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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Securities Registered Pursuant to Section 12(b) of the Act:

Securities Registered Pursuant to Section 12(g) of the Act:

None

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

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

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

     As of June 30, 2004, the aggregate market value of the Registrants’ voting and non-voting common equity (for purposes of this Joint Annual Report only, includes all Shares other than those held by the Registrants’ Directors, Trustees and executive officers) was $9,295,225,021.

     As of February 25, 2005, the Corporation had outstanding 212,467,631 Corporation Shares and the Trust had outstanding 212,467,631 Class B Shares and 100 Class A shares of beneficial interest, par value $0.01 per share (“Class A Shares”).

     For information concerning ownership of Shares, see the Proxy Statement for the Corporation’s Annual Meeting of Stockholders that is currently scheduled for May 5, 2005 (the “Proxy Statement”), which is incorporated by reference under various Items of this Joint Annual Report.

Document Incorporated by Reference:

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TABLE OF CONTENTS

      This Joint Annual Report is filed by Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the “Corporation”), and its subsidiary, Starwood Hotels & Resorts, a Maryland real estate investment trust (the “Trust”). Unless the context otherwise requires, all references to the Corporation include those entities owned or controlled by the Corporation, including SLC Operating Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), but excluding the Trust; all references to the Trust include the Trust and those entities owned or controlled by the Trust, including SLT Realty Limited 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 their respective subsidiaries, collectively. The shares of common stock, par value $0.01 per share, of the Corporation (“Corporation Shares”) and the Class B shares of beneficial interest, par value $0.01 per share, of the Trust (“Class B Shares”) are attached and trade together and may be held or transferred only in units consisting of one Corporation Share and one Class B Share (a “Share”).

PART I

Forward-Looking Statements

      This Joint Annual Report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in several places in this Joint 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-looking statements may include statements regarding the intent, belief or current expectations of Starwood, its Directors or Trustees or its officers with respect to the matters discussed in this Joint Annual Report. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements including, without limitation, the risks and uncertainties set forth below. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.

Where you can find more information

      We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s web site at 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 the SEC are also available at the New York Stock Exchange. For more information on obtaining copies of our public filings at the New York Stock Exchange, you should call (212) 656-5060. You may also obtain a copy of our filings free of charge by calling Alisa Rosenberg, Vice President, Investor Relations at (914) 640-5214.

Risks Relating to Hotel, Resort and Vacation Ownership Operations

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

      We are also impacted by our relationships with owners and franchisees. Our hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace us if certain financial or performance criteria are not met. 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 adversely affected if we could not maintain existing management, franchise or representation agreements or obtain new agreements on as favorable terms as the existing agreements.

      General Economic Conditions May Negatively Impact Our Results. Moderate or severe economic downturns or adverse conditions may negatively affect our operations. These conditions may be widespread or isolated to one or more geographic regions. A tightening of the labor markets in one or more geographic regions may result in fewer and/or less qualified applicants for job openings in our facilities. Higher wages, related labor costs and the increasing cost trends in the insurance markets may negatively impact our results as wages, related labor costs and insurance premiums increase.

      We Must Compete for Customers. The hotel and vacation ownership industries are highly competitive. Our properties compete for customers with other hotel and resort properties, and, with respect to our vacation ownership resorts and residential projects, with owners reselling their vacation ownership interests (“VOIs”), including fractional ownership, or apartments. Some of our competitors may have substantially greater marketing and financial resources than we do, and they may improve their facilities, reduce their prices or expand or improve their marketing programs in ways that adversely affect our operating results.

      We Must Compete for Management and Franchise Agreements. We compete with other hotel companies for management and franchise agreements. As a result, the terms of such agreements may not be as favorable as our current agreements. In connection with entering into management or franchise agreements, we may be required to make investments in or guarantee the obligations of third parties or guarantee minimum income to third parties.

      The Hotel Industry Is Seasonal in Nature. The hotel industry is seasonal in nature; however, the periods during 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.

      Internet Reservation Channels May Negatively Impact our Bookings. Some of our hotel rooms are booked through internet travel intermediaries such as Travelocity.com®, Expedia.com® and Priceline.com®. As the percentage of internet bookings increases, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms, by increasing the importance of price and general indicators of quality (such as “three-star downtown hotel”) at the expense of brand identification. These agencies hope that consumers will eventually develop brand loyalties to their reservations system rather than to our lodging brands. Although we expect to derive most of our business from traditional channels, if the amount of sales made through internet intermediaries increases significantly, our business and profitability may be significantly harmed.

      We Place Significant Reliance on Technology. The hospitality industry continues to demand the use of sophisticated technology and systems including technology utilized for property management, procurement, reservation systems, operation of our customer loyalty program, distribution and guest amenities. These technologies can be expected to require refinements and there is the risk that advanced new technologies will be introduced. There can be no assurance that as various systems and technologies become outdated or new technology is required we will be able to replace or introduce them as quickly as our competition or within budgeted costs for such technology. Further, there can be no assurance 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 remain attractive and competitive, the property owners and we have to spend money periodically to keep the properties well maintained, modernized and refurbished. This creates an ongoing need for cash and, to the extent the property owners and we cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwise obtained. This may depend on the financial condition of the third-party owners and franchisees. Their financial condition may also impact our ability to recover amounts that may be owed to us by owners, developers and franchisees such as indemnity payments. In addition, to continue growing our vacation ownership business and residential projects, we need to spend money to develop new units. Accordingly, our financial results may be sensitive to the cost and availability of funds 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 to investments in real property because we own and lease hotels and resorts. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, and the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, real estate, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovate hotels. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell real property. Finally, under eminent domain laws, governments can take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have a material adverse impact on our results of operations or financial condition. In addition, equity real estate investments are difficult to sell quickly and we may not be able to adjust our portfolio of owned properties quickly in response to economic or other conditions. If our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our income will be adversely affected.

      Hotel and Resort Development Is Subject to Timing, Budgeting and Other Risks. We intend to develop hotel and resort properties, including VOIs and residential components of hotel properties, as suitable

opportunities arise, taking into consideration the general economic climate. New project development has a number of risks, including risks associated with:

      We cannot assure you that any development project will be completed on time or within budget.

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

      International Operations Are Subject to Special Political and Monetary Risks. We have significant international operations which as of December 31, 2004 included 175 owned, managed or franchised properties in Europe, Africa and the Middle East (including 29 properties with majority ownership); 46 owned, managed or franchised properties in Latin America (including 12 properties with majority ownership); and 94 owned, managed or franchised properties in the Asia Pacific region (including 4 properties with majority ownership). International operations generally are subject to various political, geopolitical, and other risks that are not present in U.S. operations. These risks include the risk of war, terrorism, civil unrest, expropriation and nationalization. In addition, some international jurisdictions restrict the repatriation of non-U.S. earnings. Various international jurisdictions also have laws limiting the ability of non-U.S. entities to pay dividends and remit earnings to affiliated companies unless specified conditions have been met. In addition, sales in international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. Other than Italy, where our risks are heightened due to the 13 properties we own, our international properties are geographically diversified and are not concentrated in any particular region.

Debt Financing

      As a result of our debt obligations, we are subject to: (i) the risk that cash flow from operations will be insufficient to meet required payments of principal and interest; and (ii) interest rate risk. Although we anticipate that we will be able to repay or refinance our existing indebtedness and any other indebtedness when

it matures, there can be no assurance that we will be able to do so or that the terms of such refinancings will be favorable. Our leverage may have important consequences including the following: (i) our ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be available on terms favorable to us; (ii) a substantial decrease in operating cash flow or an increase in our expenses could make it difficult for us to meet our debt service requirements and force us to sell assets and/or modify our operations; and (iii) our higher level of debt and resulting interest expense may place us at a competitive disadvantage with respect to certain competitors with lower amounts of indebtedness and/or higher credit ratings. On January 7, 2004, Moody’s Investor Services and Standard & Poor’s placed the Company’s Ba1 and BB+ corporate credit ratings on review/watch for a possible downgrade. The review/watch was prompted by the Company’s announcement that it had invested $200 million in Le Meridien Hotels and Resorts Ltd. (“Le Meridien”) senior debt and would be in discussions to negotiate the potential recapitalization of Le Meridien. On January 27, 2005, Standard & Poor’s removed the Company from its credit review/watch and affirmed the Company’s BB+ rating with a stable outlook. Any downgrading of the Company’s credit rating may result in higher borrowing costs on future financings and impact our ability to access capital markets.

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 natural disasters, in locations where we own and/or operate significant properties and areas of the world from which we draw a large number of customers. Similarly, wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife and geopolitical uncertainty have caused in 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 comprehensive insurance coverage for general liability, property, business interruption and other risks with respect to our owned and leased properties and we make available insurance programs for owners of properties we manage and franchise. These policies offer coverage features and insured limits that we believe are customary for similar type properties. Generally, our “all-risk” property policies provide that coverage is available on a per occurrence basis and that, for each occurrence, there is a limit as well as various sub-limits on the amount of insurance proceeds we can receive. In addition, there may be overall limits under the policies. Sub-limits exist for certain types of claims such as service interruption, abatement, expediting costs or landscaping replacement, and the dollar amounts of these sub-limits are significantly lower than the dollar amounts of the overall coverage limit. Our property policies also provide that for the coverage of critical earthquake (California and Mexico) and flood, all of the claims from each of our properties resulting from a particular insurable event must be combined together for purposes of evaluating whether the annual aggregate limits and sub-limits contained in our policies have been exceeded and any such claims will also be combined with the claims of owners of managed hotels that participate in our insurance program for the same purpose. Therefore, if insurable events occur that affect more than one of our owned hotels and/or managed hotels owned by third parties that participate in our insurance program, the claims from each affected hotel will be added together to determine whether the annual aggregate limit or sub-limits, depending on the type of claim, have been reached. If the limits or sub-limits are exceeded, each affected hotel will only receive a proportional share of the amount of insurance proceeds provided for under the policy. In addition, under those circumstances, claims by third party owners will reduce the coverage available for our owned and leased properties.

      In addition, there are also other risks such as war, certain forms of terrorism such as nuclear, biological or chemical terrorism, acts of God such as hurricanes and earthquakes and some environmental hazards that may be deemed to fall completely outside the general coverage limits of our policies or may be uninsurable or may be too expensive to justify insuring against.

      We may also encounter challenges with an insurance provider regarding whether it will pay a particular claim that 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 future revenue from the hotel or resort. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property.

Acquisitions

      We intend to make acquisitions that complement our business. There can be no assurance, however, that we will be able to identify acquisition candidates or complete acquisitions on commercially reasonable terms or at all. On December 30, 2003, we announced our share ($200 million) of the acquisition with Lehman Brothers Holdings Inc. (“Lehman Brothers”) of all of the outstanding senior debt of Le Meridien. As part of this investment, we entered into an agreement with Lehman Brothers whereby they would negotiate with us on an exclusive basis towards a recapitalization of Le Meridien. The exclusivity period expired in early April 2004 although negotiations with Lehman Brothers are continuing. While negotiations are continuing, there can be no assurance that transaction agreements will be entered into or a transaction consummated and if consummated what the terms and form of such a transaction would be.

      If the Le Meridien transaction or additional acquisitions are made, there can be no assurance that any anticipated benefits will actually be realized. Similarly, there can be no assurance that we will be able to obtain additional financing for acquisitions, or that the ability to obtain such financing will not be restricted by the terms of our debt agreements.

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

      In addition to acquiring or developing hotels and resorts directly, we have from time to time invested, and expect to continue to invest, as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, joint venture investments may involve risks such as the possibility that the co-venturer in an investment might become bankrupt or not have the financial resources to meet its obligations, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by a co-venturer might subject hotels and resorts owned by the joint venture to additional risk. Although we generally seek to maintain sufficient control of any joint venture, we may be unable to take action without the approval of our joint venture partners. Alternatively, our joint venture partners could take actions binding on the joint venture without our consent. Additionally, should a joint venture partner become bankrupt, we could become liable for our partner’s share of joint venture liabilities.

Dispositions

      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 in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on restructuring and enhancing real estate returns and monetizing investments and from time to time, attempt to sell these identified properties and assets. There can be no assurance, however, that we will be able to complete dispositions on commercially reasonable terms or at all.

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 a one-week period (or in the case of fractional ownership interests, generally for three or more weeks) on either an annual or an alternate-year basis. We also acquire, develop and operate vacation ownership resorts, and provide financing to purchasers of VOIs. These activities are all subject to extensive regulation by the federal government and the states in which vacation ownership resorts are located and in which VOIs are marketed and sold including regulation of our telemarketing activities under state and federal “Do Not Call” laws. In addition, the laws of most states in which we sell VOIs grant the purchaser the right to rescind the purchase contract at any time within a statutory 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 are currently subject, changes in these requirements or a determination by a regulatory authority that we were not in compliance, could adversely affect us. In particular, increased regulations of telemarketing activities could adversely impact the marketing of our VOIs.

      We bear the risk of defaults under purchaser mortgages on VOIs. If a VOI purchaser defaults on the mortgage during the early part of the loan amortization period, we will not have recovered the marketing, selling (other than commissions in certain events), and general and administrative costs associated with such VOI, and such costs will be incurred again in connection with the resale of the repossessed VOI. Accordingly, there is no assurance that the sales price will be fully or partially recovered from a defaulting purchaser or, in the event of such defaults, that our allowance for losses will be adequate.

Recent Privacy Initiatives

      We collect information relating to our guests for various business purposes, including marketing and promotional purposes. The collection and use of personal data are governed by privacy laws and regulations enacted in the United States and other jurisdictions around the world. Privacy regulations continue to evolve and on occasion may be inconsistent from one jurisdiction to another. Compliance with applicable privacy regulations may increase our operating costs and/or adversely impact our ability to market our products, properties and services to our guests. In addition, non-compliance with applicable privacy regulations by us (or in some circumstances non-compliance by third parties engaged by us) may result in fines or restrictions on our use or transfer of data.

