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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended December 31, 2004

OR

Commission File No. 1-13881

MARRIOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

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

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

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

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes  x    No  ¨

The aggregate market value of shares of common stock held by non-affiliates at June 18, 2004, was $8,908,154,899.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement prepared for the 2005 Annual Meeting of Shareholders are incorporated by

reference into Part III of this report.

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MARRIOTT INTERNATIONAL, INC.

FORM 10-K TABLE OF CONTENTS

FISCAL YEAR ENDED DECEMBER 31, 2004

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Throughout this report, we refer to Marriott International, Inc., together with its subsidiaries, as “we,” “us,” or “the Company.”

PART I

Items 1 and 2. Business and Properties.

We are a worldwide operator and franchisor of hotels and related lodging facilities. Our operations are grouped into the following five business segments:

We were organized as a corporation in Delaware in 1997 and became a public company in 1998 when we were “spun off” as a separate entity by the company formerly named “Marriott International, Inc.”

In our Lodging business, which includes our Full-Service, Select-Service, Extended-Stay and Timeshare segments, we develop, operate and franchise hotels and corporate housing properties under 13 separate brand names, and we develop, operate and market Marriott timeshare properties under four separate brand names.

Our synthetic fuel operation consists of our interest in four coal-based synthetic fuel production facilities whose operations qualify for tax credits based on Section 29 of the Internal Revenue Code.

Prior to January 3, 2003, our operations included our Senior Living Services and Distribution Services businesses, which we now classify as discontinued operations.

Financial information by industry segment and geographic area as of December 31, 2004, and for the three fiscal years then ended appears in the Business Segments note to our Consolidated Financial Statements included in this annual report.

Lodging

We operate or franchise 2,632 lodging properties worldwide, with 482,186 rooms as of December 31, 2004. In addition, we provide 2,504 furnished corporate housing rental units. We believe that our portfolio of lodging brands is the broadest of any company in the world, and that we are the leader in the quality tier of the vacation timesharing business. Consistent with our focus on management and franchising, we own very few of our lodging properties. Our lodging brands include:

Full-Service Lodging

Select-Service Lodging

Extended-Stay Lodging

Timeshare

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Company-Operated Lodging Properties

At December 31, 2004, we operated 968 properties (255,109 rooms) under long-term management or lease agreements with property owners (together, “the Operating Agreements”) and six properties (1,362 rooms) as owned.

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

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

Franchised Lodging Properties

We have franchising programs that permit the use of certain of our brand names and our lodging systems by other hotel owners and operators. Under these programs, we generally receive an initial application fee and continuing royalty fees, which typically range from 4 percent to 6 percent of room revenues for all brands, plus 2 percent to 3 percent of food and beverage revenues for certain full-service hotels. In addition, franchisees contribute to our national marketing and advertising programs, and pay fees for use of our centralized reservation systems. At December 31, 2004, we had 1,658 franchised properties (225,715 rooms).

Summary of Properties by Brand

As of December 31, 2004, we operated or franchised the following properties by brand (excluding 2,504 corporate housing rental units):

We currently have more than 55,000 rooms in our development pipeline and expect to add 25,000 to 30,000 hotel rooms and timeshare units to our system in 2005. We believe that we have access to sufficient financial resources to finance our growth, as well as to support our ongoing operations and meet debt service and other cash requirements. Nonetheless, our ability to sell properties that we develop, and the ability of hotel developers to build or acquire new

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Marriott properties, important parts of our growth plan, are partially dependent on their access to and the availability and cost of capital. See “Liquidity and Capital Resources” caption in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Summary of Properties by Country

As of December 31, 2004, we operated or franchised properties in the following 66 countries and territories:

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Full-Service Lodging

Marriott Hotels & Resorts (including JW Marriott Hotels & Resorts and Marriott Conference Centers) is our global flagship brand, primarily serving business and leisure travelers and meeting groups at locations in downtown, urban and suburban areas, near airports and at resort locations. Marriott full-service hotels is a quality tier brand, with most hotels typically containing from 400 to 700 rooms, high-speed internet access, swimming pools, gift shops, convention and banquet facilities, a variety of restaurants and lounges, room service, concierge lounges and parking facilities. Fifteen hotels have over 1,000 rooms. Many Marriott resort hotels have additional recreational and entertainment facilities, such as tennis courts, golf courses, additional restaurants and lounges, and many have spa facilities. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). Unless otherwise indicated, our references to Marriott Hotels & Resorts throughout this report include JW Marriott Hotels & Resorts and Marriott Conference Centers.

JW Marriott Hotels & Resorts is the Marriott brand’s luxury collection of distinctive hotels that cater to accomplished, discerning travelers seeking an elegant environment and personal service. These 34 hotels and resorts are primarily located in gateway cities and upscale locations throughout the world. In addition to the features found in a typical Marriott full-service hotel, the facilities and amenities at JW Marriott Hotels & Resorts normally include larger guest rooms, higher end décor and furnishings, upgraded in-room amenities, upgraded business centers and fitness centers/spas, and 24-hour room service.

We operate 14 Marriott Conference Centers (3,577 rooms) throughout the United States. Some of the centers are used exclusively by employees of sponsoring organizations, while others are marketed to outside meeting groups and individuals. In addition to the features found in a typical Marriott full-service hotel, the centers typically include expanded meeting room space, banquet and dining facilities, guest rooms and recreational facilities.

Rooms revenue contributed the majority of Marriott Hotels & Resorts’ revenues for fiscal year 2004, with the remainder coming from food and beverage operations, recreational facilities and other services. Overall hotel system profits are usually relatively stable and include only moderate seasonal fluctuations. Business at resort properties may be seasonal depending on location.

