Vacation Ownership Business is Subject to Extensive Regulation and Risk of Default

We market and sell VOIs, which typically entitle the buyer to ownership of a fully-furnished resort unit for aone-week period (or in the case of fractional ownership interests, generally for three or more weeks) on either anannual or an alternate-year basis. We also acquire, develop and operate vacation ownership resorts, and providefinancing to purchasers of VOIs. These activities are all subject to extensive regulation by the federal governmentand the states in which vacation ownership resorts are located and in which VOIs are marketed and sold includingregulation of our telemarketing activities under state and federal “Do Not Call” laws. In addition, the laws of moststates in which we sell VOIs grant the purchaser the right to rescind the purchase contract at any time within astatutory rescission period. Although we believe that we are in material compliance with all applicable federal,state, local and foreign laws and regulations to which vacation ownership marketing, sales and operations arecurrently subject, changes in these requirements or a determination by a regulatory authority that we were not incompliance, could adversely affect us. In particular, increased regulations of telemarketing activities couldadversely impact the marketing of our VOIs.

We bear the risk of defaults under purchaser mortgages on VOIs. If a VOI purchaser defaults on the mortgageduring the early part of the loan amortization period, we will not have recovered the marketing, selling (other thancommissions in certain events), and general and administrative costs associated with such VOI, and such costs willbe incurred again in connection with the resale of the repossessed VOI. Accordingly, there is no assurance that the

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sales price will be fully or partially recovered from a defaulting purchaser or, in the event of such defaults, that ourallowance for losses will be adequate.

Privacy Initiatives

We collect information relating to our guests for various business purposes, including marketing andpromotional purposes. The collection and use of personal data are governed by privacy laws and regulationsenacted in the United States and other jurisdictions around the world. Privacy regulations continue to evolve and onoccasion may be inconsistent from one jurisdiction to another. Compliance with applicable privacy regulations mayincrease our operating costs and/or adversely impact our ability to market our products, properties and services toour guests. In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third parties engaged by us) or a breach of security on systems storing our data may result in fines,payment of damages or restrictions on our use or transfer of data.

Ability to Manage Growth

Our future success and our ability to manage future growth depend in large part upon the efforts of our seniormanagement and our ability to attract and retain key officers and other highly qualified personnel. Competition forsuch personnel is intense. Since January 2004, we have experienced significant changes in our senior management,including executive officers (See Item 10. “Directors, Executive Officers and Corporate Governance” of thisAnnual Report). There can be no assurance that we will continue to be successful in attracting and retainingqualified personnel. Accordingly, there can be no assurance that our senior management will be able to successfullyexecute and implement our growth and operating strategies.

Over the last few years we have been pursuing a strategy of reducing our investment in owned real estate andincreasing our focus on the management and franchise business. As a result, we are planning on substantiallyincreasing the number of hotels we open every year and increasing the overall number of hotels in our system. Thisincrease will require us to recruit and train a substantial number of new associates to work at these hotels as well asincreasing our capabilities to enable hotels to open on time and successfully. There can be no assurance that ourstrategy will be successful.

Tax Risks

Failure of the Trust to Qualify as a REIT Would Increase Our Tax Liability. Qualifying as a real estateinvestment trust (a “REIT”) requires compliance with highly technical and complex tax provisions that courts andadministrative agencies have interpreted only to a limited degree. Due to the complexities of our ownership,structure and operations, the Trust is more likely than are other REITs to face interpretative issues for which thereare no clear answers. We believe that for the taxable years ended December 31, 1995 through April 10, 2006, thedate which Host acquired the Trust, the Trust qualified as a REIT under the Internal Revenue Code of 1986, asamended. If the Trust failed to qualify as a REIT for any prior tax year, we would be liable to pay a significantamount of taxes for those years. Subsequent to the Host Transaction, the Trust is no longer owned by us and we arenot subject to this risk for actions following the transaction.

Evolving Government Regulation Could Impose Taxes or Other Burdens on Our Business. We rely upongenerally available interpretations of tax laws and other types of laws and regulations in the countries and locales inwhich we operate. We cannot be sure that these interpretations are accurate or that the responsible taxing or othergovernmental authority is in agreement with our views. The imposition of additional taxes or causing us to changethe way we conduct our business could cause us to have to pay taxes that we currently do not collect or pay orincrease the costs of our services or increase our costs of operations.

Our current business practice with our internet reservation channels is that the intermediary collects hoteloccupancy tax from its customer based on the price that the intermediary paid us for the hotel room. We then remitthese taxes to the various tax authorities. Several jurisdictions have stated that they may take the position that the taxis also applicable to the intermediaries’ gross profit on these hotel transactions. If jurisdictions take this position,they should seek the additional tax payments from the intermediary; however, it is possible that they may seek tocollect the additional tax payment from us and we would not be able to collect these taxes from the customers. To the

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extent that any tax authority succeeds in asserting that the hotel occupancy tax applies to the gross profit on thesetransactions, we believe that any additional tax would be the responsibility of the intermediary. However, it ispossible that we might have additional tax exposure. In such event, such actions could have a material adverse effecton our business, results of operations and financial condition.

Risks Relating to Ownership of Our Shares

Our Board of Directors May Issue Preferred Stock and Establish the Preferences and Rights of SuchPreferred Stock. Our charter provides that the total number of shares of stock of all classes which the Corporationhas authority to issue is 1,200,000,000, consisting of one billion shares of common stock and 200 million shares ofpreferred stock. Our Board of Directors has the authority, without a vote of shareholders, to establish the preferencesand rights of any preferred or other class or series of shares to be issued and to issue such shares. The issuance ofpreferred shares or other shares having special preferences or rights could delay or prevent a change in control evenif a change in control would be in the interests of our shareholders. Since our Board of Directors has the power toestablish the preferences and rights of additional classes or series of shares without a shareholder vote, our Board ofDirectors may give the holders of any class or series preferences, powers and rights, including voting rights, seniorto the rights of holders of our shares.

Our Board of Directors May Implement Anti-Takeover Devices and our Charter and Bylaws ContainProvisions which May Prevent Takeovers. Certain provisions of Maryland law permit our Board of Directors,without stockholder approval, to implement possible takeover defenses that are not currently in place, such as aclassified board. In addition, our charter contains provisions relating to restrictions on transferability of theCorporation Shares, which provisions may be amended only by the affirmative vote of our shareholders holdingtwo-thirds of the votes entitled to be cast on the matter. As permitted under the Maryland General Corporation Law,our Bylaws provide that directors have the exclusive right to amend our Bylaws.

Our Shareholder Rights Plan Would Cause Substantial Dilution to Any Shareholder That Attempts toAcquire Us on Terms Not Approved by Our Board of Directors. We adopted a shareholder rights plan whichprovides, among other things, that when specified events occur, our shareholders will be entitled to purchase fromus a newly created series of junior preferred stock. The preferred stock purchase rights are triggered by the earlier tooccur of (i) ten days after the date of a public announcement that a person or group acting in concert has acquired, orobtained the right to acquire, beneficial ownership of 15% or more of our outstanding Corporation Shares or (ii) tenbusiness days after the commencement of or announcement of an intention to make a tender offer or exchange offer,the consummation of which would result in the acquiring person becoming the beneficial owner of 15% or more ofour outstanding Corporation Shares. The preferred stock purchase rights would cause substantial dilution to aperson or group that attempts to acquire us on terms not approved by our Board of Directors.

Item 2. Properties.

We are one of the largest hotel and leisure companies in the world, with operations in approximately 100countries. We consider our hotels and resorts, including vacation ownership resorts (together “Resorts”), generallyto be premier establishments with respect to desirability of location, size, facilities, physical condition, quality andvariety of services offered in the markets in which they are located. Although obsolescence arising from age,condition of facilities, and style can adversely affect our Resorts, Starwood and third-party owners of managed andfranchised Resorts expend substantial funds to renovate and maintain their facilities in order to remain competitive.For further information see Item 7. Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Liquidity and Capital Resources in this Annual Report.

Our hotel business included 942 owned, managed or franchised hotels with approximately 285,000 rooms andour owned vacation ownership and residential business included 26 vacation ownership resorts and residentialproperties at December 31, 2008, predominantly under seven brands. All brands (other than the Four Points bySheraton and the Aloft and Element brands) represent full-service properties that range in amenities from luxuryhotels and resorts to more moderately priced hotels. We also lease three stand-alone Bliss Spas, two in New York,New York and one in London, England and have leased Bliss Spas in nine of the W Hotels. In addition, we own,lease or manage Remède Spas in four of the St. Regis hotels.

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The following table reflects our hotel and vacation ownership properties, by brand as of December 31, 2008:

Properties Rooms Properties RoomsHotels

VOI andResidential(a)

St. Regis and Luxury Collection . . . . . . . . . . . . . . . . . . 76 13,200 4 100

W . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7,800 — —

Westin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 64,400 10 2,300

Le Méridien . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 27,700 — —

Sheraton . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 409 143,300 8 4,500

Four Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134 23,500 — —

Aloft. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2,500 — —

Independent / Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2,400 4 300

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 942 284,800 26 7,200

(a) Includes sites held for development.

Hotel Business

Managed and Franchised Hotels. Hotel and resort properties in the United States are often owned byentities that do not manage hotels or own a brand name. Hotel owners typically enter into management contractswith hotel management companies to operate their hotels. When a management company does not offer a brandaffiliation, the hotel owner often chooses to pay separate franchise fees to secure the benefits of brand marketing,centralized reservations and other centralized administrative functions, particularly in the sales and marketing area.Management believes that companies, such as Starwood, that offer both hotel management services and well-established worldwide brand names appeal to hotel owners by providing the full range of management, marketingand reservation services. In 2008, we opened 84 managed and franchised hotels with approximately 20,000 roomsand 36 managed and franchised hotels with approximately 11,000 rooms left the system.

Managed Hotels. We manage hotels worldwide, usually under a long-term agreement with the hotel owner(including entities in which we have a minority equity interest). Our responsibilities under hotel managementcontracts typically include hiring, training and supervising the managers and employees that operate these facilities.For additional fees, we provide centralized reservation services and coordinate national advertising and certainmarketing and promotional services. We prepare and implement annual budgets for the hotels we manage and areresponsible for allocating property-owner funds for periodic maintenance and repair of buildings and furnishings. Inaddition to our owned and leased hotels, at December 31, 2008, we managed 436 hotels with approximately 150,000rooms worldwide. During the year ended December 31, 2008, we generated management fees by geographic area asfollows:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.1%

Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.9%

Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.2%

Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.5%

Americas (Latin America, Caribbean & Canada) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0%

Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to profits aswell as fees for other services, including centralized reservations, sales and marketing, public relations and nationaland international media advertising. In our experience, owners seek hotel managers that can provide attractivelypriced base, incentive and marketing fees combined with demonstrated sales and marketing expertise andoperations-focused management designed to enhance profitability. Some of our management contracts permitthe hotel owner to terminate the agreement when the hotel is sold or otherwise transferred to a third party, as well as

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if we fail to meet established performance criteria. In addition, many hotel owners seek equity, debt or otherinvestments from us to help finance hotel renovations or conversions to a Starwood brand so as to align the interestsof the owner and Starwood. Our ability or willingness to make such investments may determine, in part, whether wewill be offered, will accept, or will retain a particular management contract. During the year ended December 31,2008, we opened 33 managed hotels with approximately 11,000 rooms, and 10 managed hotels with approximately3,000 rooms left our system. In addition, during 2008, we signed management agreements for 71 hotels withapproximately 23,000 rooms, a small portion of which opened in 2008 and the majority of which will open in thefuture.

Brand Franchising and Licensing. We franchise our Sheraton, Westin, Four Points by Sheraton, LuxuryCollection, Le Méridien, Aloft and Element brand names and generally derive licensing and other fees fromfranchisees based on a fixed percentage of the franchised hotel’s room revenue, as well as fees for other services,including centralized reservations, sales and marketing, public relations and national and international mediaadvertising. In addition, a franchisee may also purchase hotel supplies, including brand-specific products, fromcertain Starwood-approved vendors. We approve certain plans for, and the location of, franchised hotels and reviewtheir design. At December 31, 2008, there were 437 franchised properties with approximately 111,000 roomsoperating under the Sheraton, Westin, Four Points by Sheraton, Aloft, Element, Luxury Collection and Le Méridienbrands. During the year ended December 31, 2008, we generated franchise fees by geographic area as follows:

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.8%Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1%Americas (Latin America, Caribbean & Canada) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.7%Asia Pacific . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6%Middle East and Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.8%

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0%

In addition to the franchise contracts we retained in connection with the sale of hotels discussed earlier, duringthe year ended December 31, 2008, we opened 51 franchised hotels with approximately 9,000 rooms, and 26franchised hotels with approximately 8,000 rooms left our system. In addition, during 2008, we signed franchiseagreements for 76 hotels with approximately 13,000 rooms, a portion of which opened in 2008 and a portion ofwhich will open in the future.

Owned, Leased and Consolidated Joint Venture Hotels. Historically, we have derived the majority of ourrevenues and operating income from our owned, leased and consolidated joint venture hotels and a significant portionof these results are driven by these hotels in North America. However, beginning in 2006, we embarked upon astrategy of selling a significant number of hotels. Since the beginning of 2006, we have sold 56 wholly owned hotelswhich has substantially reduced our revenues and operating income from owned, leased and consolidated joint venturehotels. The majority of these hotels were sold subject to long-term management or franchise contracts. Total revenuesgenerated from our owned, leased and consolidated joint venture hotels worldwide for the years ending December 31,2008, 2007 and 2006 were $2.259 billion, $2.429 billion and $2.692 billion, respectively (total revenues from ourowned, leased and consolidated joint venture hotels in North America were $1.427 billion, $1.587 billion and$1.881 billion for 2008, 2007 and 2006, respectively). The following represents our top five markets in the UnitedStates by metropolitan area as a percentage of our total owned, leased and consolidated joint venture revenues for theyear ended December 31, 2008 (with comparable data for 2007):

Top Five Domestic Markets in the United States as a % of Total OwnedRevenues for the Year Ended December 31, 2008 with Comparable Data for 2007(1)

Metropolitan Area2008

Revenues2007

Revenues

New York, NY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.5% 13.1%Hawaii . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1% 6.3%San Francisco, CA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7% 5.2%Phoenix, AZ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6% 5.6%Chicago, IL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9% 3.8%

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The following represents our top five international markets by country as a percentage of our total owned,leased and consolidated joint venture revenues for the year ended December 31, 2008 (with comparable data for2007):

Top Five International Markets as a % of Total Owned Revenuesfor the Year Ended December 31, 2008 with Comparable Data for 2007(1)

Country2008

Revenues2007

Revenues

Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.0% 8.0%

Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5% 8.6%Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4% 5.1%

Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8% 4.3%

United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2% 3.3%

(1) Includes the revenues of hotels sold for the period prior to their sale.

Following the sale of a significant number of our hotels in the past three years, we currently own or lease 69hotels as follows:

Hotel Location Rooms

U.S. Hotels:The St. Regis Hotel, New York New York, NY 229

St. Regis Resort, Aspen Aspen, CO 179

St. Regis Hotel, San Francisco San Francisco, CA 260

The Phoenician Scottsdale, AZ 647

W New York — Times Square New York, NY 507

W Chicago Lakeshore Chicago, IL 520

W San Francisco San Francisco, CA 410

W Los Angeles Westwood Los Angeles, CA 258

W Chicago City Center Chicago, IL 369

W New York — The Court and Tuscany New York, NY 318

W New Orleans New Orleans, LA 423

W New Orleans, French Quarter New Orleans, LA 98W Atlanta Atlanta, GA 275

The Westin Maui Resort & Spa Maui, HI 759

The Westin Peachtree Plaza, Atlanta Atlanta, GA 1068

The Westin Horton Plaza San Diego San Diego, CA 450

The Westin San Francisco Airport San Francisco, CA 397

The Westin St. John Resort & Villas St. John, Virgin Islands 175

Sheraton Manhattan Hotel New York, NY 665

Sheraton Kauai Resort Kauai, HI 394

Sheraton Steamboat Springs Resort Steamboat Springs, CO 312

Sheraton Newton Hotel Boston, MA 270

Sheraton Suites Philadelphia Airport Philadelphia, PA 251

Aloft Lexington Lexington, MA 136

Aloft Philadelphia Airport Philadelphia, PA 136

Element Lexington Lexington, MA 123

Four Points by Sheraton Philadelphia Airport Philadelphia, PA 177

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Hotel Location Rooms

Four Points by Sheraton Tucson University Plaza Tucson, AZ 150

Four Points by Sheraton Minneapolis Gateway Hotel Minneapolis, MN 252

The Boston Park Plaza Hotel & Towers Boston, MA 941

Tremont Hotel Chicago, IL 135

Clarion Hotel San Francisco, CA 251

Cove Haven Resort Scranton, PA 276

Pocono Palace Resort Scranton, PA 189

Paradise Stream Resort Scranton, PA 143

Park Ridge Hotel & Conference Center King of Prussia, PA 265

International Hotels:St. Regis Grand Hotel, Rome Rome, Italy 161Grand Hotel Florence, Italy 107

Hotel Gritti Palace Venice, Italy 91

Park Tower Buenos Aires, Argentina 181

Hotel Alfonso XIII Seville, Spain 147

Hotel Imperial Vienna, Austria 138

Hotel Bristol, Vienna Vienna, Austria 140

Hotel Goldener Hirsch Salzburg, Austria 69

Hotel Maria Cristina San Sebastian, Spain 136

The Westin Excelsior, Rome Rome, Italy 319

The Westin Resort & Spa, Los Cabos Los Cabos, Mexico 243

The Westin Resort & Spa, Puerto Vallarta Puerto Vallarta, Mexico 279

The Westin Excelsior, Florence Florence, Italy 171

The Westin Resort & Spa Cancun Cancun, Mexico 379

The Westin Denarau Island Resort Nadi, Fiji 273

The Westin Dublin Hotel Dublin, Ireland 163

Sheraton Centre Toronto Hotel Toronto, Canada 1377

Sheraton On The Park Sydney, Australia 557

Sheraton Rio Hotel & Resort Rio de Janeiro, Brazil 559

Sheraton Diana Majestic Hotel Milan, Italy 107

Sheraton Ambassador Hotel Monterrey, Mexico 229

Sheraton Lima Hotel & Convention Center Lima, Peru 431

Sheraton Santa Maria de El Paular Rascafria, Spain 44

Sheraton Mencey Hotel Santa Cruz De Tenerife, Spain 286

Sheraton Fiji Resort Nadi, Fiji 264

Sheraton Buenos Aires Hotel & Convention Center Buenos Aires, Argentina 739Sheraton Maria Isabel Hotel & Towers Mexico City, Mexico 755

Sheraton Gateway Hotel in Toronto International Airport Toronto, Canada 474

Le Centre Sheraton Montreal Hotel Montreal, Canada 825

Sheraton Paris Airport Hotel & Conference Centre Paris, France 252

Sheraton Brussels Hotel and Towers Brussels, Belgium 511

Four Points by Sheraton Sydney Sydney, Australia 630

The Park Lane Hotel, London London, England 302

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An indicator of the performance of our owned, leased and consolidated joint venture hotels is revenue peravailable room (“REVPAR”)(1), as it measures the period-over-period growth in rooms revenue for comparableproperties. This is particularly the case in the United States where there is no impact on this measure from foreignexchange rates.

The following table summarizes REVPAR, average daily rates (“ADR”) and average occupancy rates on ayear-to-year basis for our 59 owned, leased and consolidated joint venture hotels (excluding 19 hotels sold or closedand 10 hotels undergoing significant repositionings or without comparable results in 2008 and 2007) (“Same-StoreOwned Hotels”) for the years ended December 31, 2008 and 2007:

2008 2007 Variance

Year EndedDecember 31,

Worldwide (59 hotels with approximately 21,000 rooms)

REVPAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $168.93 $171.01 �1.2%

ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $237.45 $235.18 1.0%

Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.1% 72.7% �1.6

North America (31 hotels with approximately 13,000 rooms)

REVPAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $178.14 $181.68 �1.9%

ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $241.26 $242.07 �0.3%

Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.8% 75.1% �1.3

International (28 hotels with approximately 8,000 rooms)

REVPAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $154.62 $154.40 0.1%

ADR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $230.91 $223.54 3.3%

Occupancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67.0% 69.1% �2.1

(1) REVPAR is calculated by dividing room revenue, which is derived from rooms and suites rented or leased, bytotal room nights available for a given period. REVPAR may not be comparable to similarly titled measuressuch as revenues.

During the years ended December 31, 2008 and 2007, we invested approximately $282 million and$211 million, respectively, for capital improvements at owned hotels. These capital expenditures include con-struction costs at the Sheraton Suites in Philadelphia, PA, Sheraton Steamboat Resort in Colorado, Sheraton in Fiji,The Phoenician in Scottsdale, AZ, W Times Square in New York, NY, Aloft Philadelphia, in Philadelphia, PA, andthe Aloft and Element hotels in Lexington, MA.

Vacation Ownership and Residential Business

We develop, own and operate vacation ownership resorts, market and sell the VOIs in the resorts and, in manycases, provide financing to customers who purchase such ownership interests. Owners of VOIs can trade theirinterval for intervals at other Starwood vacation ownership resorts, for intervals at certain vacation ownershipresorts not otherwise sponsored by Starwood through an exchange company, or for hotel stays at Starwoodproperties. From time to time, we securitize or sell the receivables generated from our sale of VOIs.

We have also entered into arrangements with several owners for mixed use hotel projects that will include aresidential component. We have entered into licensing agreements for the use of certain of our brands to allow theowners to offer branded condominiums to prospective purchasers. In consideration, we typically receive a licensingfee equal to a percentage of the gross sales revenue of the units sold. The licensing arrangement generally terminatesupon the earlier of sell-out of the units or a specified length of time.

At December 31, 2008, we had 26 residential and vacation ownership resorts and sites in our portfolio with 21actively selling VOIs and residences, 3 sites being held for possible future development and 2 that have sold allexisting inventory. During 2008 and 2007, we invested approximately $363 million and $448 million, respectively,for vacation ownership capital expenditures, including VOI construction at the Sheraton Vistana Villages inOrlando, FL, the Westin St. John Resort and Villas in the Virgin Islands, the Westin Riverfront Resort in Avon, CO,

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the Westin Nanea Ocean Resort Villas in Maui, HI, the Westin Desert Willow Villas in Palm Desert, CA, and theWestin Lagunamar Ocean Resort in Cancun, as well as construction costs at the St. Regis Bal Harbour Resort inMiami Beach, FL.

As a result of the current economic crisis and its impact on the timeshare industry, we evaluated all of ourexisting vacation ownership projects as well as our plans for projects not yet under development. As a result of thatcomprehensive review, we decided to abandon several projects where we had not yet begun full scale development.We recorded an impairment charge of $72 million in 2008, primarily related to the impairment of two vacationownership projects, one in Mexico and the other in the Caribbean.

Item 3. Legal Proceedings.

Incorporated by reference to the description of legal proceedings in Note 23. Commitments and Contingencies,in the consolidated financial statements set forth in Part II, Item 8. Financial Statements and Supplementary Data.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

Executive Officers of the Registrants

See Part III, Item 10. of this Annual Report for information regarding the executive officers of the Registrants,which information is incorporated herein by reference.

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PART II

Item 5. Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities.

Market Information

The Corporation Shares are traded on the New York Stock Exchange (the “NYSE”) under the symbol “HOT.”

The following table sets forth, for the fiscal periods indicated, the high and low sale prices per CorporationShare on the NYSE Composite Tape.

High Low

2008Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28.55 $10.97

Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $43.29 $25.95

Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55.06 $38.89

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56.00 $37.07

2007Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62.83 $42.78

Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75.45 $52.63

Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $74.35 $65.35

First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $69.65 $59.63

Holders

As of February 20, 2009, there were approximately 17,000 holders of record of Corporation Shares.

Dividends Made/Declared

The following table sets forth the frequency and amount of dividends made by the Corporation to holders ofCorporation Shares for the years ended December 31, 2008 and 2007:

DividendsDeclared

2008Annual dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.90(a)

2007Annual dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.90(b)

(a) The Corporation declared a dividend in the fourth quarter of 2008 to shareholders of record on December 31,2008, which was paid in January 2009.

(b) The Corporation declared a dividend in the fourth quarter of 2007 to shareholders of record on December 31,2007, which was paid in January 2008.

Conversion of Securities; Sale of Unregistered Securities

In 2006, we completed the redemption of the remaining 25,000 outstanding shares of Class B ExchangeablePreferred Shares of the Trust (“Class B EPS”) for approximately $1 million in cash. Also in 2006, in connectionwith the Host Transaction, we redeemed all of the Class A Exchangeable Preferred Shares of the Trust (“Class AEPS”) (approximately 562,000 shares) and Realty Partnership units (approximately 40,000 units) for approximately$34 million in cash. SLC Operating Limited Partnership units are convertible into Corporation Shares at the unitholder’s option, provided that we have the option to settle conversion requests in cash or Corporation Shares. In2006, we redeemed approximately 926,000 SLC Operating Limited Partnership units for approximately $56 million

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in cash, and there were approximately 178,000 and 179,000 of these units outstanding at December 31, 2008 and2007, respectively.

Issuer Purchases of Equity Securities

Pursuant to the Share Repurchase Program, Starwood repurchased 13.6 million Corporation Shares in the openmarket for an aggregate cost of $593 million during 2008. We did not repurchase any Corporation Shares during thethree months ended December 31, 2008.

As of December 31, 2008, no repurchase capacity remained available under our Share RepurchaseAuthorization.

Information relating to securities authorized for issuance under equity compensation plans is provided underItem 12 of this Annual Report and is incorporated herein by reference.

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STOCKHOLDER RETURN PERFORMANCE

Set forth below is a line graph comparing the cumulative total stockholder return on the Corporation Shares(and Shares until April 7, 2006) against the cumulative total return on the S&P 500 and the S&P 500 Hotel Index(the “S&P 500 Hotel”) for the five fiscal years beginning December 31, 2003 and ending December 31, 2008. Thegraph assumes that the value of the investments was 100 on December 31, 2003 and that all dividends and otherdistributions were reinvested. In addition, the Share prices for the periods prior to the Host Transaction on April 10,2006 have been adjusted based on the value shareholders received for their Class B shares. The comparisons areprovided in response to SEC disclosure requirements and are not intended to forecast or be indicative of futureperformance.

0

50

100

150

200

250

300

200820072006200520042003

DO

LL

AR

S

Starwood

S&P 500

S&P 500 Hotel

2003 2004 2005 2006 2007 2008

Starwood 100.00 164.69 182.46 223.92 160.97 68.73

S&P 500 100.00 110.87 116.31 134.66 142.05 89.51

S&P 500 Hotel 100.00 145.60 147.82 169.41 148.33 76.70

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Item 6. Selected Financial Data.

The following financial and operating data should be read in conjunction with the information set forth under“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidatedfinancial statements and related notes thereto appearing elsewhere in this Annual Report and incorporated herein byreference.

2008 2007 2006 2005 2004Year Ended December 31,

(In millions, except per Share data)

Income Statement DataRevenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,907 $6,153 $ 5,979 $5,977 $5,368

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . $ 619 $ 858 $ 839 $ 822 $ 653

Income from continuing operations . . . . . . . . . . . . $ 254 $ 543 $ 1,115 $ 423 $ 369

Diluted earnings per Share from continuingoperations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.37 $ 2.57 $ 5.01 $ 1.88 $ 1.72

Operating DataCash from operating activities . . . . . . . . . . . . . . . . $ 646 $ 884 $ 500 $ 764 $ 578

Cash from (used for) investing activities . . . . . . . . . $ (172) $ (215) $ 1,402 $ 85 $ (415)

Cash used for financing activities . . . . . . . . . . . . . . $ (243) $ (712) $(2,635) $ (253) $ (273)

Aggregate cash distributions paid . . . . . . . . . . . . . . $ 172 $ 90 $ 276 $ 176 $ 172

Cash distributions and dividends declared perShare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.90 $ 0.90 $ 0.84(a) $ 0.84 $ 0.84

(a) In connection with the Host Transaction, in February and March 2006, the Trust declared distributions totaling$0.42 per Share. In December 2006, the Corporation declared a dividend of $0.42 per Corporation Share.

2008 2007 2006 2005 2004At December 31,

(In millions)

Balance Sheet DataTotal assets . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,703 $9,622 $9,280 $12,494 $12,298

Long-term debt, net of current maturities andincluding exchangeable units and Class Bpreferred shares . . . . . . . . . . . . . . . . . . . . . . $3,502 $3,590 $1,827 $ 2,926 $ 3,823

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)discusses our consolidated financial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of these consolidated financial statementsrequires 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 reportedamounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, managementevaluates its 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-insurance claims payable, restructuring costs, retirement benefits andcontingencies and litigation.

Management bases its estimates and judgments on historical experience and on various other factors that arebelieved to be reasonable under the circumstances, the results of which form the basis for making judgments aboutthe carrying value of assets and liabilities that are not readily available from other sources. Actual results may differfrom these estimates under different assumptions and conditions.