Certain Interests

      Barry S. Sternlicht is the Executive Chairman of the Corporation and the Trust and, until October 1, 2004, was the Chief Executive Officer. Mr. Sternlicht also serves as the President and Chief Executive Officer of, and may be deemed to control, Starwood Capital Group, L.L.C. (“Starwood Capital”), a real estate investment firm. Starwood Capital and the Company have entered into a non-compete agreement whereby Starwood Capital may not purchase a hotel property in the United States without the consent of the Company. Although Starwood Capital is not subject to a non-compete agreement with the Company for hotel properties outside of the United States, as a matter of practice, all opportunities to purchase such properties are also first presented to the Company in accordance with the Company’s Corporate Opportunity Policy. In each case, to the extent that management of the Company recommends not to pursue an opportunity, the Governance and Nominating Committee of the Board of Directors (or other committee of independent directors) will make a decision as to whether or not the Company will pursue the opportunity. In addition, from time to time, the Company has entered into transactions in which Mr. Sternlicht has an interest. See Item 13. Certain Relationships and Related Transactions. To the extent any executive officer or director of the Company has an interest in businesses that seek to do business with the Company, any agreements with those businesses are subject to Governance and Nominating Committee (or other committee of independent directors) approval pursuant to the Company’s Corporate Opportunity Policy.

Ability to Manage Growth

      Our future success and our ability to manage future growth depend in large part upon the efforts of our senior management and our ability to attract and retain key officers and other highly qualified personnel. Competition for such personnel is intense. During 2004, we experienced changes in our senior management, including a new Chief Executive Officer and Chief Financial Officer. In addition, in February 2005 our President and Chief Operating Officer announced his intention to retire at the end of 2005. There can be no assurance that we will continue to be successful in attracting and retaining qualified personnel. Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our growth and operating strategies.

Tax Risks

      Failure of the Trust to Qualify as a REIT Would Increase Our Tax Liability. Qualifying as a real estate investment trust (a “REIT”) requires compliance with highly technical and complex tax provisions that courts and administrative agencies have interpreted only to a limited degree. Also, facts and circumstances that we do not control may affect the Trust’s ability to qualify as a REIT. The Trust believes that since the taxable year ended December 31, 1995, it has qualified as a REIT under the Internal Revenue Code of 1986, as amended. The Trust intends to continue to operate so it qualifies as a REIT. However, the Trust cannot assure you that it will continue to qualify as a REIT. If the Trust fails to qualify as a REIT for any prior tax year(s), the Trust would be liable to pay a significant amount of taxes for those year(s). Similarly, if the Trust fails to qualify as a REIT in the future, our liability for taxes would increase.

      Additional Legislation Could Eliminate or Reduce Certain Benefits of Our Structure. On January 6, 1999, we consummated a reorganization pursuant to an Agreement and Plan of Restructuring dated as of September 16, 1998, as amended, among the Corporation, ST Acquisition Trust, a wholly owned subsidiary of the Corporation, and the Trust (the “Reorganization”). Pursuant to the Reorganization, the Trust became a subsidiary of the Corporation, which, through a wholly-owned subsidiary, holds all the outstanding Class A shares of beneficial interest, par value $0.01 per share, of the Trust. The Reorganization was proposed in response to the Internal Revenue Service Restructuring and Reform Act of 1998 (“H.R. 2676”), which made it difficult for us to acquire and operate additional hotels while still maintaining our former status as a “grandfathered paired share real estate investment trust.” While we believe that the Reorganization was the best alternative in light of H.R. 2676 and that our current structure does not raise the same concerns that led Congress to enact such legislation, no assurance can be given that additional legislation, regulations or administrative interpretations will not be adopted that would eliminate or reduce certain benefits of the Reorganization and could have a material adverse effect on our results of operations, financial condition and prospects.

      As part of the Jobs and Growth Tax Relief Reconciliation Act of 2003, the tax rates on corporate dividends to shareholders were decreased to 15 and 5 percent, depending on the shareholders’ individual tax brackets. However, dividends paid by a REIT are generally not eligible for the reduced dividend tax rate. REIT dividends largely represent rents and other income that are passed through to shareholders as dividends deductible to the REIT, rather than corporate earnings subject to the corporate income tax. The implementation of this statute may cause individual investors to view stocks of non-REIT corporations as more attractive relative to shares of REITs than was the case previously.

      Furthermore, the American Jobs Creation Act of 2004 (the “Act”) was enacted on October 22, 2004. The Act made certain changes to the rules relating to REITs including, for example, changes to the “straight debt” safe harbor rules and provisions permitting a REIT in certain circumstances to pay a monetary penalty for failure to satisfy a REIT requirement in lieu of being subject to disqualification as a REIT. However, given the fact that the statute was only recently enacted, it is not entirely clear how the Internal Revenue Service will apply and interpret each new provision of the Act.

      We undertake global tax planning in the normal course of business. These activities may be subject to review by tax authorities. As a result of the review process, uncertainties exist and it is possible that some matters could be resolved adversely to us.

      Evolving government regulation could impose taxes or other burdens on our business. We rely upon generally available interpretations of tax laws and regulations in the countries and locales in which we operate. We cannot be sure that these interpretations are accurate or that the responsible taxing authority is in agreement with our views. The imposition of additional taxes could cause us to have to pay taxes that we currently do not collect or pay or increase 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 hotel occupancy tax from its customer based on the price that the intermediary paid us for the hotel room. We then remit these taxes to the various tax authorities. Several jurisdictions have stated that they may take the position that the tax is 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 to collect the additional tax payment from us and we would not be able to collect these taxes from the customers. To the extent that any tax authority succeeds in asserting that the hotel occupancy tax applies to the gross profit on these transactions, we believe that any additional tax would be the responsibility of the intermediary. However, it is possible that we might have additional tax exposure. In such event, such actions could have a material adverse effect on our business, results of operations and financial condition.

Risks Relating to Ownership of Our Shares

      No Person or Group May Own More Than 8% of Our Shares. Our governing documents provide (subject to certain exceptions) that no one person or group may own or be deemed to own more than 8% of our outstanding stock or Shares of beneficial interest, whether measured by vote, value or number of Shares. There is an exception for shareholders who owned more than 8% as of February 1, 1995, who may not own or be deemed to own more than the lesser of 9.9% or the percentage of Shares they held on that date, provided, that if the percentage of Shares beneficially owned by such a holder decreases after February 1, 1995, such a holder may not own or be deemed to own more than the greater of 8% or the percentage owned after giving effect to the decrease. We may waive this limitation if we are satisfied that such ownership will not jeopardize the Trust’s status as a REIT. In addition, if Shares which would cause the Trust to be beneficially owned by fewer than 100 persons are issued or transferred to any person, such issuance or transfer shall be null and void. This ownership limit may have the effect of precluding a change in control of us by a third party without the consent of our Board of Directors, even if such change in control would otherwise give the holders of Shares or other of our equity securities the opportunity to realize a premium over then-prevailing market prices, and even if such change in control would not reasonably jeopardize the status of the Trust as a REIT.

      Our Board of Directors May Issue Preferred Stock and Establish the Preferences and Rights of Such Preferred Stock. Our charter provides that the total number of shares of stock of all classes which the Corporation has authority to issue is 1,350,000,000, initially consisting of one billion shares of common stock, 50 million shares of excess common stock, 200 million shares of preferred stock and 100 million shares of excess preferred stock. Our Board of Directors has the authority, without a vote of shareholders, to establish the preferences and rights of any preferred or other class or series of shares to be issued and to issue such shares. The issuance of preferred shares or other shares having special preferences or rights could delay or prevent a change in control even if a change in control would be in the interests of our shareholders. Since our Board of Directors has the power to establish the preferences and rights of additional classes or series of shares without a shareholder vote, our Board of Directors may give the holders of any class or series preferences, powers and rights, including voting rights, senior to the rights of holders of our shares.

      Our Board of Directors May Implement Anti-Takeover Devices and our Charter and By-Laws Contain Provisions 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 a classified board. In addition, our charter contains provisions relating to restrictions on transferability of the Corporation Shares, which may be amended only by the affirmative vote of our shareholders holding two-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 to Acquire Us on Terms Not Approved by Our Board of Directors. We adopted a shareholder rights plan which provides, among other things, that when specified events occur, our shareholders will be entitled to purchase from us a newly created series of junior preferred stock, subject to the ownership limit described above. The preferred stock purchase rights are triggered by the earlier to occur of (i) ten days after the date of a public announcement that a person or group acting in concert has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of our outstanding Corporation Shares or (ii) ten business 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 of

our outstanding Corporation Shares. The preferred stock purchase rights would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors.

      Changes in Stock Option Accounting Rules May Adversely Impact Our Reported Operating Results Prepared in Accordance with Generally Accepted Accounting Principles, Our Stock Price and Our Competitiveness in the Employee Marketplace. We have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce. Currently, Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” allows companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” with a pro forma disclosure of the impact on net income of using the fair value recognition method. We have elected to apply APB No. 25 and accordingly, we do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our Shares on the date of grant.

      In the fourth quarter of 2004, the Financial Accounting Standards Board (“FASB”) concluded that SFAS No. 123(R), “Share-Based Payment,” will be effective for public companies for interim or annual periods beginning after June 15, 2005. Under SFAS No. 123(R), companies must measure compensation cost for all share-based payments, including employee stock options, using a fair value based method and these payments must be recognized as expenses in our statements of operations. The implementation of SFAS No. 123(R) beginning in the third quarter of fiscal 2005 will require us to expense the fair value of our stock options in our consolidated statement of operations rather than disclosing the impact on results of operations within our footnotes in accordance with the disclosure provisions of SFAS No. 123 (see Note 2 of the Notes to Consolidated Financial Statements). The implementation of SFAS No. 123(R) will result in lower reported earnings per share, which could negatively impact our future stock price. In addition, this could negatively impact our ability to utilize employee stock plans to recruit and retain employees and could result in a competitive disadvantage to us in the employee marketplace.

General

      We are one of the world’s largest hotel and leisure companies. We conduct our hotel and leisure business both directly and through our subsidiaries. Our brand names include St. Regis®, The Luxury Collection®, Sheraton®, Westin®, W® and Four Points® by Sheraton. Through these brands, we are well represented in most major markets around the world. Our operations are grouped into two business segments, hotels and vacation ownership operations.

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

      Our hotel business emphasizes the global operation of hotels and resorts primarily in the luxury and upscale segment of the lodging industry. We seek to acquire interests in, or management or franchise rights with respect to properties in this segment. At December 31, 2004, our hotel portfolio included owned, leased, managed and franchised hotels totaling 733 hotels with approximately 231,000 rooms in more than 80 countries, and is comprised of 140 hotels that we own or lease or in which we have a majority equity interest, 283 hotels managed by us on behalf of third-party owners (including entities in which we have a minority equity interest) and 310 hotels for which we receive franchise fees.

      Our revenues and earnings are also derived from the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs in the resorts and providing financing to customers who purchase such interests. Generally these resorts are marketed under the brand names mentioned above. At December 31, 2004, we had 19 vacation ownership resorts in the United States and the Bahamas.

      The Trust was organized in 1969, and the Corporation was incorporated in 1980, both under the laws of Maryland. Sheraton Hotels & Resorts and Westin Hotels & Resorts, Starwood’s largest brands, have been

serving guests for more than 60 years. Starwood Vacation Ownership (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, and our telephone number is (914) 640-8100.

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

Competitive Strengths

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

      Brand Strength. We have assumed a leadership position in markets worldwide based on our superior global distribution, coupled with strong brands and brand recognition. Our upscale and luxury brands continue to capture market share from our competitors by aggressively cultivating new customers while maintaining loyalty among the world’s most active travelers. The strength of our brands is evidenced, in part, by the superior ratings received from our hotel guests and from industry publications. In 2004 we had more than 30 of our hotels on the Condé Nast Traveler’s 2004 Readers Choice Awards List, including four hotels on their “Top 100 Best Hotels in the World.” For the third year in a row we were named the “World’s Leading Hotel Group” at the World Travel Awards.

      Frequent Guest Program. Our loyalty program, Starwood Preferred Guest® (“SPG”), has over 22 million members and since its inception in 1999, has been awarded the Hotel Program of the Year five times by consumers via the prestigious Freddie Awards. SPG has also received awards for Best Customer Service, Best Web Site, Best Elite-Level Program and Best Award Redemption. SPG, which was the first loyalty program in the hotel industry with a policy of no blackout dates and no capacity controls, enables members to redeem stays when they want and where they want. SPG yields repeat guest business due to rewarding frequent stays and purchasers of VOIs with points towards free hotel stays and other rewards, or airline miles with any of the participating 32 airline programs.

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

      Premier and Distinctive Properties. We control a distinguished and diversified group of hotel properties throughout the world, including the St. Regis in New York, New York; The Phoenician in Scottsdale, Arizona; the Hotel Gritti Palace in Venice, Italy; the St. Regis in Beijing, China; and the Westin Palace in Madrid, Spain. These are among the leading hotels in the industry and are at the forefront of providing the highest quality and service. Our properties are consistently recognized as the best of the best by readers of Condé Nast Traveler, who are among the world’s most sophisticated and discerning group of travelers. The November 2004 edition of the Condé Nast Traveler Magazine named four Starwood properties in the top 100 “Best in the World”, with over 30 properties listed in the Readers’ Choice Awards list. In addition, the Condé Nast Traveler Magazine January 2005 issue included 51 Starwood properties among its prestigious Gold List and Gold List Reserve, more than any other hotel company.