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Marriott Hotels & Resorts

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

The Ritz-Carlton

Renaissance Hotels & Resorts is a distinctive and global quality-tier brand that targets individual business and leisure travelers and group meetings seeking stylish and personalized environments. Renaissance hotels are generally located at downtown locations in major cities, in suburban office parks, near major gateway airports and in destination resorts. Most hotels contain from 300 to 500 rooms; however, a few of the convention oriented hotels are larger, and some hotels in non-gateway markets, particularly in Europe, are smaller. Renaissance products and services typically include stylish décor, high-speed internet access, restaurants and lounges, room service, swimming pools, gift shops, concierge lounges, and meeting and banquet facilities. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). Renaissance resort properties have additional recreational and entertainment facilities and services, including golf courses, tennis courts, water sports, additional restaurants and spa facilities.

Renaissance Hotels & Resorts

Bulgari Hotels & Resorts. As part of our ongoing strategy to expand our reach through partnerships with pre-eminent world-class companies, in early 2001 we entered into a joint venture with Bulgari SpA to create and introduce distinctive new luxury hotel properties in prime locations – Bulgari Hotels & Resorts. The first property (58 rooms), the Bulgari Hotel Milano, opened in Milan, Italy, in May 2004. The second property announced is the Bulgari Resort Bali, currently under construction and scheduled to open in late 2005. Other projects are currently in various stages of development in Europe, Asia, and North America.

Ramada International. We sold Ramada International, a moderately-priced and predominantly franchised brand targeted at business and leisure travelers outside the United States, to Cendant Corporation (“Cendant”) during the fourth quarter of 2004. We continue to manage four Ramada International properties (727 rooms) located outside of the United States at December 31, 2004. Additionally, in the second quarter of 2004, Cendant exercised its option to redeem our interest in the Two Flags joint venture, and as a result, Cendant acquired the trademarks and licenses for

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the Ramada and Days Inn lodging brands in the United States. The Two Flags joint venture was originally formed in 2002 by us and Cendant to further develop and expand the Ramada and Days Inn brands in the United States. We contributed the domestic Ramada license agreements and related intellectual property to the joint venture, and Cendant contributed the Days Inn license agreement and related intellectual property.

Select-Service Lodging

Courtyard is our upper-moderate-price select-service hotel product. Aimed at individual business and leisure travelers as well as families, Courtyard hotels maintain a residential atmosphere and typically contain 90 to 150 rooms. Well landscaped grounds typically include a courtyard with a pool and social areas. Most hotels feature functionally designed quality guest rooms and meeting rooms, free in-room high-speed internet access, limited restaurant facilities, a swimming pool and an exercise room. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components), and most hotels will also have The Market (a self-serve food store open 24 hours a day). In addition, our Courtyard brand is undergoing a reinvention strategy designed to meet the evolving needs of the business traveler. Reinvented Courtyards feature fresh, crisp designs for guest rooms and public spaces and 24-hour food availability. Through year-end 2004, 87 hotels have been reinvented, and reinventions of an additional 71 properties are expected to be completed by year-end 2005. The operating systems developed for these hotels allow Courtyard to be price-competitive while providing better value through superior facilities and guest service. At year-end 2004, there were 656 Courtyards operating in 21 countries.

Courtyard

Fairfield Inn is our hotel brand that competes in the lower-moderate-price tier. Aimed at value-conscious individual business and leisure travelers, a typical Fairfield Inn or Fairfield Inn & Suites has 60 to 140 rooms and offers free in-room high-speed internet access, a swimming pool, complimentary continental breakfast and free local phone calls. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). At year-end 2004, there were 409 Fairfield Inns and 114 Fairfield Inn & Suites (523 hotels total), operating in the United States, Canada and Mexico.

Fairfield Inn

SpringHill Suites is our all-suite brand in the upper-moderate-price tier targeting business travelers, leisure travelers and families. SpringHill Suites typically have 90 to 165 studio suites that are 25 percent larger than a typical hotel guest room. The brand offers a broad range of amenities, including free in-room high-speed internet access, complimentary hot breakfast buffet and exercise facilities. By the end of 2005, hotels are required to have a new superior bedding package (offering better mattress quality and enhanced bedding components). In 2005, the brand will introduce The Market (a self-serve food store open 24 hours a day). There were 125 properties (14,550 rooms) located in the United States and Canada at December 31, 2004.

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Extended-Stay Lodging

Residence Inn, North America’s leading extended-stay brand, allows guests on long-term trips to maintain balance between work and life while away from home. Spacious suites with full kitchens and separate areas for sleeping, working, relaxing and eating offer home-like comfort with functionality. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). A friendly staff and welcome services like complimentary hot breakfast and evening social hours add to the sense of community. There are 463 Residence Inn hotels across North America.

Residence Inn

TownePlace Suites is a moderately priced extended-stay hotel product that is designed to appeal to business and leisure travelers who stay for five nights or more. The typical TownePlace Suites hotel contains 100 studio, one-bedroom and two-bedroom suites. Each suite has a fully equipped kitchen and separate living area with a comfortable, residential feel. Each hotel provides housekeeping services and has on-site exercise facilities, an outdoor pool, 24-hour staffing, free in-room high-speed internet access and laundry facilities. By the end of 2005, hotels are required to have a new, superior bedding package (offering better mattress quality and enhanced bedding components). At December 31, 2004, 115 TownePlace Suites (11,710 rooms) were located in 35 states.

Marriott ExecuStay provides furnished corporate apartments for stays of one month or longer nationwide. ExecuStay owns no residential real estate and provides units primarily through short-term lease agreements with apartment owners and managers and franchise agreements. Consistent with our plan to shift the business toward franchising, the total number of units leased by ExecuStay decreased and more than 20 franchise markets were added during 2004. At December 31, 2004, Marriott ExecuStay’s franchise program, launched in July 2002, included 14 franchisees covering 35 U.S. markets.