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CRITICAL ACCOUNTING POLICIES

We believe the following to be our critical accounting policies:

Revenue Recognition. Our revenues are primarily derived from the following sources: (1) hotel and resortrevenues at our owned, leased and consolidated joint venture properties; (2) vacation ownership and residentialrevenues; (3) management and franchise revenues; (4) revenues from managed and franchised properties; and(5) other revenues which are ancillary to our operations. Generally, revenues are recognized when the services havebeen rendered. The following is a description of the composition of our revenues:

• Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hoteloperations, including the rental of rooms and food and beverage sales from owned, leased or consolidatedjoint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have beenrendered. These revenues are impacted by global economic conditions affecting the travel and hospitalityindustry as well as relative market share of the local competitive set of hotels. REVPAR is a leading indicatorof revenue trends at owned, leased and consolidated joint venture hotels as it measures the period-over-period growth in rooms revenue for comparable properties.

• Vacation Ownership and Residential — We recognize revenue from VOI sales and financings and the salesof residential units which are typically a component of mixed use projects that include a hotel. Such revenuesare impacted by the state of the global economies and, in particular, the U.S. economy, as well as interest rateand other economic conditions affecting the lending market. Revenue is generally recognized upon the buyerdemonstrating a sufficient level of initial and continuing investment, the period of cancellation with refundhas expired and receivables are deemed collectible. We determine the portion of revenues to recognize forsales accounted for under the percentage of completion method based on judgments and estimates includingtotal project costs to complete. Additionally, we record reserves against these revenues based on expecteddefault levels. Changes in costs could lead to adjustments to the percentage of completion status of a project,which may result in differences in the timing and amount of revenues recognized from the projects. We havealso entered into licensing agreements with third-party developers to offer consumers branded condomin-iums or residences. Our fees from these agreements are generally based on the gross sales revenue of unitssold. Residential fee revenue is recorded in the period that a purchase and sales agreement exists, delivery ofservices and obligations has occurred, the fee to the owner is deemed fixed and determinable andcollectibility of the fees is reasonably assured.

• Management and Franchise Revenues — Represents fees earned on hotels managed worldwide, usuallyunder long-term contracts, franchise fees received in connection with the franchise of our Sheraton, Westin,Four Points by Sheraton, Le Méridien and Luxury Collection brand names, termination fees and theamortization of deferred gains related to sold properties for which we have significant continuinginvolvement, offset by payments by us under performance and other guarantees. Management fees arecomprised 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 profitability. For any time during the year, when the provisions ofour management contracts allow receipt of incentive fees upon termination, incentive fees are recognized forthe fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due orpayable. Therefore, during periods prior to year-end, the incentive fees recorded may not be indicative of theeventual incentive fees that will be recognized at year-end as conditions and incentive hurdle calculationsmay not be final. Franchise fees are generally based on a percentage of hotel room revenues. As with hotelrevenues discussed above, these revenue sources are affected by conditions impacting the travel andhospitality industry as well as competition from other hotel management and franchise companies.

• Revenues from Managed and Franchised Properties — These revenues represent reimbursements of costsincurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costsat managed properties where we are the employer. Since the reimbursements are made based upon the costsincurred with no added margin, these revenues and corresponding expenses have no effect on our operatingincome and our net income.

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Frequent Guest Program. SPG is our frequent guest incentive marketing program. SPG members earnpoints based on spending at our properties, as incentives to first time buyers of VOIs and residences and throughparticipation in affiliated programs. Points can be redeemed at substantially all of our owned, leased, managedand franchised properties as well as through other redemption opportunities with third parties, such as conversionto airline miles. Properties are charged based on hotel guests’ qualifying expenditures. Revenue is recognized byparticipating hotels and resorts when points are redeemed for hotel stays.

We, through the services of third-party actuarial analysts, determine the fair value of the future redemptionobligation based on statistical formulas which project the timing of future point redemption based on historicalexperience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of thepoints that will eventually be redeemed as well as the cost of reimbursing hotels and other third parties in respect ofother redemption opportunities for point redemptions. Actual expenditures for SPG may differ from the actuariallydetermined liability. The total actuarially determined liability as of December 31, 2008 and 2007 is $662 millionand $536 million, respectively. A 10% reduction in the “breakage” of points would result in an estimated increase of$85 million to the liability at December 31, 2008.

Long-Lived Assets. We evaluate the carrying value of our long-lived assets for impairment by comparing theexpected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger eventsoccur. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of thenet book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cashflows of the assets at a rate deemed reasonable for the type of asset and 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 factors as future development in thesurrounding 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, can have amaterial impact on the carrying value of the asset.

Loan Loss Reserves. For the vacation ownership and residential segment, we record an estimate of expecteduncollectibility on our VOI notes receivable as a reduction of revenue at the time we recognize profit on a sale of avacation ownership interest. We hold large amounts of homogeneous VOI notes receivable and therefore assessuncollectibility based on pools of receivables. In estimating our loss reserves, we use a technique referred to as staticpool analysis, which tracks uncollectible notes for each year’s sales over the life of the respective notes and projectsan estimated default rate that is used in the determination of our loan loss reserve requirements. As of December 31,2008, the average estimated default rate for our pools of receivables was 7.9%. Given the significance of ourrespective pools of VOI notes receivable, a change in the projected default rate can have a significant impact to ourloan loss reserve requirements, with a 0.1% change estimated to have an impact of approximately $3 million.

For the hotel segment, we measure the impairment of a loan based on the present value of expected future cashflows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. Forimpaired loans, we establish a specific impairment reserve for the difference between the recorded investment in theloan and the present value of the expected future cash flows or the estimated fair value of the collateral. We apply theloan impairment policy individually to all loans in the portfolio and do not aggregate loans for the purpose ofapplying such policy. For loans that we have determined to be impaired, we recognize interest income on a cashbasis.

Assets Held for Sale. We consider properties to be assets held for sale when management approves andcommits to a formal plan to actively market a property or group of properties for sale and a signed sales contract andsignificant non-refundable deposit or contract break-up fee exist. Upon designation as an asset held for sale, werecord the carrying value of each property or group of properties at the lower of its carrying value which includesallocable segment goodwill or its estimated fair value, less estimated costs to sell, and we stop recordingdepreciation expense. Any gain realized in connection with the sale of a property for which we have significantcontinuing involvement (such as through a long-term management agreement) is deferred and recognized over theinitial term of the related agreement. The operations of the properties held for sale prior to the sale date are recordedin discontinued operations unless we will have continuing involvement (such as through a management or franchiseagreement) after the sale.

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Legal Contingencies. We are subject to various legal proceedings and claims, the outcomes of which aresubject to significant uncertainty. Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting forContingencies,” requires that an estimated loss from a loss contingency should be accrued by a charge to income if itis probable that an asset has been impaired or a liability has been incurred and the amount of the loss can bereasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome andthe ability to make a reasonable estimate of the amount of loss. Changes in these factors could materially impact ourfinancial position or our results of operations.

Income Taxes. We provide for income taxes in accordance with SFAS No. 109, “Accounting for IncomeTaxes,” and Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty inIncome Taxes” (“FIN 48”). The objectives of accounting for income taxes are to recognize the amount of taxespayable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences ofevents that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessingthe future tax consequences of events that have been recognized in our financial statements or tax returns.

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RESULTS OF OPERATIONS

The following discussion presents an analysis of results of our operations for the years ended December 31,2008, 2007 and 2006.

Year Ended December 31, 2008 Compared with Year Ended December 31, 2007

Continuing Operations

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Owned, Leased and Consolidated Joint VentureHotels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,259 $2,429 $(170) (7.0)%

Management Fees, Franchise Fees and OtherIncome . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 857 834 23 2.8%

Vacation Ownership and Residential . . . . . . . . . . . 749 1,025 (276) (26.9)%

Other Revenues from Managed and FranchiseProperties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,042 1,865 177 9.5%

Total Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,907 $6,153 $(246) (4.0)%

The decrease in revenues from owned, leased and consolidated joint venture hotels was partially due to lostrevenues from 19 wholly owned hotels sold or closed in 2008 and 2007. These sold or closed hotels had revenues of$77 million in the year ended December 31, 2008 compared to $121 million in the corresponding period of 2007.Revenues at our Same-Store Owned Hotels (59 hotels for the year ended December 31, 2008 and 2007, excludingthe 19 hotels sold or closed and 10 additional hotels undergoing significant repositionings or without comparableresults in 2008 and 2007) decreased 1.5%, or $31 million, to $2.015 billion for the year ended December 31, 2008when compared to $2.046 billion in the same period of 2007 due primarily to a decrease in REVPAR.

REVPAR at our Same-Store Owned Hotels decreased 1.2% to $168.93 for the year ended December 31, 2008when compared to the corresponding 2007 period. The decrease in REVPAR at these Same-Store Owned Hotelsresulted from a 1.0% increase in ADR to $237.45 for the year ended December 31, 2008 compared to $235.18 forthe corresponding 2007 period and a decrease in occupancy rates to 71.1% in the year ended December 31, 2008when compared to 72.7% in the same period in 2007. REVPAR at Same-Store Owned Hotels in North Americadecreased 1.9% for the year ended December 31, 2008 when compared to the same period of 2007. REVPARdeclined in most of our major domestic markets, including Atlanta, Georgia, Kauai, Hawaii and New York,New York, due to the severe economic crisis in the United States, and globally. REVPAR at our international Same-Store Owned Hotels increased by 0.1% for the year ended December 31, 2008 when compared to the same period of2007. Once again, due to the global economic crisis, REVPAR declined in most of our major international markets,including the United Kingdom and Italy. REVPAR for Same-Store Owned Hotels internationally increased 0.6%excluding the unfavorable effects of foreign currency translation.

The increase in management fees, franchise fees and other income was primarily a result of a $35 millionincrease in management and franchise revenue to $717 million for the year ended December 31, 2008. The increasewas due to the net addition of 48 managed and franchised hotels to our system. Other income decreased $13 millionprimarily due to $18 million of income recognized in 2007 from the sale of a managed hotel that resulted in apayment of an $18 million fee to us.

The decrease in vacation ownership and residential sales and services was primarily due to an overall decline indemand as a result of the economic climate, and the timing of revenue recognition from ongoing projects underconstruction which are being accounted for under percentage of completion accounting. Originated contract sales ofVOI inventory, which represents vacation ownership revenues before adjustments for percentage of completionaccounting and rescission, decreased 26% in the year ended December 31, 2008 when compared to the same periodin 2007. Additionally, sales in Hawaii were negatively impacted by the sell out of our largest project on Maui inearly 2008. The decline in the vacation ownership business was partially offset by strong results in the residential

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branding business. The increase in residential fees for the year ended December 31, 2008 to $49 million whencompared to $18 million in 2007 was primarily related to fees earned from the St. Regis Singapore Residences,which opened during the year and a nonrefundable license fee received in connection with another residentialproject.

Other revenues and expenses from managed and franchised properties increased primarily due to an increase inthe number of our managed and franchised hotels. These revenues represent reimbursements of costs incurred onbehalf of managed hotel and vacation ownership properties and franchisees and relate primarily to payroll costs atmanaged properties where we are the employer. Since the reimbursements are made based upon the costs incurredwith no added margin, these revenues and corresponding expenses have no effect on our operating income and ournet income.

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Selling, General, Administrative and Other . . $477 $508 $(31) (6.1)%

The decrease in selling, general, administrative and other expenses was primarily a result of our focus onreducing our cost structure in light of the declining business conditions in this current economic climate. Beginningin the middle of 2008, we began an activity value analysis project to review our cost structure across a majority ofour corporate departments and divisional headquarters. We have completed the first two phases of that programwhich has resulted in the majority of these cost savings and additional phases are expected to be completed in early2009.

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Restructuring and Other Special Charges, Net . . $141 $53 $88 n/a

During the year ended December 31, 2008, we recorded restructuring and other special charges of $141 mil-lion, including $62 million of severance and related charges associated with our ongoing initiative of rationalizingour cost structure in light of the current economic climate. We also recorded impairment charges of approximately$79 million primarily related to the decision not to develop two vacation ownership projects as a result of the currenteconomic climate and its impact on business conditions in the timeshare industry (see Note 13 of the consolidatedfinancial statements).

During the year ended December 31, 2007, we recorded $53 million in net restructuring and other specialcharges primarily related to accelerated depreciation of property, plant and equipment at the Sheraton Bal Harbourin Florida (“Bal Harbour”) and demolition costs associated with our redevelopment of that hotel. Bal Harbour wasclosed for business on July 1, 2007, and the majority of its employees were terminated. The hotel was demolishedand we are in the process of building a St. Regis hotel along with branded residences and fractional units.

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Depreciation and Amortization . . . . . . . . . . . $323 $306 $17 5.6%

The increase in depreciation expense was due to an increase in capital spending on our owned hotels partiallyoffset by the impact of hotels sold or held for sale. The increase in amortization expense was primarily due to thewrite-off, through amortization expense, of an investment in a management contract during 2008.

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Operating Income . . . . . . . . . . . . . . . . . . . . . $619 $858 $(239) (27.9)%

The decrease in operating income was primarily due to the decrease in vacation ownership sales and services aswell as the decrease in revenues from owned, leased and consolidated joint venture hotels discussed above.

33

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Equity Earnings and Gains and Losses fromUnconsolidated Ventures, Net . . . . . . . . . . $16 $66 $(50) (75.8)%

The decrease in equity earnings and gains and losses from unconsolidated joint ventures was primarily due toour share of non-recurring gains, in 2007, on the sale of several hotels in an unconsolidated joint venture as well asdecreased operating results, in 2008, at several properties owned by joint ventures in which we hold minorityinterests.

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Net Interest Expense . . . . . . . . . . . . . . . . . . . $207 $147 $60 40.8%

The increase in net interest expense was primarily due to increased borrowings to fund our share repurchaseprogram. Our weighted average interest rate was 5.24% at December 31, 2008 versus 6.52% at December 31, 2007.The average debt balance during 2008 and 2007 was $3.802 billion and $3.114 billion respectively.

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Loss on Asset Dispositions and Impairments, Net . . $(98) $(44) $(54) n/a

During 2008, we recorded a net loss of $98 million primarily related to $64 million of impairment charges onfive hotels, a $22 million impairment of our investment in vacation ownership notes receivable that we havepreviously securitized, and an $11 million write-off of our investment in a joint venture in which we hold minorityinterest (see Note 5 of the consolidated financial statements).

During 2007, we recorded a net loss of $44 million primarily related to a net loss of $58 million on the sale ofeight wholly-owned hotels and a loss of approximately $7 million primarily related to charges at three otherproperties. These losses were offset in part by $20 million of net gains primarily on the sale of assets in which weheld a minority interest and a gain of $6 million as a result of insurance proceeds received for property damagecaused by storms at two owned hotels in prior years.

Year EndedDecember 31,

2008

Year EndedDecember 31,

2007

Increase/(Decrease)from Prior

Year

PercentageChange

from PriorYear

Income Tax Expense . . . . . . . . . . . . . . . . . . . $76 $189 $(113) (59.8)%

The decrease in income tax expense is primarily related to a decrease in pretax income and certain other onetime tax benefits. The effective tax rate decreased to 23.0% in the year ended December 31, 2008 as compared to25.8% in 2007. The 2008 tax rate was favorably impacted by a $31 million benefit related to the reversal of capitaland net operating loss valuation allowances, a $20 million benefit related to lower foreign taxes, and a $14 millionbenefit associated with tax on the repatriation of foreign earnings. These benefits were partially offset by a$16 million charge for the basis difference on certain asset sales and a $7 million charge related to amortization ofprepaid taxes in connection with certain related party transactions during 2008. The 2007 expense was favorablyimpacted by a $158 million benefit related to the reversal of capital and net operating loss valuation allowances anda $28 million benefit associated with our election to claim foreign tax credits generated in 1999 and 2000. Offsettingthese benefits in 2007 were a $97 million charge associated with adjustments to the tax benefit from the HostTransaction and a $13 million charge associated with changes in uncertain tax positions.

Discontinued Operations, Net of Tax

For the year ended December 31, 2008, the gain on dispositions includes a $124 million gain ($129 million pretax) on the sale of three properties which were sold unencumbered by management or franchise

34

contracts. Discontinued operations for the year ended December 31, 2008 also includes a $49 million tax charge as aresult of a 2008 administrative tax ruling for an unrelated taxpayer, that impacts the tax liability associated with thedisposition of one of our businesses several years ago.

For the year ended December 31, 2007, the loss on disposition represented a $1 million tax assessmentassociated with the disposition of our gaming business in 1999.

Cumulative Effect of Accounting Change, Net of Tax

On January 1, 2007, we adopted FIN 48 and recorded a benefit of $35 million to the beginning balance ofretained earnings.

Year Ended December 31, 2007 Compared with Year Ended December 31, 2006

Continuing Operations

Revenues. Total revenues, including other revenues from managed and franchised properties, were$6.153 billion, an increase of $174 million when compared to 2006 levels. Revenues reflected a 9.8% decreasein revenues from our owned, leased and consolidated joint venture hotels to $2.429 billion for the year endedDecember 31, 2007 when compared to $2.692 billion in the corresponding period of 2006, a 20.4% increase inmanagement fees, franchise fees and other income to $834 million for the year ended December 31, 2007 whencompared to $693 million in the corresponding period of 2006, a 2.0% increase in vacation ownership andresidential revenues to $1.025 billion for the year ended December 31, 2007 when compared to $1.005 billion in thecorresponding period of 2006, and an increase of $276 million in other revenues from managed and franchisedproperties to $1.865 billion for the year ended December 31, 2007 when compared to $1.589 billion in thecorresponding period of 2006.

The $263 million decrease in revenues from owned, leased and consolidated joint venture hotels was primarilydue to lost revenues from 56 wholly owned hotels sold or closed in 2007 and 2006. These sold or closed hotels hadrevenues of $121 million in the year ended December 31, 2007, compared to $570 million in the correspondingperiod of 2006. The decrease in revenues from sold or closed hotels was partially offset by improved results at ourremaining owned, leased and consolidated joint venture hotels. Revenues at our Same-Store Owned Hotels (66hotels for the year ended December 31, 2007 and 2006, excluding 56 hotels sold or closed and 8 hotels undergoingsignificant repositionings or without comparable results in 2007 and 2006) increased 9.1%, or $173 million, to$2.068 billion for the year ended December 31, 2007 when compared to $1.895 billion in the same period of 2006due primarily to an increase in REVPAR. REVPAR at our Same-Store Owned Hotels increased 10.2% to $160.38for the year ended December 31, 2007 when compared to the corresponding 2006 period. The increase in REVPARat these Same-Store Owned Hotels was attributed to a 9.2% increase in ADR to $222.03 for the year endedDecember 31, 2007 compared to $203.31 for the corresponding 2006 period and due to a slight increase inoccupancy rates to 72.2% in the year ended December 31, 2007 when compared to 71.6% in the same period in2006. REVPAR at Same-Store Owned Hotels in North America increased 7.3% for the year ended December 31,2007 when compared to the same period of 2006. REVPAR growth was particularly strong at our owned hotels inKauai, Hawaii, New York, New York, San Francisco, California and New Orleans, Louisiana. REVPAR at ourinternational Same-Store Owned Hotels increased by 15.6% for the year ended December 31, 2007 when comparedto the same period of 2006. REVPAR growth was particularly strong at our owned hotels in Australia, Austria andItaly. REVPAR for Same-Store Owned Hotels internationally increased 7.8% excluding the favorable effects offoreign currency translation.

The increase in management fees, franchise fees and other income of $141 million was primarily a result of a$123 million increase in management and franchise revenue to $687 million for the year ended December 31, 2007.The increase was due to the strong growth in REVPAR at existing hotels under management and the net addition of34 managed and franchised hotels to our system. The increase in management and franchise fees also resulted fromthe full year impact of revenues from the 33 hotels sold to Host in the second quarter of 2006. Management feesfrom these hotels in the year ended December 31, 2007 totaled $63 million, as compared to $44 million in the sameperiod of 2006. Revenues from the amortization of the deferred gain associated with the Host Transaction were$49 million in the year ended December 31, 2007, as compared to $34 million in the corresponding period of 2006.

35

Other income increased $19 million and includes $18 million of income earned in the first quarter of 2007 from ourcarried interest in a managed hotel that was sold in January 2007. These increases were partially offset by lost feesfrom contracts that were terminated in the last 12 months.

The increase in vacation ownership and residential sales and services of $20 million was primarily due to therevenue recognition from ongoing projects under construction in Hawaii which were accounted for underpercentage of completion accounting. This net increase was offset, in part, by a decrease in residential sales asthe year ended December 31, 2007 included $3 million of revenues from the sale of residential units at the St. Regisin New York compared to 2006 which included $94 million in revenues from the sale of residential units at the St.Regis Museum Tower in San Francisco, which sold out in 2006, and at the St. Regis in New York, where only a fewresidential units remained available for sale in 2007. Additionally, during the year ended December 31, 2006, werecorded a gain of $17 million on the sale of $133 million of vacation ownership receivables. We did not sell anysuch receivables in 2007 and therefore no gain was recognized.

Originated contract sales of VOI inventory, which represents vacation ownership revenues before adjustmentsfor percentage of completion accounting and rescission, decreased 3.8% in the year ended December 31, 2007 whencompared to the same period in 2006 as the mix of products sold during 2007 differed from that sold in 2006.Additionally, sales and profits in Hawaii were negatively impacted by a decline in closing rates (the percentage oftours that were converted to actual sales of vacation ownership intervals) in the second half of 2007 due to theimpending sell out of our project on Maui, partially offset by higher sales and profits at other timeshare projects.

Other revenues and expenses from managed and franchised properties increased to $1.865 billion from$1.589 billion for the year ended December 31, 2007 and 2006, respectively, primarily due to an increase in thenumber of our managed and franchised hotels. These revenues represent reimbursements of costs incurred on behalfof managed hotel and vacation ownership properties and franchisees and relate primarily to payroll costs atmanaged properties where we are the employer. Since the reimbursements are made based upon the costs incurredwith no added margin, these revenues and corresponding expenses have no effect on our operating income and ournet income.

Selling, General, Administrative and Other. Selling, general, administrative and other expenses, whichincludes costs and expenses from our Bliss spas and from the sale of Bliss products, was $508 million in the yearended December 31, 2007 when compared to $466 million in the same period in 2006. The increase was primarilydue to investments in our global development capability and costs associated with the launch of our new brands,Aloft and Element, and other brand initiatives.

Restructuring and Other Special Charges, Net. During the year ended December 31, 2007, we recorded$53 million in net restructuring and other special charges primarily related to accelerated depreciation of property,plant and equipment at the Sheraton Bal Harbour in Florida (“Bal Harbour”) and demolition costs associated withour redevelopment of that hotel. Bal Harbour was closed for business on July 1, 2007, and the majority of itsemployees were terminated. The hotel was demolished and we are in the process of building a St. Regis hotel alongwith branded residences and fractional units.

During the year ended December 31, 2006, we recorded $20 million in net restructuring and other specialcharges primarily related to transition costs associated with the acquisition of the Le Méridien brand andmanagement and franchise business (“the Le Méridien Acquisition”) in November 2005 and severance costsprimarily related to certain executives in connection with the continued corporate restructuring that began at the endof 2005. These charges were offset, in part, by the reversal of accruals for a lease we assumed as part of the mergerwith Sheraton Holding Corporation (“Sheraton Holding”) and its subsidiaries (formerly ITT Corporation) in 1998as the lease matured at the end of 2006 and the accruals exceeded our maximum remaining obligation under thelease.

Depreciation and Amortization. Depreciation expense was $280 million during the year ended Decem-ber 31, 2007, consistent with the corresponding period of 2006. We sold or closed 45 wholly owned hotels during2006. However, the majority of these hotels were classified as held for sale as of December 31, 2005 andconsequently, no depreciation was recognized for either the year ended December 31, 2007 or 2006 for those hotels.

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Amortization expense was $26 million in the year ended December 31, 2007, consistent with the corre-sponding period of 2006.

Operating Income. Operating income increased 2.3% or $19 million to $858 million for the year endedDecember 31, 2007 when compared to $839 million in the same period in 2006, primarily due to the increase inmanagement fees, franchise fees and other income, partially offset by the restructuring and other special chargesand the decline in revenues from owned, leased and consolidated joint venture hotels discussed above.

Equity Earnings and Gains and Losses from Unconsolidated Ventures, Net. Equity earnings and gains andlosses from unconsolidated joint ventures increased to $66 million for the year ended December 31, 2007 from$61 million in the same period of 2006 partially due to our share of gains on the sale of several hotels in anunconsolidated joint venture during 2007.

Net Interest Expense. Net interest expense decreased to $147 million for the year ended December 31, 2007as compared to $215 million in the same period of 2006, primarily due to $37 million of expenses recorded in thefirst quarter of 2006 related to the early extinguishment of debt in connection with two transactions whereby wedefeased and were released from certain debt obligations that allowed us to sell certain hotels that previously servedas collateral for such debt. The decrease was also due to an increase in capitalized interest related to vacationownership projects under construction and a decrease in our overall interest rate. Our weighted average interest ratewas 6.52% at December 31, 2007 versus 6.97% at December 31, 2006.

Loss on Asset Dispositions and Impairments, Net. During 2007, we recorded a net loss of $44 million,primarily related to a net loss of $58 million on the sale of eight wholly owned hotels and a loss of approximately$7 million primarily related to charges at three other properties. These losses were offset in part by $20 million ofnet gains primarily on the sale of assets in which we held a minority interest and a gain of $6 million as a result ofinsurance proceeds received for property damage caused by storms at two owned hotels in prior years.

During 2006, we recorded a net loss of $3 million primarily related to several offsetting gains and losses,including the sale of ten wholly-owned hotels, which were sold unencumbered by management agreements,impairment charges related to various properties, including the Sheraton Cancun which was damaged by HurricaneWilma in 2005, and an adjustment to reduce the previously recorded gain on the sale of a hotel consummated in2004 as certain contingencies associated with the sale became probable in 2006. These losses were primarily offsetby a gain of $29 million on the sale of our interests in two joint ventures and a $13 million gain as a result ofinsurance proceeds received as reimbursement for property damage caused by Hurricane Wilma.

Income Tax Expense. We recorded income tax expense from continuing operations of $189 million for theyear ended December 31, 2007 compared to a benefit of $434 million in the corresponding period of 2006. The 2007expense was favorably impacted by a $114 million benefit related to the reversal of capital loss valuation allowance,a $28 million benefit associated with our election to claim foreign tax credits generated in 1999 and 2000 and a$35 million benefit associated with the utilization of capital losses. Offsetting these benefits were a $97 millioncharge associated with the Host Transaction and a $13 million charge associated with interest accrued for uncertaintax positions. The 2006 tax benefit includes a one-time benefit of approximately $524 million realized inconnection with the Host Transaction, a $59 million benefit due primarily to the completion of various stateand federal income tax audits of prior years, a $34 million benefit associated with our election to claim foreign taxcredits in 2006 and 2005 and a $32 million benefit associated with the Trust prior to its acquisition by Host.

Discontinued Operations

For the year ended December 31, 2007, the loss on disposition represented a $1 million tax assessmentassociated with the disposition of our gaming business in 1999. For the year ended December 31, 2006, the loss ondisposition represented a $2 million tax assessment associated with the disposition of our gaming business in 1999.

Cumulative Effect of Accounting Change, Net of Tax

On January 1, 2007, we adopted FIN 48 and recorded a benefit of $35 million to the beginning balance ofretained earnings.

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On January 1, 2006, we adopted SFAS No. 152 and recorded a charge of $70 million, net of a $46 million taxbenefit, in cumulative effect of accounting change.

LIQUIDITY AND CAPITAL RESOURCES

Cash From Operating Activities

Cash flow from operating activities is generated primarily from management and franchise revenues,operating income from our owned hotels and sales of VOIs and residential units. Other sources of cash aredistributions from joint-ventures, servicing financial assets and interest income. These are the principal sources ofcash used to fund our operating expenses, interest payments on debt, capital expenditures, dividend payments,property and income taxes and share repurchases. We believe that our existing borrowing availability together withcapacity for additional borrowings and cash from operations will be adequate to meet all funding requirements forour operating expenses, principal and interest payments on debt, capital expenditures, dividend payments and sharerepurchases in the foreseeable future.

The majority of our cash flow is derived from corporate and leisure travelers and is dependent on the supplyand demand in the lodging industry. In a recessionary economy, we experience significant declines in business andleisure travel. The impact of declining demand in the industry and higher hotel supply in key markets could have amaterial impact on our sources of cash.

Our day-to-day operations are financed through a net working capital deficit, a practice that is common in ourindustry. The ratio of our current assets to current liabilities was 0.81 and 0.87 as of December 31, 2008 and 2007,respectively. Consistent with industry practice, we sweep the majority of the cash at our owned hotels on a dailybasis and fund payables as needed by drawing down on our existing revolving credit facility.

State and local regulations governing sales of VOIs and residential properties allow the purchaser of such aVOI or property to rescind the sale subsequent to its completion for a pre-specified number of days. In addition, cashpayments received from buyers of units under construction are held in escrow during the period prior to obtaining acertificate of occupancy. These payments and the deposits collected from sales during the rescission period are theprimary components of our restricted cash balances in our consolidated balance sheets. At December 31, 2008 and2007, we had short-term restricted cash balances of $96 million and $196 million, respectively.