      Scale. As one of the largest hotel and leisure companies focusing on the luxury and upscale full-service lodging market, we have the scale to support our core marketing and reservation functions. We also believe that our scale will contribute to lower our cost of operations through purchasing economies areas such as insurance, energy, telecommunications, technology, employee benefits, food and beverage, furniture, fixtures and equipment and operating supplies.

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

      While we focus on the luxury and upscale portion of the full-service lodging and vacation ownership 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 extensive amenities and services at more affordable rates.

      We derive our cash flow from multiple sources within our hotel and vacation ownership segments, including owned hotels activity and management and franchise fees, and are geographically diverse with operations around the world. The following tables reflect our hotel and vacation ownership properties by type of revenue source and geographical presence by major geographic area as of December 31, 2004:

Business Segment and Geographical Information

      Incorporated by reference in Note 21. Business Segment and Geographical Information, in the notes to financial statements set forth in Part II, Item 8. Financial Statements and Supplementary Data.

Business Strategy

      Our primary business objective is to maximize earnings and cash flow by increasing the profitability of our existing portfolio; selectively acquiring interests in additional assets; increasing the number of our hotel management contracts and franchise agreements; acquiring and developing vacation ownership resorts and selling VOIs; and maximizing the value of our owned real estate properties, including selectively disposing of non-core hotels (including hotels where the return on invested capital is not adequate) and “trophy” assets that may be sold at significant premiums. We plan to meet these objectives by leveraging our global assets, broad customer base and other resources and by taking advantage of our scale to reduce costs. The uncertainty relating to political and economic environments around the world and their consequent impact on travel in their respective regions and the rest of the world, make financial planning and implementation of our strategy more challenging.

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

      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 all of the following criteria:

      We may also selectively choose to develop and construct desirable hotels and resorts to help us meet our strategic goals, such as the ongoing development of the St. Regis Museum Tower Hotel in San Francisco, California which is expected to have approximately 260 hotel rooms and 102 residential condominiums.

      Furthermore, we have developed plans along with third party developers for flexible new-build Sheraton and Westin prototypes, with the intent of expanding these brands into tertiary markets.

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 distribution system, price, the ability to earn and redeem loyalty program points and other factors. Management believes that we compete favorably in these areas. Our properties compete with other hotels and resorts, including facilities owned by local interests and facilities owned by national and international chains, in their geographic markets. Our principal competitors include other hotel operating companies, ownership companies (including hotel REITs) and national and international hotel brands.

      We encounter strong competition as a hotel, resort and vacation ownership operator and developer. While some of our competitors are private management firms, several are large national and international chains that 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. In addition, hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.

Environmental Matters

      We are subject to certain requirements and potential liabilities under various federal, state and local environmental laws, ordinances and regulations (“Environmental Laws”). For example, a current or previous owner or operator of real property may become liable for the costs of removal or remediation of hazardous or toxic substances on, under or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of hazardous or toxic substances may adversely affect the owner’s ability to sell or rent such real property or to borrow using such real property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic wastes may be liable for the costs of removal or remediation of such wastes at the treatment, storage or disposal facility, regardless of whether such facility is owned or operated by such person. We use certain substances and generate certain wastes that may be deemed hazardous or toxic under applicable Environmental Laws, and we from time to time have incurred, and in the future may incur, costs related to cleaning up contamination resulting from historic uses of certain of our current or former properties or our treatment, storage or disposal of wastes at facilities owned by 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, floor coverings, ceiling coverings, tiles, decorative treatments and piping located at certain of our hotels) in the event of damage or demolition, or certain renovations or remodeling. These laws also govern emissions of and exposure to asbestos fibers in the air. Environmental Laws also regulate polychlorinated biphenyls (“PCBs”), which may be present in electrical equipment. A number of our hotels have underground storage tanks (“USTs”) and equipment containing chlorofluorocarbons (“CFCs”); the operation and subsequent removal or upgrading of certain USTs and the use of equipment containing CFCs also are regulated by Environmental Laws. In connection

with our ownership, operation and management of our properties, we could be held liable for costs of remedial or other action with respect to PCBs, USTs or CFCs.

      Environmental Laws are not the only source of environmental liability. Under the common law, owners and operators of real property may face liability for personal injury or property damage because of various environmental 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 the ordinary course of operations, management anticipates that such costs will not have a material adverse effect on the operations or financial condition of the Company.

Seasonality and Diversification

      The hotel industry is seasonal in nature; however, the periods during which our properties experience higher revenue activities vary from property to property and depend principally upon location. Generally, our revenues and operating 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 undergoing renovation, these hotels are generally not operating at full capacity and, as such, these renovations can negatively impact our revenues and operating income.

Employees

      At December 31, 2004, we employed approximately 120,000 employees at our corporate offices, owned and managed hotels and vacation ownership resorts, of whom approximately 44% were employed in the United States. At December 31, 2004, approximately 35% of the U.S.-based employees were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, labor relations have been maintained in a normal and satisfactory manner, and management believes that our employee relations are good, although labor negotiations continue in San Francisco and Los Angeles, where the union is attempting to negotiate a contract term that will expire at the same time as union contracts in other cities.

      We are one of the largest hotel and leisure companies in the world, with operations in more than 80 countries. We consider our hotels and resorts, including vacation ownership resorts (together “Resorts”), generally to be premier establishments with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Although obsolescence arising from age and condition of facilities can adversely affect our Resorts, Starwood and third-party owners of managed and franchised 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 of Operations — Liquidity and Capital Resources in this Joint Annual Report.

      Our hotel business included 733 owned, managed or franchised hotels with approximately 231,000 rooms and our vacation ownership business included 19 vacation ownership resorts at December 31, 2004, predominantly under six brands. All brands represent full-service properties that range in amenities from luxury hotels 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. In addition, we are opening a Bliss Spa at the W New York and a Remedé Spa at the St. Regis Aspen.

      The following table reflects our hotel and vacation ownership properties, by brand:

      St. Regis Hotels & Resorts (luxury full-service hotels and resorts) deliver the most discreet, personalized and anticipatory level of service to high-end leisure and business travelers. St. Regis hotels typically have individual design characteristics to accentuate each individual location and city. Most St. Regis hotels have spacious, luxurious rooms and suites with highly designed, residential surroundings and include a 4- or 5-Star restaurant on premises. We are in the process of developing several condominium and fractional residential properties as part of existing, or to be built, St. Regis hotels. Some of these properties include the St. Regis Museum Tower Hotel in San Francisco, California, scheduled to open in mid 2005, the St. Regis in Aspen, Colorado, which opened in December 2004, and Temenos, Anguilla, a St. Regis Retreat, which is scheduled to debut in 2006.

      The Luxury Collection (luxury full-service hotels and resorts) is a group of unique hotels and resorts offering exceptional service to an elite clientele (some of which may also be branded a St. Regis, Sheraton or Westin). The Luxury Collection includes some of the world’s most renowned and legendary hotels generally well known by the individual hotel name. These hotels are distinguished by magnificent decor, spectacular settings and impeccable service.

      Sheraton Hotels & Resorts (upscale full-service hotels and resorts) is the Company’s largest brand serving the needs of upscale business and leisure travelers worldwide. Sheraton hotels and resorts offer the entire spectrum of comfort, from full-service hotels in major cities to luxurious resorts. These hotels and resorts typically feature a wide variety of on-site business services and a full range of amenities including rooms that feature generous work spaces, allowing business travelers to stay productive on the road.

      Westin Hotels & Resorts (luxury and upscale full-service hotels and resorts) are first-class, signature hotels that typically make up an integral part of a city or region in which the hotels are located. Westin hotels and resorts are characterized by a commitment to uncompromised elegance, service and guest experience.

      W Hotels (stylish boutique full-service urban hotels and resorts) was inaugurated in December 1998 with the opening of the W New York. W hotels provide a unique hotel alternative to business travelers, combining the personality, style and distinctive flavor of an intimate hotel with the functionality, reliability and attentive service of a major business and leisure hotel. W hotels feature modern, sophisticated design with custom-made furnishings and accessories, fully wired rooms with the most advanced technology in the industry, and unique, high-quality signature restaurants and bars. Together with partners, we are in the process of developing several condominium residences as part of the W hotels, including the W Dallas Victory Hotel and Residences which is expected to open in late 2005.

      Four Points by Sheraton (moderately priced full-service hotels) deliver extensive amenities and services such as room service, dry cleaning, fitness centers, meeting facilities and business centers to frequent business travelers at reasonable prices. These hotels provide a comfortable, well-appointed room, which typically includes a two-line telephone, a large desk for working or in-room dining, comfortable seating and full-service restaurants.

Hotel Business

      Owned, Leased and Consolidated Joint Venture Hotels. The following table summarizes revenue per available room (“REVPAR”)⁽¹⁾, average daily rates (“ADR”) and average occupancy rates on a year-to-year basis for our 138 owned, leased and consolidated joint venture hotels (excluding 26 hotels sold or closed during 2004 and 2003) (“Same-Store Owned Hotels”) for the years ended December 31, 2004 and 2003:

     During the years ended December 31, 2004 and 2003, we invested approximately $299 million, excluding the inventory expenditures at the St. Regis Museum Tower in San Francisco, California discussed below, and $259 million, respectively, for capital improvements at owned hotels and capital expenditures on technology development. During 2004 and 2003, these capital expenditures included the significant renovation of our flagship Sheraton, the Sheraton New York Hotel and Towers in New York, New York.

      Managed and Franchised Hotels. Hotel and resort properties in the United States are often owned by entities that do not manage hotels or own a brand name. Hotel owners typically enter into management contracts with hotel management companies to operate their hotels. When a management company does not

offer a brand affiliation, 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 and marketing services.

      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 management contracts typically include hiring, training and supervising the managers and employees that operate these facilities. For additional fees, we provide reservation services and coordinate national advertising and certain marketing and promotional services. We prepare and implement annual budgets for the hotels we manage and are responsible for allocating property-owner funds for periodic maintenance and repair of buildings and furnishings. In addition to our owned and leased hotels, at December 31, 2004, we managed 283 hotels with approximately 101,000 rooms worldwide.

      Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to profits as well as fees for other services, including centralized reservations, sales and marketing, public relations and national and international media advertising. In our experience, owners seek hotel managers that can provide attractively priced base, incentive, marketing and franchise fees combined with demonstrated sales and marketing expertise and operations-focused management designed to enhance profitability. Some of our management contracts permit the hotel owner to terminate the agreement when the hotel is sold or otherwise transferred to a third party, as well as if we fail to meet established performance criteria. In addition, many hotel owners seek equity, debt or other investments from us to help finance hotel renovations or conversions to a Starwood brand so as to align the interests of the owner and the Company. Our ability or willingness to make such investments may determine, in part, whether we will be offered, will accept, or will retain a particular management contract. During 2004, we signed management agreements for 29 hotels with approximately 9,000 rooms, and 15 hotels with approximately 3,000 rooms left the system.

      Brand Franchising and Licensing. We franchise our Sheraton, Westin, Four Points by Sheraton and Luxury Collection brand names and generally derive licensing and other fees from franchisees 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 media advertising. In addition, a franchisee may also purchase hotel supplies, including brand-specific products, from certain Starwood-approved vendors. We approve certain plans for, and the location of, franchised hotels and review their design. At December 31, 2004, there were 310 franchised properties with approximately 80,000 rooms operating under the Sheraton, Westin, Four Points by Sheraton and Luxury Collection brands. During 2004, we signed franchise agreements with 35 hotels with approximately 7,000 rooms, and 16 hotels with approximately 4,000 rooms left the system.

      We have also entered into arrangements with several owners for mixed use hotel projects that will include a residential component. We entered into licensing agreements for the use of our W, Westin and St. Regis brands to allow the owners to offer branded condominiums to prospective purchasers. In consideration, we will receive a licensing fee equal to a percentage of the gross sales revenue of the units sold. The licensing arrangement terminates upon the earlier of sell-out of the units or a specified length of time.

Vacation Ownership and Residential Business

      We develop, own and operate vacation ownership resorts, market and sell the VOIs in the resorts and, in many cases, provide financing to customers who purchase such ownership interests. Owners of VOIs can trade their interval for intervals at other Starwood vacation ownership resorts, for intervals at certain vacation ownership resorts not otherwise sponsored by Starwood through an exchange company, or for hotel stays at Starwood properties. From time to time, we securitize or sell the receivables generated from our sale of VOIs.

      At December 31, 2004, we had 19 vacation ownership resorts in our portfolio with 12 actively selling VOIs, two expected to start construction in the future and five that have sold all existing inventory. During 2004 and 2003, we invested approximately $162 million and $140 million, respectively, for capital expendi-

tures, including VOI construction at Westin Ka’anapali Ocean Resort and Villas in Maui, Hawaii and Westin Mission Hills Resort in Rancho Mirage, California, and construction of fractional units at the St. Regis in Aspen, Colorado.

      In December 2004, we completed the conversion of 98 guest rooms at the St. Regis in Aspen, Colorado into 25 fractional units which are being sold in four week intervals, and 20 new hotel rooms. Also in late 2004, we began selling condominiums at the St. Regis Museum Tower which is under construction in San Francisco, California. For the year ended December 31, 2004, the Company invested approximately $75 million for construction of the hotel and residences at the St. Regis Museum Tower.

      Incorporated by reference to the description of legal proceedings in Note 20. Commitments and Contingencies, in the notes to financial statements set forth in Part II, Item 8. Financial Statements and Supplementary Data.

      Not applicable.

Executive Officers of the Registrants

      See Part III, Item 10. of this Joint Annual Report for information regarding the executive officers of the Registrants, which information is incorporated herein by reference.

PART II

Market Information

      The Shares are traded on the New York Stock Exchange (the “NYSE”) under the symbol “HOT.” The Class A Shares are all indirectly held by the Corporation and have never been traded.

      The following table sets forth, for the fiscal periods indicated, the high and low sale prices per Share on the NYSE Composite Tape.