Marriott Executive Apartments. We provide temporary housing (“Serviced Apartments”) for business executives and others who need quality accommodations outside their home country, usually for 30 or more days. Some Serviced Apartments operate under the Marriott Executive Apartments brand, which is designed specifically for the long-term international traveler. At December 31, 2004, four Serviced Apartments properties and 10 Marriott Executive Apartments (2,471 rooms total) were located in nine countries and territories. All Marriott Executive Apartments are located outside the United States.

Timeshare

Marriott Vacation Club International develops, sells and operates vacation timesharing resorts under four brands. Revenues are generated from three primary sources: (1) selling fee simple and other forms of timeshare intervals, (2) financing consumer purchases of timesharing intervals, and (3) operating the resorts.

Many timesharing resorts are located adjacent to Marriott-operated hotels, and timeshare owners have access to certain hotel facilities during their vacation. Owners can trade their annual interval for intervals at other Marriott timesharing resorts or for intervals at certain timesharing resorts not otherwise sponsored by Marriott through a third-party exchange company. Owners can also trade their unused interval for points in the Marriott Rewards frequent stay program, enabling them to stay at over 2,500 Marriott hotels worldwide.

Marriott Vacation Club International (“MVCI”) brand offers full-service villas featuring living and dining areas, one-, two- and three-bedroom options, full kitchen and washer/dryer. In 43 locations worldwide, this brand draws United States and international customers who vacation regularly with a focus on family, relaxation and recreational activities. In the United States, MVCI is located in Las Vegas, in beach and golf communities in Arizona, California, the Carolinas, Florida and Hawaii, and in ski resorts in California, Colorado and Utah. Internationally, MVCI has resorts in Aruba, France, Spain and Thailand.

The Ritz-Carlton Club brand is a luxury-tier real estate fractional brand that combines the benefits of second home ownership with personalized services and amenities. This brand is designed as a private club whose members have access to all Ritz-Carlton Clubs. This brand is offered in ski, golf and beach destinations in Colorado, St. Thomas, U.S.V.I., and Florida.

Marriott Grand Residence Club is an upper-quality-tier fractional ownership brand for corporate and leisure customers. This brand is currently offering ownership in projects located in Lake Tahoe, California, and London, England.

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Horizons by Marriott Vacation Club International is Marriott Vacation Club’s moderately priced timeshare brand whose product offerings and customer base are currently focused on facilitating family vacations in entertainment communities. Horizons resorts are located in Orlando, Florida, and Branson, Missouri.

We expect that our future timeshare growth will increasingly reflect opportunities presented by partnerships, joint ventures, and other business structures. In 2004, we initiated sales at our Las Vegas joint venture, and we expect to open the Las Vegas resort in the third quarter of 2005. Marriott Vacation Club International opened the following three resorts in 2004 under the MVCI brand: Aruba Surf Club in Aruba, Canyon Villas in Phoenix, Arizona, and Ocean Watch in Myrtle Beach, South Carolina. Our project in Hilton Head, South Carolina, opened for sales in 2004, and we expect that the resort will open in the second quarter of 2005.

Marriott Vacation Club International’s owner base continues to expand, with approximately 281,500 owners at year-end 2004, compared to approximately 256,000 at year-end 2003.

Timeshare (all brands)

Other Activities

Marriott Golf manages 31 golf course facilities as part of our management of hotels and for other golf course owners.

We operate 18 systemwide hotel reservation centers, 10 in the United States and Canada and eight in other countries and territories, that handle reservation requests for Marriott lodging brands worldwide, including franchised properties. We own one of the U.S. facilities and lease the others. Additionally, we focus on increasing value for the consumer and “selling the way the customer wants to buy.” Our Look No Further Best Rate Guarantee, which gives customers access to the same rates whether they book through our telephone reservation system, our web site or any other reservation channel; our strong Marriott Rewards loyalty program; and our information-rich and easy to use Marriott.com web site all encourage customers to make reservations using the Marriott web site. We have complete control over our inventory and pricing and utilize online agents on an as-needed basis. The shift of hotel bookings to our web site from other online channels results in higher revenue, margins and profitability. With over 2,600 hotels, economies of scale enable us to reduce costs per occupied room, drive profits for our owners and increase our fee revenue.

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

Competition

We encounter strong competition both as a lodging operator and as a franchisor. There are approximately 675 lodging management companies in the United States, including several that operate more than 100 properties. These operators are primarily private management firms, but also include several large national chains that own and operate their own hotels and also franchise their brands. Management contracts are typically long-term in nature, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.

Affiliation with a national or regional brand is prevalent in the U.S. lodging industry. In 2004, approximately two-thirds of U.S. hotel rooms were brand-affiliated. Most of the branded properties are franchises, under which the operator pays the franchisor a fee for use of its hotel name and reservation system. The franchising business is fairly concentrated, with the three largest franchisors operating multiple brands accounting for a significant proportion of all U.S. rooms.

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

Based on lodging industry data, we have less than an 8.4 percent share of the U.S. hotel market (based on number of rooms), and less than a 1 percent share of the lodging market outside the United States. We believe that our hotel

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brands are attractive to hotel owners seeking a management company or franchise affiliation because our hotels typically generate higher occupancies and Revenue per Available Room (REVPAR) than direct competitors in most market areas. We attribute this performance premium to our success in achieving and maintaining strong customer preference. Approximately 34 percent of our timeshare ownership resort sales come from additional purchases by or referrals from existing owners. We believe that the location and quality of our lodging facilities, our marketing programs, our reservation systems and our emphasis on guest service and satisfaction are contributing factors across all of our brands.