Cash From Investing Activities

Gross capital spending during the full year ended December 31, 2008 was as follows (in millions):

Capital Expenditures:Owned, Leased and Consolidated Joint Venture Hotels . . . . . . . . . . . . . . . . . . . . . . . . . $279

Corporate and information technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 363

Vacation Ownership and Residential Capital Expenditures:Capital expenditures (includes land acquisitions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110

Net capital expenditures for inventory (excluding St. Regis Bal Harbour)(1) . . . . . . . . . . 131

Capital expenditures for inventory — St. Regis Bal Harbour . . . . . . . . . . . . . . . . . . . . . 148

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389

Development Capital(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

Total Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $817

(1) Represents gross inventory capital expenditures of $254 less cost of sales of $123.

(2) Includes $3 million of expenditures that are classified as Plant, property and equipment, net on the consolidatedbalance sheet.

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Gross capital spending during the year ended December 31, 2008 included approximately $282 million inrenovations of our wholly owned assets including construction costs at the Sheraton Suites in Philadelphia, PA,Sheraton Steamboat Resort in Colorado, Sheraton in Fiji, The Phoenician in Scottsdale, AZ, W Times Square inNew York, NY, Aloft Philadelphia, in Philadelphia, PA, and the Aloft and Element hotels in Lexington, MA.Investment spending on gross VOI inventory was $402 million, which was offset by cost of sales of $123 millionassociated with VOI sales. The inventory spend included VOI construction at the Sheraton Vistana Villages inOrlando, FL, the Westin St. John Resort and Villas in the Virgin Islands, the Westin Riverfront Resort in Avon, CO,the Westin Nanea Ocean Resort Villas in Maui, HI, the Westin Desert Willow Villas in Palm Desert, CA, and theWestin Lagunamar Ocean Resort in Cancun, as well as construction costs at the St. Regis Bal Harbour Resort inMiami Beach, FL.

As a result of the global economic climate, we have scaled back our plans for capital expenditures in 2009. Ourcapital expenditure program includes both offensive and defensive capital. Defensive spend is related to repairs,maintenance, and renovations that we believe is necessary to stay competitive in the markets we are in. Other thancapital to address fire, life and safety issues, we consider defensive capital to be discretionary and reductions to thiscapital program could result in decreases to our cash flow from operations, as hotels in certain markets couldbecome less desirable. The offensive capital expenditures, which are primarily related to new projects that weexpect will generate a return, are also considered discretionary. We currently anticipate that our defensive capitalexpenditures for 2009 (excluding vacation ownership and residential inventory) will be approximately $150 millionfor maintenance, renovations, and technology capital. The majority of this capital would be discretionary and wouldbe unrelated to fire, life and safety issues. In addition, we currently expect to spend approximately $175 million forinvestment projects, including construction of the St. Regis Bal Harbour and various joint ventures and otherinvestments.

In order to secure management or franchise agreements, we have made loans to third-party owners, mademinority investments in joint ventures and provided certain guarantees and indemnifications. See Note 23 of theconsolidated financial statements for discussion regarding the amount of loans we have outstanding with owners,unfunded loan commitments, equity and other potential contributions, surety bonds outstanding, performanceguarantees and indemnifications we are obligated under, and investments in hotels and joint ventures.

We intend to finance the acquisition of additional hotel properties (including equity investments), constructionof the St. Regis Bal Harbour, hotel renovations, VOI and residential construction, capital improvements, technologyspend and other core and ancillary business acquisitions and investments and provide for general corporate purposes(including dividend payments and share repurchases) through our credit facilities described below, through the netproceeds from dispositions, through the assumption of debt, and from cash generated from operations.

We periodically review our business to identify properties or other assets that we believe either are non-core(including hotels where the return on invested capital is not adequate), no longer complement our business, are inmarkets which may not benefit us as much as other markets during an economic recovery or could be sold atsignificant premiums. We are focused on enhancing real estate returns and monetizing investments.

Since 2006, we have sold 56 hotels realizing proceeds of approximately $5 billion in numerous transactions(see Note 5 of the consolidated financial statements). There can be no assurance, however, that we will be able tocomplete future dispositions on commercially reasonable terms or at all.

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Cash Used for Financing Activities

The following is a summary of our debt portfolio (including capital leases) as of December 31, 2008:

AmountOutstanding atDecember 31,

2008(a)

Interest Rate atDecember 31,

2008AverageMaturity

(Dollars in millions) (In years)

Floating Rate DebtSenior Credit Facilities:

Revolving Credit Facilities . . . . . . . . . . . . . . . . . . . . $ 213 2.32% 2.1

Term Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,375 2.35% 1.3

Mortgages and Other . . . . . . . . . . . . . . . . . . . . . . . . 43 5.80% 4.0

Total/Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,631 2.43% 1.5

Fixed Rate DebtSenior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,249 7.14% 5.3

Mortgages and Other . . . . . . . . . . . . . . . . . . . . . . . . 128 7.48% 9.2

Total/Average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,377 7.16% 5.5

Total DebtTotal Debt and Average Terms . . . . . . . . . . . . . . . . . $4,008 5.24% 3.9

(a) Excludes approximately $642 million of our share of unconsolidated joint venture debt, all of which is non-recourse.

Due to the current credit liquidity crisis, we evaluated the commitments of each of the lenders in our RevolvingCredit Facilities (the “Facilities”). In addition, we have reviewed our debt covenants and restrictions and do notanticipate any issues regarding the availability of funds under the Facilities.

See Note 15 of the consolidated financial statements for specifics related to our financing transactions,issuances, and terms entered into for the years ended December 31, 2008 and 2007.

Our Facilities are used to fund general corporate cash needs. As of December 31, 2008, we have availability ofover $1.5 billion under the Facilities. The term loan maturity of $500 million on June 29, 2009 is expected to berepaid using cash balances generated from operations and proceeds from our Facilities. We have reviewed thefinancial covenants associated with our Facilities, the most restrictive being the leverage ratio. As of December 31,2008, we were in compliance with this covenant and expect to remain in compliance through the end of 2009. Wehave the ability to manage the business in order to reduce our leverage ratio by reducing operating costs, selling,general and administrative costs and postponing discretionary capital expenditures. However, there can be noassurance that we will stay below the required leverage ratio if the current economic climate continues to worsen.

Our current credit ratings and outlook are as follows: S&P BB+ (negative outlook); Moody’s Baa3 (underreview for possible downgrade); and; Fitch BB+ (negative outlook). Our debt was downgraded by S&P in the fourthquarter of 2008 and by Fitch in 2009, primarily due to the trends in the lodging industry and the impact of the currentmarket conditions on our ability to meet our future debt covenants. The impact of the ratings could impact ourcurrent and future borrowing costs, which cannot be currently estimated.

We have historically securitized our VOI notes receivable as a financing mechanism. However, due to theliquidity crisis and unfavorable markets we have not securitized any notes receivable since 2006. Althoughconditions remain uncertain in the asset backed securities market, we are exploring a variety of avenues to sellvacation ownership receivables. However, given unpredictable market conditions, we do not currently expect toreceive proceeds from securitizations in 2009.

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Based upon the current level of operations, management believes that our cash flow from operations and assetsales, together with our significant cash balances (approximately $491 million at December 31, 2008, including$102 million of short-term and long-term restricted cash), available borrowings under the Facilities and other bankcredit facilities (approximately $1.585 billion at December 31, 2008 which includes $35 million from internationalrevolving lines of credit), our expected income tax refund of over $200 million in 2009 (see Note 14 of theconsolidated financial statements), and capacity for additional borrowings will be adequate to meet anticipatedrequirements for scheduled maturities, dividends, working capital, capital expenditures, marketing and advertisingprogram expenditures, other discretionary investments, interest and scheduled principal payments and sharerepurchases for the foreseeable future. However, there can be no assurance that we will be able to refinance ourindebtedness as it becomes due and, if refinanced, on favorable terms. In addition, there can be no assurance that inour continuing business we will generate cash flow at or above historical levels, that currently anticipated resultswill be achieved or that we will be able to complete dispositions on commercially reasonable terms or at all.

If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may berequired to sell additional assets at lower than preferred amounts, reduce capital expenditures, refinance all or aportion of our existing debt or obtain additional financing at unfavorable rates. Our ability to make scheduledprincipal payments, to pay interest on or to refinance our indebtedness depends on our future performance andfinancial results, which, to a certain extent, are subject to general conditions in or affecting the hotel and vacationownership industries and to general economic, political, financial, competitive, legislative and regulatory factorsbeyond our control.

We had the following contractual obligations(1) outstanding as of December 31, 2008 (in millions):

TotalDue in LessThan 1 Year

Due in1-3 Years

Due in3-5 Years

Due After5 Years

Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,006 $506 $1,101 $1,500 $ 899

Capital lease obligations(2) . . . . . . . . . . . . 2 — — — 2

Operating lease obligations . . . . . . . . . . . . 1,158 90 200 170 698

Unconditional purchase obligations(3) . . . . 98 35 59 2 2Other long-term obligations . . . . . . . . . . . 4 — 3 1 —

Total contractual obligations . . . . . . . . . . . $5,268 $631 $1,363 $1,673 $1,601

(1) The table below excludes unrecognized tax benefits that would require cash outlays for $503 million, the timingof which is uncertain. Refer to Note 14 of the consolidated financial statements for additional discussion on thismatter. In addition, the table excludes amounts related to the construction of our St. Regis Bal Harbour projectthat has a total project cost of $780 million, of which $226 million has been paid through December 31, 2008.

(2) Excludes sublease income of $2 million.

(3) Included in these balances are commitments that may be reimbursed or satisfied by our managed and franchisedproperties.

We had the following commercial commitments outstanding as of December 31, 2008 (in millions):

TotalLess Than

1 Year 1-3 Years 3-5 YearsAfter

5 Years

Amount of Commitment Expiration Per Period

Standby letters of credit . . . . . . . . . . . . . . . . . . $115 $115 $— $— $—

A dividend of $0.90 per share was paid in January 2009 to shareholders of record as of December 31, 2008.

A dividend of $0.90 per share was paid in January 2008 to shareholders of record as of December 31, 2007.

Stock Sales and Repurchases

Share Repurchases. In April of 2007, the Board of Directors authorized an additional $1 billion in Sharerepurchases under our existing Corporate Share Repurchase Authorization (the “Share Repurchase Authoriza-tion”). In November 2007, the Board of Directors of Starwood further authorized the repurchase of up to an

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additional $1 billion of Corporation Shares under the Share Repurchase Authorization. During the year endedDecember 31, 2008, we repurchased approximately 13.6 million shares at a total cost of approximately $593 mil-lion. As of December 31, 2008, there was no availability remaining under the Share Repurchase Authorization.

At December 31, 2008, we had outstanding approximately 183 million Corporation Shares and 178,000 SLCOperating Limited Partnership units.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements include retained interests in securitizations of $19 million, letters of creditof $115 million, unconditional purchase obligations of $98 million and surety bonds of $91 million. These items aremore fully discussed earlier in this section and in the Notes to Financial Statements and Item 8 of Part II of thisreport.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

In limited instances, we seek to reduce earnings and cash flow volatility associated with changes in interestrates and foreign currency exchange rates by entering into financial arrangements intended to provide a hedgeagainst a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extentthey are not hedged.

We enter into a derivative financial arrangement to the extent it meets the objectives described above, and wedo not engage in such transactions for trading or speculative purposes.

At year-end 2008, we were party to the following derivative instruments:

• Forward contracts to hedge forecasted transactions for management and franchise fee revenues earned inforeign currencies. The aggregate dollar equivalent of the notional amounts was approximately $55 million,and they expire in 2009.

• Forward foreign exchange contracts to manage the foreign currency exposure related to certain intercom-pany loans not deemed to be permanently invested. The aggregate dollar equivalent of the notional amountsof the forward contracts was approximately $376 million and they expire in 2009.

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The following table sets forth the scheduled maturities and the total fair value of our debt portfolio and otherfinancial instruments as of year-end 2008 (in millions, excluding interest rates):

2009 2010 2011 2012 2013 Thereafter

Total atDecember 31,

2008

Total FairValue at

December 31,2008

Expected Maturity or Transaction DateAt December 31,

LiabilitiesFixed rate . . . . . . . . . . . . . . . $ 6 $ 5 $ 8 $804 $653 $901 $2,377 $1,599

Average interest rate . . . . . . . 7.16%

Floating rate . . . . . . . . . . . . . $500 $500 $588 $ 43 $ — $ — $1,631 $1,631

Average interest rate . . . . . . . 2.43%

Forward Foreign ExchangeHedge Contracts:Fixed (EUR) to Fixed

(USD) . . . . . . . . . . . . . . . . $ 51 $ — $ — $ — $ — $ — $ 5 $ 5

Average Exchange rate . . . . . . 1.39

Fixed (CAD) to Fixed(USD) . . . . . . . . . . . . . . . . $ 4 $ — $ — $ — $ — $ — $ 1 $ 1

Average Exchange rate . . . . . . .81

Forward Foreign ExchangeContracts:Fixed (EUR) to Fixed

(USD) . . . . . . . . . . . . . . . . $198 $ — $ — $ — $ — $ — $ (1) $ (1)

Average Exchange rate . . . . . . 1.41

Fixed (ARS) to Fixed(USD) . . . . . . . . . . . . . . . . $ 15 $ — $ — $ — $ — $ — $ — $ —

Average Exchange rate . . . . . . .28

Fixed (CLP) to Fixed (USD). . $ 15 $ — $ — $ — $ — $ — $ — $ —

Average Exchange rate . . . . . . .00

Fixed (MYR) to Fixed(USD) . . . . . . . . . . . . . . . . $ 18 $ — $ — $ — $ — $ — $ — $ —

Average Exchange rate . . . . . . .29

Fixed (JPY) to Fixed (USD) . . $ 12 $ — $ — $ — $ — $ — $ — $ —

Average Exchange rate . . . . . . .01

Fixed (CAD) to Fixed(USD) . . . . . . . . . . . . . . . . $ 8 $ — $ — $ — $ — $ — $ — $ —

Average Exchange rate . . . . . . .84Fixed (AUD) to Fixed

(USD) . . . . . . . . . . . . . . . . $ 22 $ — $ — $ — $ — $ — $ (1) $ (1)Average Exchange rate . . . . . . .70

Fixed (JPY) to Fixed (SGD) . . $ 6 $ — $ — $ — $ — $ — $ — $ —

Fixed (SGD) to Fixed(THB) . . . . . . . . . . . . . . . . $ 5 $ — $ — $ — $ — $ — $ — $ —

Fixed (AUD) to Fixed(EUR) . . . . . . . . . . . . . . . . $ 43 $ — $ — $ — $ — $ — $ (1) $ (1)

Fixed (GBP) to Fixed(EUR) . . . . . . . . . . . . . . . . $ 27 $ — $ — $ — $ — $ — $ — $ —

Fixed (JPY) to Fixed (THB) . . $ 6 $ — $ — $ — $ — $ — $ — $ —

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Item 8. Financial Statements and Supplementary Data.

The financial statements and supplementary data required by this Item are included in Item 15 of this AnnualReport and are incorporated herein by reference.

Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.

Not applicable.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s management conducted an evaluation, under the supervision and with the participation of theCompany’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures as of December 31, 2008. Based on this evaluation, the ChiefExecutive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures areeffective in alerting them in a timely manner to material information required to be included in the Company’s SECreports.

Management’s Report on Internal Control over Financial Reporting

Management of Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries is responsible for establishingand maintaining adequate internal control over financial reporting, as such term is defined in Exchange ActRule 13a-15(f) or 15(d)-15(f). Those rules define internal control over financial reporting as a process designed toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles (“GAAP”) andincludes those policies and procedures that:

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactionsand dispositions of the assets of the Company;

• Provide reasonable assurance that the transactions are recorded as necessary to permit the preparation offinancial statements in accordance with GAAP, and the receipts and expenditures of the Company are beingmade only in accordance with authorizations of management and directors of the Company; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use ordisposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controlsmay become inadequate because of changes in conditions, or that the degree of compliance with policies orprocedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal controls over financialreporting as of December 31, 2008. In making this assessment, the Company’s management used the criteriaestablished in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). Based on our assessment and those criteria, management believes that, as ofDecember 31, 2008, the Company’s internal control over financial reporting is effective.

Management has engaged Ernst & Young LLP, the independent registered public accounting firm that auditedthe financial statements included in this Annual Report on Form 10-K, to attest to the Company’s internal controlover financial reporting. Its report is included herein.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Starwood Hotels & Resorts Worldwide, Inc.

We have audited Starwood Hotels & Resorts Worldwide, Inc.’s (the “Company”) internal control over financialreporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). TheCompany’s management is responsible for maintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reporting included in the accompanyingManagement’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinionon the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on theassessed risk, and performing such other procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’sassets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financialreporting as of December 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of the Company as of December 31, 2008 and 2007 and the relatedconsolidated statements of income, comprehensive income, equity and cash flows for each of the three years in theperiod ended December 31, 2008 of the Company and our report dated February 26, 2009, expressed an unqualifiedopinion thereon.

/s/ Ernst & Young LLP

New York, New YorkFebruary 26, 2009

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Changes in Internal Controls

There has not been any change in our internal control over financial reporting identified in connection with theevaluation that occurred during the year ended December 31, 2008 that has materially affected, or is reasonablylikely to materially affect, those controls.

Item 10. Directors, Executive Officers and Corporate Governance.

The Board of Directors of the Company is currently comprised of 10 members, each of whom is elected for aone-year term. The following table sets forth, for each of the members of the Board of Directors as of the date of thisAnnual Report, certain information regarding such Director.

Name (Age) Principal Occupation and Business Experience Service Period

Frits van Paasschen (47) Chief Executive Officer of the Company sinceSeptember 2007. Prior to joining Starwood, Mr. vanPaasschen served as President and CEO of CoorsBrewing Company. From April 2004 to March2005, Mr. van Paasschen worked independentlythrough FPaasschen Consulting and MercatorInvestments. From 1997 to 2004, Mr. van Paasschenheld various positions at Nike, Inc., most recentlyas Corporate Vice President/General Manager,Europe, Middle East and Africa. From 1995 to1997, Mr. van Paasschen served as Vice President,Finance and Planning at Disney Consumer Productsand earlier in his career was a managementconsultant for eight years at McKinsey & Companyand the Boston Consulting Group.

CEO and Director sinceSeptember 2007

Adam M. Aron (54) Chairman and Chief Executive Officer of WorldLeisure Partners, Inc., a leisure-related consultancy,since 2006. From 1996 through 2006, Mr. Aronserved as Chairman and Chief Executive Officer ofVail Resorts, Inc., an owner and operator of skiresorts and hotels. Mr. Aron is a director ofNorwegian Cruise Line Limited and Prestige CruiseHoldings, Inc.

Director since August2006

Charlene Barshefsky (58) Senior International Partner at the law firm ofWilmerHale, LLP, Washington, D.C. sinceSeptember 2001. From March 1997 to January2001, Ambassador Barshefsky was the UnitedStates Trade Representative, the chief tradenegotiator and principal trade policy maker for theUnited States and a member of the President’sCabinet. Ambassador Barshefsky is a director ofThe Estee Lauder Companies, Inc., AmericanExpress Company and Intel Corporation.Ambassador Barshefsky also serves on the Board ofDirectors of the Council on Foreign Relations and isa Trustee of the Howard Hughes Medical Institute.She has been a Director of the Company, and was aTrustee of the Trust, since October 2001.

Director and Trustee(1)

since October 2001

46

Name (Age) Principal Occupation and Business Experience Service Period

Thomas E. Clarke (57) President of New Business Ventures of Nike, Inc., adesigner, developer and marketer of footwear,apparel and accessory products, since 2001.Dr. Clarke joined Nike, Inc. in 1980. He wasappointed Divisional Vice President in charge ofmarketing in 1987, Corporate Vice President in1990, and served as President and Chief OperatingOfficer from 1994 to 2000. Dr. Clarke previouslyheld various positions with Nike, Inc. primarily inresearch, design, development and marketing.Dr. Clarke is also a director of Newell Rubbermaid,a global marketer of consumer and commercialproducts.

Director since April 2008

Clayton C. Daley, Jr. (57) Spent his entire professional career with Procter &Gamble, joining the company in 1974, and has helda number of key accounting and finance positionsincluding Comptroller, U.S. Operations forProcter & Gamble USA; Vice President andComptroller of Procter & Gamble International andVice President and Treasurer. Mr. Daley wasappointed to his current position as Chief FinancialOfficer, Procter & Gamble in 1998 and was electedVice Chair in 2007. Mr. Daley is a director of BoysScouts of America, Dan Beard Council, CancerFamily Care and Nucor Corporation.

Director since November2008

Bruce W. Duncan (57) President, CEO and Director of First IndustrialRealty Trust, Inc. since January 2009 prior to whichtime he was a private investor since January 2006.From April to September 2007, Mr. Duncan servedas Chief Executive Officer of the Company on aninterim basis. He also has been a senior advisor toKohlberg Kravis & Roberts & Co. from July 2008to January 2009. From May 2005 to December2005, Mr. Duncan was Chief Executive Officer andTrustee of Equity Residential (“EQR”), a publiclytraded apartment company. From January 2003 toMay 2005, he was President and Trustee of EQR.

Chairman of the Boardssince May 2005;Director since April 1999;Trustee(1) since August1995

Lizanne Galbreath (51) Managing Partner of Galbreath & Company, a realestate investment firm, since 1999. From April 1997to 1999, Ms. Galbreath was Managing Director ofLaSalle Partners/Jones Lang LaSalle where she alsoserved as a Director. From 1984 to 1997,Ms. Galbreath served as a Managing Director thenChairman and CEO of The Galbreath Company, thepredecessor entity of Galbreath & Company.

Director and Trustee(1)

since May 2005

Eric Hippeau (57) Managing Partner of Softbank Capital Partners, atechnology venture capital firm, since March 2000.Mr. Hippeau served as Chairman and ChiefExecutive Officer of Ziff-Davis Inc., an integratedmedia and marketing company, from 1993 to March2000 and held various other positions with Ziff-Davis from 1989 to 1993. Mr. Hippeau is adirector of Yahoo! Inc.

Director and Trustee(1)

since April 1999

47

Name (Age) Principal Occupation and Business Experience Service Period

Stephen R. Quazzo (49) Managing Director, Chief Executive Officer and co-founder of Transwestern Investment Company,L.L.C., a real estate principal investment firm, sinceMarch 1996. From April 1991 to March 1996, Mr.Quazzo was President of Equity InstitutionalInvestors, Inc., a subsidiary of Equity GroupInvestments, Inc.

Director since April 1999;Trustee(1) since August1995

Thomas O. Ryder (64) Retired as Chairman of the Board of The Reader’sDigest Association, Inc. on January 1, 2007. Priorto his retirement, Mr. Ryder was Chairman of theBoard of Reader’s Digest Association, Inc. sinceJanuary 1, 2006 and Chairman of the Board andChief Executive Officer from April 1998 throughDecember 31, 2005. Mr. Ryder was President,American Express Travel Related ServicesInternational, a division of American ExpressCompany, which provides travel, financial andnetwork services, from October 1995 to April 1998.He is a director of Amazon.com, Inc. and Chairmanof the Board of Virgin Mobile USA, Inc.

Director and Trustee(1)

since April 2001

Kneeland C.Youngblood (53)

A founding partner of Pharos Capital Group,L.L.C., a private equity fund focused on technologycompanies, business service companies and healthcare companies, since January 1998. From July1985 to December 1997, he was in private medicalpractice. He is former Chairman of the Board of theAmerican Beacon Funds, a mutual fund companymanaged by AMR Investments, an investmentaffiliate of American Airlines. He is also a directorof Burger King Holdings, Inc., Gap, Inc., andEnergy Future Holdings (formerly TXU Corp.).

Director and Trustee(1)

since April 2001

(1) Prior to the Host Transaction, the Trust was a subsidiary of the Corporation and directors may have also servedas Trustees of the Trust. On April 10, 2006, in connection with the Host Transaction, the Trustees resigned.

Executive Officers of the Registrants

The following table includes certain information with respect to each of the Company’s executive officers.

Name Age Position

Frits van Paasschen . . . . . . . . . . . 47 Chief Executive Officer and a Director

Matthew E. Avril . . . . . . . . . . . . 49 President, Hotel Group

Vasant M. Prabhu . . . . . . . . . . . . 49 Executive Vice President and Chief Financial Officer

Kenneth S. Siegel . . . . . . . . . . . . 53 Chief Administrative Officer, General Counsel and Secretary

Simon M. Turner . . . . . . . . . . . . 47 President, Global DevelopmentPhilip P. McAveety . . . . . . . . . . . 42 Executive Vice President and Chief Brand Officer

Jeffrey M. Cava . . . . . . . . . . . . . 57 Executive Vice President and Chief Human Resources Officer

Frits van Paasschen. See Item 10. Directors, Executive Officers and Corporate Governance above.

Matthew E. Avril. Mr. Avril has been President, Hotel Group, since September 2008. From January 1, 2004until September 2008, he was President & Managing Director of Operations for Starwood Vacation Ownership.

Philip P. McAveety. Mr. McAveety has been Executive Vice President and Chief Brand Officer since April2008. Prior to joining the company, Mr. McAveety was Global Brand Director of Camper, a fashion footwear

48

company, from January 2007 until March 2008. From July 1997 until December 2006, he served as Vice President,Brand Marketing, Europe, Middle East and Africa at Nike, Inc.

Vasant M. Prabhu. Mr. Prabhu has been the Executive Vice President and Chief Financial Officer sinceJanuary 2004. Prior to joining the Company, Mr. Prabhu served as Executive Vice President and Chief FinancialOfficer for Safeway Inc., from September 2000 through December 2003. Mr. Prabhu was previously the Presidentof the Information and Media Group at the McGraw-Hill Companies, Inc., from June 1998 to August 2000, and heldseveral senior positions at divisions of PepsiCo, Inc. from June 1992 to May 1998. From August 1983 to May 1992he was a partner at Booz Allen Hamilton, an international management consulting firm. Mr. Prabhu is a director ofMattel, Inc.

Kenneth S. Siegel. Mr. Siegel has been Chief Administrative Officer and General Counsel since May 2006.From November 2000 to May 2006, Mr. Siegel held the position of Executive Vice President and General Counsel.In February 2001, he was also appointed as the Secretary of the Company. Mr. Siegel was formerly the Senior VicePresident and General Counsel of Gartner, Inc., a provider of research and analysis on information technologyindustries, from January 2000 to November 2000. Prior to that time, he served as Senior Vice President, GeneralCounsel and Corporate Secretary of IMS Health Incorporated, an information services company, and its prede-cessors from February 1997 to December 1999. Prior to that time, Mr. Siegel was a Partner in the law firm ofBaker & Botts, LLP. Mr. Siegel is also a Trustee and Chairman of Cancer Hope Network, a non-profit entity, aTrustee of Minority Corporate Counsel Association, and a Trustee of the American Hotel & Lodging EducationalFoundation.

Simon M. Turner. Mr. Turner has been President, Global Development since May 2008. From June 1996 toApril 2008, he was a principal of Hotel Capital Advisers, Inc., a hotel investment advisory firm. During this period,Mr. Turner served on the board of directors of Four Season Hotels, Inc., serving as a member of the HumanResources Committee and the Audit Committee. He was also a member of the board of Fairmont Raffles HotelsInternational and was chairman of the Audit Committee. From July 1987 to May 1996, Mr. Turner was a member ofthe Investment Banking Department of Salomon Brothers, based in both New York and London.

Jeffrey M. Cava. Mr. Cava has been Executive Vice President and Chief Human Resources Officer, sinceMay 2008. Mr. Cava served as Executive Vice President and Chief Human Resources Officer for Wendy’sInternational, Inc. from June 2003 to May 2008. Prior to joining Wendy’s, Mr. Cava was Vice President & ChiefHuman Resources Officer for Nike Inc.; Vice President Human Resources for The Walt Disney Company,Consumer Products Group; and Vice President of Global Staffing, Training and Development for ITT SheratonCorporation.

Corporate Governance

We have submitted the CEO certification to the NYSE pursuant to NYSE Rule 303A.12(a) following the 2008Annual Meeting of Shareholders.

The remaining information called for by Item 10 is incorporated by reference to the information under thefollowing captions in the Proxy Statement: “Corporate Governance”; “Election of Directors”; “Board Meetings andCommittees”; and; “Section 16(a) Beneficial Ownership Reporting Compliance.”

Item 11. Executive Compensation.

The information called for by Item 11 is incorporated by reference to the information under the followingcaptions in the Proxy Statement: “Executive Compensation,” “Compensation Discussion and Analysis,” “Com-pensation Committee Report,” “Summary Compensation Table,” “Grants of Plan-Based Awards,” “NarrativeDisclosure to Summary Compensation Table and Grants of Plan-Based Awards,” “Outstanding Equity Awards atFiscal Year-End,” “Option Exercises and Stock Vested,” “Nonqualified Deferred Compensation,” “PotentialPayments upon Termination or Change-in-Control,” and “Director Compensation.”

49

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters.

The information called for by Item 12 is incorporated by reference to the information under the caption“Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Informa-tion-December 31, 2008” in the Proxy Statement.

Item 13. Certain Relationships and Related Transactions and Director Independence.

The information called for by Item 13 is incorporated by reference to the information under the captions“Certain Relationships and Related Transactions” and “Corporate Governance” in the Proxy Statement.