Holders

      As of February 25, 2005, there were approximately 212,468,000 holders of record of Shares and one holder of record of the Class A Shares.

Distributions Made/ Declared

      The following table sets forth the frequency and amount of distributions made by the Trust to holders of Shares for the years ended December 31, 2004 and 2003:

     The Corporation has not paid any cash dividends since its organization and does not anticipate that it will pay any dividends in the foreseeable future.

      Holders of Class B Shares are entitled, subject to certain conditions, to receive a non-cumulative annual distribution, which was set at an initial rate of $0.60 per Share for 1999, to the extent the distribution is authorized by the Board of Trustees of the Trust. The distribution was increased to an annual rate of $0.80 in 2001. In the beginning of 2002, we shifted from paying a quarterly distribution to paying an annual distribution (and intend to continue our distributions on an annual basis for 2005). For 2003 and 2004, the Trust paid a distribution of $0.84 per Share. Unless distributions for the then current distribution period have been paid on the Class B Shares, the Trust is not permitted to pay a distribution on the Class A Shares (except in certain circumstances). At this time, we anticipate that the 2005 distributions will be held constant at $0.84 per Share. The final determination of the amount of the distribution will be subject to economic and financial conditions, as well as approval by the Board of Trustees of the Trust.

Conversion of Securities; Sale of Unregistered Securities

      During 2004, approximately 109,000 shares of Class B Exchangeable Preferred Shares (“Class B EPS”) were converted into 119,000 shares of Class A Exchangeable Preferred Shares (“Class A EPS”). No shares of Class A EPS were exchanged for Shares during 2004. In accordance with the terms of the Class B EPS, approximately 567,000 shares of Class B EPS were redeemed for approximately $22 million in cash in 2004. As of December 31, 2004 approximately 53,000 Class B EPS remained outstanding.

Issuer Purchases of Equity Securities

      Pursuant to the Share Repurchase Program, Starwood repurchased 7.0 million Shares in the open market for an aggregate cost of $310 million during 2004. The Company repurchased the following Shares during the three months ended December 31, 2004:

      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 consolidated financial statements and related notes thereto appearing elsewhere in this Joint Annual Report and incorporated herein by reference.

      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 accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those relating to revenue recognition, bad debts, inventories, investments, plant, property and equipment, goodwill and intangible assets, income taxes, financing operations, frequent guest program liability, self-insurance claims payable, restructuring costs, retirement benefits and contingencies and litigation.

      Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates under different assumptions and conditions.

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 resort revenues at our owned, leased and consolidated joint venture properties; (2) management and franchise fees; (3) vacation ownership revenues; and (4) other revenues which are ancillary to our operations. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of our revenues:

      Frequent Guest Program. SPG is our frequent guest incentive marketing program. SPG members earn points based on spending at our properties, as incentives to first time buyers of VOIs and, to a lesser degree, through participation in affiliated partners’ programs. Points can be redeemed at most of our owned, leased, managed and franchised properties. The cost of operating the program, including the estimated cost of award redemption, is charged to properties based on members’ qualifying expenditures. Revenue is recognized by participating 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 redemption obligation based on statistical formulas which project the timing of future point redemption based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. Actual expenditures for SPG may differ from the actuarially determined liability. The total actuarially determined liability as of December 31, 2004 and 2003 is

$255 million and $201 million, respectively. A 10% reduction in the “breakage” of points would result in an increase of $38 million to the liability at December 31, 2004.

      Long-Lived Assets. We evaluate the carrying value of our long-lived assets for impairment by comparing the expected undiscounted future cash flows of the assets to the net book value of the assets if certain trigger events occur. If the expected undiscounted future cash flows are less than the net book 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 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 the surrounding area, status of expected local competition and projected incremental income from renovations. Changes to our plans, including a decision to dispose of or change the intended use of an asset, can have a material impact on the carrying value of the asset. When a decision is made to sell an asset, we do not record that asset as held for sale until all the criteria in SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” have been met and we have received a non-refundable deposit.

      Legal Contingencies. We are subject to various legal proceedings and claims, the outcomes of which are subject to significant uncertainty. SFAS No. 5, “Accounting for Contingencies,” requires that an estimated loss from a loss contingency should be accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss and changes in these factors could materially impact our financial position or our results of operations.

      Income Taxes. We provide for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns.

RESULTS OF OPERATIONS

      The following discussion presents an analysis of results of our operations for the years ended December 31, 2004, 2003 and 2002.

      Our operating results for 2004 improved significantly when compared to 2003 due, in large part, to the continued economic recovery in the United States, particularly its effect on the hospitality industry. Our operating results for a substantial part of 2003 were significantly impacted by the weakened worldwide economic environment, the war in Iraq and its aftermath, and the Severe Acute Respiratory Syndrome (“SARS”) epidemic, all of which resulted in a dramatic slowdown in business and international travel. In the latter part of 2003 and continuing into 2004, transient travel in North America, where we have our largest concentration of owned hotels, began to increase, more than offsetting the then weaknesses in group travel.

      We derive the majority of our revenues and operating income from our owned, leased and consolidated joint venture hotels and, as discussed above, a significant portion of these results are driven by these hotels in North America. Total revenues generated from our hotels in North America for the years ending December 31, 2004 and 2003 were $2.423 billion and $2.285 billion, respectively (our worldwide owned, leased and consolidated joint venture revenues were $3.326 billion and $3,085 billion for 2004 and 2003, respectively).

The following represents the geographical breakdown of our owned, leased and consolidated joint venture revenues in North America by metropolitan area for the years ended December 31, 2004 and 2003:

      A leading indicator for the performance of our owned, leased and consolidated joint venture hotels is REVPAR, which we consider to be a meaningful indicator of our performance, as it measures the period-over-period growth in rooms revenue for comparable properties. This is particularly the case in the United States where there is no impact on this measure from foreign exchange rates.

Year Ended December 31, 2004 Compared with Year Ended December 31, 2003

Continuing Operations

      Revenues. Total revenues, including other revenues from managed and franchised properties, were $5.368 billion, an increase of $738 million when compared to 2003 levels. Revenues reflect a 7.8% increase in revenues from our owned, leased and consolidated joint venture hotels to $3.326 billion for the year ended December 31, 2004 when compared to $3.085 billion in the corresponding period of 2003, an increase of $164 million in management fees, franchise fees and other income to $419 million for the year ended December 31, 2004 when compared to $255 million in the corresponding period of 2003, an increase of $201 million in vacation ownership and residential revenues to $640 million for the year ended December 31, 2004 when compared to $439 million in the corresponding period of 2003 and an increase of $132 million in other revenues from managed and franchised properties to $983 million for the year ended December 31, 2004 when compared to $851 million in the corresponding period of 2003.

      The increase in revenues from owned, leased and consolidated joint venture hotels is due in large part to the continued economic recovery, particularly its effect on the hospitality industry. The war in Iraq, the SARS epidemic and the weakened worldwide economic environment in 2003 negatively impacted the results for a substantial part of the year ended December 31, 2003. Results in 2004 were also favorably impacted by the addition of the Sheraton Kauai in Hawaii which we acquired in March 2004. These improved results in 2004 were offset, in part, by the absence in 2004 of the revenues generated by 16 non-strategic domestic hotels and four hotels in Costa Smeralda, Italy, which were for the most part, sold in the first half of 2003. Revenues from these hotels in 2003 were $110 million. Revenues at our hotels owned during both periods (“Same-Store Owned Hotels”) (138 hotels for the year ended December 31, 2004 and 2003, excluding 26 hotels sold or closed or without comparable results in 2004 and 2003) increased 11.4%, or $333 million, to $3.266 billion for the year ended December 31, 2004 when compared to $2.933 billion in the same period of 2003 due primarily to an increase in REVPAR. REVPAR at our Same-Store Owned Hotels increased 13.0% to $110.81 for the year ended December 31, 2004 when compared to the corresponding 2003 period. The increase in REVPAR

was attributed to increases in occupancy rates to 68.5% in the year ended December 31, 2004 when compared to 64.7% in the same period in 2003, and a 6.8% increase in ADR at these Same-Store Owned Hotels to $161.74 for the year ended December 31, 2004 compared to $151.49 for the corresponding 2003 period. REVPAR at Same-Store Owned Hotels in North America increased 12.1% for the year ended December 31, 2004 when compared to the same period of 2003 due to increased transient and group travel business for the period. REVPAR growth at these hotels, and thereby revenues, was strongest in major metropolitan cities such as New York, Boston, Toronto and Los Angeles where we have a large concentration of owned hotels. REVPAR at our international Same-Store Owned Hotels, increased by 15.6% for the year ended December 31, 2004 when compared to the same period of 2003, with Europe, where we have our biggest concentration of international owned hotels, increasing 13.2%. REVPAR for Same-Store Owned Hotels internationally increased 6.7% for the year ended December 31, 2004 excluding the favorable effects of foreign currency translation. REVPAR for Same-Store Owned Hotels in Europe increased 3.1% excluding the favorable effect of foreign currency translation.

      The increase in vacation ownership and residential sales and services is primarily due to the increase in the sales of VOIs of 47.1% to $531 million in 2004 compared to $361 million in 2003. These increases represent increased sales volume as well as the revenue recognition from progressing and completed projects accounted for under the percentage of completion accounting methodology as required by generally accepted accounting principles primarily at the Westin Ka’anapali Ocean Resort Villas in Maui, Hawaii, The St. Regis in Aspen, Colorado, the Westin Kierland Resort and Spa in Scottsdale, Arizona, the Sheraton Vistana Villages in Orlando, Florida, and the Westin Mission Hills Resort in Rancho Mirage, California. Contract sales of VOI inventory, which represents vacation ownership revenues before adjustments for percentage of completion accounting and rescissions and excluding fractional sales at the St. Regis Aspen and residential sales at the St. Regis Museum Tower in San Francisco, California described below, increased 28.4% in the year ended December 31, 2004 when compared to the same period in 2003. The increase in vacation ownership and residential sales in 2004, when compared to 2003, was also due to sales of fractional units at the St. Regis in Aspen, Colorado and residential units at the St. Regis Museum Tower in San Francisco, California, both of which were new projects in 2004. In December 2004, we completed the conversion of 98 guest rooms at the St. Regis in Aspen into 25 fractional units, which are being sold in four week intervals, and 20 new hotel rooms. In 2004, we recognized approximately $51 million of revenues from this project. We also began selling condominiums at the St. Regis Museum Tower in San Francisco in late 2004 and recognized approximately $15 million of revenues from this project in 2004. The St. Regis Museum Tower is under construction and is expected to open in the summer of 2005 with 260 hotel rooms and 102 condominium units.

      The increase in management fees, franchise fees and other income of $164 million was primarily due to the inclusion of approximately $49 million of revenues from the Bliss spas and product sales, which were acquired at the beginning of 2004, and approximately $46 million of income (including the impact of foreign exchange rates) earned on the Le Meridien debt participation acquired by us in late December 2003. Additionally, management and franchise fees increased approximately $53 million to $303 million for the year ended December 31, 2004, when compared to $250 million in the same period of 2003, due to strong top line growth resulting from the economic recovery discussed earlier.

      Other revenues and expenses from managed and franchised properties increased to $983 million from $851 million for the year ended December 31, 2004 and 2003, respectively. These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees and relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income and our net income.

      Operating Income. Our total operating income was $653 million in the year ended December 31, 2004 compared to $427 million in 2003. Excluding depreciation and amortization of $431 million and $429 million for the years ended December 31, 2004 and 2003, respectively, operating income increased 26.6% or $228 million to $1.084 billion for the year ended December 31, 2004 when compared to $856 million in the same period in 2003, primarily due to the improved owned hotel performance and vacation ownership sales

discussed above, offset in part by certain non-recurring increases in selling, general, and administrative costs, including the accrual, not payment, for separation costs for our Executive Chairman as provided for in his employment agreement, higher incentive compensation costs commensurate with our improved performance, certain legal settlement costs, and costs associated with our World Conference in January 2004 (we did not have a conference in the prior year).

      Operating income at our hotel segment was $664 million in the year ended December 31, 2004 compared to $445 million in the same period of 2003. The improved operating results at our owned, leased and consolidated joint venture hotels more than offset the absence of operating income from the hotels sold in 2003 as discussed above, as well as the increased energy and health insurance costs. Operating income for the vacation ownership and residential segment was $142 million in the year ended December 31, 2004 compared to $89 million for the same period in 2003 primarily due to the significant increase in income from the sales of VOIs and the percentage of completion accounting methodology discussed above.

      Restructuring and Other Special Credits, Net. During the twelve months ended December 31, 2004, we reversed a $37 million reserve previously recorded through restructuring and other special charges due to a favorable judgment in a litigation matter. During the twelve months ended December 31, 2003, we received $12 million in a favorable settlement of a litigation matter. This credit was offset by an increase of $13 million in a reserve for legal defense costs associated with a separate litigation matter. Additionally, we reversed a $9 million liability that was originally established in 1997 for the ITT Excess Pension Plan and is no longer required as we finalized the settlement of the remaining obligations associated with the plan and reversed $1 million related to the collection of receivables previously deemed impaired.

      Depreciation and Amortization. Depreciation expense increased $3 million to $413 million during the year ended December 31, 2004 compared to $410 million in the corresponding period of 2003. This slight increase was due to additional depreciation expense resulting from capital expenditures at our owned, leased and consolidated joint venture hotels in the past 12 months. Amortization expense decreased to $18 million in the year ended December 31, 2004 compared to $19 million in the corresponding period of 2003.

      Gain on Sale of VOI Notes Receivable. Gains from the sale of VOI receivables of $14 million and $15 million in 2004 and 2003, respectively, are primarily due to the sale of $113 million and $181 million of vacation ownership receivables during the years ended December 31, 2004 and 2003, respectively.