Properties that we operate or franchise are regularly upgraded to maintain their competitiveness. Our management, lease and franchise agreements provide for the allocation of funds, generally a fixed percentage of revenue, for periodic renovation of buildings and replacement of furnishings. We believe that these ongoing refurbishment programs are adequate to preserve the competitive position and earning power of the hotels and timeshare properties. While service excellence is Marriott’s hallmark, we continually look for new ways to delight our guests. Currently, we are focused on elevating the Marriott experience beyond that of a traditional hotel stay to a total guest experience that encompasses exceptional style, personal luxury and superior service. This approach to hospitality, “The New Look and Feel of Marriott Now,” is influenced by the world’s foremost innovations in design, technology, culinary expertise, service and comfort.

This evolution can begin to be seen across all of our brands, in new hotel designs, exotic destinations, enhanced fitness centers, sumptuous spas and expanded culinary offerings. Each brand, whether luxury or moderately priced, will be more upscale and attuned to customer needs than ever before. We believe that by operating a number of hotels among our brands, we stay in direct touch with customers and react to changes in the marketplace more quickly than chains that rely exclusively on franchising.

The vacation ownership industry is one of the fastest growing segments in hospitality and is comprised of a number of highly competitive companies including several branded hotel companies. Since entering the timeshare industry in 1984, we have become a recognized leader in vacation ownership worldwide. Competition in the timeshare business is based primarily on the quality and location of timeshare resorts, the pricing of timeshare intervals and the availability of program benefits, such as exchange programs. We believe that our focus on offering distinct vacation experiences, combined with our financial strength, diverse market presence, strong brands and well-maintained properties, will enable us to remain competitive.

Marriott Rewards is a frequent guest program with over 21 million members and nine participating Marriott brands. The Marriott Rewards program yields repeat guest business by rewarding frequent stays with points toward free hotel stays and other rewards, or airline miles with any of 26 participating airline programs. We believe that Marriott Rewards generates substantial repeat business that might otherwise go to competing hotels. In 2004, approximately 40 percent of our room nights were purchased by Marriott Rewards members. In addition, the ability of Marriott Vacation Club International timeshare owners to convert unused intervals into Marriott Rewards points enhances the competitive position of our timeshare brand.

Synthetic Fuel

Operations

Our synthetic fuel operation currently consists of our interest in four coal-based synthetic fuel production facilities (the “Facilities”), two of which are located at a coal mine in Saline County, Illinois, with the remaining two located at a coal mine in Jefferson County, Alabama. Three of the four plants are held in one entity, and one of the plants is held in a separate entity. The synthetic fuel produced at the Facilities through 2007 qualifies for tax credits based on Section 29 of the Internal Revenue Code (credits are not available for fuel produced after 2007). Although the Facilities incur significant losses, these losses are more than offset by the tax credits generated under Section 29, which reduce our income tax expense.

At both of the locations, the synthetic fuel operation has entered into long-term site leases at sites that are adjacent to large underground mines as well as barge load-out facilities on navigable rivers. In addition, the synthetic fuel operation has entered into long-term coal purchase agreements with the owners of the adjacent coal mines and long-term synthetic fuel sales contracts with the Tennessee Valley Authority and with Alabama Power Company, two major utilities. These contracts ensure that the operation has long-term agreements to purchase coal and sell synthetic fuel, covering approximately 80 percent of the productive capacity of the Facilities. From time to time, the synthetic fuel operation supplements these base contracts, as opportunities arise, by entering into spot contracts to buy coal from these or other coal mines and sell synthetic fuel to different end users. The operation is slightly seasonal as the synthetic fuel is mainly burned to produce electricity, and electricity use peaks in the summer in the markets served by the synthetic fuel operation. The long-term contracts can generally be cancelled by us in the event that we choose not to operate the Facilities or that the synthetic fuel produced at the Facilities does not qualify for tax credit under Section 29 of the Internal Revenue Code.

In addition, the synthetic fuel operation has entered into a long-term operations and maintenance agreement with an experienced manager of synthetic fuel facilities. This manager is responsible for staffing the Facilities, operating and maintaining the machinery and conducting routine maintenance on behalf of the synthetic fuel operation.

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Finally, the synthetic fuel operation has entered into a long-term license and binder purchase agreement with Headwaters Incorporated, which permits the operation to utilize a carboxylated polystyrene copolymer emulsion patented by Headwaters and manufactured by Dow Chemical that is mixed with coal to produce a qualified synthetic fuel.

Our Investment

We acquired the Facilities from PacifiCorp Financial Services (“PacifiCorp”) in October 2001 for $46 million in cash. We began operating these Facilities in the first quarter of 2002.

On June 21, 2003, we sold an approximately 50 percent ownership interest in the synthetic fuel entities. We received cash and promissory notes totaling $25 million at closing, and we are receiving additional profits that we expect will continue over the life of the ventures based on the actual amount of tax credits allocated to the purchaser.

On November 7, 2003, the U.S. Internal Revenue Service (“IRS”) issued private letter rulings to the synthetic fuel joint venture confirming that the synthetic fuel produced by the Facilities is a “qualified fuel” under Section 29 of the Internal Revenue Code and that the resulting tax credit may be allocated among the members of the synthetic fuel joint venture.

As a result of a put option associated with the June 21, 2003, sale of a 50 percent ownership interest, we consolidated the two synthetic fuel joint ventures from that date through November 6, 2003. Effective November 7, 2003, because the put option was voided, we began accounting for the synthetic fuel joint ventures using the equity method of accounting. Beginning March 26, 2004, as a result of adopting FIN 46(R), “Consolidation of Variable Interest Entities,” we have again consolidated the synthetic fuel joint ventures, and we reflect our partner’s share of the operating losses as minority interest.

Internal Revenue Service Placed-in-Service Challenge

In July 2004, IRS field auditors issued a notice of proposed adjustment and later a Summary Report to PacifiCorp that included a challenge to the placed-in-service dates of three of the four synthetic fuel facilities owned by one of our synthetic fuel joint ventures. One of the conditions to qualify for tax credits under Section 29 of the Internal Revenue Code is that the production facility must have been placed in service before July 1, 1998.