Item 14. Principal Accountant Fees and Services.

The information called for by Item 14 is incorporated by reference to the information under the captions,“Audit Fees” and “Pre-Approval of Services in the Proxy Statement.”

50

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE

Page

Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2

Consolidated Balance Sheets as of December 31, 2008 and 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006 . . . . . . . . . F-4

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2008, 2007 and2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statements of Equity for the Years Ended December 31, 2008, 2007 and 2006. . . . . . . . . . F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006 . . . . . . F-7

Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8

Schedule:

Schedule II — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Starwood Hotels & Resorts Worldwide, Inc.

We have audited the accompanying consolidated balance sheets of Starwood Hotels & Resorts Worldwide,Inc. (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income,comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2008.Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financialstatements and schedule are the responsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, theconsolidated financial position of the Company at December 31, 2008 and 2007, and the consolidated resultsof its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformitywith U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule,when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respectsthe information set forth therein.

As discussed in Note 2 to the consolidated financial statements, the Company adopted Financial AccountingStandards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes an Interpretation of FASBStatement No. 109, on January 1, 2007, Statement of Financial Accounting Standards (“SFAS”) No. 152,Accounting for Real Estate Time-Sharing Transactions, and SFAS No. 123 (revised 2004), Share-Based Payment,on January 1, 2006 and SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postre-tirement Plans, on December 31, 2006.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board(United States), the Company’s internal control over financial reporting as of December 31, 2008, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission and our report dated February 26, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

New York, New YorkFebruary 26, 2009

F-2

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

2008 2007December 31,

(In millions, exceptshare data)

ASSETSCurrent assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 389 $ 151Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 196Accounts receivable, net of allowance for doubtful accounts of $49 and $50 . . . . . . . . . . 552 627Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 986 714Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 136

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,166 1,824Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372 423Plant, property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,599 3,850Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 —Goodwill and intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,235 2,302Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 639 729Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 682 494

$9,703 $9,622

LIABILITIES AND STOCKHOLDERS’ EQUITYCurrent liabilities:

Short-term borrowings and current maturities of long-term debt . . . . . . . . . . . . . . . . . . . $ 506 $ 5Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 201Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,274 1,175Accrued salaries, wages and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 405Accrued taxes and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391 315

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,688 2,101Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,502 3,590Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 28Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,843 1,801

8,059 7,520

Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 26

Commitments and contingenciesStockholders’ equity:

Corporation common stock; $0.01 par value; authorized 1,000,000,000 sharesoutstanding 182,827,483 and 190,998,585 shares at December 31, 2008 and 2007respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2

Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 868Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (391) (147)Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,517 1,353

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,621 2,076

$9,703 $9,622

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

F-3

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF INCOME

2008 2007 2006Year Ended December 31,

(In millions, except per sharedata)

RevenuesOwned, leased and consolidated joint venture hotels . . . . . . . . . . . . . . . . . . . . . . $2,259 $2,429 $2,692Vacation ownership and residential sales and services . . . . . . . . . . . . . . . . . . . . . 749 1,025 1,005Management fees, franchise fees and other income . . . . . . . . . . . . . . . . . . . . . . . 857 834 693Other revenues from managed and franchised properties . . . . . . . . . . . . . . . . . . . 2,042 1,865 1,589

5,907 6,153 5,979Cost and ExpensesOwned, leased and consolidated joint venture hotels . . . . . . . . . . . . . . . . . . . . . . 1,722 1,805 2,023Vacation ownership and residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583 758 736Selling, general, administrative and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477 508 466Restructuring and other special charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141 53 20Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 280 280Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 26 26Other expenses from managed and franchised properties . . . . . . . . . . . . . . . . . . . 2,042 1,865 1,589

5,288 5,295 5,140Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 858 839Equity earnings and gains and losses from unconsolidated ventures, net . . . . . . . 16 66 61Interest expense, net of interest income of $3, $21 and $29 . . . . . . . . . . . . . . . . . (207) (147) (215)Loss on asset dispositions and impairments, net . . . . . . . . . . . . . . . . . . . . . . . . . (98) (44) (3)

Income from continuing operations before taxes and minority equity . . . . . . . . . . 330 733 682Income tax (expense) benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (76) (189) 434Minority equity in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1) (1)

Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 543 1,115Discontinued operations:

Gain (loss) on dispositions, net of tax expense of $54, $1 and $2 . . . . . . . . . . 75 (1) (2)Cumulative effect of accounting change, net of tax . . . . . . . . . . . . . . . . . . . . . . . — — (70)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 329 $ 542 $1,043

Earnings (Losses) Per Share — BasicContinuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.40 $ 2.67 $ 5.25Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.41 — (0.01)Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (0.33)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.81 $ 2.67 $ 4.91

Earnings (Losses) Per Share — DilutedContinuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.37 $ 2.57 $ 5.01Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.40 — (0.01)Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (0.31)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.77 $ 2.57 $ 4.69

Weighted average number of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 203 213

Weighted average number of Shares assuming dilution . . . . . . . . . . . . . . . . . . . . 185 211 223

Distribution and dividends declared per Share. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.90 $ 0.90 $ 0.84

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

F-4

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

2008 2007 2006Year Ended December 31,

(In millions)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 329 $542 $1,043

Other comprehensive income (loss), net of taxes:

Foreign currency translation adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (190) 84 72

Recognition of accumulated foreign currency translation adjustments on soldhotels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 29

Pension liability adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (58) 3 2

Change in fair value of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 — —

Unrealized losses on investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (6) (1)

(244) 81 102

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85 $623 $1,145

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

F-5

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF EQUITY

Shares Amount Shares Amount Shares Amount

AdditionalPaid-in

Capital(b)Deferred

Compensation

AccumulatedOther

ComprehensiveLoss(a)

RetainedEarnings

ExchangeableUnits and

Class B EPS Class A EPS Shares

(In millions)

Balance at December 31, 2005 . . . — $— 1 $— 217 $ 4 $ 5,412 $(53) $(322) $ 170Net income . . . . . . . . . . . . . . . — — — — — — — — — 1,043Implementation of

SFAS No. 123(R) . . . . . . . . . . — — — — — — (53) 53 — —Disposition of the Trust(c) . . . . . . — — — — — — (2,368) — — (83)Stock option and restricted stock

award transactions, net . . . . . . . — — — — 15 — 588 — — —ESPP stock issuances . . . . . . . . . — — — — — — 7 — — —Share repurchases . . . . . . . . . . . — — — — (22) — (1,263) — — —Redemption of convertible debt . . . — — — — 3 — — — — —Conversion or redemption and

cancellation of Class A EPS,Class B EPS and PartnershipUnits . . . . . . . . . . . . . . . . . — — (1) — — (2) (37) — — —

Foreign currency translation . . . . . — — — — — — — — 72 —Recognition of accumulated foreign

currency translation adjustmentson sold hotels . . . . . . . . . . . . — — — — — — — — 29 —

Minimum pension liabilityadjustment . . . . . . . . . . . . . . — — — — — — — — 2 —

Implementation of SFAS No. 158,net . . . . . . . . . . . . . . . . . . . — — — — — — — — (8) —

Unrealized loss on securities, net . . — — — — — — — — (1) —Distributions declared . . . . . . . . . — — — — — — — — — (182)

Balance at December 31, 2006 . . . — — — — 213 2 2,286 — (228) 948Net income . . . . . . . . . . . . . . . — — — — — — — — — 542Stock option and restricted stock

award transactions, net . . . . . . . — — — — 7 — 358 — — —ESPP stock issuances . . . . . . . . . — — — — — — 7 — — —Share repurchases . . . . . . . . . . . — — — — (29) — (1,787) — — —Tax adjustments related to the

disposition of the Trust . . . . . . — — — — — — 4 — — —FIN No. 48 implementation . . . . . — — — — — — — — — 35Foreign currency translation . . . . . — — — — — — — — 84 —Unrealized loss on securities, net . . — — — — — — — — (6) —Pension adjustments . . . . . . . . . . — — — — — — — — 3 —Dividends declared . . . . . . . . . . — — — — — — — — — (172)

Balance at December 31, 2007 . . . — — — — 191 2 868 — (147) 1,353Net income . . . . . . . . . . . . . . . — — — — — — — — — 329Stock option and restricted stock

award transactions, net . . . . . . . — — — — 6 — 212 — — —ESPP stock issuances . . . . . . . . . — — — — — — 6 — — —Share repurchases . . . . . . . . . . . — — — — (14) — (593) — — —Foreign currency translation . . . . . — — — — — — — — (190) —Unrealized loss on investments . . . — — — — — — — — (2) —Change in fair value of

derivatives . . . . . . . . . . . . . . — — — — — — — — 6 —Pension adjustments, net . . . . . . . — — — — — — — — (58) —Dividends declared . . . . . . . . . . — — — — — — — — — (165)

Balance at December 31, 2008 . . . — $— — $— 183 $ 2 $ 493 $ — $(391) $1,517

(a) As of December 31, 2008, this balance is comprised of $304 million of cumulative translation adjustments, $4 unrealized net gain onsecurities and $91 million of cumulative pension adjustments.

(b) Stock option and restricted stock award transactions are net of a tax benefit of $33 million, $65 million and $143 million in 2008, 2007, and2006, respectively.

(c) As part of the Host Transaction, the Company sold the Class A Shares of the Trust and shareholders sold the Class B Shares of the Trust. Thebook value of the Trust associated with this sale was removed through retained earnings up to the amount of retained earnings that existed atthe sale date with the remaining balance reducing additional paid-in capital. See Note 1 for additional information on the Host Transaction.

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

F-6

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

2008 2007 2006Year Ended December 31,

(In millions)

Operating ActivitiesNet income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 329 $ 542 $ 1,043Adjustments to net income:

Discontinued operations:(Gain) loss on dispositions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (75) — 2Other adjustments relating to discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 —

Cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 70Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 99 103Excess stock-based compensation tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16) (46) (87)Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 306 306Amortization of deferred loan costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4 5Non-cash portion of restructuring and other special charges (credits), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 48 (7)Non-cash foreign currency (gains) losses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) 11 (8)Amortization of deferred gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (83) (81) (62)Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 43 25Minority equity in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1 —Distributions in excess (deficit) of equity earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 10 (30)Gain on sale of VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (2) (18)Loss on asset dispositions and impairments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 44 3Non-cash portion of income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 (142) (620)

Changes in working capital:Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 134 (35)Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 (34) 49Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (280) (143) (82)Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (2) (11)Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 177 12Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) 210 (64)

VOI notes receivable activity, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (150) (209) (109)Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 (87) 15

Cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 646 884 500

Investing ActivitiesPurchases of plant, property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (476) (384) (371)Proceeds from asset sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 133 1,515Issuance of notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (10) (19)Collection of notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 55 114Acquisitions, net of acquired cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (74) (25)Purchases of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) (49) (61)Proceeds from investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 112 252Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21) 2 (3)

Cash (used for) from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (172) (215) 1,402

Financing ActivitiesRevolving credit facility and short-term borrowings (repayments), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (570) 341 73Long-term debt issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 986 1,400 2Long-term debt repaid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (799) (1,534)Dividends/distributions paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (172) (90) (276)Proceeds from stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 190 380Excess stock based compensation tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 46 87Share repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (593) (1,787) (1,287)Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) (13) (80)

Cash used for financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (243) (712) (2,635)Exchange rate effect on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 11 19

Increase (Decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 (32) (714)Cash and cash equivalents — beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 183 897

Cash and cash equivalents — end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 389 $ 151 $ 183

Supplemental Disclosures of Cash Flow InformationCash paid during the period for:

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 186 $ 164 $ 247

Income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58 $ 128 $ 249

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

F-7

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying consolidated financial statements represent the consolidated financial position andconsolidated results of operations of Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the“Corporation”). Unless the context otherwise requires, all references to the Corporation include those entitiesowned or controlled by the Corporation, which prior to April 10, 2006 included Starwood Hotels & Resorts (the“Trust”). All references to “Starwood” or the “Company” refer to the Corporation, the Trust and its respectivesubsidiaries, collectively through April 7, 2006. As a result of the Host Transaction (as defined below) in April2006, the financial statements for the Trust are no longer required to be consolidated or presented separately, nor isthe Company required to include a guarantor footnote containing certain financial information for Sheraton HoldingCorporation (“Sheraton Holding”), a former subsidiary of the Corporation.

Starwood is one of the world’s largest hotel and leisure companies. The Company’s principal business is hotelsand leisure, which is comprised of a worldwide hospitality network of almost 970 full-service hotels, vacationownership resorts and residential developments primarily serving two markets: luxury and upscale. The principaloperations of Starwood Vacation Ownership, Inc. (“SVO”) include the acquisition, development and operation ofvacation ownership resorts; marketing and selling vacation ownership interests (“VOIs”) in the resorts; andproviding financing to customers who purchase such interests.

The Trust was formed in 1969 and elected to be taxed as a real estate investment trust under the InternalRevenue Code. In 1980, the Trust formed the Corporation and made a distribution to the Trust’s shareholders of oneshare of common stock, par value $0.01 per share, of the Corporation (a “Corporation Share”) for each commonshare of beneficial interest, par value $0.01 per share, of the Trust (a “Trust Share”).

Pursuant to a reorganization in 1999, the Trust became a subsidiary of the Corporation, which indirectly heldall outstanding shares of the new Class A shares of beneficial interest of the Trust (“Class A Shares”). In the 1999reorganization, each Trust Share was converted into one share of the new non-voting Class B Shares of beneficialinterest in the Trust (a “Class B Share”). Prior to the Host Transaction discussed below and in detail in Note 5, theCorporation Shares and the Class B Shares traded together on a one-for-one basis, consisting of one CorporationShare and one Class B Share (the “Shares”).

On April 7, 2006, in connection with the transaction (the “Host Transaction”) with Host Hotels & Resorts, Inc.,its subsidiary Host Marriot, L.P. and certain other subsidiaries of Host Hotels & Resorts, Inc. (collectively, “Host”)described below, the Shares were depaired and the Corporation Shares became transferable separately from theClass B Shares. As a result of the depairing, the Corporation Shares trade alone under the symbol “HOT” on theNew York Stock Exchange (“NYSE”). As of April 10, 2006, neither Shares nor Class B Shares are listed or tradedon the NYSE.

On April 10, 2006, in connection with the Host Transaction, certain subsidiaries of Host acquired the Trust andSheraton Holding from the Corporation. As part of the Host Transaction, among other things, (i) a subsidiary ofHost was merged with and into the Trust, with the Trust surviving as a subsidiary of Host, (ii) all the capital stock ofSheraton Holding was sold to Host and (iii) a subsidiary of Host was merged with and into SLT Realty LimitedPartnership (the “Realty Partnership”) with the Realty Partnership surviving as a subsidiary of Host.

Note 2. Significant Accounting Policies

Principles of Consolidation. The accompanying consolidated financial statements of the Company and itssubsidiaries include the assets, liabilities, revenues and expenses of majority-owned subsidiaries over which theCompany exercises control. Intercompany transactions and balances have been eliminated in consolidation.

Cash and Cash Equivalents. The Company considers all highly liquid investments purchased with anoriginal maturity of three months or less to be cash equivalents.

F-8

Restricted Cash. Restricted cash primarily consists of deposits received on sales of VOIs and residentialproperties that are held in escrow until a certificate of occupancy is obtained, the legal rescission period has expiredand the deed of trust has been recorded in governmental property ownership records. At December 31, 2008 and2007, the Company had short-term restricted cash balances of $96 million and $196 million, respectively.

Inventories. Inventories are comprised principally of VOIs of $729 million and $620 million as ofDecember 31, 2008 and 2007, respectively, residential inventory of $203 million and $33 million at December 31,2008 and 2007, respectively, hotel inventory and Bliss inventory. VOI and residential inventory is carried at thelower of cost or net realizable value and includes $25 million, $37 million and $22 million of capitalized interestincurred in 2008, 2007 and 2006, respectively. Hotel inventory includes operating supplies and food and beverageinventory items which are generally valued at the lower of FIFO cost (first-in, first-out) or market. Hotel inventoryalso includes linens, china, glass, silver, uniforms, utensils and guest room items. Significant purchases of theseitems with a useful life of greater than one year are recorded at purchased cost and amortized over their useful life.Normal replacement purchases are expensed as incurred. Bliss inventory is valued at lower of cost or market.

Loan Loss Reserves. For the vacation ownership and residential segment, the Company records an estimateof expected uncollectibility on its VOI notes receivable as a reduction of revenue at the time it recognizes profit on atimeshare sale. The Company holds large amounts of homogeneous VOI notes receivable and therefore assessesuncollectibility based on pools of receivables. In estimating loss reserves, the Company uses a technique referred toas static pool analysis, which tracks uncollectible notes for each year’s sales over the life of the respective notes andprojects an estimated default rate that is used in the determination of its loan loss reserve requirements. As ofDecember 31, 2008, the average estimated default rate for the Company’s pools of receivables was 7.9%. Given thesignificance of the Company’s respective pools of VOI notes receivable, a change in the projected default rate canhave a significant impact to its loan loss reserve requirements, with a 0.1% change estimated to have an impact ofapproximately $3 million.

For the hotel segment, the Company measures loan impairment based on the present value of expected futurecash flows discounted at the loan’s original effective interest rate or the estimated fair value of the collateral. Forimpaired loans, the Company establishes a specific impairment reserve for the difference between the recordedinvestment in the loan and the present value of the expected future cash flows or the estimated fair value of thecollateral. The Company applies the loan impairment policy individually to all loans in the portfolio and does notaggregate loans for the purpose of applying such policy. For loans that the Company has determined to be impaired,the Company recognizes interest income on a cash basis.

Assets Held for Sale. The Company considers properties to be assets held for sale when managementapproves and commits to a formal plan to actively market a property or group of properties for sale and a signedsales contract and significant non-refundable deposit or contract break-up fee exist. Upon designation as an assetheld for sale, the Company records the carrying value of each property or group of properties at the lower of itscarrying value which includes allocable segment goodwill or its estimated fair value, less estimated costs to sell, andthe Company stops recording depreciation expense. Any gain realized in connection with the sale of a property forwhich the Company has significant continuing involvement (such as through a long-term management agreement)is deferred and recognized over the initial term of the related agreement (See Note 12). The operations of theproperties held for sale prior to the sale date, if material, are recorded in discontinued operations unless theCompany will have continuing involvement (such as through a management or franchise agreement) after the sale.

Investments. Investments in joint ventures are accounted for using the guidance of the revised FinancialAccounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities,an Interpretation of ARB No. 51,” for all ventures deemed to be variable interest entities (“VIEs”). See additionalinformation regarding the Company’s VIEs in Note 23. All other joint venture investments are accounted for underthe equity method of accounting when the Company has a 20% to 50% ownership interest or exercises significantinfluence over the venture. If the Company’s interest exceeds 50% or in certain cases, if the Company exercises

F-9

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

control over the venture, the results of the joint venture are consolidated herein. All other investments are generallyaccounted for under the cost method.

The fair market value of investments is based on the market prices for the last day of the period if theinvestment trades on quoted exchanges. For non-traded investments, fair value is estimated based on the underlyingvalue of the investment, which is dependent on the performance of the investment as well as the volatility inherent inexternal markets for these types of investments. In assessing potential impairment for these investments, theCompany will consider these factors as well as forecasted financial performance of its investment. If these forecastsare not met, the Company may have to record impairment charges.

Plant, Property and Equipment. Plant, property and equipment, including capitalized interest of $10 mil-lion, $10 million and $5 million incurred in 2008, 2007 and 2006, respectively, applicable to major projectexpenditures are recorded at cost. The cost of improvements that extend the life of plant, property and equipment arecapitalized. These capitalized costs may include structural improvements, equipment and fixtures. Costs for normalrepairs and maintenance are expensed as incurred. Depreciation is recorded on a straight-line basis over theestimated useful economic lives of 15 to 40 years for buildings and improvements; 3 to 10 years for furniture,fixtures and equipment; 3 to 7 years for information technology software and equipment and the lesser of the leaseterm or the economic useful life for leasehold improvements. Gains or losses on the sale or retirement of assets areincluded in income when the assets are sold provided there is reasonable assurance of the collectibility of the salesprice and any future activities to be performed by the Company relating to the assets sold are insignificant.

The Company evaluates the carrying value of its assets for impairment. For assets in use when the triggerevents specified in Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impair-ment or Disposal of Long-Lived Assets,” occur, the expected undiscounted future cash flows of the assets arecompared to the net book value of the assets. If the expected undiscounted future cash flows are less than the netbook value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings.Fair value is based upon discounted cash flows of the assets at rates deemed reasonable for the type of asset andprevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pendingoffers.

Goodwill and Intangible Assets. Goodwill and intangible assets arise in connection with acquisitions,including the acquisition of management contracts. In accordance with the guidance in SFAS No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortizegoodwill and intangible assets with indefinite lives. Intangible assets with finite lives are amortized on a straight-line basis over their respective useful lives. The Company reviews all goodwill and intangible assets for impairmentby comparisons of fair value to book value annually, or upon the occurrence of a trigger event. Impairment charges,if any, are recognized in operating results.

Frequent Guest Program. Starwood Preferred Guest» (“SPG”) is the Company’s frequent guest incentivemarketing program. SPG members earn points based on spending at the Company’s properties, as incentives to first-time buyers of VOIs and residences, and through participation in affiliated partners’ programs such as co-brandedcredit cards. Points can be redeemed at substantially all of the Company’s owned, leased, managed and franchisedproperties as well as through other redemption opportunities with third parties, such as conversion to airline miles.Properties are charged based on hotel guests’ expenditures. Revenue is recognized by participating hotels andresorts when points are redeemed for hotel stays.

The Company, through the services of third-party actuarial analysts, determines the fair value of the futureredemption obligation based on statistical formulas which project the timing of future point redemption based onhistorical experience, including an estimate of the “breakage” for points that will never be redeemed, and anestimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other thirdparties in respect of other redemption opportunities for point redemptions. The Company’s management andfranchise agreements require that the Company be reimbursed currently for the costs of operating the program,

F-10

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

including marketing, promotion, communications with, and performing member services for the SPG members.Actual expenditures for SPG may differ from the actuarially determined liability.

The liability for the SPG program is included in other long-term liabilities and accrued expenses in theaccompanying consolidated balance sheets. The total actuarially determined liability as of December 31, 2008 and2007 is $662 million and $536 million, respectively, of which $232 million and $182 million, respectively, isincluded in accrued expenses.

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

Derivative Financial Instruments. The Company periodically enters into interest rate swap agreements,based on market conditions, to manage interest rate exposure. The net settlements paid or received under theseagreements are accrued consistent with the terms of the agreements and are recognized in interest expense over theterm of the related debt.

The Company enters into foreign currency hedging contracts to manage exposure to foreign currencyfluctuations. All foreign currency hedging instruments have an inverse correlation to the hedged assets or liabilities.Changes in the fair value of the derivative instruments are classified in the same manner as the classification of thechanges in the underlying assets or liabilities due to fluctuations in foreign currency exchange rates. These forwardcontracts do not qualify as hedges under the provisions of SFAS No. 133.

The Company periodically enters into forward contracts to manage foreign exchange risk based on marketconditions. Beginning in January 2008, the Company entered into forward contracts to hedge fluctuations inforecasted transactions based on foreign currencies that are billed in United States dollars. These forward contractshave been designated as cash flow hedges under the provisions of SFAS No. 133, and their change in fair value isrecorded as a component of other comprehensive income. As a forecasted transaction occurs, the gain or loss isreclassified from other comprehensive income to management fees, franchise fees and other income.

The Company does not enter into derivative financial instruments for trading or speculative purposes andmonitors the financial stability and credit standing of its counterparties.

Foreign Currency Translation. Balance sheet accounts are translated at the exchange rates in effect at eachperiod end and income and expense accounts are translated at the average rates of exchange prevailing during theyear. The national currencies of foreign operations are generally the functional currencies. Gains and losses fromforeign exchange and the effect of exchange rate changes on intercompany transactions of a long-term investmentnature are generally included in other comprehensive income. Gains and losses from foreign exchange rate changesrelated to intercompany receivables and payables that are not of a long-term investment nature are reportedcurrently in costs and expenses and amounted to a net gain of $5 million in 2008, net loss of $11 million in 2007 anda net gain of $8 million in 2006.

Income Taxes. The Company provides for income taxes in accordance with SFAS No. 109, “Accounting forIncome Taxes.” The objectives of accounting for income taxes are to recognize the amount of taxes payable orrefundable for the current year and deferred tax liabilities and assets for the future tax consequences of events thathave been recognized in an entity’s financial statements or tax returns.

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NOTES TO FINANCIAL STATEMENTS — (Continued)

Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which thosetemporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in earnings in the period when the new rate is enacted.

Stock-Based Compensation.

On January 1, 2006, the Company adopted the fair value recognition provisions of SFAS No. 123(R), “Share-Based Payment, a revision of the FASB Statement No. 123, Accounting for Stock-Based Compensation”(“SFAS 123(R)”). SFAS 123(R) requires the measurement and recognition of compensation expense for allshare-based awards to be based on estimated fair values of the share award on the date of grant. Under the modifiedprospective method of adoption selected by the Company, compensation cost recognized is the same that wouldhave been recognized had the recognition provisions of SFAS No. 123(R) been applied from its original effectivedate.

SFAS No. 123(R) requires the Company to calculate the fair value of share-based awards on the date of grant.The Company has determined that a lattice valuation model would provide a better estimate of the fair value ofoptions granted under its long-term incentive plans than a Black-Scholes model and therefore, for all optionsgranted subsequent to January 1, 2005 the lattice valuation model was utilized. The lattice valuation option pricingmodel requires the Company to estimate key assumptions such as expected life, volatility, risk-free interest rates anddividend yield to determine the fair value of share-based awards, based on both historical information andmanagement judgment regarding market factors and trends. The Company amortizes the share-based compensationexpense over the period that the awards are expected to vest, net of estimated forfeitures. If the actual forfeituresdiffer from management estimates, additional adjustments to compensation expense are recorded. Please refer toNote 21, Stock-Based Compensation. The Company’s policy is to issue new shares upon exercise.

Revenue Recognition. The Company’s revenues are primarily derived from the following sources: (1) hoteland resort revenues at the Company’s owned, leased and consolidated joint venture properties; (2) vacationownership and residential revenues; (3) management and franchise revenues; (4) revenues from managed andfranchised properties; and (5) other revenues which are ancillary to the Company’s operations. Generally, revenuesare recognized when the services have been rendered. Taxes collected from customers and submitted to taxingauthorities are not recorded in revenue. The following is a description of the composition of revenues for theCompany:

• Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hoteloperations, including the rental of rooms and food and beverage sales, from owned, leased or consolidatedjoint venture hotels and resorts. Revenue is recognized when rooms are occupied and services have beenrendered.

• Vacation Ownership and Residential — The Company recognizes revenue from VOI and residential sales inaccordance with SFAS No. 152, “Accounting for Real Estate Time Sharing Transactions,” and SFAS No. 66,“Accounting for Sales of Real Estate,” as amended. The Company recognizes sales when the buyer hasdemonstrated a sufficient level of initial and continuing investment, the period of cancellation with refundhas expired and receivables are deemed collectible. For sales that do not qualify for full revenue recognitionas the project has progressed beyond the preliminary stages but has not yet reached completion, all revenueand profit are initially deferred and recognized in earnings through the percentage-of-completion method.Interest income associated with timeshare notes receivable is also included in vacation ownership andresidential sales and services revenue and totaled $57 million, $40 million and $30 million in 2008, 2007 and2006, respectively. The Company has also entered into licensing agreements with third-party developers tooffer consumers branded condominiums or residences. The fees from these arrangements are generallybased on the gross sales revenue of the units sold. Residential fee revenue is recorded in the period that apurchase and sales agreement exists, delivery of services and obligations has occurred, the fee to the owner isdeemed fixed and determinable and collectibility of the fees is reasonably assured.

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NOTES TO FINANCIAL STATEMENTS — (Continued)

• Management and Franchise Revenues — Represents fees earned on hotels managed worldwide, usuallyunder long-term contracts, franchise fees received in connection with the franchise of the Company’sSheraton, Westin, Four Points by Sheraton, Le Méridien, St. Regis, W, Luxury Collection, Aloft and Elementbrand names, termination fees and the amortization of deferred gains related to sold properties for which theCompany has significant continuing involvement, offset by payments by the Company under performanceand other guarantees. Management fees are comprised of a base fee, which is generally based on apercentage of gross revenues, and an incentive fee, which is generally based on the property’s profitability.Base fee revenues are recognized when earned in accordance with the terms of the contract. For any timeduring the year, when the provisions of the management contracts allow receipt of incentive fees upontermination, incentive fees are recognized for the fees due and earned as if the contract was terminated at thatdate, exclusive of any termination fees due or payable. Franchise fees are generally based on a percentage ofhotel room revenues and are recognized in accordance with SFAS No. 45, “Accounting for Franchise FeeRevenue,” as the fees are earned and become due from the franchisee.

• Revenues from Managed and Franchised Properties — These revenues represent reimbursements of costsincurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costsat managed properties where the Company is the employer. Since the reimbursements are made based uponthe costs incurred with no added margin, these revenues and corresponding expenses have no effect on theCompany’s operating income or net income.