      Net Interest Expense. Interest expense, which is net of discontinued operations allocations of $7 million for the year ended December 31, 2003, decreased to $254 million from $282 million. This decrease was due primarily to the lower debt balances in 2004 compared to the same period of 2003 as a result of the paydown of debt in 2003 with the proceeds from asset sales, the payoff of the Series B Convertible Senior Notes in 2004, and the amortization of deferred gains recorded as a result of interest rate swap terminations completed in early March 2004, offset in part by slightly higher interest rates. Our weighted average interest rate was 5.81% at December 31, 2004 versus 5.46% at December 31, 2003.

      Loss On Asset Dispositions and Impairments, Net. During 2004, we recorded a net loss of $33 million primarily related to the sale of two hotels in 2004, the sale of one hotel in January 2005, and three investments deemed impaired in 2004.

      During 2003, we recorded a $181 million charge related to the impairment of 18 non-core domestic hotels that were held for sale. We sold 16 of these hotels for net proceeds of $404 million. We also recorded a $9 million gain on the sale of a 51% interest in undeveloped land in Costa Smeralda in Sardinia, Italy. This gain was offset by a $9 million write down of the value of a hotel which was formerly operated together with one of the non-core domestic hotels and is now closed and under review for alternative use and a $2 million charge related to an impairment of an investment.

      Discontinued Operations. For the year ended December 31, 2004, the net gain on dispositions includes $16 million related to the favorable resolution of certain tax matters and $10 million primarily related to the reversal of reserves, both of which related to our former gaming business which was disposed of in 1999. The reserves were reversed as the related contingencies were resolved.

      For the year ended December 31, 2003, loss from discontinued operations represents the results of the Principe di Savoia Hotel in Milan, Italy (“Principe”) net of $7 million of allocated interest expense. We sold the Principe in June 2003, with no continuing involvement. The net gain on dispositions for the year ended December 31, 2003 consists of $174 million of gains recorded in connection with the sale of the Principe on June 30, 2003 and the reversal of a $32 million accrual relating to our former gaming business disposed of in 1999 and 2000. We believe that these accruals are no longer required as the related contingencies have been resolved.

      Income Tax Expense. The effective income tax rate for continuing operations for the year ended December 31, 2004 was approximately 10.5%. Our effective income tax rate is determined by the level and composition of pre-tax income subject to varying foreign, state and local taxes and other items. The effective tax rate for the year ended December 31, 2004 benefited from approximately $28 million primarily related to the reversal of tax reserves as a result of the resolution of certain tax matters during the year. For the year ended December 31, 2003 we had a tax benefit of $113 million on a pre-tax loss of $11 million, primarily due to the tax exempt Trust income and the favorable settlement of various tax matters.

Year Ended December 31, 2003 Compared with Year Ended December 31, 2002

Continuing Operations

      Revenues. Total revenues, including other revenues from managed and franchised properties, were $4.630 billion, remaining virtually flat compared to 2002 levels. Revenues reflect a 3.3% decrease in revenues from our owned, leased and consolidated joint venture hotels to $3.085 billion for the year ended December 31, 2003 when compared to $3.190 billion in the corresponding period of 2002, a decrease of $10 million in management fees, franchise fees and other income to $255 million for the year ended December 31, 2003 when compared to $265 million in the corresponding period of 2002, an increase of $86 million in vacation ownership and residential revenues to $439 million for the year ended December 31, 2003 when compared to $353 million in the corresponding period of 2002 and an increase of $71 million in other revenues from managed and franchised properties to $851 million for the year ended December 31, 2003 when compared to $780 million in the corresponding period of 2002.

      The decrease in revenues from owned, leased and consolidated joint venture hotels is due primarily to the absence of revenues generated by 16 non-strategic domestic hotels and four hotels in Costa Smeralda, Italy, which were mostly sold in the first half of 2003, and offset by increased revenues from our Same-Store Owned Hotels (140 hotels for 2003 and 2002, excluding 25 hotels sold or closed during these periods). Revenues from the 20 sold hotels during 2003 were $110 million, a decrease of $140 million as compared to $250 million in the same period of 2002. Revenues from our Same-Store Owned Hotels increased 2.0% to $2.967 billion for the year ended December 31, 2003 when compared to $2.909 billion in the same period of 2002 due primarily to an increase in REVPAR. REVPAR at our Same-Store Owned Hotels increased 1.3% to $98.34 for the year ended December 31, 2003 when compared to the corresponding 2002 period. The increase in REVPAR at these Same-Store Owned Hotels was attributed to an increase in occupancy to 64.6% in the year ended December 31, 2003 when compared to 64.0% in the same period of 2002 and a slight increase in ADR of 0.3% to $152.12 for the year ended December 31, 2003 compared to $151.69 for the corresponding 2002 period. REVPAR at Same-Store Owned Hotels in North America decreased 0.2% for the year ended December 31, 2003 when compared to the same period of 2002. The slight decrease in REVPAR and revenues from owned, leased and consolidated joint venture hotels in North America was primarily due to the decline in business transient demand as a result of the weakened global economies. REVPAR at our international Same-Store Owned Hotels increased by 5.8% for the year ended December 31, 2003 when compared to the same period of 2002, primarily due to the favorable effect of foreign currency translation. Including the impact of foreign currency, REVPAR for Same-Store Owned Hotels in Europe increased 6.2%, in Latin America decreased 5.5% and in Asia Pacific increased 31.7% when compared to 2002. Excluding the favorable effect of foreign exchange, REVPAR at our Same-Store Owned Hotels internationally decreased 6.5% for the year ended 2003 when compared to 2002 due to the weakened global economies and adverse political and economic conditions.

      The increase in vacation ownership and residential sales and services primarily resulted from the increase in VOI sales of 30.7% to $361 million in 2003 compared to $276 million in 2002. Contract sales of VOI inventory increased 23.2% in the year ended December 31, 2003 when compared to the same period in 2002, primarily as a result of sales at the Westin Ka’anapali Ocean Resort Villas in Maui, Hawaii, which sold out the first phase prior to the opening, as well as strong demand reflected in our resorts in Scottsdale and Orlando in the latter part of the year.

      The decrease in management fees, franchise fees and other income of $10 million was primarily due to reduced interest income and increased insurance claims at our captive insurance company offset, in part, by an increase in management and franchise fees.

      Other revenues and expenses from managed and franchised properties increased to $851 million in 2003 when compared to $780 million in 2002, primarily due to the addition of hotels to our portfolio of managed and franchised hotels. These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees and relate primarily to payroll costs at managed properties where we are the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on our operating income and net income.

      Operating Income. Our total operating income (which includes $9 million of restructuring and other special credits in 2003 and $7 million of restructuring and other special credits and $30 million of foreign exchange gains related to the devaluation of the Argentine Peso in 2002) was $427 million for the year ended December 31, 2003 compared to $551 million in the same period of 2002. Excluding depreciation and amortization of $429 million and $488 million for the years ended December 31, 2003 and 2002, respectively, operating income decreased 17.6% or $183 million to $856 million for the year ended December 31, 2003 when compared to $1.039 million in the same period in 2002, primarily due to the decline in operating income at our owned, leased and consolidated joint venture hotels as a result of the weakened global economies, the war in Iraq and its aftermath and the SARS epidemic and the absence of the revenues and corresponding operating income from the sold properties discussed above. Operating income at our owned, leased and consolidated joint venture hotels was $445 million for the year ended December 31, 2003 compared to $589 million in the same period of 2002. These hotels were also negatively impacted by increased energy, workers compensation insurance and other health benefits related costs and reduced cancellation and telecommunication fees in 2003 when compared to 2002. In addition, our total operating income in 2003 was adversely impacted by the nonrecurring Argentina foreign exchange gains in 2002 of $30 million.

      Operating income for the vacation ownership segment was $89 million in the year ended December 31, 2003 compared to $69 million in 2002 primarily due to the increased sales from the vacation ownership projects discussed above.

      Restructuring and Other Special Credits, Net. During 2003, we received $12 million in a favorable settlement of a litigation matter. This credit was offset by an increase of $13 million in a reserve for legal defense costs associated with a separate litigation matter. Additionally, we reversed a $9 million liability that was originally established in 1997 for the ITT Excess Pension Plan and is no longer required as we finalized the settlement of its remaining obligations associated with the plan and reversed $1 million related to the collection of receivables previously deemed impaired. During the year ended December 31, 2002, we reversed $7 million of previously recorded restructuring and other special charges primarily related to adjustments to the severance liability established in connection with the cost containment efforts after the events of September 11, 2001, sales of our investments in certain e-business ventures previously deemed impaired and the collection of receivables which were previously deemed uncollectible.

      Depreciation and Amortization. Depreciation expense decreased to $410 million in the year ended December 31, 2003 compared to $473 million in the corresponding period of 2002. Additional depreciation resulting from capital expenditures at our owned, leased and consolidated joint venture hotels was more than offset by the reduced depreciation expense from fully depreciated furniture, fixtures and equipment, as we reached the five year anniversary of the merger with ITT Corporation in February 2003 and the 16 non-core domestic hotels, and the four Costa Smeralda hotels which were initially classified as held for sale and depreciation suspended effective March 31, 2003. Amortization expense increased to $19 million in the year

ended December 31, 2003 compared to $15 million in the corresponding period of 2002 due to the additional amortization of intangible assets associated with costs incurred in connection with new management contracts.

      Gain on Sale of VOI Notes Receivable. Gains from the sale of VOI receivables of $15 million and $16 million in 2003 and 2002, respectively, are primarily due to the sale of $181 million and $133 million of vacation ownership receivables during the years ended December 31, 2003 and 2002, respectively. Included in the $181 million of VOI receivable sales in 2003 are $89 million of VOI receivables which were repurchased from existing securitizations.

      Net Interest Expense. Interest expense for the years ended December 31, 2003 and 2002, which is net of interest income of $5 million and $2 million, respectively, and discontinued operations allocations of $7 million and $15 million for 2003 and 2002, respectively, decreased to $282 million from $323 million, due primarily to the pay down of debt with $1.1 billion of proceeds from the hotel sales discussed previously, $30 million of early debt extinguishment charges recorded in the second quarter of 2002, lower interest rates in 2003 compared to 2002 and the impact of certain financing transactions, including the issuance of debt in April 2002 and May 2003. Our weighted average interest rate was 5.46% at December 31, 2003 versus 5.64% at December 31, 2002.

      Gain (loss) on Asset Dispositions and Impairments, Net. During 2003, we recorded a $181 million charge related to the impairment of 18 non-core domestic hotels that were held for sale. We sold 16 of these hotels for net proceeds of $404 million. We also recorded a $9 million gain on the sale of a 51% interest in undeveloped land in Costa Smeralda in Sardinia, Italy. This gain was offset by a $9 million write down of the value of a hotel which was formerly operated together with one of the non-core domestic hotels and is now closed and under review for alternative use and a $2 million charge related to an impairment of an investment. During 2002, we sold our investment in Interval International, for a gain of $6 million. This gain is offset in part by a net loss of $3 million on the disposition of two hotels.

      Income Tax Expense. The income tax benefit of $113 million on the pre-tax loss of $11 million for 2003 is primarily the result of tax exempt Trust income and the favorable settlement of various tax matters. The 2002 income tax provision of $2 million on pre-tax income of $255 million is primarily the result of tax exempt Trust income and net tax benefits primarily related to approximately $39 million of various adjustments to federal and state tax liabilities resulting from the successful settlement of tax matters dating back to 1993. Our effective income tax rate is determined by the level and composition of pretax income subject to varying foreign, state and local taxes and other items. The tax rate for the year ended December 31, 2003 is significantly lower than the prior year due to the combination of lower pretax income and the distribution of $0.84 per Share.

      Discontinued Operations. For the years ended 2003 and 2002, loss from discontinued operations represents the results of the Principe, net of $7 million and $15 million, of allocated interest expense, respectively. We sold the Principe with no continuing involvement in June 2003. The net gain on dispositions for 2003 consists of $174 million of gains recorded in connection with the sale of the Principe and the reversal of a $32 million accrual relating to our gaming businesses disposed of in 1999 and 2000 which are no longer required as the related contingencies have been resolved.

      During 2002, we recorded an after tax gain of $109 million from discontinued operations primarily related to the issuance of new Internal Revenue Service (“IRS”) regulations in early 2002, which allowed us to recognize a $79 million tax benefit from a tax loss on the 1999 sale of the former gaming business. The tax loss was previously disallowed under the old regulations. In addition, we recorded a $25 million gain resulting from an adjustment to our tax basis in ITT World Directories, a subsidiary which was disposed of in early 1998 through a tax deferred reorganization. The increase in the tax basis has the effect of reducing the deferred tax charge recorded on the disposition in 1998. This gain also included the reversal of $5 million of liabilities set up in conjunction with the sale of the former gaming business that are no longer required as the related contingencies have been resolved.

LIQUIDITY AND CAPITAL RESOURCES

Cash From Operating Activities

      Cash flow from operating activities is the principal source of cash used to fund our operating expenses, interest payments on debt, maintenance capital expenditures and distribution payments by the Trust. We anticipate that cash flow provided by operating activities will be sufficient to service these cash requirements. In 2002, we shifted from a quarterly distribution to an annual distribution, and declared a distribution of $0.84 per Share to shareholders of record on December 31, 2003 and 2004. We paid the 2003 distribution in January 2004 and the 2004 distribution in January 2005. We believe that existing borrowing availability together with capacity from additional borrowings and cash from operations will be adequate to meet all funding requirements for our operating expenses, interest payments on debt, maintenance capital expenditures and distribution payments by the Trust for the foreseeable future.