We strongly believe that all the Facilities meet the placed-in-service requirement. Although we are engaged in discussions with the IRS and are confident this issue will be resolved in our favor and not result in a material charge to us, we cannot assure you as to the ultimate outcome of this matter. If ultimately resolved against us, we could be prevented from realizing projected future tax credits and cause us to reverse previously utilized tax credits, requiring payment of substantial additional taxes. Since acquiring the plants, we have recognized approximately $435 million of tax credits from all four plants through December 31, 2004. The tax credits recognized through December 31, 2004, associated with the three facilities in question totaled approximately $330 million.

On October 6, 2004, we entered into amendment agreements with our synthetic fuel partner that result in a shift in the allocation of tax credits between us. On the synthetic fuel facility that is not being reviewed by the IRS, our partner increased its allocation of tax credits from approximately 50 percent to 90 percent through March 31, 2005, and pays a higher price per tax credit to us for that additional share of tax credits. With respect to the three synthetic fuel facilities under IRS review, our partner reduced its allocation of tax credits from approximately 50 percent to an average of roughly 5 percent through March 31, 2005. If the IRS’ placed-in-service challenge regarding the three facilities is not successfully resolved by March 31, 2005, our partner will have the right to return its ownership interest in those three facilities to us at that time. We will have the flexibility to continue to operate at current levels, reduce production and/or sell an interest to another party. If there is a successful resolution by March 31, 2005, our partner’s share of the tax credits from all four facilities will return to approximately 50 percent. In any event, on March 31, 2005, our share of the tax credits from the one facility not under review will return to approximately 50 percent.

Discontinued Operations

Senior Living Services

On December 30, 2002, we entered into definitive agreements to sell our senior living management business to Sunrise Senior Living, Inc. (“Sunrise”) and to sell nine senior living communities to CNL Retirement Properties, Inc. (“CNL”), and we recorded after-tax charges of $131 million in 2002 associated with our agreement to sell our senior living management business. We completed the sales to Sunrise and CNL, in addition to the related sale of a parcel of land to Sunrise in March 2003, for $266 million. We recorded after-tax gains of $19 million in 2003.

As a result of the above transactions we now report this business in discontinued operations.

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Distribution Services

In the third quarter of 2002, we completed a strategic review of our Distribution Services business and decided to exit that business. As of January 3, 2003, through a combination of sale and transfer of nine facilities and the termination of all operations at four facilities, we completed our exit of the Distribution Services business. We recorded after-tax charges of $40 million in 2002 in connection with the decision to exit this business. Accordingly, we now report this business in discontinued operations.

Forward-Looking Statements

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

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

Risks and Uncertainties

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

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

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

Any one or more of these factors could limit or reduce the demand, and therefore the prices we are able to obtain, for hotel rooms, timeshare units and corporate apartments. In addition, reduced demand for hotels could also give rise to losses under loans, guarantees and minority equity investments that we have made in connection with hotels that we manage.

The uncertain pace of the lodging industry’s recovery will continue to impact our financial results and growth. Both the Company and the lodging industry were hurt by several events occurring over the last few years, including the global economic downturn, the terrorist attacks on New York and Washington, Severe Acute Respiratory Syndrome (SARS) and military action in Iraq. Business and leisure travel decreased and remained depressed as some potential travelers reduced or avoided discretionary travel in light of increased delays and safety concerns and economic declines stemming from an erosion in consumer confidence. Weaker hotel performance reduced management and franchise fees and gave rise to fundings or losses under loans, guarantees and minority investments that we have made in connection with some hotels that we manage, which, in turn, has had a material adverse impact on our financial performance. Although both the lodging and travel industries are recovering, the pace, duration and full extent of that recovery remain unclear. Accordingly, our financial results and growth could be harmed if that recovery stalls or is reversed.

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

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

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

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

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

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

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

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

Changes in privacy law could adversely affect our ability to market our products effectively. Our timeshare business, and to a lesser extent our lodging segments, rely on a variety of direct marketing techniques, including telemarketing and mass mailings. Recent initiatives, such as the National Do Not Call Registry and various state laws regarding marketing and solicitation, including anti-spam legislation, have created some concern about the continuing effectiveness of telemarketing and mass mailing techniques and could force further changes in our marketing strategy. If this occurs, we may not be able to develop adequate alternative marketing strategies, which could impact the amount and timing of our sales of timeshare units and other products. We also obtain lists of potential customers from travel service providers with whom we have substantial relationships and market to some individuals on these lists directly. If the acquisition of these lists were outlawed or otherwise restricted, our ability to develop new customers and introduce them to our products could be impaired.

Activities relating to our synthetic fuel operations could increase our tax liabilities. The Company earns revenues and generates tax credits from its synthetic fuel operations, which create a fuel that qualifies for tax credits pursuant to Section 29 of the Internal Revenue Code. The performance of the synthetic fuel operations depends in part on our ability to utilize the tax credits, which in turn is dependent on our financial performance. If our businesses do not generate sufficient profits, we might suffer losses associated with generating tax credits that we were unable to utilize. In addition, the IRS field audit team’s challenge to whether three of our synthetic fuel facilities satisfy statutory placed-in-service requirements could, if ultimately resolved against us, prevent us from realizing projected future tax credits and cause us to reverse previously utilized credits, requiring payment of substantial additional taxes. The ability of our synthetic fuel operations to generate tax credits could also be adversely impacted by the productivity of these operations, which may be diminished by problems related to supply, production and demand at any of the synthetic fuel facilities, the power plants that buy synthetic fuel from the joint venture or the coal mines where the joint venture buys coal, and by the reduction or elimination of projected future tax credits for synthetic fuel if average crude oil prices in 2005 and beyond exceed certain statutory thresholds, which could affect our ongoing production decisions.