Insurance Retention. Through its captive insurance company, the Company provides insurance coverage forworkers’ compensation, property and general liability claims arising at hotel properties owned or managed by theCompany through policies written directly and through reinsurance arrangements. Estimated insurance claimspayable represent expected settlement of outstanding claims and a provision for claims that have been incurred butnot reported. These estimates are based on the Company’s assessment of potential liability using an analysis ofavailable information including pending claims, historical experience and current cost trends. The amount of theultimate liability may vary from these estimates. Estimated costs of these self-insurance programs are accrued,based on the analysis of third-party actuaries.

Costs Incurred to Sell VOIs. The Company capitalizes direct costs attributable to the sale of VOIs until thesales are recognized. Selling and marketing costs capitalized under this methodology were approximately $7 millionand $6 million as of December 31, 2008 and 2007, respectively, and all such capitalized costs are included inprepaid expenses and other assets in the accompanying consolidated balance sheets. Costs eligible for capitalizationfollow the guidelines of SFAS No. 152. If a contract is cancelled, the Company charges the unrecoverable directselling and marketing costs to expense and records forfeited deposits as income.

VOI and Residential Inventory Costs. Real estate and development costs are valued at the lower of cost ornet realizable value. Development costs include both hard and soft construction costs and together with real estatecosts are allocated to VOIs and residential units on the relative sales value method. Interest, property taxes andcertain other carrying costs incurred during the construction process are capitalized as incurred. Such costsassociated with completed VOI and residential units are expensed as incurred.

Advertising Costs. The Company enters into multi-media ad campaigns, including television, radio, internetand print advertisements. Costs associated with these campaigns, including communication and production costs,are aggregated and expensed the first time that the advertising takes place in accordance with the American Instituteof Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) No. 93-7, “Reporting on AdvertisingCosts.” If it becomes apparent that the media campaign will not take place, all costs are expensed at that time.During the years ended December 31, 2008, 2007 and 2006, the Company incurred approximately $146 million,$116 million and $135 million of advertising expense, respectively, a significant portion of which was reimbursedby managed and franchised hotels.

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NOTES TO FINANCIAL STATEMENTS — (Continued)

Retained Interests. The Company periodically sells notes receivable originated by its vacation ownershipbusiness in connection with the sale of VOIs. The Company retains interests in the assets transferred to qualified andnon-qualified special purpose entities which are accounted for as over-collateralizations and interest only strips.These retained interests are treated as “available-for-sale” transactions under the provisions of SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities.” The Company reports changes in the fairvalues of these Retained Interests considered temporary through the accompanying consolidated statement ofcomprehensive income. A change in fair value determined to be other-than-temporary is recorded as a loss in theCompany’s consolidated statement of income. The Company had Retained Interests of $19 million and $40 millionat December 31, 2008 and 2007, respectively.

Use of Estimates. The preparation of financial statements in conformity with accounting principles gen-erally accepted in the United States requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates.

Reclassifications. Certain reclassifications have been made to the prior years’ financial statements toconform to the current year presentation.

Impact of Recently Issued Accounting Standards.

Adopted Accounting Standards

In January 2009, the FASB issued Financial Statement of Position (“FSP”) Issue No. EITF 99-20-1,“Amendments to the Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF No. 99-20-1”). FSP EITFNo. 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income andImpairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor inSecuritized Financial Assets” to achieve more consistent determination of whether an other-than-temporaryimpairment has occurred. The Company adopted FSP EITF No. 99-20-1 in December 2008 and it did not havea material impact on the consolidated financial statements.

In December 2008, the FASB issued FSP No. 140-4 and FIN No. 46(R)-8, “Disclosures by Public Entities(Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (“FSP No. 140-4”)which amends FASB No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities, a replacement of SFAS No. 125” and FIN No. 46 (R) “Consolidation of Variable Interest Entities” torequire public enterprises, including sponsors that have a variable interest in a variable interest entity, to provideadditional disclosures about their involvement with variable interest entities. This FSP No. 140-4 is effective inreporting periods ending after December 15, 2008. The Company adopted FSP No. 140-4 in December 2008 and itdid not have a material impact on its consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”(“SFAS 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting theprinciples to be used in the preparation of financial statements of nongovernmental entities that are presented inconformity with GAAP. Effective November 15, 2008, the Company adopted SFAS No. 162, which did not haveany impact on the Company’s financial statements.

Effective January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”)No. 157, “Fair Value Measurements” (“SFAS No. 157”). In February 2008, the Financial Accounting StandardsBoard (“FASB”) issued FSP No. SFAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a oneyear deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except thosethat are recognized or disclosed in the financial statements at fair value at least annually. Therefore, the Companyhas adopted the provisions of SFAS No. 157 with respect to its financial assets and liabilities only. SFAS No. 157defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles

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NOTES TO FINANCIAL STATEMENTS — (Continued)

and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchangeprice that would be received for an asset or paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on themeasurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use ofobservable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy basedon three levels of inputs, of which the first two are considered observable and the last unobservable, that may beused to measure fair value as follows:

• Level 1 — Quoted prices in active markets for identical assets or liabilities.

• Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted pricesfor similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observableor can be corroborated by observable market data for substantially the full term of the assets or liabilities.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant tothe fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on the Company’s consolidated financialstatements. See Note 11 for additional information.

In December 2007, the Emerging Issues Task Force of the FASB (“EITF”) reached a consensus on EITF issueNo. 07-6 “Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66 When theAgreement Includes a Buy-Sell Clause” (“EITF 07-6”). EITF 07-6 establishes that a buy-sell clause, in and of itselfdoes not constitute a prohibited form of continuing involvement that would preclude partial sales treatment underFASB Statement No. 66. EITF 07-6 will be effective for new arrangements entered into in fiscal years beginningafter December 15, 2007 and interim periods within those fiscal years. The Company adopted EITF 07-6 onJanuary 1, 2008 and it did not have a material impact on the consolidated financial statements.

In June 2007, the FASB ratified the consensus reached by the EITF on Issue No. 06-11 “Accounting for IncomeTax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). Under this consensus, a realizedincome tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid toemployees under certain equity-based benefit plans should be recognized as an increase in additional paid-incapital. The consensus is effective in fiscal years beginning after December 15, 2007 and should be appliedprospectively for income tax benefits derived from dividends declared after adoption. The Company adoptedEITF 06-11 on January 1, 2008 and it did not have an impact on the Company’s consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”) This standard permits entitiesto choose to measure financial instruments and certain other items at fair value and is effective for the first fiscalyear beginning after November 15, 2007. SFAS No. 159 must be applied prospectively, and the effect of the first re-measurement to fair value, if any, should be reported as a cumulative — effect adjustment to the opening balance ofretained earnings. The adoption of SFAS No. 159 is not expected to have a material impact on the Company’sconsolidated financial statements. The Company adopted SFAS No. 159 on January 1, 2008, and did not elect thefair value option for any of its assets or liabilities.

In November 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-8, “Applicability ofthe Assessment of a Buyer’s Continuing Investment under FASB Statement No. 66, Accounting for Sales of RealEstate, for Sales of Condominiums” (“EITF 06-8”). EITF 06-8 will require condominium sales to meet thecontinuing involvement criterion of SFAS No. 66 in order for profit to be recognized under the percentage ofcompletion method. EITF 06-8 will be effective for annual reporting periods beginning after March 15, 2007. Thecumulative effect of applying EITF 06-8, if any, is to be reported as an adjustment to the opening balance of retainedearnings in the year of adoption. The adoption of EITF 06-8 did not have a significant impact on the Company’sfinancial statements or require a cumulative effect adjustment.

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NOTES TO FINANCIAL STATEMENTS — (Continued)

In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”(“FIN 48”). This interpretation, among other things, creates a two step approach for evaluating uncertain taxpositions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on itstechnical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines theamount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position thatwas previously recognized would occur when a company subsequently determines that a tax position no longermeets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuationallowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. TheCompany adopted FIN 48 on January 1, 2007, and recorded an increase of approximately $35 million as acumulative-effect adjustment to the beginning balance of retained earnings. See Note 14 for additional information.

In December 2004, the FASB issued SFAS No. 152, which amends SFAS No. 66, and SFAS No. 67,“Accounting for Costs and Initial Rental Operations of Real Estate Projects,” in association with the issuance ofAICPA SOP 04-2, “Accounting for Real Estate Time-Sharing Transactions.” These statements were issued toaddress the diversity in practice caused by a lack of guidance specific to real estate time-sharing transactions.Among other things, the standard addresses the treatment of sales incentives provided by a seller to a buyer toconsummate a transaction, the calculation of accounting for uncollectible notes receivable, the recognition ofchanges in inventory cost estimates, recovery or repossession of VOIs, selling and marketing costs, associations andupgrade and reload transactions. The standard also requires a change in the classification of the provision for loanlosses for VOI notes receivable from an expense to a reduction in revenue.

In accordance with SFAS No. 66, as amended by SFAS No. 152, the Company recognizes sales when theperiod of cancellation with refund has expired, receivables are deemed collectible and the buyer has demonstrated asufficient level of initial and continuing involvement. For sales that do not qualify for full revenue recognition as theproject has progressed beyond the preliminary stages but has not yet reached completion, all revenue and associateddirect expenses are initially deferred and recognized in earnings through the percentage-of-completion method.

The Company adopted SFAS No. 152 on January 1, 2006 and recorded a charge of $70 million, net of a$46 million tax benefit, as a cumulative effect of accounting change in its 2006 consolidated statement of income.

Future Adoption of Accounting Standards

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets (“FSPNo. 142-3”). FSP No. 142-3 amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill andOther Intangible Assets.” FSP No. 142-3 is effective for financial statements issued for fiscal years beginning afterDecember 15, 2008 and interim periods within those fiscal years. The Company is currently evaluating the impactthat FSP No. 142-3 will have on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and HedgingActivities-an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires enhanceddisclosure related to derivatives and hedging activities. Under SFAS No. 161, entities are required to provideenhanced disclosures relating to: (i) how and why an entity uses derivative instruments; (ii) how derivativeinstruments and related hedge items are accounted for under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS No. 133”); and; (iii) how derivative instruments and related hedged items affect anentity’s financial statements. SFAS No. 161 must be applied prospectively to all derivative instruments and non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accountedfor under SFAS No. 133 for all financial statements issued for fiscal years and interim periods beginning afterNovember 15, 2008. The Company is currently evaluating the impact that SFAS No. 161 will have on itsconsolidated financial statements.

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (SFAS 141(R)), “Business Combinations,”which is a revision of SFAS 141, “Business Combinations.” The primary requirements of SFAS 141(R) are asfollows: (i.) Upon initially obtaining control, the acquiring entity in a business combination must recognize 100% ofthe fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions evenif the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will beeliminated. (ii.) Contingent consideration arrangements will be fair valued at the acquisition date and included onthat basis in the purchase price consideration. The concept of recognizing contingent consideration at a later datewhen the amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable. (iii.)All transaction costs will be expensed as incurred. SFAS 141 (R) is effective as of the beginning of an entity’s firstfiscal year beginning after December 15, 2008. Adoption is prospective and early adoption is not permitted.

In December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in Consolidated FinancialStatements — An Amendment of ARB No. 51, or SFAS No. 160.” SFAS No. 160 establishes new accounting andreporting standards for the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not believethat SFAS 160 will have a material impact on the consolidated financial statements.

Note 3. Earnings per Share

The following is a reconciliation of basic earnings per Share to diluted earnings per Share for income fromcontinuing operations (in millions, except per Share data):

Earnings SharesPer

Share Earnings SharesPer

Share Earnings SharesPer

Share

2008 2007 2006Year Ended December 31,

Basic earnings from continuing operations . . . . . . . . . . $254 181 $1.40 $543 203 $2.67 $1,115 213 $5.25Effect of dilutive securities:

Employee options and restricted stock awards . . . . . . — 4 — 8 — 9Convertible debt . . . . . . . . . . . . . . . . . . . . . . . . . . — — — — — 1

Diluted earnings from continuing operations . . . . . . . . . $254 185 $1.37 $543 211 $2.57 $1,115 223 $5.01

Approximately 7 million Shares, 1 million Shares and 2 million Shares were excluded from the computation ofdiluted Shares in 2008, 2007 and 2006, respectively, as their impact would have been anti-dilutive.

On March 15, 2006, the Company completed the redemption of the remaining 25,000 shares of Class BExchangeable Preferred Shares of the Trust (“Class B EPS”) for approximately $1 million. In April 2006, theCompany completed the redemption of the remaining 562,000 shares of Class A Exchangeable Preferred Shares ofthe Trust (“Class A EPS”) for approximately $33 million. For the period prior to the redemption dates,157,000 shares of Class A and Class B EPS are included in the computation of basic Shares for the year endedDecember 31, 2006.

Prior to June 5, 2006, the Company had contingently convertible debt, the terms of which allowed for theCompany to redeem such instruments in cash or Shares. The Company, in accordance with SFAS No. 128,“Earnings per Share,” utilized the if-converted method to calculate dilution once certain trigger events were met.One of the trigger events for the Company’s contingently convertible debt was met during the first quarter of 2006when the closing sale price per Share was $60 or more for a specified length of time. On May 5, 2006, the Companygave notice of its intention to redeem the convertible debt on June 5, 2006. Under the terms of the convertibleindenture, prior to this redemption date, the note holders had the right to convert their notes into Shares at the statedconversion rate. Under the terms of the indenture, the Company settled conversions by paying the principal portionof the notes in cash and the excess amount of the conversion spread in Corporation Shares. For the period prior to the

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NOTES TO FINANCIAL STATEMENTS — (Continued)

conversion dates, approximately 1 million Shares were included in the computation of diluted Shares for the yearended December 31, 2006.

In connection with the Host Transaction, Starwood’s shareholders received 0.6122 Host shares and $0.503 incash for each of their Class B Shares. Holders of Starwood employee stock options did not receive this considerationwhile the market price of the Company’s publicly traded shares was reduced to reflect the payment of thisconsideration directly to the holders of the Class B Shares. In order to preserve the value of the Company’s optionsimmediately before and after the Host Transaction, in accordance with the stock option agreements, the Companyadjusted its stock options to reduce the strike price and increase the number of stock options using the intrinsic valuemethod based on the Company’s stock price immediately before and after the transaction. As a result of thisadjustment, the diluted stock options increased by approximately 1 million Corporation Shares effective as of theclosing of the Host Transaction. In accordance with SFAS No. 123(R), this adjustment did not result in anyincremental fair value, and as such, no additional compensation cost was recognized. Furthermore, in order topreserve the value of the contingently convertible debt discussed above, the Company modified the conversion rateof the contingently convertible debt in accordance with the indenture.

Note 4. Significant Acquisitions

Acquisition of the Sheraton Full Moon Maldives Resort and Spa

During the fourth quarter of 2008, the company entered into a joint venture that acquired the Sheraton FullMoon Maldives Resort and Spa. The company invested approximately $28 million in this venture in exchange for a45% ownership interest.

Acquisition of the Sheraton Steamboat Resort and Conference Center

During the second quarter of 2007, the Company purchased the Sheraton Steamboat Resort & ConferenceCenter for approximately $58 million in cash from a joint venture in which the Company held a 10% interest. Thesale resulted in the recognition of a gain by the joint venture, and the Company’s portion of the gain wasapproximately $7 million, which was recorded as a reduction in the basis of the assets purchased by the Company.

Acquisition of an interest in a Joint Venture that Purchased the Sheraton Grande Tokyo Bay Hotel

During the first quarter of 2007, the Company entered into a joint venture that acquired the Sheraton GrandeTokyo Bay Hotel. This hotel has been managed by the Company since its opening and will continue to be operatedby the Company under a long-term management agreement with the joint venture. The Company investedapproximately $19 million in this venture in exchange for a 25.1% ownership interest.

Acquisition of Certain Assets from Club Regina Resorts

In December 2006, the Company completed a transaction to, among other things, purchase certain assets fromClub Regina Resorts (“CRR”) in Mexico. These assets included land and fixed assets adjacent to The WestinResort & Spa in Los Cabos, Mexico, and terminated CRR’s rights to solicit guests at three Westin properties inMexico. In addition to the purchase of these assets, the transaction included the settlement of all pending andthreatened legal claims between the parties and the exchange of a new issue of CRR notes with a lower principalamount for notes the Company previously held from an affiliate of CRR. Total consideration of approximately$41 million was paid by Starwood for these items. The portion related to the legal settlement was expensed.

Development of Restaurant Concepts with Chef Jean-Georges Vongerichten

In May 2006, the Company partnered with Chef Jean-Georges Vongerichten and a private equity firm to createa joint venture that will develop, own, operate, manage and license world-class restaurant concepts created by Jean-Georges Vongerichten, including operating the existing Spice Market restaurant located in New York City. The

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

concepts owned by the venture will be available for Starwood’s upper-upscale and luxury hotel brands including W,Westin, Le Meridien and St. Regis. Additionally, the venture may own and operate freestanding restaurants outsideof Starwood’s hotels. Starwood invested approximately $22 million in this venture for a 32.7% equity interest.

Note 5. Asset Dispositions and Impairments

During 2008, as a result of the current economic climate, the Company reviewed the recoverability of itscarrying values of its owned hotels and concluded that five hotels were impaired. These hotels are non-Starwoodbranded hotels, in which the Company has no intention to invest significant capital and operating income hasdeteriorated significantly. The fair values of the hotels were estimated by using comparative sales for similar assetsand recent letters of intent to sell certain assets. An impairment charge of $64 million was recorded in the year endedDecember 31, 2008 associated with these hotels. These assets are reported in the Hotels operating segment. It isreasonably possible that there will be additional impairments on owned hotels in 2009 if economic conditionsworsen.

During 2008, as a result of current market conditions and its impact on the timeshare industry, the Companyreviewed the fair value of its economic interests in securitized VOI notes receivable and concluded these interestswere impaired. The fair value of the Company’s investment in these retained interests was determined by estimatingthe net present value of the expected future cash flows, based on expected default and prepayment rates (SeeNote 10.) The Company recorded an impairment charge of $22 million in the year ended December 31, 2008 relatedto these retained interests. These assets are reported in the Vacation Ownership and Residential operating segment.

During the fourth quarter of 2008, the Company sold The Westin Turnberry for net cash proceeds of$99 million. This sale was subject to a long term management contract and the Company recorded a deferred gain of$27 million in connection with the sale.

During the third quarter of 2008, the Company recorded a loss of $11 million primarily related to an investmentin which the Company holds a minority interest. This investment was fully written off as the joint venture’s lendersbegan foreclosure proceedings on the underlying assets of the venture.

During 2007, the Company recorded a net loss of $44 million, primarily related to a net loss of $58 million onthe sale of eight wholly owned hotels and a loss of approximately $7 million primarily related to charges at threeother properties. These losses were offset in part by $20 million of net gains primarily on the sale of assets in whichthe Company held a minority interest and a gain of $6 million as a result of insurance proceeds received for propertydamage caused by storms at two owned hotels in prior years.

During the second quarter of 2006, the Company consummated the Host Transaction whereby subsidiaries ofHost acquired 33 properties and the stock of certain controlled subsidiaries, including Sheraton Holding and theTrust. The stock and cash transaction was valued at approximately $4.1 billion, including debt assumption (based onHost’s closing stock price on April 7, 2006 of $20.53). In the first phase of the transaction, 28 hotels and the stock ofcertain controlled subsidiaries, including Sheraton Holding and the Trust, were acquired by Host for considerationvalued at $3.54 billion. On May 3, 2006, four additional hotels located in Europe were sold to Host for net proceedsof approximately $481 million in cash. On June 13, 2006, the final hotel in Venice, Italy was sold to Host for netproceeds of approximately $74 million in cash. In connection with the first phase of the transaction, Starwoodshareholders received approximately $2.8 billion in the form of Host common stock valued at $2.68 billion and$119 million in cash for their Class B shares. Based on Host’s closing price on April 7, 2006, this consideration hada per — Class B share value of $13.07. Starwood directly received approximately $738 million of consideration inthe first phase, including $600 million in cash, $77 million in debt assumption and $61 million in Host commonstock. In addition, the Corporation assumed from its subsidiary, Sheraton Holding, debentures with a principalbalance of $600 million. As the sale of the Class B shares involved a transaction with Starwood’s shareholders, thebook value of the Trust associated with this sale was treated as a non-reciprocal transaction with owners and wasremoved through retained earnings up to the amount of retained earnings that existed at the sale date with the

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

remaining balance reducing additional paid in capital. This portion of the transaction was treated as a non-cashexchange by Starwood and, consequently, was excluded from the consolidated statement of cash flows. The portionof the transaction between the Company and Host was recorded as a disposition under the provisions ofSFAS No. 144. As Starwood sold these hotels subject to long-term management contracts, the calculated gainon the sale of approximately $962 million has been deferred and is being amortized over the initial managementcontract term of 20 years. This transaction also generated a capital loss, net of carry back and 2006 utilization, of$2.4 billion for federal tax purposes. The entire tax benefit of the loss was offset by a valuation allowance due to theuncertainty of realizing the tax benefit of this capital loss carryforward before its expiration in 2011. See Note 14.The Company sold all of the Host common stock in the second quarter of 2006 and recorded a net gain ofapproximately $1 million.

During 2006, the Company sold ten additional hotels in multiple transactions for approximately $437 millionin cash. The Company recorded a net loss of approximately $7 million associated with these sales. In addition, theCompany recorded a $5 million adjustment to reduce the gain on the sale of a hotel consummated in 2004 as certaincontingencies associated with that sale became probable in 2006.

Also in 2006, the Company recorded a loss of approximately $23 million primarily in connection with theimpairment of two properties, one of which has been demolished and is being rebuilt under the Aloft and Elementbrands and another which represents land that was sold to a developer who is building two Starwood branded hotelson the site. This loss was offset by a gain of approximately $29 million on the sale of the Company’s interests in twojoint ventures.

Also during 2006, the Company recorded an impairment charge of $11 million related to the Sheraton Cancunin Cancun, Mexico that was damaged by Hurricane Wilma in 2005 and was completely demolished in order to buildadditional vacation ownership units. This impairment charge was offset by a $13 million gain as a result ofinsurance proceeds received primarily for the Sheraton Cancun and the Company’s other owned hotel in Cancun,the Westin Cancun, as reimbursement for property damage caused by the same storm.

In September 2006, a joint venture, in which the Company has a minority interest, completed the sale of theWestin Kierland hotel in Scottsdale, Arizona and the Company realized net proceeds of approximately $45 million.The Company continues to manage the hotel subject to a newly amended, long-term management contract.Accordingly, the Company’s share of the gain on the sale of approximately $46 million was deferred and is beingrecognized in earnings over the remaining 21 years of the management contract.

Note 6. Assets Held for Sale

During the first quarter of 2008, the Company entered into a purchase and sale agreement for the sale of a hotelfor total consideration of $10 million. The Company received a non-refundable deposit from the prospective buyerduring the first quarter of 2008. The Company recorded an impairment charge of approximately $1 million in thefirst quarter of 2008 related to this hotel. The sale of this hotel is expected to be completed in 2009.

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Note 7. Plant, Property and Equipment

Plant, property and equipment, excluding assets held for sale, consisted of the following (in millions):

2008 2007December 31,

Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 635 $ 714

Buildings and improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,444 3,589

Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,792 1,690

Construction work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 221

6,070 6,214

Less accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . (2,471) (2,364)

$ 3,599 $ 3,850

Unamortized capitalized computer software costs were $129 million and $104 million at December 31, 2008and 2007 respectively. Amortization of capitalized computer software costs was $24 million, $23 million and$22 million for the years ended December 31, 2008, 2007 and 2006 respectively

Note 8. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill for the year ended December 31, 2008 are as follows(in millions):

HotelSegment

VacationOwnership

Segment Total

Balance at January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,465 $241 $1,706

Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . (18) — (18)

Asset dispositions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51) — (51)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 — 2

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,398 $241 $1,639

Intangible assets consisted of the following (in millions):

2008 2007December 31,

Trademarks and trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315 $ 320

Management and franchise agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354 310

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 90

759 720

Accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (163) (124)

$ 596 $ 596

The intangible assets related to management and franchise agreements have finite lives, and accordingly, theCompany recorded amortization expense of $32 million, $26 million and $25 million, respectively, during the yearsended December 31, 2008, 2007 and 2006. The other intangible assets noted above have indefinite lives.

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NOTES TO FINANCIAL STATEMENTS — (Continued)

Amortization expense relating to intangible assets with finite lives for each of the years ended December 31 isexpected to be as follows (in millions):

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $28

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $27

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, the Company performed its annualimpairment test of goodwill for both of its reporting segments and concluded that the goodwill was not impaired.However, based on the economic climate and the deterioration of results in the hotel and timeshare industry, it isreasonably possible that the fair value of goodwill related to the hotel and vacation ownership segment couldcontinue to decline in the near term.

Note 9. Other Assets

Other assets include the following (in millions):

2008 2007December 31,

VOI notes receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $444 $373

Other notes receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 41

Prepaid taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 —

Deposits and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76 80

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $682 $494

Included in these balances at December 31, 2008 and 2007 are the following fixed rate notes receivable relatedto the financing of VOIs (in millions):

2008 2007December 31,

Gross VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $581 $484

Allowance for uncollectible VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . (91) (68)

Net VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490 416

Less current maturities of gross VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . (54) (50)

Current portion of the allowance for uncollectible VOI notes receivable. . . . . . . . . . . 8 7

Long-term portion of net VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $444 $373

The current maturities of net VOI notes receivable are included in accounts receivable in the Company’sbalance sheets.

As discussed in Note 2, as the Company holds large amounts of similar VOI notes receivable, the Companyassesses its loan loss reserves based on pools of receivables. As of December 31, 2008, the average estimated defaultrate for the Company’s pool of receivables was 7.9%. Given the significance of the Company’s respective pools ofVOI notes receivable, a change in the projected default rate can have a significant impact to its loan loss reserverequirements, with a 0.1% change estimated to have an impact of approximately $3 million. It is reasonably

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

possible that the carrying value of the VOI notes receivable could materially change in 2009 if the economycontinues to worsen.

The interest rates of the owned VOI notes receivable are as follows:

2008 2007December 31,

Range of stated interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0% - 18% 0% - 18%

Weighted average interest rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.9% 11.8%

The maturities of the gross VOI notes receivable are as follows (in millions):

2008 2007December 31,

Due in 1 year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54 $ 50

Due in 2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 35

Due in 3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 38

Due in 4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 50

Due in 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 56

Due beyond 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 255

Total gross VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $581 $484

The activity in the allowance for VOI loan losses was as follows (in millions):

Balance at January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68

Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

Write-offs of uncollectible receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (50)

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91

Note 10. Notes Receivable Securitizations

From time to time, the Company securitizes, without recourse, its fixed rate VOI notes receivable. Toaccomplish these securitizations, the Company transfers a pool of VOI notes receivable to special purpose entities(together with the special purpose entities in the next sentence, the “SPEs”) and the SPEs transfer the VOI notesreceivable to qualifying special purpose entities (“QSPEs”), as defined in SFAS No. 140, “Accounting for Transfersand Servicing of Financial Assets and Extinguishments of Liabilities — a Replacement of FASB StatementNo. 125” (“SFAS No. 140”). To accomplish these securitizations, the Company transfers a pool of VOI notesreceivable to SPEs and the SPEs transfer the VOI notes receivable to a third party purchaser. The Companycontinues to service the securitized VOI notes receivable pursuant to servicing agreements negotiated at arms-length based on market conditions; accordingly, the Company has not recognized any servicing assets or liabilities.All of the Company’s VOI notes receivable securitizations to date have qualified to be, and have been, accounted foras sales in accordance with SFAS No. 140.

With respect to those transactions still outstanding at December 31, 2008, the Company retains economicinterests (the “Retained Interests”) in securitized VOI notes receivables through SPE ownership of QSPE beneficialinterests. The Retained Interests, which are comprised of subordinated interests and interest only strips in the relatedVOI notes receivable, provides credit enhancement to the third-party purchasers of the related QSPE beneficialinterests. Retained Interests cash flows are limited to the cash available from the related VOI notes receivable, afterservicing and other related fees, absorbing 100% of any credit losses on the related VOI notes receivable and QSPEfixed rate interest expense. With respect to those transactions still outstanding at December 31, 2008, the Retained

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Interests are classified and accounted for as “available-for-sale” securities in accordance with SFAS No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 140.

The Company’s securitization agreements provide the Company with the option, subject to certain limitations,to repurchase or replace defaulted VOI notes receivable at their outstanding principal amounts. Such activity totaled$23 million, $21 million and $15 million during 2008, 2007 and 2006, respectively. The Company has been able toresell the VOIs underlying the VOI notes repurchased or replaced under these provisions without incurringsignificant losses. The Company’s replacement of the defaulted VOI notes receivable under the securitizationagreements with new VOI notes receivable resulted in net gains of approximately $4 million, $2 million and$1 million during 2008, 2007 and 2006, respectively, which are included in vacation ownership and residential salesand services in the Company’s consolidated statements of income.

In September 2006, the Company repurchased all of the VOI notes receivables still outstanding ($20 million)that had been securitized in 2001 for $18 million. In addition, in November 2006 the Company securitizedapproximately $133 million of VOI notes receivable (the “2006 Securitization”) resulting in net cash proceeds ofapproximately $116 million. In accordance with SFAS No. 152, the related gain of $17 million is included invacation ownership and residential sales and services in the Company’s consolidated statements of income.