      Provisions of certain of our secured debt require that cash reserves be maintained. Additional cash reserves are required if aggregate operations of the related hotels fall below a specified level. Additional cash reserves for certain debt became required in late 2003 following a difficult period in the hospitality industry, resulting from the war in Iraq and the worldwide economic downturn. As of December 31, 2004 and 2003, $132 million and $13 million, respectively, of cash related to these required cash reserves was classified as restricted cash in our consolidated balance sheet. The cash reserves, which are expected to continue to accrue and remain restricted through September 2005, are not expected to have a material impact on our liquidity. Once aggregate hotel operations meet the specified levels over the required time period, the additional cash reserves, plus accrued interest, will be released to us.

      In addition, state and local regulations governing sales of VOIs allow the purchaser of such a VOI to rescind the sale subsequent to its completion for a pre-specified number of days or until a certificate of occupancy is obtained. As such, cash collected from such sales during the rescission period is also classified as restricted cash in our consolidated balance sheets. At December 31, 2004 and 2003, we have $200 million and $56 million, respectively, of such restricted cash.

Cash Used for Investing Activities

      Contractual Obligations. On December 30, 2003, together with Lehman Brothers, we announced the acquisition of all of the outstanding senior debt (approximately $1.3 billion), at a discount, of Le Meridien. Our approximate $200 million investment is represented by a high yield junior participation interest. As part of this investment, we entered into an agreement with Lehman Brothers whereby they would negotiate with us on an exclusive basis towards a recapitalization of Le Meridien. The exclusivity period expired in early April 2004 although negotiations with Lehman Brothers are continuing. While negotiations are continuing, there can be no assurance that transaction agreements will be entered into or a transaction consummated and if consummated what the terms and form of such a transaction would be.

      In limited cases, we have made loans to owners of or partners in hotel or resort ventures for which we have a management or franchise agreement. Loans outstanding under this program totaled $160 million at December 31, 2004. We evaluate these loans for impairment, and at December 31, 2004, believe these loans are collectible. Unfunded loan commitments, excluding the Westin Boston, Seaport Hotel discussed below, aggregating $46 million were outstanding at December 31, 2004, of which $7 million are expected to be funded in 2005 and $30 million are expected to be funded in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. We also have $78 million of equity and other potential contributions associated with managed or joint venture properties, $34 million of which is expected to be funded in 2005.

      We participate in programs with unaffiliated lenders in which we may partially guarantee loans made to facilitate third-party ownership of hotels that we manage or franchise. As of December 31, 2004, we were a guarantor for a loan which could reach a maximum of $30 million related to the St. Regis in Monarch Beach, California, which opened in mid-2001. We do not anticipate any funding under the loan guarantee in 2005, as the project is well capitalized. Furthermore, since this property was funded with significant equity and

subordinated debt financing, if our loan guarantee was to be called, we could take an equity position in this property at a value significantly below construction costs.

      Additionally, during the second quarter of 2004, we entered into a long-term management contract to manage the Westin Boston, Seaport Hotel in Boston, Massachusetts, which is under construction and scheduled to open in 2006. In connection with this agreement, we will provide up to $28 million in mezzanine loans and other investments ($13 million of which has been funded) as well as various guarantees, including a principal repayment guarantee for the term of the senior debt (four years with a one-year extension option), which is capped at $40 million, and a debt service guarantee during the term of the senior debt which is limited to the interest expense on the amounts drawn under such debt and principal amortization. Any payments under the debt service guarantee, attributable to principal, will reduce the cap under the principal repayment guarantee. The fair value of these guarantees of $3 million is reflected in other liabilities in our accompanying balance sheet as of December 31, 2004. In addition, we have issued a completion guarantee for this approximate $200 million project. In the event the completion guarantee is called on, we would have recourse to a guaranteed maximum price contract from the general contractor, performance bonds from all major trade contractors and a payment bond from the general contractor. We would only be required to perform under the completion guaranty in the event of a default by the general contractor that is not cured by the contractor or the applicable bonds. We do not anticipate that we would be required to perform under these guarantees.

      Surety bonds issued on behalf of us as of December 31, 2004 totaled $38 million, the majority of which were required by state or local governments relating to our vacation ownership operations and by our insurers to secure large deductible insurance programs.

      To secure management contracts, we may provide performance guarantees to third-party owners. Most of these performance guarantees allow us to terminate the contract rather than fund shortfalls if certain performance levels are not met. In limited cases, we are obliged to fund shortfalls in performance levels through the issuance of loans. As of December 31, 2004, we had nine management contracts with performance guarantees with possible cash outlays of up to $76 million, $50 million of which, if required, would be funded over a period of 25 years and would be largely offset by management fees received under these contracts. Many of the performance tests are multi-year tests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure and acts of war and terrorism. We do not anticipate any significant funding under the performance guarantees in 2005. In addition, we have agreed to guarantee certain performance levels at a managed property that has authorized VOI sales and marketing. The exact amount and nature of the guaranty is currently under dispute. However, we do not believe that any payments under this guaranty will be significant. We do not anticipate losing a significant number of management or franchise contracts in 2005.

      We had the following contractual obligations outstanding as of December 31, 2004 (in millions):

     We had the following commercial commitments outstanding as of December 31, 2004 (in millions):

     In January 2004, we acquired a 95% interest in Blissworld LLC which operates three stand alone spas (two in New York, New York and one in London, England) and a beauty products business with distribution through its own internet site and catalogue as well as through third party retail stores. The purchase price for the acquired interest was approximately $25 million, and was funded from available cash.

      We intend to finance the acquisition of additional hotel properties (including equity investments), hotel renovations, VOI construction, capital improvements, technology spend and other core business acquisitions and investments and provide for general corporate purposes through our credit facilities described below, through the net proceeds from dispositions, through the assumption of debt and through the issuance of additional equity or debt securities.

      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 in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on restructuring and enhancing real estate returns and monetizing investments and from time to time, attempt to sell these identified properties and assets. There can be no assurance, however, that we will be able to complete dispositions on commercially reasonable terms or at all.

Cash Used for Financing Activities

      Following is a summary of our debt portfolio (including capital leases) as of December 31, 2004:

     Fiscal 2004 Developments. In August 2004, we completed a $300 million addition to the term loan under our existing Senior Credit Facility. The proceeds were used to repay a portion of the existing revolving credit facility and for general corporate purposes. The Senior Credit Facility now consists of a $1.0 billion revolving loan and a $600 million term loan, each maturing in 2006 with a one year extension option and a current interest rate of LIBOR plus 1.25%. We currently expect to be in compliance with all covenants for the remainder of the Senior Credit Facility term.

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

      In May 2001, we sold an aggregate face amount of $572 million Series B zero coupon convertible senior notes (along with $244 million of Series A notes, which were subsequently repurchased in May 2002) due 2021. The Series B convertible notes were convertible when the market price of our Shares exceeds 120% of the then-accreted conversion price of the convertible senior notes. The maximum conversion of notes was approximately 5.8 million Shares. Holders of Series B Convertible Senior Notes put the majority of these

notes to us in May 2004 for a purchase price of approximately $311 million, and in December 2004 we purchased the remaining $20 million, leaving a zero balance as of December 31, 2004.

      Fiscal 2003 Developments. In May 2003, we sold an aggregate of $360 million 3.5% coupon convertible senior notes due 2023. The notes are convertible, subject to certain conditions, into 7.2 million Shares based on a conversion price of $50.00 per Share. Gross proceeds received were used to repay a portion of our Senior Credit Facility and for other operational purposes. Holders may first present their notes to us for repurchase in May 2006.

      During the second quarter of 2003, we amended our Senior Credit Facility. The amendment adjusted the leverage coverage ratio for the second quarter of 2003 and for the next eight quarters (through June 30, 2005). In addition, we modified our current covenant on encumbered EBITDA (as defined) and added a restriction on the level of cash dividends.

      Fiscal 2002 Developments. In October 2002, we refinanced our previous senior credit facility with a new four-year $1.3 billion senior credit facility. The new facility is comprised of a $1.0 billion revolving facility and a $300 million term loan (later increased to $600 million as discussed earlier), each maturing in 2006, with a one-year extension option, and an initial interest rate of LIBOR + 1.625%. The proceeds from the new Senior Credit Facility were used to pay off all amounts owed under our previous senior credit facility, which was due to mature in February 2003. We incurred approximately $1 million in charges in connection with this early extinguishment of debt.

      In September 2002, we terminated certain Fair Value Swaps, resulting in a $78 million cash payment to us. These proceeds were used to pay down the previous revolving credit facility and will result in a decrease to interest expense on the hedged debt through its maturity in 2007. In order to retain our fixed versus floating rate debt position, we immediately entered into five new Fair Value Swaps on the same underlying debt as the terminated swaps.

      In April 2002, we sold $1.5 billion of senior notes in two tranches — $700 million principal amount of 7³/8% senior notes due 2007 and $800 million principal amount of 7⁷/8% senior notes due 2012. We used the proceeds to repay all of our senior secured notes facility and a portion of our previous senior credit facility. In connection with the repayment of debt, we incurred charges of approximately $29 million including approximately $23 million for the early termination of interest rate swap agreements associated with repaid debt, and $6 million for the write-off of deferred financing costs and termination fees associated with the early extinguishment of debt.

      Other. We have approximately $619 million of outstanding debt maturing in 2005. Based upon the current level of operations, management believes that our cash flow from operations, together with available borrowings under the Revolving Credit Facility (approximately $864 million at December 31, 2004), available borrowings from international revolving lines of credit (approximately $103 million at December 31, 2004), and capacity for additional borrowings will be adequate to meet anticipated requirements for scheduled maturities, dividends, working capital, capital expenditures, marketing and advertising program expenditures, other discretionary investments, interest and scheduled principal payments for the foreseeable future. However, we have a substantial amount of indebtedness and had a working capital deficiency of $445 million at December 31, 2004. There can be no assurance that we will be able to refinance our indebtedness as it becomes due and, if refinanced, on favorable terms. In addition, there can be no assurance that our business will continue to generate cash flow at or above historical levels or that currently anticipated results will be achieved.

      We maintain non-U.S.-dollar-denominated debt, which provides a hedge of our international net assets and operations but also exposes our debt balance to fluctuations in foreign currency exchange rates. During the years ended December 31, 2004 and 2003, the effect of changes in foreign currency exchange rates was a net increase in debt of approximately $13 million and $54 million, respectively. Our debt balance is also affected by changes in interest rates as a result of our Fair Value Swaps. The fair market value of the Fair Value Swaps is recorded as an asset or liability and as the Fair Value Swaps are deemed to be effective, an adjustment is recorded against the corresponding debt. At December 31, 2004, our debt included an increase of

approximately $29 million related to the unamortized premium on terminated Fair Value Swaps and the fair market value of current Fair Value Swap assets. At December 31, 2003 our debt included an increase of approximately $57 million related to fair value swap liabilities.

      If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to sell additional assets, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. Our ability to make scheduled principal payments, to pay interest on or to refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the hotel and vacation ownership industries and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.

      On May 6, 2003, Standard & Poor’s announced its decision to downgrade our Credit Rating to BB+ (non-investment grade with a stable outlook) from BBB- (investment grade rating on Credit Watch with negative implications). On January 7, 2004, Moody’s Investor Services and Standard & Poor’s placed our Ba1 (non-investment grade) and BB+ corporate credit ratings on review/watch for a possible downgrade. The review/watch was prompted by our announcement that we had invested $200 million in Le Meridien’s senior debt and would be in discussions to negotiate the potential recapitalization of Le Meridien. On January 27, 2005, Standard & Poor’s removed our review/watch and affirmed our BB+ rating with a stable outlook. Any downgrading of our credit rating may result in higher borrowing costs on future financings.

      In 2002, we shifted from a quarterly distribution to an annual distribution. A distribution of $0.84 per Share, was paid in January 2005 and January 2004 to shareholders of record as of December 31, 2004 and 2003, respectively.

      On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85 percent dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations and, as of today, uncertainty remains as to how to interpret numerous provisions in the Act. As such, we are not yet in a position to decide on whether, and to what extent, we might repatriate foreign earnings that have not yet been remitted to the U.S. Based on our preliminary analysis to date, however, it is possible that we may repatriate some amount up to $500 million, with the respective tax liability of up to $26 million. We expect to be in a position to finalize our assessment by mid-2005.

Stock Sales and Repurchases

      At December 31, 2004, we had outstanding approximately 209 million Shares, 1.2 million partnership units and 651,000 million Class A EPS and Class B EPS. Through December 31, 2004, in accordance with the terms of the Class B EPS, approximately 567,000 shares of Class B EPS and Exchangeable Units were redeemed for approximately $22 million. During 2004, no shares of Class A EPS were exchanged for Shares.

      In 1998, the Corporation’s Board of Directors approved the repurchase of up to $1 billion of Shares under a Share repurchase program (the “Share Repurchase Program”). On April 2, 2001, the Corporation’s Board of Directors authorized the repurchase of up to an additional $500 million of Shares under the Share Repurchase Program. Pursuant to the Share Repurchase Program, Starwood repurchased 7.0 million Shares in the open market for an aggregate cost of $310 million during 2004.

Off-Balance Sheet Arrangements

      Our off-balance sheet arrangements include beneficial interest in securitizations of $58 million, third-party loan guarantees of $67 million, letters of credit of $125 million, unconditional purchase obligations of $161 million and surety bonds of $38 million. These items are more fully discussed earlier in this section and in the Notes to Consolidated Financial Statements, Item 8 of Part II of this report.

      In limited instances, we seek to reduce earnings and cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into financial arrangements intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged.