Obligations associated with our exit from the Senior Living Services business may be larger than expected. Our agreement to sell the Senior Living Services business provides for indemnification of Sunrise Senior Living, Inc. based on pre-closing events and liabilities resulting from the consummation of the transaction. The amount of the indemnification obligations depends, in large part, on actions of third parties that are outside of our control. As a result, it is difficult to predict the ultimate impact of the indemnities, and the amount of these adjustments and indemnities could be larger than expected.

Employee Relations

At December 31, 2004, we had approximately 133,000 employees. Approximately 9,000 employees were represented by labor unions. We believe relations with our employees are positive.

Other Properties

In addition to the operating properties discussed above, we lease five office buildings with combined space of approximately 1.3 million square feet in Maryland and Florida where our corporate, Ritz-Carlton and Marriott Vacation Club International headquarters are located.

We believe our properties are in generally good physical condition with the need for only routine repairs and maintenance and periodic capital improvements.

Internet Address and Company SEC Filings

Our internet address is www.marriott.com. On the investor relations portion of our web site, www.marriott.com/investor, we provide a link to our electronic SEC filings, including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to these reports. All such filings are available free of charge and are available as soon as reasonably practicable after filing.

Executive Officers of the Registrant

See Item 10 on page 78 of this report for information about our executive officers.

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Item 3. Legal Proceedings.

The CTF/HPI arbitration and litigation is described under the caption heading “Litigation and Arbitration” in Footnote 18 of the Notes to Consolidated Financial Statements set forth in Part II, Item 8, of this annual report and is hereby incorporated by reference.

In addition, on December 22, 2004, P.T. Karang Mas Sejahtera, the owner of The Ritz-Carlton Bali Resort and Spa, filed an action against the Company and The Ritz-Carlton Hotel Company, LLC in the Superior Court of the State of California for the County of Los Angeles alleging breach of the operating agreement governing the hotel, breach of fiduciary duty, fraudulent concealment, interference with contract and conspiracy to breach fiduciary duty. The complaint seeks unspecified damages, an accounting and a declaration that the owner has a right to terminate the operating agreement governing the hotel. On January 21, 2005, we removed the action to the U.S. District Court for the Central District of California, filed an answer and moved to transfer the action to the District of Maryland. No scheduling order has been entered at this time.

We believe that the claims made against us are without merit, and we intend to vigorously defend against them. However, we cannot assure you as to the outcome of these lawsuits, nor can we currently estimate the range of potential losses to the Company.

From time to time, we are also subject to certain legal proceedings and claims in the ordinary course of business. We currently are not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

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

None.

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Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information and Dividends

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

At February 10, 2005, there were 225,768,576 shares of Class A Common Stock outstanding held by 48,282 shareholders of record. Our Class A Common Stock is traded on the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock Exchange and Philadelphia Stock Exchange. The year-end closing price for our stock was $62.98 on December 31, 2004, and $46.15 on January 2, 2004. All prices are reported on the consolidated transaction reporting system.

Fourth Quarter 2004 Issuer Purchases of Equity Securities

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Item 6. Selected Financial Data.

The following table presents a summary of selected historical financial data for the Company derived from our financial statements as of and for the five fiscal years ended December 31, 2004.

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

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

BUSINESS AND OVERVIEW

We are a worldwide operator and franchisor of 2,632 hotels and related facilities. Our operations are grouped into five business segments, Full-Service Lodging, Select-Service Lodging, Extended-Stay Lodging, Timeshare and Synthetic Fuel. In our Lodging business, we operate, develop and franchise under 13 separate brand names in 66 countries and territories. We also operate and develop Marriott timeshare properties under four separate brand names.

We earn base, incentive and franchise fees based upon the terms of our management and franchise agreements. Revenues are also generated from the following sources associated with our timeshare business: (1) selling timeshare intervals, (2) operating the resorts, and (3) financing customer purchases of timesharing intervals. In addition, we earn revenues and generate tax credits from our synthetic fuel joint ventures.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense and interest income. With the exception of our Synthetic Fuel segment, we do not allocate income taxes to our segments. As timeshare note sales are an integral part of the timeshare business, we include timeshare note sale gains in our timeshare segment results, and we allocate other gains as well as equity income (losses) from our joint ventures to each of our segments.

Lodging supply growth in the United States was low during 2004, while demand growth was high. In the United States, demand was strong in the Eastern and Western regions, while the Midwestern and South Central regions experienced more moderate increases in demand. Demand associated with business travel improved steadily in 2004, and leisure demand remained high. The weak U.S. dollar in relation to other currencies, particularly the euro, resulted in increased travel into the U.S. as overseas trips for many international travelers were less expensive. Conversely, many U.S. vacationers who might have traveled abroad, traveled domestically instead, as the weak dollar made overseas trips more costly.

Outside of the U.S. we experienced stronger demand versus the prior year, particularly in Asia and the Middle East. While demand in Latin America and the Caribbean was also good, Europe remains a challenge, as some economies have been slow to rebound.

We focus on increasing value for the consumer and “selling the way the customer wants to buy.” Our Look No Further Best Rate Guarantee, strong Marriott Rewards loyalty program, and information-rich, easy to use web site encourage customers to make reservations through Marriott.com. We have complete control over our inventory and pricing and utilize online agents on an as needed basis. The shift of hotel bookings to our web site from other online channels results in higher revenue, margins and profitability.

By the end of 2004, we had high-speed internet access available in over 2,400 hotels, far outpacing our competition, and we had wireless internet access in lobbies, meeting rooms and public spaces in more than 1,900 hotels.