Key assumptions used in measuring the fair value of the Retained Interests at the time of the 2006Securitization and at December 31, 2006, relating to the 2006 Securitization, were as follows: discount rate of10%; annual prepayments, which yields an average expected life of the prepayable VOI notes receivable of94 months; and expected gross VOI notes receivable balance defaulting as a percentage of the total initial pool of14.2%. These key assumptions are based on the Company’s prior experience.

At December 31, 2008, the aggregate outstanding principal balance of VOI notes receivable that have beensecuritized was $228 million. The principal amounts of those VOI notes receivables that were more than 90 daysdelinquent at December 31, 2008 was approximately $5 million.

Gross credit losses for all VOI notes receivable that have been securitized totaled $31 million, $23 million and$17 million during 2008, 2007 and 2006, respectively.

The Company received aggregate cash proceeds of $26 million, $33 million and $36 million from the RetainedInterests during 2008, 2007 and 2006, respectively. The Company received aggregate servicing fees of $3 million,$4 million and $4 million related to these VOI notes receivable during 2008, 2007 and 2006, respectively.

At the time of each VOI notes receivable securitization and at the end of each financial reporting period, theCompany estimates the fair value of its Retained Interests using a discounted cash flow model. All assumptions usedin the models are reviewed and updated, if necessary, based on current trends and historical experience. As ofDecember 31, 2008, the aggregate net present value and carrying value of Retained Interests for the Company’sthree outstanding note securitizations was approximately $19 million, with the following key assumptions used inmeasuring the fair value: an average discount rate of 17.8%, an average expected annual prepayment rate includingdefaults of 20.4%, and an expected weighted average remaining life of prepayable notes receivable of 73 months.The change in the fair value of the Retained Interests was determined to be other than temporary and an impairmentcharge of $22 million was recorded in the fourth quarter of 2008 (see Note 5).

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The Company completed a sensitivity analysis on the net present value of the Retained Interests to measure thechange in value associated with independent changes in individual key variables. The methodology appliedunfavorable changes for the key variables of expected prepayment rates, discount rates and expected gross creditlosses as of December 31, 2008. The decreases in value of the Retained Interests that would result from variousindependent changes in key variables are shown in the chart that follows (in millions). The factors may not moveindependently of each other.

Annual prepayment rate:

100 basis points-dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.4

100 basis points-percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4%

200 basis points-dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.8

200 basis points-percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6%

Discount rate:

100 basis points-dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.3

100 basis points-percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.9%

200 basis points-dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.7

200 basis points-percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.7%

Gross annual rate of credit losses:

100 basis points-dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.9

100 basis points-percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27.4%

200 basis points-dollars . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.8200 basis points-percentage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.0%

Note 11. Fair Value

In accordance with SFAS No. 157, the following table presents the Company’s fair value hierarchy for itsfinancial assets and liabilities measured at fair value on a recurring basis as of December 31, 2008 (in millions):

Level 1 Level 2 Level 3 Total

Assets:

Forward contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 6 $— $ 6

Retained Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 19 19

$— $ 6 $19 $25

Liabilities:

Forward contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— $ 3 $— $ 3

The forward contracts are over the counter contracts that do not trade on a public exchange. The fair values ofthe contracts are based on inputs such as foreign currency spot rates and forward points that are readily available onpublic markets, and as such, are classified as Level 2. The Company considered both its credit risk, as well as itscounterparties’ credit risk in determining fair value and no adjustment was made as it was deemed insignificantbased on the short duration of the contracts and the Company’s rate of short-term debt.

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The Company estimates the fair value of its Retained Interests using a discounted cash flow model withunobservable inputs, which is considered Level 3. The following key assumptions are used in measuring the fairvalue: an average discount rate of 17.8%, an average expected annual prepayment rate, including defaults, of20.4%, and an expected weighted-average remaining life of prepayable notes receivable of 73 months. See Note 10for the impact on the fair value based on changes to the assumptions.

The following table presents a reconciliation of the Company’s Retained Interests measured at fair value on arecurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2008 (in millions):

Balance at January 1, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40

Total losses (realized/unrealized)

Included in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17)

Included in other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)

Purchases, issuances, and settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Transfers in and/or out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19

Note 12. Deferred Gains

The Company defers gains realized in connection with the sale of a property for which the Company continuesto manage the property through a long-term management agreement and recognizes the gains over the initial term ofthe related agreement. As of December 31, 2008 and 2007, the Company had total deferred gains of $1.151 billionand $1.216 billion, respectively, included in accrued expenses and other liabilities in the Company’s consolidatedbalance sheets. Amortization of deferred gains is included in management fees, franchise fees and other income inthe Company’s consolidated statements of income and totaled approximately $83 million, $81 million and$62 million in 2008, 2007 and 2006, respectively. The increase in deferred gain amortization in 2008 and2007 is primarily due to the Host Transaction discussed in Note 5.

Note 13. Restructuring and Other Special Charges, Net

During the year ended December 31, 2008, the Company recorded a $60 million restructuring charge inconnection with its ongoing initiative of rationalizing its cost structure in light of the decline in growth in itsbusiness units. The charge primarily related to costs associated with the closure of three vacation ownership callcenters and nine sales centers as well as severance costs associated with the reduction in force at the Company’scorporate offices. In addition, the Company recorded a $2 million restructuring charge related to further demolitioncosts at the Sheraton Bal Harbour Beach Resort (“Bal Harbour”), which is being redeveloped as a St. Regis hotelalong with branded residences and fractional units.

In 2008, due to the global economic climate and its impact on the timeshare industry, the Company evaluatedall of its existing vacation ownership projects to determine if such projects were still economically viable, and if so,whether their fair values exceeded their carrying values. As a result of this analysis, the Company decided not topursue or continue development at primarily two main projects, resulting in an impairment charge of approximately$72 million. This charge relates to the impairment of land, fixed assets, and non recoverable intangible assets. Thefair value was determined using a discounted cash flow method based on the alternative and best use for therespective project sites.

Also in 2008, as a result of the global economic climate, the Company deemed that its minority investments intwo joint venture hotel projects were other-than-temporarily impaired and recorded an impairment charge of$7 million. For each hotel, the construction of the property has not been completed and the lenders have begun theforeclosure process. The controlling partners will not make additional capital contributions or pay the debt service.

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

During the year ended December 31, 2007, the Company recorded net restructuring and other special chargesof approximately $53 million primarily related to the Company’s redevelopment of the Sheraton Bal Harbour BeachResort. The Company demolished the hotel in late 2007 and plans to rebuild a St. Regis hotel along with brandedresidences and fractional units. Bal Harbour was closed for business on July 1, 2007, and the majority of employeeswere terminated. The charge primarily related to accelerated depreciation, demolition, and severance costs. Thischarge was partially offset by a $2 million refund related to a terminated life insurance policy.

During the year ended December 31, 2006, the Company incurred and paid approximately $21 million oftransition costs associated with the Le Méridien Acquisition. Also during 2006, the Company recorded a charge ofapproximately $7 million related to severance costs primarily related to certain executives in connection with thecontinued corporate restructuring that began at the end of 2005, of which approximately $4 million related tocompensation expense due to the accelerated vesting of previously granted stock-based awards. These charges wereoffset by the reversal of $8 million of accruals for a lease the Company assumed as part of the merger with SheratonHolding in 1998 as the reserve exceeded the Company’s maximum obligation.

Restructuring and Other Special Charges by operating segment are as follows:

2008 2007 2006

Year EndedDecember 31,

Segment

Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41 $53 $20

Vacation Ownership & Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 — —

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $141 $53 $20

The Company had remaining accruals of $41 million as of December 31, 2008, which are primarily recorded inaccrued expenses and other liabilities. The following table summarizes activity in the restructuring and other specialcharges related accounts during the year ended December 31, 2008 (in millions):

December 31,2007 Expenses Payments

Non-CashOther

Reversal ofAccruals

December 31,2008

Retained reserves established bySheraton Holding prior to itsmerger with the Company in1998 . . . . . . . . . . . . . . . . . . . $ 8 — — — — $ 8

Bal Harbour demolition costs . . . 1 $ 2 $ (3) — — —

Consulting fees associated withcost reduction initiatives . . . . . — 5 (2) — — 3

Severance . . . . . . . . . . . . . . . . . — 39 (20) $ 4 23

Closure of vacation ownershipfacilities . . . . . . . . . . . . . . . . . — 16 (1) (8) — 7

Impairments . . . . . . . . . . . . . . . — 79 — (79) — —

Total . . . . . . . . . . . . . . . . . . . . . $ 9 $141 $(26) $(83) — $41

F-27

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Note 14. Income Taxes

Income tax data from continuing operations of the Company is as follows (in millions):

2008 2007 2006Year Ended December 31,

Pretax incomeU.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $195 $ 517 $ 556

Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 216 126

$330 $ 733 $ 682

Provision (benefit) for income taxCurrent:

U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (12) $ 166 $ 104

State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8 31

Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 157 51

69 331 186

Deferred:

U.S. federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 (105) (517)

State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) — (84)

Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (37) (19)

7 (142) (620)

$ 76 $ 189 $(434)

No provision has been made for U.S. taxes payable on undistributed foreign earnings amounting to approx-imately $807 million as of December 31, 2008 since these amounts are permanently reinvested.

Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets andliabilities. Deferred tax assets (liabilities) include the following (in millions):

2008 2007December 31,

Plant, property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 389 $ 312

Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 15

Allowances for doubtful accounts and other reserves . . . . . . . . . . . . . . . . . . . . . . 132 160

Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 100

Net operating loss, capital loss and tax credit carryforwards . . . . . . . . . . . . . . . . . 605 723

Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (238) (102)

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 108

1,101 1,316

Less valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (488) (615)

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 613 $ 701

At December 31, 2008, the Company had federal and state net operating losses of approximately $29 millionand $2.4 billion, respectively, and federal tax credit carryforwards of $79 million. The Company also had foreignnet operating loss and tax credit carryforwards of approximately $32 million and $19 million, respectively. The

F-28

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Company expects to realize future tax benefits from substantially all its federal and state net operating losses tax,which expire by 2027. The Company has established a valuation allowance against substantially all of the taxbenefit for the remaining federal and state carryforwards as it is unlikely that the benefit will be realized prior totheir expiration. The Company is currently considering certain tax-planning strategies that may allow it to utilizethese tax attributes within the statutory carryforward period.

The Company generated a federal capital loss in connection with the Host Transaction which was originallyestimated at approximately $2.6 billion at December 31, 2006. During 2007, the Company completed its 2006 taxreturn which included the Host Transaction and adopted FIN 48. As a result, the Company reduced its originalestimate of this capital loss and corresponding valuation allowance by approximately $1.2 billion, resulting in arevised amount of $1.4 billion at December 31, 2006. Through December 31, 2008, approximately $558 million ofthis loss has been utilized to offset 2008 and prior years’ capital gains. The remaining $818 million of capital loss isavailable to offset federal capital gains through 2011. The Company also had state capital losses related to the HostTransaction of approximately $981 million, substantially all of which expire in 2011. Due to the uncertainty ofrealizing the tax benefit of the federal and state capital loss carryforwards, the entire tax benefit of the losses hasbeen offset by a valuation allowance.

In February 1998, the Company disposed of ITT World Directories. The Company recorded $551 million ofincome taxes relating to this transaction. While the Company strongly believes this transaction was completed on atax-deferred basis, in 2002 the IRS proposed an adjustment to fully tax the gain in 1998, which would increaseStarwood’s taxable income by approximately $1.4 billion in that year. During 2004, the Company filed a petition inUnited States Tax Court to contest the IRS’s proposed adjustment. As a result of an August 2005 United States TaxCourt decision against another taxpayer, the Company decided to treat this transaction as if it were taxable in 1998for accounting purposes. As such, the Company applied substantially all of its federal net operating losscarryforwards against the gain and accrued interest, resulting in a $360 million net current liability. The Companypaid the entire current liability to the IRS in October 2005 in order to eliminate any future interest accrualsassociated with the pending dispute. In January 2009, the Company and the IRS reached an agreement in principleto settle the litigation pertaining to the tax treatment of this transaction. The Company expects to finalize the detailsof the agreement and obtain the refund during 2009.

A reconciliation of the tax provision of the Company at the U.S. statutory rate to the provision for income tax asreported is as follows (in millions):

2008 2007 2006Year Ended December 31,

Tax provision at U.S. statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $115 $ 257 $ 239

U.S. state and local income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13 (10)

Exempt Trust income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (32)

Tax on repatriation of foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . . (14) (29) (16)

Foreign tax rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) 12 (15)

Change in uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 13 —

Tax settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2 (59)

Tax benefit on the deferred gain from asset sales. . . . . . . . . . . . . . . . . . . (10) (3) (356)

Tax benefits recognized on Host Transaction . . . . . . . . . . . . . . . . . . . . . . — 97 (1,017)

Basis difference on asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 (2) (41)

Change in of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (158) 884

Tax expense amortization from intercompany transactions . . . . . . . . . . . . 7 — —

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (13) (11)

Provision for income tax (benefit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 76 $ 189 $ (434)

F-29

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

During 2007, the Company completed an evaluation of its ability to claim U.S. foreign tax credits generated inprior years on its federal tax return. As a result of this analysis, the Company determined that it can realize thecredits for the 1999 and 2000 tax years. The Company had not previously accrued this benefit since the realizationof the benefit was determined to be unlikely. Therefore, during 2007, a $28 million tax benefit, net of incrementaltaxes and interest, was recorded for these foreign tax credits. In addition, during 2006, the Company determined thatit could claim the credits for the 2005 and 2006 tax years. The Company had not previously accrued this benefitsince the realization of the benefit was determined to be unlikely. Therefore, during 2006, a $15 million and$19 million tax benefit was recorded for 2006 and 2005, respectively for these foreign tax credits.

Pursuant to FIN 48, the Company is required to accrue tax and associated interest and penalty on uncertain taxpositions. During 2007, the Company recorded a $13 million charge, primarily associated with interest due onexisting uncertain tax positions.

During 2006, the IRS completed its audits of the Company’s 2001, 2002 and 2003 tax returns and issued itsfinal audit adjustments to the Company. In addition, state income tax audits for various jurisdictions and tax yearswere completed during 2006. As a result of the completion of these audits, the Company recorded a $50 million taxbenefit. The Company also recognized a $9 million tax benefit during 2006 related to the reversal of previouslyaccrued income taxes after an evaluation of the applicable exposures and the expiration of the related statutes oflimitations.

As discussed in Note 5, the Company completed the Host Transaction during the second quarter of 2006 whichincluded the sale of 33 hotel properties. As the Company sold these hotels subject to long-term managementcontracts, the gain of approximately $962 million has been deferred and is being recognized over the life of thosecontracts. Accordingly, the Company has established a deferred tax asset and recognized the related tax benefit ofapproximately $359 million for the book-tax difference on the deferred gain. Additional tax benefits of $1.017 bil-lion resulted from the Host Transaction, consisting primarily of the tax benefit of $832 million on the $2.4 billionfederal capital loss, net of carrybacks and 2006 utilization. The remaining benefit consisted of an adjustment todeferred income taxes for the increased tax basis of certain retained assets, partially offset by current tax liabilitiesgenerated as a result of the transaction. During 2007, the Company completed its 2006 tax return which included theHost Transaction. As a result, the Company recognized a net $97 million tax charge during 2007 as an adjustment tothe original tax benefit accrued in 2006. The net charge was comprised of a $114 million charge related to areduction to the amount of capital loss generated in the transaction offset by a $17 million tax benefit related to otheraspects of the transaction. As a valuation allowance fully offsets the capital loss carryforward, the Company alsorecorded a $114 million tax benefit for the reversal of the capital loss valuation allowance.

During 2008, the Company sold the Westin Turnberry subject to a long-term management contract. As a result,the pretax gain has been deferred and is being recognized over the life of the contract. Accordingly, the Companyhas established a deferred tax asset and recognized the related tax benefit of approximately $10 million for thebook-tax difference on the deferred gain.

During 2008 and 2007, the Company completed certain transactions that generated capital gains for U.S. taxpurposes. These gains were completely offset by the capital loss generated in the Host Transaction. As discussedabove, the Company had not previously accrued a benefit for the capital loss since the realization was determined tobe unlikely. Therefore, during 2008 and 2007, the Company recorded tax benefits of $31 million and $35 million,respectively, to reverse the capital loss valuation allowance.

As a result of the implementation of FIN 48 in 2007, the Company recognized a $35 million cumulative effectadjustment to the beginning balance of retained earnings in the period. As of December 31, 2008, the Company hadapproximately $1.0 billion of total unrecognized tax benefits, of which $150 million would affect its effective taxrate if recognized. As discussed above, the Company expects to resolve the tax litigation related to the ITT WorldDirectories transaction during 2009 and expects to reduce that amount of unrecognized tax benefits by approx-imately $499 million. The Company does not expect other significant increases or decreases to the amount of

F-30

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

unrecognized tax benefits within 12 months of December 31, 2008. A reconciliation of the beginning and endingbalance of unrecognized tax benefits is as follows (in millions):

Balance at January 1, 2007. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 964

Additions based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . . 6

Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Settlements with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2)

Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —

Reductions due to the lapse of applicable statutes of limitation . . . . . . . . . . . . . . . . . . . . (1)

Balance at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 968

Balance at January 1, 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 968

Additions based on tax positions related to the current year . . . . . . . . . . . . . . . . . . . . . . . 41

Additions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Settlements with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3)

Reductions for tax positions of prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)

Reductions due to the lapse of applicable statutes of limitation . . . . . . . . . . . . . . . . . . . . (1)

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,003

The Company recognizes interest and penalties related to unrecognized tax benefits through income taxexpense. The Company had $76 million and $29 million accrued for the payment of interest and no accruedpenalties as of December 31, 2008 and December 31, 2007, respectively.

The Company is subject to taxation in the U.S. federal jurisdiction, as well as various state and foreignjurisdictions. As of December 31, 2008, the Company is no longer subject to examination by U.S. federal taxingauthorities for years prior to 2004 and to examination by any U.S. state taxing authority prior to 1998. Allsubsequent periods remain eligible for examination. In the significant foreign jurisdictions in which the Companyoperates, the Company is no longer subject to examination by the relevant taxing authorities for any years prior to2001.

F-31

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Note 15. Debt

Long-term debt and short-term borrowings consisted of the following (in millions):

2008 2007December 31,

Senior Credit Facilities:

Revolving Credit Facilities, interest rates of 2.32% at December 31, 2008,maturing 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 213 $ 787

Term loan, interest rates ranging from 1.88% to 2.69% at December 31,2008, maturing2009 and 2010 (2.35% at December 31, 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,375 1,000

Senior Notes, interest at 7.875%, maturing 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 799 792

Senior Notes (former Sheraton Holding notes), interest at 7.375%, maturing 2015. . . . . . . . 449 449

Senior Notes, interest at 6.25%, maturing 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 601 400Senior Notes, interest at 6.75%, maturing 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 —

Mortgages and other, interest rates ranging from 5.80% to 8.56%, various maturities. . . . . . 171 167

4,008 3,595

Less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (506) (5)

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,502 $3,590

Aggregate debt maturities for each of the years ended December 31 are as follows (in millions):

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 506

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 596

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 847

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653

Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901

$4,008

Due to the current credit liquidity crisis, the Company evaluated the commitments of each of the lenders in itsrevolving credit facilities. Based on this review, the Company does not anticipate any issues regarding theavailability of funds under the revolving credit facilities.

The Company maintains lines of credit under which bank loans and other short-term debt are drawn. Inaddition, smaller credit lines are maintained by the Company’s foreign subsidiaries. The Company had approx-imately $1.585 billion of available borrowing capacity under its domestic and foreign lines of credit as ofDecember 31, 2008. The short-term borrowings at December 31, 2008 and 2007 were insignificant.

The Company is subject to certain restrictive debt covenants under its short-term borrowing and long-term debtobligations including defined financial covenants, limitations on incurring additional debt, escrow account fundingrequirements for debt service, capital expenditures, tax payments and insurance premiums, among other restric-tions. The Company was in compliance with all of the short-term and long-term debt covenants at December 31,2008.

For adjustable rate debt, fair value approximates carrying value due to the variable nature of the interest rates.For non-public fixed rate debt, fair value is determined based upon discounted cash flows for the debt at ratesdeemed reasonable for the type of debt and prevailing market conditions and the length to maturity for the debt. Theestimated fair value of debt at December 31, 2008 and 2007 was $3.2 billion and $3.7 billion, respectively, and wasdetermined based on quoted market prices and/or discounted cash flows.

F-32

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

On May 23, 2008, the Company completed a public offering of $600 million of senior notes, consisting of$200 million aggregate principal amount 6.25% Senior Notes (“6.25% Notes”) due February 15, 2013 and$400 million aggregate principal amount 6.75% Senior Notes (“6.75% Notes”) due May 15, 2018 (collectively, the“Notes”). The Company received net proceeds of approximately $596 million, which were used to reduce theoutstanding borrowings under its Revolving Credit Facilities. Interest on the 6.25% Notes is payable semi-annuallyon February 15 and August 15 and interest on the 6.75% Notes is payable semi-annually on May 15 andNovember 15. The Company may redeem all or a portion of the Notes at any time at the Company’s option at a priceequal to the greater of (1) 100% of the aggregate principal plus accrued and unpaid interest and (2) the sum of thepresent values of the remaining scheduled payments of principal and interest discounted at the redemption rate on asemi-annual basis at the Treasury rate plus 35 basis points for the 6.25% Notes and 45 basis points for the6.75% Notes, plus accrued and unpaid interest. The Notes rank parri passu with all other unsecured andunsubordinated obligations. Upon a change in control of the Company, the holders of the Notes will have theright to require repurchase of the respective Notes at 101% of the principal amount plus accrued and unpaid interest.Certain covenants on the Notes include restrictions on liens, sale and leaseback transactions, mergers, consoli-dations and sale of assets.

On April 11, 2008, the Company’s $375 million Revolving Credit Facility that matured on April 27, 2008 wasconverted to a term loan (“Term Loan”). The proceeds of the Term Loan were used to repay outstanding revolvingloans. The Term Loan expires on April 11, 2010, however, it can be extended until February 10, 2011 as long ascertain extension requirements are satisfied and subject to an extension fee. The term loans may be prepaid at anytime at the Company’s option without premium or penalty.

In the second quarter of 2008, the Company borrowed approximately $66 million under an internationalrevolving credit facility, which was repaid during the fourth quarter of 2008 in conjunction with the sale of threeproperties by the Company (see Note 17).

On September 13, 2007, the Company completed a public offering of $400 million 6.25% Senior Notes(“6.25% Notes”) due February 13, 2013. The Company received net proceeds of approximately $396 million, whichwere used to reduce the outstanding borrowings under its Revolving Credit Facility. Interest on the 6.25% Notes ispayable semi-annually on February 15 and August 15. At any time, the Company may redeem all or a portion of the6.25% Notes at the Company’s option at a price equal to the greater of (1) 100% of the aggregate principal plusaccrued and unpaid interest and (2) the sum of the present values of the remaining scheduled payments of principaland interest discounted at the redemption rate on a semi-annual basis at the Treasury rate plus 35 basis points, plusaccrued and unpaid interest. The 6.25% Notes rank parri passu with all other unsecured and unsubordinatedobligations. Upon a change in control of the Company, the holders of the 6.25% Notes will have the right to requirerepurchase of the respective Notes at 101% of the principal amount plus accrued and unpaid interest. Certaincovenants in the 6.25% Notes include restrictions on liens, sale and leaseback transactions, mergers, consolidationsand sale of assets.

On June 29, 2007, the Company entered into a credit agreement that provides for two term loans of$500 million each. One term loan matures on June 29, 2009, and the other matures on June 29, 2010. Proceedsfrom these loans were used to repay balances under the existing Revolving Credit Facility (established under the2006 Facility referenced below), which remains in effect. The Company may prepay the outstanding aggregateprincipal amount, in whole or in part, at any time. The covenants in this credit agreement are the same as those in theCompany’s existing Revolving Credit Facility.

On April 27, 2007 the Company amended its Revolving Credit Facility to the interest rate (from the originalrate of LIBOR + 0.475% to LIBOR + 0.400%) and increase commitments by $450 million, to a total of$2.250 billion. Of this amount, $375 million expired on April 27, 2008, and the remaining $1.875 billion willexpire in February 2011.

F-33

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Note 16. Other Liabilities

Other liabilities consisted of the following (in millions):

2008 2007December 31,

Deferred gains on asset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,069 $1,133

SPG point liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430 354

Deferred income including VOI and residential sales . . . . . . . . . . . . . . . . . . . . . . 55 34

Benefit plan liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 62

Insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 68

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 150

$1,843 $1,801

Note 17. Discontinued Operations

Summary financial information for discontinued operations is as follows (in millions):

2008 2007 2006Year Ended December 31,

Income Statement DataGain (loss) on disposition, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75 $(1) $(2)

For the year ended December 31, 2008, the gain on dispositions includes a $124 million gain ($129 million pretax) on sale of three hotels which were sold unencumbered by management or franchise contracts. Discontinuedoperations for the year ended December 31, 2008 also includes a $49 million tax charge as a result of a 2008administrative tax ruling for an unrelated taxpayer that impacts the tax liability associated with the disposition ofone of the Company’s businesses several years ago.

For the year ended December 31, 2007, the loss on disposition represents a $1 million tax assessmentassociated with the disposition of the Company’s former gaming business in 1999.

For the year ended December 31, 2006, the loss on disposition represents a $2 million tax assessmentassociated with the disposition of the Company’s former gaming business in 1999.

Note 18. Employee Benefit Plans

On December 31, 2006, the Company adopted the recognition and disclosure provisions of SFAS No. 158.SFAS No. 158 required the Company to recognize the funded status (i.e., the difference between the fair value ofplan assets and the projected benefit obligations) of its pension plans in the December 31, 2006 consolidatedbalance sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. Theincremental effects of adopting the provisions of SFAS No. 158 on the Company’s consolidated balance sheet atDecember 31, 2006 increased net liabilities by $6 million, with a corresponding decrease to accumulated othercomprehensive income. The adoption of SFAS No. 158 had no effect on the Company’s consolidated statement ofincome for the year ended December 31, 2006, or for any prior period presented, and it will not effect theCompany’s operating results in future periods.

The net actuarial loss recognized in accumulated other comprehensive income for the year ended December 31,2008 was $60 million (net of tax). The amortization of actuarial gain/loss, a component of accumulated othercomprehensive income, for the year ended December 31, 2008 was $2 million.

Included in accumulated other comprehensive income at December 31, 2008 are unrecognized net actuariallosses of $98 million ($93 million, net of tax) and net prior service credit of $2 million ($2 million, net of tax) that

F-34

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

have not yet been recognized in net periodic pension cost. The actuarial loss included in accumulated othercomprehensive income and expected to be recognized in net periodic pension cost during the year endedDecember 31, 2009 is $6 million ($6 million, net of tax).

Defined Benefit and Postretirement Benefit Plans. The Company and its subsidiaries sponsor or previouslysponsored numerous funded and unfunded domestic and international pension plans. All defined benefit planscovering U.S. employees are frozen. Certain plans covering non-U.S. employees remain active.

As a result of annuity purchases and lump sum distributions from the Company’s domestic pension plans, theCompany recorded a net settlement gain of approximately $0.1 million during the year ended December 31, 2007and a net settlement loss of approximately $0.1 million during the year ended December 31, 2006. There were nosettlement gains or losses recorded during the year ended December 31, 2008.

The Company also sponsors the Starwood Hotels & Resorts Worldwide, Inc. Retiree Welfare Program. Thisplan provides health care and life insurance benefits for certain eligible retired employees. The Company hasprefunded a portion of the health care and life insurance obligations through trust funds where such prefunding canbe accomplished on a tax effective basis. The Company also funds this program on a pay-as-you-go basis.