      Interest rate swap agreements are the primary instruments used to manage interest rate risk. At December 31, 2004, we had two outstanding long-term interest rate swap agreements under which we pay variable interest rates and receive fixed interest rates. At December 31, 2004, we had no interest rate swap agreements under which we pay a fixed rate and receive a variable rate. The following table sets forth the scheduled maturities and the total fair value of our debt portfolio:

      We use foreign currency hedging instruments to manage exposure to foreign currency exchange rate fluctuations. The gains or losses on the hedging instruments are largely offset by gains or losses on the underlying asset or liability, and consequently, a sudden significant change in foreign currency exchange rates would not have a material impact on future net income or cash flows of the hedged item. We monitor our foreign currency exposure on a monthly basis to maximize the overall effectiveness of our foreign currency hedge positions. Changes in the fair value of hedging instruments are classified in the same manner as changes in the underlying assets or liabilities due to fluctuations in foreign currency exchange rates. At December 31, 2004, the notional amount of our open foreign exchange hedging contracts protecting the value of our foreign currency denominated assets and liabilities was approximately $562 million, which includes a hedge on a portion of the principal amount of the Le Meridien investment. A hypothetical 10% change in the spot currency exchange rates would result in an increase or decrease of approximately $61 million in the fair value of the hedges at December 31, 2004, which would be offset by an opposite effect on the related underlying net asset or liability.

      We enter into a derivative financial arrangement to the extent it meets the objectives described above, and we do not engage in such transactions for trading or speculative purposes.

      See Note 18. Derivative Financial Instruments in the notes to financial statements filed as part of this Joint Annual Report and incorporated herein by reference for further description of derivative financial instruments.

      The financial statements and supplementary data required by this Item are included in Item 15 of this Joint Annual Report and are incorporated herein by reference.

      Not applicable.

Evaluation of Disclosure Controls and Procedures.

      Our management conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2004. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in alerting them in a timely manner to material information required to be included in our Securities and Exchange Commission reports. There has been no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting.

      Management of Starwood Hotels & Resorts Worldwide Inc. and its subsidiaries and Starwood Hotels & Resorts and its subsidiaries (“the Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) or 15(d)-15(f). Those rules define internal control over financial reporting as a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles (“GAAP”) and includes those policies and procedures that:

      Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

      The Company’s management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2004. In making this assessment, the Company’s management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management believes that, as of December 31, 2004, the Company’s internal control over financial reporting is effective.

      Management has engaged Ernst & Young LLP, the independent registered public accounting firm that audited the financial statements included in this Annual Report on Form 10-K, to attest to and report on management’s evaluation of the Company’s internal control over financial reporting. Its report is included herein.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors, Board of Trustees and Shareholders of

Starwood Hotels & Resorts Worldwide, Inc. and Starwood Hotels & Resorts

      We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the “Company”) and Starwood Hotels & Resorts and its subsidiaries (the “Trust”) maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Company’s and the Trust’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s and the Trust’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audits included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes 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 reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition 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 detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

      In our opinion, management’s assessment that the Company and the Trust maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company and the Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, 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 and the Trust as of December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive income, equity, and cash flows of the Company for each of the three years in the period ended December 31, 2004 and the consolidated statements of income and cash flows of the Trust for each of the three years in the period ended December 31, 2004 and our report dated March 1, 2005, expressed an unqualified opinion thereon.

New York, New York

March 1, 2005

      There has not been any change in our internal control over financial reporting identified in connection with the evaluation that occurred during the year ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, those controls.

PART III

      The Board of Directors of the Corporation and the Board of Trustees of the Trust are currently comprised of 10 members, each of whom is elected for a one-year term. The following table sets forth, for each of the members of the Board of Directors and the Board of Trustees as of the date of this Joint Annual Report, certain information regarding such Director or Trustee.

Executive Officers of the Registrants

      The following table includes certain information with respect to each of Starwood’s executive officers.

      Barry S. Sternlicht. See Item 10. Directors, Trustees and Executive Officers of the Registrants above.

      Steven J, Heyer. See Item 10. Directors, Trustees and Executive Officers of the Registrants above.

      Robert F. Cotter. Mr. Cotter was the President and Chief Operating Officer of the Corporation from November 2003 until February 2005, and the Chief Operating Officer of the Corporation from February 2000 to February 2005. He has served as a Vice President of the Trust since August 2000. From December 1999 to February 2000, he was President, International Operations, and from March 1998 to December 1999, he served as President, Europe, of the Company. In February 2005, Mr. Cotter announced his intention to retire at the end of 2005.

      Vasant M. Prabhu. Mr. Prabhu has been the Executive Vice President and Chief Financial Officer of the Corporation and has served as Vice President, Chief Financial Officer and Chief Accounting Officer of the Trust since January 2004. Prior to joining the Company, Mr. Prabhu served as Executive Vice President and Chief Financial Officer for Safeway Inc., from September 2000 through December 2003. Mr. Prabhu was previously the President of the Information and Media Group at the McGraw-Hill Companies, Inc., from June 1998 to August 2000, and held several senior positions at divisions of PepsiCo, Inc. from June 1992 to May 1998. From August 1983 to May 1992 he was a partner at Booz Allen Hamilton, an international management consulting firm.

      Kenneth S. Siegel. Mr. Siegel has been the Executive Vice President and General Counsel of the Corporation and Vice President and General Counsel of the Trust since November 2000. In February 2001, he was also appointed as the Secretary to both the Corporation and the Trust. Mr. Siegel was formerly the Senior Vice President and General Counsel of Gartner, Inc., a provider of research and analysis on information technology industries, from January 2000 to November 2000. Prior to that time, he served as Senior Vice President, General Counsel and Corporate Secretary of IMS Health Incorporated, an information services company, and its predecessors from February 1997 to December 1999. Prior to that time, Mr. Siegel was a Partner in the law firm of Baker & Botts, LLP.

      David K. Norton. Mr. Norton has been the Executive Vice President — Human Resources of the Corporation and Vice President — Human Resources of the Trust since May 2000. Prior to joining the Company, Mr. Norton held various positions with PepsiCo, Inc. from September 1990 to April 2000 including Senior Vice President, Human Resources of Frito-Lay, a division of PepsiCo, from November 1995 to April

2000 and Senior Vice President, Human Resources of PepsiCo Food Systems from December 1994 to October 1995.

      Theodore W. Darnall. Mr. Darnall has been the President of the Real Estate Group since August 2002. From July 1999 to August 2002, he was the President of the Company’s North America Group.

Corporate Governance

      The Corporation and the Trust have an Audit Committee that is currently comprised of directors and trustees, Thomas O. Ryder (chairman), Daniel W. Yih, Kneeland C. Youngblood and Eric Hippeau. The Boards of Directors and Trustees have determined that each member of the Audit Committee is “independent” as defined by applicable federal securities laws and the Listing Requirements of the New York Stock Exchange, Inc. and that Messrs. Ryder and Yih are audit committee financial experts, as defined by federal securities laws.

      The Company has adopted a Finance Code of Ethics applicable to our Chief Executive Officer, Chief Financial Officer, Corporate Controller, Corporate Treasurer, Senior Vice President-Taxes and persons performing similar functions. The text of this code of ethics may be found on the Company’s web site at http://starwoodhotels.com/corporate/investor       relations.html. We intend to post amendments to and waivers from, the Finance Code of Ethics that require disclosure under applicable SEC rules on our web site. You may obtain a free copy of this code in print by writing to our Investor Relations Department, 1111 Westchester Avenue, White Plains, New York 10604.

      The Company has adopted a Worldwide Code of Conduct applicable to all of its directors, officers and employees. The text of this code of conduct may be found on the Company’s website at http://starwoodhotels.com/corporate/investor       relations.html. You may also obtain a free copy of this code in print by writing to our Investor Relations Department, 1111 Westchester Avenue, White Plains, New York 10604.

      The Company’s Corporate Governance Guidelines and the charters of its Audit Committee, Compensation and Option Committee, and Governance and Nominating Committee are also available on its website at http://starwoodhotels.com/corporate/investor       relations.html. The information on our website is not incorporated by reference into this Joint Annual Report on Form 10-K.

      We have submitted the CEO certification to the NYSE pursuant to NYSE Rule 303A.12(a) following the 2004 Annual Meeting of Shareholders.

Section 16(a) Beneficial Ownership Reporting Compliance

      Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that Directors, Trustees and executive officers of the Company, and persons who own more than 10 percent of the outstanding Shares, file with the SEC (and provide a copy to the Company) certain reports relating to their ownership of Shares and other equity securities of the Company.

      To the Company’s knowledge, based solely on a review of the copies of these reports furnished to the Company for the fiscal year ended December 31, 2004, and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its Directors, Trustees, executive officers and greater than 10 percent beneficial owners were complied with for the most recent fiscal year, except that Mr. Sternlicht failed to timely file one Form 4 with respect to four transactions, and each of the non-employee directors (see above) failed to timely file one Form 4 with respect to one transaction. These transactions were filed late by the Company on behalf of the individuals.

      The information called for by Item 11 is incorporated by reference to the information under the following captions in the Proxy Statement: “Compensation of Directors and Trustees,” “Summary of Cash and Certain Other Compensation,” “Executive Compensation,” “Option Grants,” “Option Exercises and Holdings,”

“Employment and Compensation Agreements with Executive Officers,” “Compensation Committee Interlocks and Insider Participation” and “Compensation and Option Committee Report.”

Equity Compensation Plan Information — December 31, 2004

     The remaining information called for by Item 12 is incorporated by reference to the information under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement.

Policies of the Board of Directors of the Corporation and the Board of Trustees of the Trust

      The policy of the Board of Directors of the Corporation and the Board of Trustees of the Trust provides that any contract or transaction between the Corporation or the Trust, as the case may be, and any other entity in which one or more of its Directors, Trustees or executive officers are directors or officers, or have a financial interest, must be approved or ratified by the Governance and Nominating Committee (which is currently comprised of Stephen R. Quazzo, Ambassador Barshefsky and Bruce W. Duncan, the “Governance Committee”) and/or by a majority of the disinterested Directors or Trustees in either case after the material facts as to the relationship or interest and as to the contract or transaction are disclosed or are known to them.

Starwood Capital

      General. Barry S. Sternlicht, Executive Chairman and a Director of the Corporation, and Executive Chairman and a Trustee of the Trust, may be deemed to control and has been and remains the President and Chief Executive Officer of Starwood Capital since its formation in 1991.

      Trademark License. An affiliate of Starwood Capital has granted to us, subject to Starwood Capital’s unrestricted right to use such name, an exclusive, non-transferable, royalty-free license to use the “Starwood” name and trademarks in connection with the acquisition, ownership, leasing, management, merchandising, operation and disposition of hotels worldwide, and to use the “Starwood” name in our corporate name worldwide, in perpetuity.

      Starwood Capital Noncompete. In connection with our restructuring of the Company in 1995, Starwood Capital voluntarily agreed that, with certain exceptions, Starwood Capital would not compete directly or indirectly with us within the United States and would present to us all opportunities presented to Starwood Capital to acquire fee interests in hotels in the United States and debt interests in hotels in the United States

where it is anticipated that the equity will be acquired by the debt holder within one year from the acquisition of such debt (the “Starwood Capital Noncompete”). During the term of the Starwood Capital Noncompete, Starwood Capital and its affiliates are not permitted to acquire any such interest, or any ground lease interest or other equity interest, in hotels in the United States without the consent of the Board. In addition, our Corporate Opportunity Policy requires that each executive officer submit to the Governance Committee any opportunity that the executive officer reasonably believes is within our lines of business or in which we have an interest. Non-employee directors are subject to the same obligations with respect to opportunities presented to them in their capacity as directors. Therefore, as a matter of practice, all opportunities to purchase hotel assets, even those outside of the United States, that Starwood Capital may pursue are first presented to us. The Starwood Capital Noncompete continues until no officer, director, general partner or employee of Starwood Capital is on either the Board of Directors of the Corporation or the Board of Trustees of the Trust (subject to exceptions for certain restructurings, mergers or other combination transactions with unaffiliated parties). Several properties owned or managed by us, including the Westin Innisbrook Resort (the “Innisbrook Resort”), the Westin Mission Hills Resort and the Westin Turnberry Resort, were opportunities brought to us or our predecessors by Starwood Capital or entities related to Mr. Sternlicht. With the approval in each case of the Governance Committee of the Board of Directors of the Corporation and the Board of Trustees of the Trust, from time to time we have waived the restrictions of the Starwood Capital Noncompete, in whole or in part, (or passed on the opportunity in cases of the Corporate Opportunity Policy for non-U.S. opportunities) with respect to particular acquisition or investment opportunities in which we have no business or strategic interest. In each instance, members of management not having an interest in the transaction review and analyze the proposed transaction and may seek the advice of independent advisors. Following its review and analysis, management makes a recommendation to the Governance Committee. Upon receiving such recommendation and analysis, the Governance Committee will consider the recommendations and advice of management and may, depending on the transaction involved, retain independent financial and legal advisors in determining whether or not to pursue an opportunity or waive the Starwood Capital Noncompete.

      Miscellaneous. In July 2003, we waived the Starwood Capital Noncompete in connection with the acquisition of the Renaissance Wailea hotel in Hawaii by an affiliate of Starwood Capital. We signed a letter of intent with the affiliate to manage this property after it is extensively repositioned and renovated. We are currently negotiating the management agreement. Our Governance Committee, advised by separate independent legal and hospitality advisors, approved the waiver of the Starwood Capital Noncompete and the terms of the proposed management agreement as being at or better than market terms. We also declined the opportunity to purchase the asset because the expected after tax return on investment as determined by management based on its experience in the industry and concurred to by the Governance Committee was less than our minimum threshold and because the acquisition was not consistent with our strategic priorities.

      In August 2003, we acquired from an affiliate of Starwood Capital its beneficial ownership interest in 15 acres of land contiguous to the Westin Mission Hills Resort for a purchase price of $2.8 million. Our Governance Committee approved the transaction, which was at a discount from the price determined by an independent third party appraiser engaged by the Governance Committee.