CONSOLIDATED RESULTS

The following discussion presents an analysis of results of our operations for fiscal years ended December 31, 2004, January 2, 2004 (which we refer to as “2003”), and January 3, 2003 (which we refer to as “2002”).

Continuing Operations

Revenues

2004 Compared to 2003

Revenues increased 12 percent to $10,099 million in 2004, primarily reflecting higher fees related to increased demand for hotel rooms and unit expansion, as well as strong sales in our Timeshare segment.

2003 Compared to 2002

Revenues increased 7 percent to $9,014 million in 2003, reflecting revenue from new lodging properties, partially offset by lower demand for hotel rooms and consequently lower fees to us.

Operating Income

2004 Compared to 2003

Operating income increased $100 million to $477 million in 2004. The increase is primarily due to higher fees, which are related both to stronger REVPAR, driven by increased occupancy and average daily rate, and to the

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growth in the number of rooms, and strong timeshare results, which are mainly attributable to strong demand and improved margins, partially offset by higher general and administrative expenses. General, administrative and other expenses increased $84 million in 2004 to $607 million, primarily reflecting higher administrative expenses in both our lodging ($55 million) and timeshare businesses ($24 million), primarily associated with increased overhead costs related to the Company’s unit growth and increased development costs primarily associated with our Timeshare segment, and a $10 million reduction in foreign exchange gains, offset by $6 million of lower litigation expenses.

2003 Compared to 2002

Operating income increased 17 percent to $377 million in 2003. The favorable comparisons to 2002 include the impact of the $50 million write down of goodwill recorded in 2002 associated with our ExecuStay business, the 2003 receipt of $36 million of insurance proceeds associated with lost management fees resulting from the destruction of the Marriott World Trade Center hotel and lower 2003 operating losses from our synthetic fuel operation. In 2003, the synthetic fuel business generated operating losses of $104 million, compared to $134 million in 2002. Operating income in 2003 was hurt by $53 million of lower incentive fees, which resulted from the weak operating environment in domestic lodging. General, administrative and other expenses increased $13 million in 2003 to $523 million, reflecting higher litigation expenses related to two continuing and previously disclosed lawsuits, partially offset by the impact of the additional week in 2002 (our 2002 fiscal year included 53 weeks compared to 52 weeks in 2003). The expenses also reflect foreign exchange gains of $7 million, compared to losses of $6 million in 2002.

Gains and Other Income

The following table shows our gains and other income for the fiscal years ended December 31, 2004, January 2, 2004, and January 3, 2003.

Interest Expense

2004 Compared to 2003

Interest expense decreased $11 million to $99 million, reflecting the repayment of $234 million of senior debt in the fourth quarter of 2003 and other subsequent debt reductions, partially offset by lower capitalized interest resulting from fewer projects under construction, primarily related to our Timeshare segment.

2003 Compared to 2002

Interest expense increased $24 million to $110 million, reflecting interest on the mortgage debt assumed in the fourth quarter of 2002 associated with the acquisition of 14 senior living communities, and lower capitalized interest resulting from fewer projects under construction, primarily related to our Timeshare segment. In the fourth quarter of 2003, $234 million of senior debt was repaid. The weighted average interest rate on the repaid debt was 7 percent.

Interest Income, Provision for Loan Losses, and Income Tax

2004 Compared to 2003

Interest income, before the provision for loan losses, increased $17 million (13 percent) to $146 million, reflecting higher loan balances, including the $200 million note collected in the third quarter of 2004 related to the acquisition by Cendant Corporation of our interest in the Two Flags joint venture and higher interest rates. We recognized $9 million of interest income associated with the $200 million note, which was issued early in the 2004 second quarter. Our provision for loan losses for 2004 was a benefit of $8 million and includes $3 million of reserves for loans deemed uncollectible at three hotels, offset by the reversal of $11 million of reserves no longer deemed necessary.

Income from continuing operations before income taxes generated a tax provision of $100 million in 2004, compared to a tax benefit of $43 million in 2003. The difference is primarily attributable to the impact of the synthetic fuel joint venture, which generated a tax benefit and tax credits of $165 million in 2004, compared to $245 million in 2003 and to higher pre-tax income. In the third quarter of 2003, we sold a 50 percent interest in our synthetic fuel joint ventures, and we currently consolidate the joint ventures.

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2003 Compared to 2002

Interest income increased $7 million (6 percent) to $129 million. Our provision for loan losses for 2003 was $7 million and includes $15 million of reserves for loans deemed uncollectible at six hotels, offset by the reversal of $8 million of reserves no longer deemed necessary.

Income from continuing operations before income taxes and minority interest generated a tax benefit of $43 million in 2003, compared to a tax provision of $32 million in 2002. The difference is primarily attributable to the impact of our synthetic fuel operation, which generated a tax benefit and tax credits of $245 million in 2003, compared to $208 million in 2002. Excluding the impact of the synthetic fuel operation, our pre-tax income was lower in 2003, which also contributed to the favorable tax impact.

Our effective tax rate for discontinued operations increased from 15.7 percent to 39 percent due to the impact of the taxes in 2002 associated with the sale of stock in connection with the disposal of our Senior Living Services business.

Minority Interest

Minority interest increased from an expense of $55 million in 2003 to a benefit of $40 million in 2004, primarily as a result of the change in the ownership structure of the synthetic fuel joint ventures following our sale of 50 percent of our interest in the joint ventures. Due to the purchaser’s put option, which expired on November 6, 2003, minority interest for 2003 reflected our partner’s share of the synthetic fuel operating losses and their share of the associated tax benefit, along with their share of the tax credits from the June 21, 2003, sale date through the put option’s expiration date, when we began accounting for the ventures under the equity method of accounting. For 2004, minority interest reflects our partner’s share of the synthetic fuel losses from March 26, 2004, (when we began consolidating the ventures due to the adoption of FIN 46(R)) through year-end. For additional information, see the discussion relating to our “Synthetic Fuel” segment on page 31.