F-35

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The following table sets forth the projected benefit obligation, fair value of plan assets, the funded status andthe accumulated benefit obligation of the Company’s defined benefit pension and postretirement benefit plans atDecember 31, 2008 and 2007 (in millions):

2008 2007 2008 2007 2008 2007

Pension Benefits Foreign Pension BenefitsPostretirement

Benefits

Change in Projected Benefit ObligationBenefit obligation at beginning of year . . . . . . $ 17 $ 17 $206 $196 $ 20 $ 19

Service cost . . . . . . . . . . . . . . . . . . . . . . . . — — 4 5 — —Interest cost . . . . . . . . . . . . . . . . . . . . . . . . 1 1 11 12 1 1Actuarial loss (gain) . . . . . . . . . . . . . . . . . . — — 20 (4) — 2Settlements and curtailments . . . . . . . . . . . . — — (7) — — —Effect of foreign exchange rates . . . . . . . . . — — (27) 5 — —Benefits paid . . . . . . . . . . . . . . . . . . . . . . . (1) (1) (6) (8) (3) (2)Plan amendments . . . . . . . . . . . . . . . . . . . . — — (2) — — —

Benefit obligation at end of year . . . . . . . . . . . $ 17 $ 17 $199 $206 $ 18 $ 20

Change in Plan AssetsFair value of plan assets at beginning of

year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $185 $161 $ 5 $ 7Actual return on plan assets, net of

expenses . . . . . . . . . . . . . . . . . . . . . . . . . — — (35) 12 — —Employer contribution . . . . . . . . . . . . . . . . 1 1 20 16 3 2Effect of foreign exchange rates . . . . . . . . . — — (26) 4 — —Settlements and curtailments . . . . . . . . . . . . — — (6) — — —Asset transfer . . . . . . . . . . . . . . . . . . . . . . . — — — — (3) (2)Benefits paid . . . . . . . . . . . . . . . . . . . . . . . (1) (1) (6) (8) (3) (2)

Fair value of plan assets at end of year . . . . . . $ — $ — $132 $185 $ 2 $ 5

Funded status . . . . . . . . . . . . . . . . . . . . . . . . . $(17) $(17) $ (67) $ (21) $(16) $(15)

Accumulated benefit obligation . . . . . . . . . . . . $ 17 $ 17 $174 $186 n/a n/a

Plans with Accumulated Benefit Obligationsin Excess of Plan AssetsProjected benefit obligation . . . . . . . . . . . . . $ 17 $ 17 $132 $ 47 $ 18 $ 20

Accumulated benefit obligation . . . . . . . . . . $ 17 $ 17 $108 $ 46 n/a n/a

Fair value of plan assets . . . . . . . . . . . . . . . $ — $ — $ 57 $ 41 $ 2 $ 5

The net underfunded status of the plans at December 31, 2008 was $100 million, which $99 million is in otherliabilities and $1 million is in accrued expenses in the accompanying balance sheet. The majority of participants inthe Foreign Pension Plans are employees of managed hotels, for which we are reimbursed for costs related to theirbenefits. The impact of these reimbursements is not reflected above.

All domestic pension plans are frozen plans, where employees do not accrue additional benefits. Therefore, atDecember 31, 2008 and 2007, the projected benefit obligation is equal to the accumulated benefit obligation. InMarch 2006, the Company elected to freeze its pension plans in the United Kingdom. Its other foreign pension plansare not frozen, and accordingly, at December 31, 2008 and 2007, the accumulated benefit obligation for the foreignpension plans was $174 million and $186 million, respectively.

F-36

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The following table presents the components of net periodic benefit cost for the years ended December 31,2008, 2007 and 2006 (in millions):

2008 2007 2006 2008 2007 2006 2008 2007 2006Pension Benefits Foreign Pension Benefits Postretirement Benefits

Service cost . . . . . . . . . . . . . . . . . . . . . . . . $— $— $— $ 4 $ 5 $ 4 $— $— $—

Interest cost . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1 11 12 10 1 1 1

Expected return on plan assets . . . . . . . . . . . — — — (10) (11) (9) — (1) (1)

Amortization of actuarial loss . . . . . . . . . . . — — — 2 2 3 — — —

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 1 — — — — —

SFAS No. 87 cost/SFAS No. 106 cost . . . . . 1 1 1 8 8 8 1 — —

SFAS No. 88 settlement and curtailmentgain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — 1 — (3) — — —

Net periodic benefit cost . . . . . . . . . . . . . . . $ 1 $ 1 $ 1 $ 9 $ 8 $ 5 $ 1 $— $—

For measurement purposes, an 8% annual rate of increase in the per capita cost of covered health care benefitswas assumed for 2009, gradually decreasing to 5% in 2013. A one-percentage-point change in assumed health carecost trend rates would have approximately a $0.5 million effect on the postretirement obligation and a nominalimpact on the total of service and interest cost components of net periodic benefit cost.

The weighted average assumptions used to determine benefit obligations at December 31 were as follows:

2008 2007 2008 2007 2008 2007

Pension BenefitsForeign Pension

BenefitsPostretirement

Benefits

Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.99% 5.75% 6.19% 5.88% 6.00% 5.74%

Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . n/a n/a 3.93% 3.90% n/a n/a

The weighted average assumptions used to determine net periodic benefit cost for the years ended December 31were as follows:

2008 2007 2006 2008 2007 2006 2008 2007 2006Pension Benefits Foreign Pension Benefits Postretirement Benefits

Discount rate . . . . . . . . . . . . . . . . . . . . . 5.75% 5.75% 5.50% 5.88% 5.46% 5.09% 5.74% 5.74% 5.49%

Rate of compensation increase . . . . . . . . n/a n/a n/a 3.89% 3.90% 3.60% n/a n/a n/a

Expected return on plan assets . . . . . . . . n/a n/a n/a 6.38% 6.40% 6.91% 7.50% 7.50% 7.50%

A number of factors were considered in the determination of the expected return on plan assets. These factorsincluded current and expected allocation of plan assets, the investment strategy, historical rates of return andCompany and investment expert expectations for investment performance over approximately a ten year period.

F-37

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The weighted average asset allocations at December 31, 2008 and 2007 for the Company’s defined benefitpension and postretirement benefit plans and the Company’s current target asset allocation ranges are as follows:

TargetAllocation 2008 2007

TargetAllocation 2008 2007

TargetAllocation 2008 2007

Percentage ofPlan Assets

Percentage ofPlan Assets

Percentage ofPlan Assets

Pension Benefits Foreign Pension Benefits Postretirement Benefits

Equity securities . . . . . . . . . . . . . . n/a n/a n/a 34% 32% 45% 79% 42% 63%

Debt securities . . . . . . . . . . . . . . . n/a n/a n/a 66% 65% 48% — 37% 35%

Cash and other . . . . . . . . . . . . . . . n/a n/a n/a — 3% 7% 21% 21% 2%

100% 100% 100% 100% 100% 100%

The investment objective of the foreign pension plans and postretirement benefit plan is to seek long-termcapital appreciation and current income by investing in a diversified portfolio of equity and fixed income securitieswith a moderate level of risk. At December 31, 2008, all remaining domestic pension plans are unfunded plans.

The Company expects to contribute approximately $1 million to its domestic pension plans, approximately$18 million to its foreign pension plans, and approximately $2 million to the postretirement benefit plan in 2009.The following table represents the Company’s expected pension and postretirement benefit plan payments for thenext five years and the five years thereafter (in millions):

PensionBenefits

Foreign PensionBenefits

PostretirementBenefits

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1 $ 7 $22010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1 $ 7 $2

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1 $ 8 $2

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1 $ 8 $2

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1 $ 9 $2

2014 — 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7 $57 $8

Defined Contribution Plans. The Company and its subsidiaries sponsor various defined contribution plans,including the Starwood Hotels & Resorts Worldwide, Inc. Savings and Retirement Plan, which is a voluntarydefined contribution plan allowing participation by employees on U.S. payroll who meet certain age and servicerequirements. Each participant may contribute on a pretax basis between 1% and 50% of his or her compensation tothe plan subject to certain maximum limits. The plan also contains provisions for matching contributions to be madeby the Company, which are based on a portion of a participant’s eligible compensation. The amount of expense formatching contributions totaled $32 million in 2008, $28 million in 2007 and $25 million in 2006. Included as aninvestment choice is the Company’s publicly traded common stock, which had a balance of $30 million and$62 million at December 31, 2008 and 2007, respectively.

Multi-Employer Pension Plans. Certain employees are covered by union sponsored multi-employer pen-sion plans. Pursuant to agreements between the Company and various unions, contributions of $9 million in 2008,$9 million in 2007 and $8 million in 2006 were made by the Company and charged to expense.

F-38

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Note 19. Leases and Rentals

The Company leases certain equipment for the hotels’ operations under various lease agreements. The leasesextend for varying periods through 2014 and generally are for a fixed amount each month. In addition, several of theCompany’s hotels are subject to leases of land or building facilities from third parties, which extend for varyingperiods through 2089 and generally contain fixed and variable components, including a 25-year building lease ofthe Westin Dublin hotel in Dublin, Ireland (18 years remaining under the lease) with fixed annual payments of$3 million and a building lease of the W Times Square hotel in New York City which has a term of 25 years (18 yearsremaining under the lease) with fixed annual lease payments of $16 million. The variable components of leases ofland or building facilities are based on the operating profit or revenues of the related hotels.

In June 2004, the Company entered into an agreement to lease the W Barcelona hotel in Spain, which is in theprocess of being constructed with an anticipated opening date of December 2009. The term of this lease is 15 yearswith annual fixed rent payments which range from approximately 7 million Euros to 9 million Euros. In conjunctionwith entering into this lease, the Company made a 9 million Euro guarantee to the lessor that it will not terminate thelease prior to the lease commencement date. At the lease commencement date, the Company must provide a letter ofcredit to the lessor for 9 million Euros as security for the first three years of rent. This letter of credit wouldsupersede the Company’s guarantee once the hotel opens.

In June 2008, the Company entered into an agreement to lease the W London Leicester Square Hotel for40 years, commencing once the hotel reopens following a major renovation. The commencement of the lease term iscontingent upon the completion of the renovation which is under way and is expected to be completed in January2011. The minimum future rent payments due upon completion of the hotel is £3.5 million in year one, £4.5 millionin year two, and £5.5 million in year three. After the third year the rent changes based on the United Kingdom RRIIndex. Due to the uncertain opening date, the payments are not included in the table below.

The Company’s minimum future rents at December 31, 2008 payable under non-cancelable operating leaseswith third parties are as follows (in millions):

2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90

2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100

2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85

2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85

Thereafter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $698

Rent expense under non-cancelable operating leases consisted of the following (in millions):

2008 2007 2006Year Ended December 31,

Minimum rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $93 $86 $76

Contingent rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 10 11

Sublease rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (6) (4)

$97 $90 $83

Note 20. Stockholders’ Equity

Share Repurchases. In April 2007, the Board of Directors authorized an additional $1 billion in Sharerepurchases under the Company’s existing Corporation Share repurchase authorization (the “Share RepurchaseAuthorization”). In November 2007, the Board of Directors of the Company further authorized the repurchase of upto an additional $1 billion of Corporation Shares under the Share Repurchase Authorization. During the year ended

F-39

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

December 31, 2008, the Company repurchased 13.6 million Shares and Corporation Shares at a total cost of$593 million. As of December 31, 2008, no repurchase capacity remained under the Share RepurchaseAuthorization.

Exchangeable Preferred Shares. During 1998, 6.3 million shares of Class A EPS, 5.5 million shares ofClass B EPS and approximately 800,000 limited partnership units of the SLT Realty Limited Partnership (the“Realty Partnership”) and SLC Operating Limited Partnership (the “Operating Partnership”) were issued by theTrust and Corporation in connection with the acquisition of Westin Hotels & Resorts Worldwide, Inc. and certain ofits affiliates.

On March 15, 2006, the Company completed the redemption of the remaining 25,000 outstanding shares ofClass B EPS for approximately $1 million in cash. On April 10, 2006, when the Company consummated the firstphase of the Host Transaction, holders of Class A EPS received from Host $0.503 in cash and 0.6122 shares of Hostcommon stock. Also in connection with the Host Transaction, the Company redeemed all of the Class A EPS(approximately 562,000 shares) and Realty Partnership units (approximately 40,000 units) for approximately$34 million in cash. The Operating Partnership units are convertible into Corporation Shares at the unit holder’soption, provided that the Company has the option to settle conversion requests in cash or Shares. For the year endedDecember 31, 2006, the Company redeemed approximately 926,000 Operating Partnership units for approximately$56 million in cash. There were approximately 178,000 and 179,000 of these units outstanding at December 31,2008 and December 31, 2007, respectively.

Note 21. Stock-Based Compensation

In 2004, the Company adopted the 2004 Long-Term Incentive Compensation Plan (“2004 LTIP”), whichsuperseded the 2002 Long Term Incentive Compensation Plan (“2002 LTIP”) and provides for the purchase ofShares by directors, officers, employees, consultants and advisors, pursuant to equity award grants. Although noadditional awards will be granted under the 2002 LTIP, the Company’s 1999 Long Term Incentive CompensationPlan or the Company’s 1995 Share Option Plan, the provisions under each of the previous plans will continue togovern awards that have been granted and remain outstanding under those plans. The aggregate award pool for non-qualified or incentive stock options, performance shares, restricted stock or any combination of the foregoing whichare available to be granted under the 2004 LTIP at December 31, 2008 was approximately 70 million (with optionscounted as one share and restricted stock and performance units counted as 2.8 shares).

Compensation expense, net of reimbursements during 2008, 2007 and 2006 was approximately $68 million,$99 million and $103 million, respectively, resulting in tax benefits of $26 million, $33 million and $36 million,respectively.

F-40

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

As previously discussed, the Company utilizes the Lattice model to calculate the fair value of option grants.Weighted average assumptions used to determine the fair value of option grants were as follows:

2008 2007 2006Year Ended December 31,

Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.50% 1.40% 1.41%

Volatility:

Near term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38% 25% 26%

Long term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36% 37% 40%

Expected life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6yrs 6yrs 6yrs

Yield curve:

6 month . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.90% 5.12% 4.68%

1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.91% 4.96% 4.66%

3 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.17% 4.55% 4.58%

5 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.79% 4.52% 4.53%

10 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.73% 4.56% 4.58%

The dividend yield is estimated based on the current annualized dividend payment and the average price of theShares or Corporation Shares, as the case may be, during the prior year.

The estimated volatility is based on a combination of historical share price volatility as well as impliedvolatility based on market analysis. The historical share price volatility was measured over an 8-year period, whichis equal to the contractual term of the options. The weighted average volatility for 2008 grants was 37%.

The expected life represents the period that the Company’s stock-based awards are expected to be outstanding.It was determined based on an actuarial calculation which was based on historical experience, giving considerationto the contractual terms of the stock-based awards and vesting schedules.

The yield curve (risk-free interest rate) is based on the implied zero-coupon yield from the U.S. Treasury yieldcurve over the expected term of the option.

The following table summarizes stock option activity for the Company:

Options(In millions)

Weighted AverageExercise

Price Per Share

Outstanding at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . 12.8 $36.60

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.7 49.52

Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.1) 28.55

Forfeited, Canceled or Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.7) 47.90

Outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 $40.66

Exercisable at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5 $37.31

The weighted-average fair value per option for options granted during 2008, 2007 and 2006 was $17.24,$20.54 and $16.12, respectively, and the service period is typically four years. The total intrinsic value of optionsexercised during 2008, 2007 and 2006 was approximately $89 million, $187 million and $370 million, respectively,resulting in tax benefits of approximately $35 million, $56 million and $128 million, respectively. As ofDecember 31, 2008, there was approximately $17 million of unrecognized compensation cost, net of estimatedforfeitures, related to nonvested options, which is expected to be recognized over a weighted-average period of1.58 years on a straight-line basis for 2007 and future grants and using an accelerated recognition method for grantsprior to January 1, 2006.

F-41

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

In April 2006, as part of the Host Transaction, the Company depaired its Corporation Shares and Class BShares. As a result, the number of the Company’s options and their strike prices have been adjusted as discussed inNote 3.

The aggregate intrinsic value of outstanding options as of December 31, 2008 was $0 million. The aggregateintrinsic value of exercisable options as of December 31, 2008 was $0 million. The weighted-average contractuallife was 4.07 years for outstanding options and 3.58 years for exercisable option as of December 31, 2008.

The Company recognizes compensation expense equal to the fair market value of the stock on the date ofissuance for restricted stock and restricted stock unit grants over the service period. The service period is typicallyfour years except in the case of restricted shares or units issued in lieu of a portion of an annual cash bonus where thevesting period is typically in equal installments over a two year period.

At December 31, 2008, there was approximately $139 million (net of estimated forfeitures) in unamortizedcompensation cost related to restricted stock and restricted stock units. The weighted average remaining term was1.88 years for restricted stock grants outstanding at December 31, 2008. The fair value of restricted stock distributedduring 2008 was $85 million.

The following table summarizes the Company’s restricted stock and units activity during 2008:

Number ofRestricted

Stock and Units

Weighted AverageGrant Date Value

Per Share(In millions)

Outstanding at December 31, 2007 . . . . . . . . . . . . . . . . . . . . . . . . 5.7 $53.95

Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 $46.49

Distributed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.0) $49.34Forfeited or Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.0) $53.24

Outstanding at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . 5.4 $52.05

2002 Employee Stock Purchase Plan

In April 2002, the Board of Directors adopted (and in May 2002 the shareholders approved) the Company’s2002 Employee Stock Purchase Plan (the “ESPP”) to provide employees of the Company with an opportunity topurchase common stock through payroll deductions and reserved 10,000,000 Shares for issuance under the ESPP.The ESPP commenced in October 2002.

All full-time regular employees who have completed 30 days of continuous service and who are employed bythe Company on U.S. payrolls are eligible to participate in the ESPP. Eligible employees may contribute up to 20%of their total cash compensation to the ESPP. Amounts withheld are applied at the end of every three monthaccumulation period to purchase Shares. The value of the Shares (determined as of the beginning of the offeringperiod) that may be purchased by any participant in a calendar year is limited to $25,000. The purchase price toemployees is equal to 95% of the fair market value of Shares on the date of purchase. Participants may withdrawtheir contributions at any time before Shares are purchased.

Approximately 200,000 Shares were issued under the ESPP during the year ended December 31, 2008 atpurchase prices ranging from $16.02 to $45.98. Approximately 119,000 Shares were issued under the ESPP duringthe year ended December 31, 2007 at purchase prices ranging from $51.00 to $68.47.

Note 22. Derivative Financial Instruments

The Company, based on market conditions, enters into forward contracts to manage foreign exchange risk.Beginning in January 2008, the Company entered into forward contracts to hedge forecasted transactions based in

F-42

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

foreign currencies. These forward contracts have been designated as cash flow hedges under the provisions ofSFAS No. 133, and their change in fair value is recorded as a component of other comprehensive income. The fairvalue of these contracts has been recorded as an asset of $6 million at December 31, 2008. The notional dollaramount of the outstanding Euro and Canadian forward contracts at December 31, 2008 is $51 million and$4 million, respectively, with average exchange rates of 1.5 and 1.0, respectively, with terms of less than one year.Each of these hedges was highly effective in offsetting fluctuations in foreign currencies. An immaterial amount ofloss due to ineffectiveness was recorded in the consolidated statement of income. Additionally, during the yearended December 31, 2008, 22 forward contracts were settled. In connection with these settlements and theforecasted transactions occurring, the Company reclassified a loss of $0.8 million from accumulated othercomprehensive income to the management fees, franchise fees and other income line item in the consolidatedstatement of income.

The Company also enters into forward contracts to manage foreign exchange risk on intercompany loans thatare not deemed permanently invested. These forward contracts do not qualify as hedges under the provisions ofSFAS No. 133, and their change in fair value is recorded in the Company’s consolidated statement of income. Thefair value of these contracts has been recorded as a liability of $3 million and an asset of $1 million at December 31,2008 and December 31, 2007, respectively. The Company recorded gains of $14.4 million and $4.2 million on theforward contracts for the years ended December 31, 2008 and 2007 respectively. These gains were offset by lossesin the revaluation of cross-currency intercompany loans.

From time to time, the Company enters into interest rate swap agreements to manage interest expense. TheCompany’s objective is to manage the impact of interest rates on the results of operations, cash flows and the marketvalue of the Company’s debt. As of December 31, 2007, the fair value of the Company’s outstanding interest rateswaps was a liability of approximately $6 million and was included in other liabilities in the Company’sconsolidated balance sheet. During the first quarter of 2008, the Company terminated its outstanding interestrate swap agreements, resulting in a gain of $0.4 million.

Note 23. Commitments and Contingencies

The Company had the following contractual obligations outstanding as of December 31, 2008 (in millions):

TotalDue in Lessthan 1 Year

Due in1-3 Years

Due in3-5 Years

Due After5 Years

Unconditional purchase obligations(a) . . . . . . . . . . . . . $ 98 $35 $59 $2 $ 2

Other long-term obligations . . . . . . . . . . . . . . . . . . . . 4 — 3 1 —

Total contractual obligations . . . . . . . . . . . . . . . . . . . . $102 $35 $62 $3 $ 2

(a) Included in these balances are commitments that may be reimbursed or satisfied by the Company’s managedand franchised properties.

The Company had the following commercial commitments outstanding as of December 31, 2008 (in millions):

TotalLess Than

1 Year 1-3 Years 3-5 YearsAfter

5 Years

Amount of Commitment Expiration Per Period

Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . $115 $115 $— $— $—

Variable Interest Entities. Of the over 800 hotels that the Company manages or franchises for third partyowners, the Company has evaluated approximately 21 hotels that it has a variable interest in, generally in the form ofinvestments, loans, guarantees, or equity. The Company determines if it is the primary beneficiary of the hotel byconsidering qualitative and quantitative factors. Qualitative factors include evaluating distribution terms, propor-tional voting rights, decision making ability, and the capital structure. Quantitatively, the Company evaluatesfinancial forecasts to determine which would absorb over 50% of the expected losses of the hotel. The Company has

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

determined it is not the primary beneficiary of any of the variable interest entities (“VIEs”) and they should not beconsolidated in the Company’s financial statements.

In all cases, the VIEs associated with the Company’s variable interests are hotels for which the Company hasentered into management or franchise agreements with the hotel owners. The Company is paid a fee primarily basedon financial metrics of the hotel. The hotels are financed by the owners, generally in the form of working capital,equity, and debt.

At December 31, 2008, the Company has approximately $66 million of investments associated with 19 VIEs,equity investments of $10 million associated with one VIE, and a loan balance of $5 million associated with oneVIE. As the Company is not obligated to fund future cash contributions under these agreements, the maximum lossequals the carrying value. In addition, the Company has not contributed amounts to the VIEs in excess of theircontractual obligations.

At December 31, 2007, the Company had approximately $52 million of investments associated with 20 VIEs,equity investments of $11 million associated with two VIEs and loan balances of $7 million associated with twoVIEs.

Guaranteed Loans and Commitments. In limited cases, the Company has made loans to owners of orpartners in hotel or resort ventures for which the Company has a management or franchise agreement. Loansoutstanding under this program totaled $28 million at December 31, 2008. The Company evaluates these loans forimpairment, and at December 31, 2008, believes these loans are collectible. Unfunded loan commitmentsaggregating $64 million were outstanding at December 31, 2008, none of which are expected to be funded in2009 and $46 million are expected to be funded in total. These loans typically are secured by pledges of projectownership interests and/or mortgages on the projects. The Company also has $110 million of equity and otherpotential contributions associated with managed or joint venture properties, $52 million of which is expected to befunded in 2009.

During 2004, the Company entered into a long-term management contract to manage the Westin Boston,Seaport Hotel in Boston, Massachusetts, which opened in June 2006. In connection with this project, the Companyagreed to provide up to $28 million in mezzanine loans and other investments (all of which has been funded) as wellas various guarantees, including a principal repayment guarantee for the term of the senior debt which was capped at$40 million, a debt service guarantee during the term of the senior debt, which was limited to the interest expense onthe amounts drawn under such debt and principal amortization and a completion guarantee for this project. InJanuary 2007 this hotel was sold and the senior debt was repaid in full. In addition, the $28 million in mezzanineloans and other investments, together with accrued interest, was repaid in full. In accordance with the managementagreement, the sale of the hotel also resulted in the payment of a fee to the Company of approximately $18 million,which is included in management fees, franchise fees and other income in the consolidated statement of income forthe year ended December 31, 2007. The Company continues to manage this hotel subject to the pre-existingmanagement agreement.

Surety bonds issued on behalf of the Company at December 31, 2008 totaled $91 million, the majority ofwhich were required by state or local governments relating to the Company’s vacation ownership operations and byits insurers to secure large deductible insurance programs.

To secure management contracts, the Company may provide performance guarantees to third-party owners.Most of these performance guarantees allow the Company to terminate the contract rather than fund shortfalls ifcertain performance levels are not met. In limited cases, the Company is obliged to fund shortfalls in performancelevels through the issuance of loans. At December 31, 2008, excluding the Le Méridien management agreementmentioned below, the Company had five management contracts with performance guarantees with possible cashoutlays of up to $74 million, $53 million of which, if required, would be funded over several years and would belargely offset by management fees received under these contracts. Many of the performance tests are multi-yeartests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure and acts of war and

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

terrorism. The Company does not anticipate any significant funding under these performance guarantees in 2009. Inconnection with the acquisition of the Le Méridien brand in November 2005, the Company assumed the obligationto guarantee certain performance levels at one Le Méridien managed hotel for the periods 2007 through 2013. Thisguarantee is uncapped. However, the Company has estimated its exposure under this guarantee and does notanticipate that payments made under the guarantee will be significant in any single year. The estimated fair presentvalue of this guarantee of $7 million is reflected in other liabilities in the accompanying consolidated balance sheetat December 31, 2008 and 2007. The Company does not anticipate losing a significant number of management orfranchise contracts in 2009.

In connection with the purchase of the Le Méridien brand in November 2005, the Company was indemnifiedfor certain of Le Méridien’s historical liabilities by the entity that bought Le Méridien’s owned and leased hotelportfolio. The indemnity is limited to the financial resources of that entity. However, at this time, the Companybelieves that it is unlikely that it will have to fund any of these liabilities.

In connection with the sale of 33 hotels to Host in 2006, the Company agreed to indemnify Host for certainliabilities, including operations and tax liabilities. At this time, the Company believes that it will not have to makeany material payments under such indemnities.

Litigation. The Company is involved in various legal matters that have arisen in the normal course ofbusiness, some of which include claims for substantial sums. Accruals have been recorded when the outcome isprobable and can be reasonably estimated. While the ultimate results of claims and litigation cannot be determined,the Company does not expect that the resolution of all legal matters will have a material adverse effect on itsconsolidated results of operations, financial position or cash flow. However, depending on the amount and thetiming, an unfavorable resolution of some or all of these matters could materially affect the Company’s futureresults of operations or cash flows in a particular period.

Collective Bargaining Agreements. At December 31, 2008, approximately 37% of the Company’sU.S.-based employees were covered by various collective bargaining agreements providing, generally, for basicpay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, laborrelations have been maintained in a normal and satisfactory manner, and management believes that the Company’semployee relations are satisfactory.

Environmental Matters. The Company is subject to certain requirements and potential liabilities undervarious federal, state and local environmental laws, ordinances and regulations. Such laws often impose liabilitywithout regard to whether the current or previous owner or operator knew of, or was responsible for, the presence ofsuch hazardous or toxic substances. Although the Company has incurred and expects to incur remediation and otherenvironmental costs during the ordinary course of operations, management anticipates that such costs will not havea material adverse effect on the operations or financial condition of the Company.

Captive Insurance Company. Estimated insurance claims payable at December 31, 2008 and 2007 were$83 million and $88 million, respectively. At December 31, 2008 and 2007, standby letters of credit amounting to$115 million and $101 million, respectively, had been issued to provide collateral for the estimated claims. Theletters of credit are guaranteed by the Company.

ITT Industries. In 1995, the former ITT Corporation, renamed ITT Industries, Inc. (“ITT Industries”),distributed to its stockholders all of the outstanding shares of common stock of ITT Corporation, then a whollyowned subsidiary of ITT Industries (the “Distribution”). In connection with this Distribution, ITT Corporation,which was then named ITT Destinations, Inc., changed its name to ITT Corporation. Subsequent to the acquisitionof ITT Corporation in 1998, the Company changed the name of ITT Corporation to Sheraton Holding Corporation.

For purposes of governing certain of the ongoing relationships between the Company and ITT Industries afterthe Distribution and spin-off of ITT Corporation and to provide for an orderly transition, the Company and ITTIndustries have entered into various agreements including a spin-off agreement, Employee Benefits Services and

F-45

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Liability Agreement, Tax Allocation Agreement and Intellectual Property Transfer and License Agreements. TheCompany may be liable to or due reimbursement from ITT Industries relating to the resolution of certain pre-spin-off matters under these agreements. As discussed in Note 1, as part of the Host Transaction, the Company sold theshares of Sheraton Holding to Host. In connection with this transaction, the Company entered into an indemni-fication agreement with Host for certain obligations including those associated with the Distribution. Based onavailable information, management does not believe that these matters would have a material impact on theCompany’s consolidated results of operations, financial position or cash flows.

Note 24. Business Segment and Geographical Information

The Company has two operating segments: hotels and vacation ownership and residential. The hotel segmentgenerally represents a worldwide network of owned, leased and consolidated joint venture hotels and resortsoperated primarily under the Company’s proprietary brand names including St. Regis», The Luxury Collection»,Sheraton», Westin», W», Le Méridien», Four Points» by Sheraton, Aloft» and Element» as well as hotels andresorts which are managed or franchised under these brand names in exchange for fees. The vacation ownership andresidential segment includes the development, ownership and operation of vacation ownership resorts, marketingand selling VOIs, providing financing to customers who purchase such interests, licensing fees from brandedcondominiums and residences and the sale of residential units.

The performance of the hotels and vacation ownership and residential segments is evaluated primarily onoperating profit before corporate selling, general and administrative expense, interest expense, net of interestincome, losses on asset dispositions and impairments, restructuring and other special charges and income taxbenefit (expense). The Company does not allocate these items to its segments.