      In November 2004, we waived the Starwood Capital Noncompete in connection with the potential acquisition of two hotels in Florida which are currently franchised under a Starwood brand. Pursuant to the waiver, we permitted Starwood Capital to enter into a contract to acquire the assets on the condition that it enters into a management agreement for us to manage the assets for up to three years. The management agreement would provide for a management fee of 5% of gross operating revenues in exchange for us loaning Starwood Capital up to $2 million to facilitate capital improvements on the properties. The loan would be repayable upon expiration of the management contracts unless Starwood Capital enters into long term contracts with us. If Starwood Capital determines to operate the properties as hotels, time shares, fractional interests, branded residential or any type of transient lodging facility, Starwood Capital would be required to negotiate a “market” management agreement with us. The Governance Committee approved the waiver of the Starwood Capital Noncompete and the proposed management fee as being at or better than market rates based on management’s recommendation. In addition, we were provided an opportunity to acquire the assets but declined to do so because the expected after tax return on investment as determined by management based

on its experience in the industry was less than our minimum threshold and the acquisition of the assets was not consistent with our strategic priorities. To date, Starwood Capital has not acquired the hotels.

      In November 2004, we declined the opportunity to purchase an equity interest in a Starwood branded hotel in Asia through a joint venture consisting of Starwood Capital and a third party. The hotel is subject to a long term management contract with us that was entered into with independent third parties and that will remain in place. The Governance Committee determined that we would not be interested in acquiring the hotel based on management’s recommendation because the expected after tax return on investment as determined by management based on its experience in the industry was less than our minimum threshold because of the existing long term management contract and because the acquisition of the assets was not consistent with our strategic priorities.

      In February 2005, we agreed to waive the Starwood Capital Noncompete and the application of the Corporate Opportunity Policy with respect to a portfolio of seven hotels and a minority interest in an eighth hotel, each of which is subject to a long term management agreement with us. Under the terms of the waiver, affiliates of Starwood Capital will acquire the portfolio subject to the existing management agreements in favor of us. Starwood Capital has agreed that, following its planned restructuring of the ownership of the portfolio, the new management agreements will be revised to reflect our current form of management arrangement while preserving their current favorable economic terms. Starwood Capital has also agreed to grant us a right of first offer for an appropriate management, franchise, and/or services agreement with respect to any time share, residential or similar development opportunity at certain of the properties, to fully comply with all applicable brand standards and to certain restrictions on Mr. Sternlicht’s involvement with the operation of the properties. We declined the opportunity to acquire the properties based on management’s recommendation, because the expected after tax return on investment as determined by management based on its experience in the industry was less than our minimum threshold because of the existence of the favorable long-term management agreements and because the acquisition was not consistent with our strategic priorities.

      Beginning in the fourth quarter of 2004, Starwood Capital entered into discussions regarding a transaction with us and a third party which would involve, among other things, Starwood Capital acquiring an interest in hotels together with a third party, with us managing such properties. In the first quarter of 2005, we agreed to reimburse Starwood Capital for certain of its third party due diligence expenses in connection with its consideration of the transaction if a transaction is not consummated. A transaction involving Starwood Capital, if any, would be subject to the review and approval of the Governance Committee.

      In October 2004, in connection with a potential acquisition that we were considering jointly with Starwood Capital, Starwood Capital agreed to reimburse us for certain due diligence reviews conducted on its behalf by Starwood for which we billed them approximately $25,800.

      Portfolio Investments. An affiliate of Starwood Capital holds an approximately 31% co-controlling interest in Troon Golf (“Troon”), one of the largest third-party golf course management companies that currently manages over 120 high-end golf courses. Mr. Sternlicht’s indirect interest in Troon held through such affiliate is approximately 12%. In January 2002, after extensive review of alternatives and with the approval of the Governance Committee, we entered into a Master Agreement with Troon covering the United States and Canada whereby we have agreed to have Troon manage all golf courses in the United States and Canada that are owned by us and to use reasonable efforts to have Troon manage golf courses at resorts that we manage or franchise. We believe that the terms of the Troon agreement are at or better than market terms. Mr. Sternlicht did not participate in the negotiations or the approval of the Troon Master Agreement. During 2004, Troon managed 17 golf courses at resorts owned or managed by us. We paid Troon a total of $1,440,000 for management fees and payments for other services in 2004 for nine golf courses at resorts owned or managed by us. During 2003 and 2002, we paid $948,000 and $813,000 for management fees and payments for other services for the nine and eight golf courses at resorts owned or managed by us, respectively.

      In addition, a subsidiary of Starwood Capital is a general partner of a limited partnership which owns approximately 45% in an entity that manages over 40 health clubs, including one health club and spa space in a hotel owned by us. We paid approximately $84,000 annually to the management company for such

management services in 2003 and 2002, and $42,000 in 2004. We believe that the terms of the management agreement were at or better than market terms. The management agreement terminated on September 30, 2003 and the management company has since managed the health club and spa on a month-to-month agreement. We and the management company continued this arrangement until we closed the health club and spa in June 2004 for conversion to a Bliss spa.

      An entity in which Mr. Sternlicht has an indirect interest held 259 limited partnership units in Westin Hotels Limited Partnership (the owner of the Westin Michigan Avenue Hotel.) The units were acquired in 1995 and 1996, prior to our acquisition of Westin. The entity tendered all of its units to us in connection with our tender offer. We purchased all shares tendered to us and the entity received approximately $190,000 for its units.

      Other Management-Related Investments. Innisbrook. Mr. Sternlicht has a 38% indirect interest in an entity (the “Innisbrook Entity”) that owned the common area facilities and certain undeveloped land (but not the hotel) at the Innisbrook Resort. In May 1997, the Innisbrook Entity entered into a management agreement for the Innisbrook Resort with Westin, which was then a privately held company partly owned by Starwood Capital and Goldman, Sachs & Co. When we acquired Westin in January 1998, we acquired Westin’s rights and obligations under the management and other related agreements. Under these agreements, the hotel manager was obligated to loan up to $12.5 million to the owner in the event certain performance levels were not achieved. Management fees earned under these agreements were $636,000, $512,000 and $584,000 in 2004, 2003 and 2002, respectively. The operations of the Innisbrook Entity did not and continue not to generate sufficient cash flow to service its outstanding debt and current obligations for much of the past several years.

      We reached an agreement in 2004 with the Innisbrook Entity and its primary lender regarding certain outstanding obligations of the Innisbrook Entity, including approximately $11 million (consisting principally of loans made by us as hotel manager under the $12.5 million obligation) payable to us upon certain events. Pursuant to the agreement, the Innisbrook Entity conveyed the Innisbrook Resort to the lender (in lieu of foreclosure) and we were paid approximately $465,000 for outstanding receivables. Under the terms of the agreement, we entered into a new management agreement for the Innisbrook Resort with the lender providing for (i) an increased base management fee percentage, (ii) management of the Innisbrook Resort’s golf facilities (which we subcontracted to Troon, the manager of the facilities prior to the new agreement) (iii) the right to receive a termination fee of up to $5.9 million (declining to $5.5 million over three years) upon certain events and (iv) the right to be repaid certain capital expenditures made by us if the management agreement is terminated prior to January 1, 2006. As part of the agreement, each of the parties released substantially all of their claims against the others (including our right to receive payment of approximately $10.26 million loaned by us to the Innisbrook Entity upon the occurrence of certain events). Under the new agreement, affiliates of the Innisbrook Entity also loaned the lender $2 million to provide working capital for the Innisbrook Resort. The resolution of the matter did not have a material impact on our financial position, results of operations or cash flows and was approved by the Governance Committee based on the recommendation of management and outside legal advisors.

      Savannah. In July 2002, we acquired a 49% interest in the Westin Savannah Harbor Resort and Spa in connection with the restructuring of the indebtedness of that property. An unrelated party holds an additional 49% interest in the property. The remaining 2% is held by Troon. Troon invested in the project on a pari-passu basis and manages the golf course at the Westin Savannah. The unrelated third party negotiated the terms of the golf management agreement with Troon, and approved the terms of its equity interest, and therefore, we believe the arrangements are on an arms-length basis.

      Aircraft Lease. In February 1998, we leased a Gulfstream III Aircraft (“GIII”) from Star Flight LLC, an affiliate of Starwood Capital. The term of the lease was one year and automatically renews for one-year terms until either party terminates the lease upon 90 days’ written notice. The rent for the aircraft, which was set at approximately 90% of fair market value at the time (based on two estimates from unrelated third parties), is (i) a monthly payment of 1.25% of the lessor’s total costs relating to the aircraft (approximately $123,000 at the beginning of the lease with this amount increasing as additional costs are incurred by the

lessor), plus (ii) $300 for each hour that the aircraft is in use. The lease was revised effective January 1, 2004. Under the revised terms, the monthly lease payment is equal to (i) 1% of the fair market value of the aircraft as determined by an independent appraisal in February 2005, with the fair market value of the aircraft to be determined annually, plus (ii) $300 for each hour that the aircraft is in use. The term of the new lease agreement is for one year and it automatically renews for one-month terms unless either party terminates the lease upon 90 days’ written notice. The amount paid in 2004 in excess of the revised amount due (approximately $658,000) will be refunded by Star Flight LLC upon execution of the amended lease. Payments to Star Flight LLC were $1,724,000 (before the refunded amount disclosed above), $1,865,000 and $2,052,000 in 2004, 2003 and 2002, respectively. Starwood Capital has used the GIII as well as the Gulfstream IV Aircraft (“GIV”) operated by us. For use of the GIII, Star Flight LLC relieves us of lease payments for the days the plane is used and reimburses us for costs of operating the aircraft. For use of the GIV, Starwood Capital pays a charter rate that is at least equal to the amount we would have received from an unaffiliated third party through our charter agent, net of commissions. Lease relief and reimbursed operating costs were approximately $208,000, $52,000 and $161,000 for fiscal 2004, 2003 and 2002, respectively.

Other

      We on occasion made loans to employees, including executive officers prior to August 23, 2002, principally in connection with home purchases upon relocation. As of December 31, 2004, approximately $5.6 million in loans to approximately 15 employees was outstanding of which approximately $4.4 million were non-interest bearing home loans. Home loans are generally due five years from the date of issuance or upon termination of employment and are secured by a second mortgage on the employee’s home. Executive officers receiving home loans in connection with relocation were Robert F. Cotter, President and Chief Operating Officer, in June 2001 (original balance of $600,000), David K. Norton, Executive Vice President of Human Resources, in July 2000 (original balance of $500,000), and Theodore W. Darnall, President, Real Estate Group, in 1996 and 1998 (original balance of $750,000 ($150,000 bridge loan in 1996 and $600,000 home loan in 1998), of which $600,000 was repaid in August 2003). As a result of the acquisition of ITT Corporation in 1998, restricted stock awarded to Messrs. Sternlicht and Darnall in 1996 vested at a price for tax purposes of $53 per Share. This amount was taxable at ordinary income rates. By late 1998, the value of the stock had fallen below the amount of income tax owed. In order to avoid a situation in which the executives could be required to sell all of the Shares acquired by them to cover income taxes, in April 1999 we made interest-bearing loans at 5.67% to Messrs. Sternlicht and Darnall of approximately $1,222,000 and $416,000 respectively, to cover the taxes payable. Mr. Darnall’s loan was repaid in 2004. Accrued interest on Mr. Sternlicht’s loan at December 31, 2004 is approximately $396,000. The note and all associated accumulated interest become due on their tenth anniversary.

      Dina Diagonale held various positions with us from January 2001 through June 2004. In 2004, Ms. Diagonale earned a total of $241,409, which includes (i) approximately $77,500 upon the exercise of in-the-money options and restricted stock that vested or became exercisable in the ordinary course, (ii) Ms. Diagonale’s 2003 bonus which was paid in March 2004, and (iii) base compensation and severance. In addition, Ms. Diagonale was awarded 2,500 options to purchase Company shares in 2004, which terminated prior to vesting upon her ceasing to be employed by us. Subsequent to her departure from the Company, Ms. Diagonale married Kenneth S. Siegel, Executive Vice President and General Counsel.

      The Audit Committee has adopted a policy requiring pre-approval by the committee of all services (audit and non-audit) to be provided to us by our independent auditors. In accordance with that policy, the Audit Committee has given its approval for the provision of audit services by Ernst & Young LLP for fiscal 2004. All other services must be specifically pre-approved by the full Audit Committee or by a designated member of the Audit Committee who has been delegated the authority to pre-approve the provision of services.

      Fees paid by us to our independent auditors are set forth in the proxy statement under the heading “Audit Fees” and are incorporated herein by reference. The auditors do not specifically allocate any of the audit fees for the audit of the Trust.

PART IV

(a) The following documents are filed as a part of this Joint Annual Report:

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 2, 2005

      Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: March 2, 2005

      Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

AND STARWOOD HOTELS & RESORTS

INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors, Board of Trustees and Shareholders of

Starwood Hotels & Resorts Worldwide, Inc. and Starwood Hotels & Resorts

We have audited the accompanying consolidated balance sheets of Starwood Hotels & Resorts Worldwide, Inc. (a Maryland corporation) (the “Company”) and Starwood Hotels & Resorts (a Maryland real estate investment trust) (the “Trust”) as of December 31, 2004 and 2003, and the related consolidated statements of income, comprehensive income, equity, and cash flows of the Company for each of the three years in the period ended December 31, 2004 and the consolidated statements of income and cash flows of the Trust for each of the three years in the period ended December 31, 2004. Our audits also included the financial statement schedules listed in the Index to Financial Statements and Schedules. These financial statements and schedules are the responsibility of the Company’s and Trust’s management. Our responsibility is to express an opinion on these financial statements and schedules 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 about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and the Trust at December 31, 2004 and 2003, and the consolidated results of the Company’s and the Trust’s operations and cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s and the Trust’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2005 expressed an unqualified opinion thereon.

New York, New York

March 1, 2005

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)