Income from Continuing Operations

2004 Compared to 2003

Income from continuing operations increased 25 percent to $594 million, and diluted earnings per share from continuing operations increased 27 percent to $2.47. The favorable results were primarily driven by strong hotel demand, new unit growth, strong timeshare results, higher interest income reflecting higher balances and rates, lower interest expense due to debt reductions, lower loan loss provisions, stronger synthetic fuel results and increased gains of $58 million, partially offset by higher income taxes excluding the synthetic fuel impact, and higher general and administrative expenses.

2003 Compared to 2002

Income from continuing operations increased 8 percent to $476 million, and diluted earnings per share from continuing operations advanced 11 percent to $1.94. Synthetic fuel operations contributed $96 million in 2003 compared to $74 million in 2002. Our lodging financial results declined $5 million to $702 million in 2003. The comparisons from 2002 benefit from the $50 million pre-tax charge to write down acquisition goodwill for ExecuStay in 2002, offset by the $44 million pre-tax gain on the sale of our investment in Interval International in 2002, and further benefit from our 2003 receipt of a $36 million insurance settlement for lost management fees associated with the New York Marriott World Trade Center hotel, which was destroyed in the 2001 terrorist attacks.

Marriott Lodging

We consider lodging revenues and lodging financial results to be meaningful indicators of our performance because they measure our growth in profitability as a lodging company and enable investors to compare the sales and results of our lodging operations to those of other lodging companies.

Revenues

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Income from Continuing Operations

2004 Compared to 2003

Lodging, which includes our Full-Service, Select-Service, Extended-Stay and Timeshare segments, reported financial results of $835 million in 2004, compared to $702 million in 2003, and revenues of $9,778 million in 2004, a 12 percent increase from revenues of $8,712 million in 2003. The results reflect an 18 percent increase in base, franchise and incentive fees from $742 million in 2003 to $873 million in 2004, favorable timeshare results and increased gains and joint venture results of $36 million. The increase in base and franchise fees was driven by higher REVPAR for comparable rooms, primarily resulting from both domestic and international occupancy and average daily rate increases and new unit growth. Systemwide REVPAR for comparable North American properties increased 8.5 percent, and REVPAR for our comparable North American company-operated properties increased 8.6 percent. Systemwide REVPAR for comparable international properties, including The Ritz-Carlton, increased 14.2 percent, and REVPAR for comparable international company-operated properties, including The Ritz-Carlton, increased 16.6 percent. The increase in incentive management fees during the year primarily reflects the impact of increased international demand, particularly in Asia and the Middle East, and increased business at properties throughout North America. We have added 166 properties (27,038 rooms) and deflagged 42 properties (7,335 rooms) since year-end 2003. Most of the deflagged properties were Fairfield Inns. In addition, 210 properties (28,081 rooms) exited our system as a result of the sale of our Ramada International Hotels & Resorts franchised brand. Worldwide REVPAR for comparable company-operated properties increased 10.5 percent, while worldwide REVPAR for comparable systemwide properties increased 9.6 percent.

2003 Compared to 2002

Lodging, which includes our Full-Service, Select-Service, Extended-Stay and Timeshare segments, reported financial results of $702 million in 2003, compared to $707 million in 2002, and revenues of $8,712 million in 2003, a 6 percent increase, compared to revenues of $8,222 million in 2002. The 2003 lodging revenue and financial results include the receipt of a $36 million insurance settlement for lost revenues associated with the New York World Trade Center hotel. Our revenues from base management fees totaled $388 million, an increase of 2 percent, reflecting 3 percent growth in the number of managed rooms and a 1.9 percent decline in REVPAR for our North American managed hotels. Incentive management fees were $109 million, a decline of 33 percent, reflecting lower property-level house profit. House profit margins declined 2.7 percentage points, largely due to lower average room rates, higher wages, insurance and utility costs, and lower telephone profits, offset by continued productivity improvements. Franchise fees totaled $245 million, an increase of 6 percent. The comparison to 2002 includes the impact of the $50 million pre-tax write down of ExecuStay goodwill recorded in 2002, partially offset by a $44 million pre-tax gain related to the sale of our investment in Interval International.

Lodging Development

We opened 144 properties totaling 24,380 rooms, excluding Ramada International, across our brands in 2004, and 42 properties (7,335 rooms) were deflagged and exited the system. In addition, 210 properties (28,081 rooms) exited our system as a result of the sale of our Ramada International Hotels & Resorts franchised brand in 2004. Highlights of the year included:

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We currently have more than 55,000 rooms in our development pipeline and expect to add 25,000 to 30,000 hotel rooms and timeshare units to our system in 2005. We expect to deflag approximately 4,000 rooms during 2005. These growth plans are subject to numerous risks and uncertainties, many of which are outside of our control. See “Forward-Looking Statements” above and “Liquidity and Capital Resources” below.

REVPAR

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

The following table shows occupancy, average daily rate and REVPAR for each of our comparable principal established brands. We have not presented statistics for company-operated North American Fairfield Inn and SpringHill Suites properties here (or in the comparable information for the prior years presented later in this report) because we operate only a limited number of properties, as both of these brands are predominantly franchised and such information would not be meaningful for those brands (identified as “nm” in the tables below). Systemwide statistics include data from our franchised properties, in addition to our owned, leased and managed properties.

For North American properties (except for The Ritz-Carlton, which includes January through December), the occupancy, average daily rate and REVPAR statistics used throughout this report for the fiscal year ended December 31, 2004, include the period from January 3, 2004, through December 31, 2004, while the statistics for the fiscal year ended January 2, 2004, include the period from January 4, 2003, through January 2, 2004.

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