F-46

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

The following table presents revenues, operating income, assets and capital expenditures for the Company’sreportable segments (in millions):

2008 2007 2006

Revenues:

Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,013 $5,000 $4,863

Vacation ownership and residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894 1,153 1,116

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,907 $6,153 $5,979

Operating income:

Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 785 $ 878 $ 828

Vacation ownership and residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136 246 253

Total segment operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 921 1,124 1,081

Selling, general, administrative and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (161) (213) (222)

Restructuring and other special charges, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . (141) (53) (20)

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619 858 839

Gain on sale of VOI notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — —

Equity earnings and gains and losses from unconsolidated ventures, net:

Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 55 46

Vacation ownership and residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 11 15

Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (207) (147) (215)

Loss on asset dispositions and impairments, net . . . . . . . . . . . . . . . . . . . . . . . . . (98) (44) (3)

Income from continuing operations before taxes and minority interest . . . . . . . . . $ 330 $ 733 $ 682

Depreciation and amortization:

Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 251 $ 242 $ 251

Vacation ownership and residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 21 16

Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 43 39

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323 $ 306 $ 306

Assets:

Hotel(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,728 $6,772

Vacation ownership and residential(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,183 1,918

Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792 932

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,703 $9,622

(a) Includes $315 million and $341 million of investments in unconsolidated joint ventures at December 31, 2008and 2007, respectively.

(b) Includes $38 million and $42 million of investments in unconsolidated joint ventures at December 31, 2008 and2007, respectively.

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Capital expenditures:

Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $282 $211 $245

Vacation ownership and residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 96 78

Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 77 48

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $476 $384 $371

The following table presents revenues and long-lived assets by geographical region (in millions):

2008 2007 2006 2008 2007Revenues Long-Lived Assets

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,211 $4,563 $4,580 $2,552 $2,576

Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370 380 375 402 493

All other international . . . . . . . . . . . . . . . . . . . . . 1,326 1,210 1,024 1,027 1,204

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,907 $6,153 $5,979 $3,981 $4,273

Other than Italy, there were no individual international countries, which comprised over 10% of the totalrevenues of the Company for the years ended December 31, 2008, 2007 or 2006, or 10% of the total long-livedassets of the Company as of December 31, 2008 or 2007.

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

Note 25. Quarterly Results (Unaudited)

March 31 June 30 September 30 December 31 YearThree Months Ended

(In millions, except per Share data)

2008Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,466 $1,573 $1,535 $1,333 $5,907Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . $1,320 $1,374 $1,326 $1,268 $5,288Income from continuing operations . . . . . . . . . . . $ 79 $ 107 $ 113 $ (45) $ 254Discontinued operations . . . . . . . . . . . . . . . . . . . $ (47) $ (2) $ — $ 124 $ 75Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32 $ 105 $ 113 $ 79 $ 329Earnings per Share:Basic —

Income from continuing operations . . . . . . . . . $ 0.43 $ 0.58 $ 0.63 $ (0.25) $ 1.40Discontinued operations . . . . . . . . . . . . . . . . . $ (0.26) $ (0.01) $ — $ 0.69 $ 0.41Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.17 $ 0.57 $ 0.63 $ 0.44 $ 1.81

Diluted —Income from continuing operations . . . . . . . . . $ 0.42 $ 0.56 $ 0.62 $ (0.25) $ 1.37Discontinued operations . . . . . . . . . . . . . . . . . $ (0.25) $ — $ — $ 0.68 $ 0.40Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.17 $ 0.56 $ 0.62 $ 0.43 $ 1.77

2007Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,431 $1,572 $1,540 $1,610 $6,153Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . $1,250 $1,383 $1,294 $1,368 $5,295Income from continuing operations . . . . . . . . . . . $ 123 $ 145 $ 129 $ 146 $ 543Discontinued operations . . . . . . . . . . . . . . . . . . . $ (1) $ — $ — $ — $ (1)Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 122 $ 145 $ 129 $ 146 $ 542Earnings per Share:Basic —

Income from continuing operations . . . . . . . . . $ 0.58 $ 0.69 $ 0.63 $ 0.77 $ 2.67Discontinued operations . . . . . . . . . . . . . . . . . $ — $ — $ — $ — $ —Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.58 $ 0.69 $ 0.63 $ 0.77 $ 2.67

Diluted —Income from continuing operations . . . . . . . . . $ 0.56 $ 0.67 $ 0.61 $ 0.74 $ 2.57Discontinued operations . . . . . . . . . . . . . . . . . $ — $ — $ — $ — $ —Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.56 $ 0.67 $ 0.61 $ 0.74 $ 2.57

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

NOTES TO FINANCIAL STATEMENTS — (Continued)

SCHEDULE II

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.VALUATION AND QUALIFYING ACCOUNTS

(In millions)

BalanceJanuary 1,

Chargedto/reversed

fromExpenses

Chargedto/from Other

Accounts(a)Payments/

OtherBalance

December 31,

Additions (Deductions)

2008Trade receivables — allowance for doubtful

accounts . . . . . . . . . . . . . . . . . . . . . . . . . . $50 $ 8 $ 3 $(12) $ 49Notes receivable — allowance for doubtful

accounts . . . . . . . . . . . . . . . . . . . . . . . . . . $94 $ 55 $ — $(32) $117Reserves included in accrued and other

liabilities:Restructuring and other special charges . . . . $ 9 $141 $(83) $(26) $ 41

2007Trade receivables — allowance for doubtful

accounts . . . . . . . . . . . . . . . . . . . . . . . . . . $49 $ 6 $ 6 $(11) $ 50Notes receivable — allowance for doubtful

accounts . . . . . . . . . . . . . . . . . . . . . . . . . . $74 $ 37 $ (9) $ (8) $ 94Reserves included in accrued and other

liabilities:Restructuring and other special charges . . . . $11 $ 53 $(46) $ (9) $ 9

2006Trade receivables — allowance for doubtful

accounts . . . . . . . . . . . . . . . . . . . . . . . . . . $50 $ (1) $ 3 $ (3) $ 49Notes receivable — allowance for doubtful

accounts . . . . . . . . . . . . . . . . . . . . . . . . . . $81 $ 26 $ 7 $(40) $ 74Reserves included in accrued and other

liabilities:Restructuring and other special charges . . . . $28 $ 20 $ (4) $(33) $ 11

(a) Charged to/from other accounts:Description of

Charged to/fromOther Accounts

2008Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (7)Plant, property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66)Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14)APIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Total charged to/from other accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(80)

2007Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2Plant, property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(48)Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3)Total charged to/from other accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(49)

2006Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1APIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4)

Total charged to/from other accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6

S-1

PART IV

Item 15. Exhibits, Financial Statement Schedules.

(a) The following documents are filed as a part of this Annual Report:

1-2. The financial statements and financial statement schedule listed in the Index to Financial Statementsand Schedule following the signature pages hereof.

3. Exhibits:

ExhibitNumber Description of Exhibit

2.1 Formation Agreement, dated as of November 11, 1994, among the Company, Starwood Capital and theStarwood Partners (incorporated by reference to Exhibit 2 to the Company’s Current Report on Form 8-Kdated November 16, 1994). (The SEC file number of all filings made by the Company pursuant to theSecurities Exchange Act of 1934, as amended, and referenced herein is 1-7959).

2.2 Form of Amendment No. 1 to Formation Agreement, dated as of July 1995, among the Company and theStarwood Partners (incorporated by reference to Exhibit 10.23 to the Company’s Registration Statementon Form S-2 filed with the SEC on June 29, 1995 (Registration Nos. 33-59155 and 33-59155-01)).

2.3 Master Agreement and Plan of Merger, dated as of November 14, 2005, among Host MarriottCorporation, Host Marriott, L.P., Horizon Supernova Merger Sub, L.L.C., Horizon SLT Merger Sub,L.P., Starwood Hotels & Resorts Worldwide, Inc., Starwood Hotels & Resorts, Sheraton HoldingCorporation and SLT Realty Limited Partnership (the “Merger Agreement”) (incorporated byreference to Exhibit 10.1 to the Company’s Current Report on From 8-K filed with the SEC onNovember 14, 2005).

2.4 Amendment Agreement, dated as of March 24, 2006, to the Merger Agreement (incorporated by referenceto Exhibit 2.1 of the Joint Current Report on Form 8-K filed with the SEC on March 29, 2006).

3.1 Articles of Amendment and Restatement of the Company, as of May 30, 2007 (incorporated by referenceto Appendix A to the Company’s 2007 Notice of Annual Meeting and Proxy Statement).

3.2 Amended and Restated Bylaws of the Company, as amended and restated through April 10, 2006(incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with theSEC on April 13, 2006 (the “April 13 Form 8-K”).

3.3 Amendment to Amended and Restated Bylaws of the Company, dated as of March 13, 2008 (incorporatedby reference to Exhibit 3.1 to the Company’s Current Report on Form 8-k filed with the SEC on March 18,2008).

4.1 Termination Agreement dated as of April 7, 2006 between the Company and the Trust (incorporated byreference to Exhibit 4.1 of the April 13 Form 8-K).

4.2 Amended and Restated Rights Agreement, dated as of April 7, 2006, between the Company and AmericanStock Transfer and Trust Company, as Rights Agent (which includes the form of Amended and RestatedArticles Supplementary of the Series A Junior Participating Preferred Stock as Exhibit A, the form ofRights Certificate as Exhibit B and the Summary of Rights to Purchase Preferred Stock as Exhibit C)(incorporated by reference to Exhibit 4.2 of the April 13 Form 8-K).

4.3 Amended and Restated Indenture, dated as of November 15, 1995, as Amended and Restated as ofDecember 15, 1995 between ITT Corporation (formerly known as ITT Destinations, Inc.) and the FirstNational Bank of Chicago, as trustee (incorporated by reference to Exhibit 4.A.IV to the First Amendmentto ITT Corporation’s Registration Statement on Form S-3 filed November 13, 1996).

4.4 First Indenture Supplement, dated as of December 31, 1998, among ITT Corporation, the Company andThe Bank of New York (incorporated by reference to Exhibit 4.1 to the Company’s Current Report onForm 8-K filed with the SEC on January 8, 1999).

4.5 Second Indenture Supplement, dated as of April 9, 2006, among the Company, Sheraton HoldingCorporation and Bank of New York Trust Company, N.A., as trustee (incorporated by reference toExhibit 4.3 to the April 13 Form 8-K).

51

ExhibitNumber Description of Exhibit

4.6 Indenture, dated as of April 19, 2002, among the Company, the guarantor parties named therein and U.S.Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s andSheraton Holding Corporation’s Joint Registration Statement on Form S-4 filed with the SEC onNovember 19, 2002 (the “2002 Forms S-4”)).

4.7 Indenture, dated as of September 13, 2007, between the Company and the U.S. Bank NationalAssociation, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report onForm 8-K filed with the SEC on September 17, 2007 (the “September 17 Form 8-K”)).

4.8 Supplemental Indenture, dated as of September 13, 2007, between the Company and the U.S. BankNational Association, as trustee (incorporated by reference to Exhibit 4.2 to the September 17Form 8-K”).

4.9 Supplemental Indenture No. 2, dated as of May 23, 2008, between the Company and U.S. Bank NationalAssociation, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report onForm 8-k filed with the SEC on May 28, 2008).

The Registrants hereby agree to file with the Commission a copy of any instrument, including indentures,defining the rights of long-term debt holders of the Registrants and their consolidated subsidiaries uponthe request of the Commission.

10.1 Third Amended and Restated Limited Partnership Agreement for Operating Partnership, dated January 6,1999, among the Company and the limited partners of Operating Partnership (incorporated by reference toExhibit 10.2 to the 1998 Form 10-K).

10.2 Form of Trademark License Agreement, dated as of December 10, 1997, between Starwood Capital andthe Company (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-Kfor the fiscal year ended December 31, 1997 (the “1997 Form 10-K”)).

10.3 Credit Agreement, dated as of February 10, 2006, among the Company, certain additional DollarRevolving Loan Borrowers, certain additional Alternate Currency Revolving Loan Borrowers, variousLenders, Deutsche Bank AG New York Branch, as Administrative Agent, JPMorgan Chase Bank, N.A.and Societe Generale, as Syndication Agents, Bank of America, N.A. and Calyon New York Branch, asCo-Documentation Agents, Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and Banc ofAmerica Securities LLC, as Lead Arrangers and Book Running Managers, The Bank of Nova Scotia,Citicorp North America, Inc., and the Royal Bank of Scotland PLC, as Senior Managing Agents andNizvho Corporate Bank, Ltd. as Managing Agent (the “Credit Agreement”) (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 15, 2006).

10.4 First Amendment, dated as of March 31, 2006, to the Credit Agreement (incorporated by reference toExhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2006).

10.5 Second Amendment, dated as of June 29, 2006, to the Credit Agreement (incorporated by reference toExhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on July 6, 2006).

10.6 Third Amendment dated as of April 27, 2007, to the Credit Agreement (incorporated by reference toExhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 30, 2007).

10.7 Fourth Amendment, dated as of December 20, 2007, to the Credit Agreement (incorporated by referenceto Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31,2007).

10.8 Fifth Amendment, dated as of April 11, 2008, to the Credit Agreement, dated as of February 10, 2006,(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with theSEC on April 15, 2008).

10.9 Credit Agreement, dated as of June 29, 2007, among the Company, Bank of America, N.A., asadministrative agent and various lenders party thereto (incorporated by reference to Exhibit 10.01 tothe Company’s Current Report on Form 8-K, filed with the SEC on July 5, 2007).

10.10 Starwood Hotels & Resorts Worldwide, Inc. 1995 Long-Term Incentive Plan (the “Company’s 1995LTIP”) (Amended and Restated as of December 3, 1998) (incorporated by reference to Annex E to the1998 Proxy Statement).(1)

10.11 Second Amendment to the Company’s 1995 LTIP (incorporated by reference to Exhibit 10.3 to the 200310-Q1).(1)

52

ExhibitNumber Description of Exhibit

10.12 Form of Non-Qualified Stock Option Agreement pursuant to the Company’s 1995 LTIP (incorporated byreference to Exhibit 10.26 to the 2004 Form 10-K).(1)

10.13 Starwood Hotels & Resorts Worldwide, Inc. 1999 Long-Term Incentive Compensation Plan (the “1999LTIP”) (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q forthe quarterly period ended June 30, 1999 (the “1999 Form 10-Q2”)).(1)

10.14 First Amendment to the 1999 LTIP, dated as of August 1, 2001 (incorporated by reference to Exhibit 10.1to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001).(1)

10.15 Second Amendment to the 1999 LTIP (incorporated by reference to Exhibit 10.2 to the 2003 10-Q1).(1)

10.16 Form of Non-Qualified Stock Option Agreement pursuant to the 1999 LTIP (incorporated by reference toExhibit 10.30 to the 2004 Form 10-K).(1)

10.17 Form of Restricted Stock Agreement pursuant to the 1999 LTIP (incorporated by reference toExhibit 10.31 to the 2004 Form 10-K).(1)

10.18 Starwood Hotels & Resorts Worldwide, Inc. 2002 Long-Term Incentive Compensation Plan (the “2002LTIP”) (incorporated by reference to Annex B of the Company’s 2002 Proxy Statement).(1)

10.19 First Amendment to the 2002 LTIP (incorporated by reference to Exhibit 10.1 to the 2003 10-Q1).(1)

10.20 Form of Non-Qualified Stock Option Agreement pursuant to the 2002 LTIP (incorporated by reference toExhibit 10.49 to the 2002 Form 10-K filed on February 28, 2003 (the “2002 10-K”)).(1)

10.21 Form of Restricted Stock Agreement pursuant to the 2002 LTIP (incorporated by reference toExhibit 10.35 to the 2004 Form 10-K).(1)

10.22 2004 Long-Term Incentive Compensation Plan, amended and restated as of December 31, 2008 (“2004LTIP”) (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filedwith the SEC on January 6, 2009 (the “January 2009 8-K”)).(1)

10.23 Form of Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference toExhibit 10.4 to the 2004 Form 10-Q2).(1)

10.24 Form of Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference toExhibit 10.38 to the 2004 Form 10-K).(1)

10.25 Form of Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP (incorporated by reference toExhibit 10.2 to the Company’s Current Report on Form 8-K filed February 13, 2006 (the February 2006Form 8-K”)).(1)

10.26 Form of Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated by reference to Exhibit 10.1to the February 2006 Form 8-K).(1)

10.27 Form of Amended and Restated Non-Qualified Stock Option Agreement pursuant to the 2004 LTIP(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for theperiod ended June 30, 2006 (the 2006 Form 10-Q2”)).(1)

10.28 Form of Amended and Restated Restricted Stock Agreement pursuant to the 2004 LTIP (incorporated byreference to Exhibit 10.2 to the 2006 Form 10-Q2).(1)

10.29 Annual Incentive Plan for Certain Executives, amended and restated as of December 2008 (incorporatedby reference to Exhibit 10.2 to the January 2009 8-K).(1)

10.30 Starwood Hotels & Resorts Worldwide, Inc. Amended and Restated Deferred Compensation Plan,effective as of January 22, 2008 (incorporate by reference to Exhibit 10.35 to the Company’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2007).(1)

10.31 Form of Indemnification Agreement between the Company and each of its Directors/Trustees andexecutive officers (incorporated by reference to Exhibit 10.10 to the 2003 Form 10-K).(1)

10.32 Employment Agreement, dated as of November 13, 2003, between the Company and Vasant Prabhu(incorporated by reference to Exhibit 10.68 to the 2003 10-K).(1)

10.33 Letter Agreement, dated August 14, 2007, between the Company and Vasant Prabhu (incorporated byreference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 17, 2007 (the“August 17 Form 8-K”)).(1)

53

ExhibitNumber Description of Exhibit

10.34 Amendment, dated as of December 30, 2008, to employment agreement between the Company andVasant Prabhu.(1)(2)

10.35 Employment Agreement, dated as of September 20, 2004, between the Company and Steven J. Heyer(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with theSEC on September 24, 2004).(1)

10.36 Amendment, dated as of May 4, 2005, to Employment Agreement between the Company and Steve J.Heyer (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for thequarterly period ended March 31, 2005).(1)

10.37 Separation Agreement and Mutual General Release of Claims between the Company and Steven J. Heyer(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with theSEC on April 2, 2007).(1)

10.38 Form of Non-Qualified Stock Option Agreement between the Company and Steven J. Heyer pursuant tothe 2004 LTIP (incorporated by reference to Exhibit 10.70 to the 2004 Form 10-K).(1)

10.39 Form of Restricted Stock Unit Agreement between the Company and Steven J. Heyer pursuant to the 2004LTIP (incorporated by reference to Exhibit 10.71 to the 2004 Form 10-K).(1)

10.40 Employment Agreement, dated as of November 13, 2003, between the Company and Kenneth Siegel(incorporated by reference to Exhibit 10.57 to the Company’s Annual Report on Form 10-K for the fiscalyear ended December 31, 2000 (the “2000 Form 10-K”)).(1)

10.41 Letter Agreement, dated July 22, 2004 between the Company and Kenneth Siegel (incorporated byreference to Exhibit 10.73 to the 2004 Form 10-K).(1)

10.42 Letter Agreement, dated August 14, 2007, between the Company and Kenneth S. Siegel (incorporated byreference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed August 17, 2007 (the“August 17 Form 8-K”)).(1)

10.43 Amendment, dated as of December 30, 2008, to employment agreement between the Company andKenneth S. Siegel.(1)(2)

10.44 Employment Agreement, dated July 18, 1999, between Starwood Vacation Ownership and RaymondGellein, Jr. (incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-Kfor the period ended December 31, 2006 (the “2006 Form 10-K”)).(1)

10.45 Form of cash bonus award between the Company and Raymond L. Gellein, Jr. (incorporated by referenceto the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 (the2007 10-Q3).(1)

10.46 Amendment agreement, dated December 6, 2007, among Starwood Vacation Ownership, the Companyand Raymond Gellein, Jr. (incorporated by reference to Exhibit 10.49 to the Company’s Annual Report onForm 10-K for the fiscal year ended December 31, 2007)

10.47 Employment Agreement, dated as of September 21, 2006, between the Company and Matthew A. Ouimet(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with theSEC on September 27, 2006).(1)

10.48 Letter Agreement, dated August 14, 2007, between the Company and Matthew A. Ouimet (incorporatedby reference to Exhibit 10.2 to the August 17 Form 8-K).(1)

10.49 Separation Agreement and Mutual General Release of Claims, effective as of August 31, 2008, betweenthe Company and Matthew Ouimet (incorporated by reference to Exhibit 10.1 to the Company’s quarterlyreport on Form 10-Q for the quarterly period ended September 30, 2008).(1)

10.50 Employment Agreement, dated as of August 2, 2007, between the Company and Bruce W. Duncan(incorporated by reference to Exhibit 10.5 to the Company’s quarterly report on Form 10-Q for thequarterly period ended June 30, 2007).(1)

10.51 Form of Restricted Stock Unit Agreement between the Company and Bruce W. Duncan pursuant to the2004 LTIP (incorporated by reference to Exhibit 10.2 to the 2007 Form 10-Q1).(1)

10.52 Amended and Restated Employment Agreement, dated as of December 30, 2008, between the Companyand Frits van Paasschen.(1)(2)

54

ExhibitNumber Description of Exhibit

10.53 Form of Non-Qualified Stock Option Agreement between the Company and Frits van Paasschen pursuantto the 2004 LTIP (incorporated by reference to Exhibit 10.5 to the 2007 Form 10-Q3).(1)

10.54 Form of Restricted Stock Unit Agreement between the Company and Frits van Paasschen pursuant to the2004 LTIP (incorporated by reference to Exhibit 10.6 to the 2007 Form 10-Q3).(1)

10.55 Form of Restricted Stock Grant between the Company and Frits van Paasschen pursuant to the 2004 LTIP(incorporated by reference to Exhibit 10.7 to the 2007 Form 10-Q3).(1)

10.56 Form of Severance Agreement between the Company and each of Messrs. Ouimet, Gellein (incorporatedby reference to Exhibit 10.3 to the 2006 Form 10-Q2).(1)

10.57 Form of Severance Agreement between the Company and each of Messrs. Siegel and Prabhu.(1)(2)

12.1 Calculation of Ratio of Earnings to Total Fixed Charges.(2)

21.1 Subsidiaries of the Registrants.(2)

23.1 Consent of Ernst & Young LLP.(2)

31.1 Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 — Chief ExecutiveOfficer.(2)

31.2 Certification Pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 — Chief FinancialOfficer.(2)

32.1 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code — ChiefExecutive Officer.(2)

32.2 Certification Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code — ChiefFinancial Officer.(2)

(1) Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant toItem 14(a)(iii) of Form 10-K.

(2) Filed herewith.

55

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

STARWOOD HOTELS & RESORTS WORLD-WIDE, INC.

By: /s/ FRITS VAN PAASSCHEN

Frits van PaasschenChief Executive Officer and Director

Date: February 27, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by thefollowing persons on behalf of the Registrant in the capacities and on the dates indicated.

Signature Title Date

/s/ FRITS VAN PAASSCHEN

Frits van Paasschen

Chief Executive Officer and Director February 27, 2009

/s/ BRUCE W. DUNCAN

Bruce W. Duncan

Chairman and Director February 27, 2009

/s/ VASANT M. PRABHU

Vasant M. Prabhu

Executive Vice President and ChiefFinancial Officer (Principal FinancialOfficer)

February 27, 2009

/s/ ALAN M. SCHNAID

Alan M. Schnaid

Senior Vice President, CorporateController and Principal AccountingOfficer

February 27, 2009

/s/ ADAM M. ARON

Adam M. Aron

Director February 27, 2009

/s/ CHARLENE BARSHEFSKY

Charlene Barshefsky

Director February 27, 2009

/s/ THOMAS E. CLARKE

Thomas E. Clarke

Director February 27, 2009

/s/ CLAYTON C. DALEY, JR.

Clayton C. Daley, Jr.

Director February 27, 2009

/s/ LIZANNE GALBREATH

Lizanne Galbreath

Director February 27, 2009

/s/ ERIC HIPPEAU

Eric Hippeau

Director February 27, 2009

56

Signature Title Date

/s/ STEPHEN R. QUAZZO

Stephen R. Quazzo

Director February 27, 2009

/s/ THOMAS O. RYDER

Thomas O. Ryder

Director February 27, 2009

/s/ KNEELAND C. YOUNGBLOOD

Kneeland C. Youngblood

Director February 27, 2009

57

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The St. Regis Bali ResortSt. Regis Punta Mita

The Equinox Golf Resort & Spa, Manchester VillageThe Grand Mauritian Resort & Spa Hotel IvyThe Joule, a Luxury Collection HotelThe Nines, a Luxury Collection Hotel

W Atlanta BuckheadW Hong KongW IstanbulW Minneapolis—The FoshayW Scottsdale

Le Meridien BangkokLe Meridien Chiang MaiLe Meridien Chiang Rai ResortLe Meridien Shimei Bay Beach Resort & SpaLe Meridien Towers Makkah

The Westin Beijing ChaoyangWestin Book CadillacThe Westin Dubai Mina Seyahi Beach Resort & MarinaThe Westin Edina Galleria

The Westin HuntsvilleThe Westin Imagine OrlandoThe Westin Mount LaurelThe Westin National HarborThe Westin Reston HeightsThe Westin RichmondThe Westin Riverfront Resort and Spa, AvonThe Westin Verasa Napa

Sheraton Athlone HotelSheraton Carlsbad Resort and SpaSheraton Chicago Northbrook HotelSheraton Columbia Downtown HotelSheraton Dallas HotelSheraton Dallas North HotelSheraton Denver HotelSheraton Dreamland HotelSheraton Erie Bayfront HotelSheraton Ft. Worth Hotel and SpaSheraton Garden Grove—Anaheim South HotelSheraton Houston West HotelSheraton Huizhou Beach ResortSheraton Jacksonville HotelSheraton JFK Airport HotelSheraton Louisville Riverside HotelSheraton Maldives Fullmoon Resort & Spa

Sheraton MendozaSheraton Phoenix Downtown HotelSheraton San PabloSheraton Sopot HotelSheraton St. Paul WoodburySheraton Stonebriar Hotel

aloft Beijing Hotelaloft Charleston Airport & Convention Centeraloft Chesapeakealoft Chicago O’Harealoft Denver International Airportaloft Dulles Northaloft Friscoaloft Las Colinasaloft Lexingtonaloft Minneapolisaloft Montreal Airportaloft Nashville—Cool Springsaloft Ontario—Rancho Cucamongaaloft Philadelphia Airportaloft Planoaloft Portland Airport at Cascade Stationaloft Rogers—Bentonville

Four Points by Sheraton Asheville Downtown

Four Points by Sheraton Beijing, HaidianFour Points by Sheraton ChangshuFour Points by Sheraton ColonFour Points by Sheraton Hangzhou, BinjiangFour Points by Sheraton Houston Memorial CityFour Points by Sheraton Jacksonville BaymeadowsFour Points by Sheraton Levis Convention CentreFour Points by Sheraton Manhattan SoHo—VillageFour Points by Sheraton PerinorteFour Points by Sheraton Philadelphia City CenterFour Points by Sheraton Philadelphia NortheastFour Points by Sheraton Sheikh Zayed Road, DubaiFour Points by Sheraton Tallahassee NorthFour Points by Sheraton TempeFour Points by Sheraton Victoria Gateway

element Las Vegas Summerlinelement Lexington

Starwood Hotels & Resorts Worldwide, Inc.

New in 2008

Corporate Offices

Starwood Hotels & Resorts Worldwide, Inc.1111 Westchester Avenue, White Plains, New York 10604914 640 8100, www.starwoodhotels.com

Independent Registered Public Accounting Firm

Ernst & Young LLP, New York, New York

Stock Registrar & Transfer Agent

Registered shareholders with questions concerning stock certificates, account information, dividend payments or stock transfers should contact our transfer agent at:

American Stock Transfer & Trust Company59 Maiden Lane, New York, New York 10038800 350 6202, www.amstock.com

Form 10-K and Other Investor Information

A copy of the Annual Report of Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”) on Form 10-K filed with the Securities and Exchange Commission may be obtained online at www.starwoodhotels.com and by shareholders of record of Starwood without charge by calling 914 640 8100 or upon written request to:

Investor RelationsStarwood Hotels & Resorts Worldwide, Inc.1111 Westchester Avenue, White Plains, New York 10604

Note: This Annual Report contains forward-looking statements within the meaning of federal securities regulations. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties and other factors that may cause actual results to differ materially from those anticipated at the time the forward-looking statements are made. Further results, performance and achievements may be affected by general economic conditions including the timing and robustness of a recovery from the current global economic downturn, the impact of war and terrorist activity, business and financing conditions, foreign exchange fluctuations, cyclicality of the real estate, including the sale of residential units, and the hotel and vacation ownership businesses, operating risks associated with the sale of residential units, hotel and vacation ownership businesses, relationships with associates, customers and property own-ers, the impact of the internet reservation channels, our reliance on technology, domestic and international political and geopolitical conditions, competition, governmental and regulatory actions (including the impact of changes in U.S. and foreign tax laws and their interpretation), travelers’ fears of exposure to contagious diseases, risk associated with the level of our indebtedness, risk associated with potential acquisitions and dispositions, and other circumstances and uncertainties. These risks and uncertainties are presented in detail in our filings with the Securities and Exchange Commission. Although we believe the expectations reflected in such forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained or that results will not materially differ. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

© 2009 Starwood Hotels & Resorts Worldwide, Inc.

Corporate Information

Starwood Hotels & Resorts Worldwide, Inc.

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2009 PROXY STATEMENT & 2008 ANNUAL REPORT