Forward-Looking Statements
We make forward-looking statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report based on the beliefs and assumptions of our management and on information currently available to us. Forward-looking statements include information about our possible or assumed future results of operations, which follow under the headings "Business and Overview," "Liquidity and Capital Resources," and other statements throughout this report preceded by, followed by or that include the words "believes," "expects," "anticipates," "intends," "plans," "estimates" or similar expressions.
Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those we express in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the "SEC"). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
In addition, see the "Item 1A. Risk Factors" caption in the "Part II-OTHER INFORMATION" section of this report.

BUSINESS AND OVERVIEW

Lodging Business

Our lodging business model primarily involves managing and franchising hotels, rather than owning them. At September 7, 2012, we operated 43 percent of the hotel rooms in our worldwide system under management agreements, our franchisees operated 54 percent under franchise agreements, we owned or leased 2 percent, and unconsolidated joint ventures that we have an interest in held management and franchise agreements for 1 percent.

Our emphasis on long-term management contracts and franchising tends to provide more stable earnings in periods of economic softness, while the addition of new hotels to our system generates growth, typically with little or no investment by the company. This strategy has allowed substantial growth while minimizing financial leverage and risk in a cyclical industry. In addition, we believe we maintain our financial flexibility by minimizing our capital investments and adopting a strategy of recycling the investments that we make.

We earn base management fees and in some cases incentive management fees from the hotels that we manage, and we earn franchise fees on the hotels that others operate under franchise agreements with us. Base fees are typically a percentage of property-level revenue while incentive fees are typically a percentage of net house profit adjusted for a specified owner return. Net house profit is calculated as gross operating profit (house profit) less non-controllable expenses such as insurance, real estate taxes, capital spending reserves, and the like.
We remain focused on doing the things that we do well; that is, selling rooms, taking care of our guests, and making sure we control costs at company-operated properties as well as costs above-property. Our brands remain strong as a result of skilled management teams, dedicated associates, superior customer service with an emphasis on guest and associate satisfaction, significant distribution, our Marriott Rewards and The Ritz-Carlton Rewards loyalty programs, a multichannel reservations system, and desirable property amenities. We strive to effectively leverage our size and broad distribution. We, along with owners and franchisees, continue to invest in our brands by means of new, refreshed, and reinvented properties, new room and public space designs, and enhanced amenities and technology offerings. We address, through various means, hotels in the system that do not meet standards. We continue to enhance the appeal of our proprietary, information-rich, and easy-to-use website, Marriott.com, through functionality and service improvements, and we expect to continue capturing an increasing proportion of property-level reservations via this cost-efficient channel.

Our profitability, as well as that of owners and franchisees, has benefited from our approach to property-level and above-property productivity. Properties in our system continue to maintain very tight cost controls. We also control above-property costs, some of which we allocate to hotels, by remaining focused on systems, processing, and support areas.

Lodging Performance Measures

We consider Revenue per Available Room ("RevPAR"), which we calculate by dividing room sales for comparable properties by room nights available to guests for the period, to be a meaningful indicator of our performance because it measures the period-over-period change in room revenues for comparable properties. RevPAR may not be comparable to similarly titled measures, such as revenues. References to RevPAR throughout this report are in constant dollars, unless otherwise noted. We calculate constant dollar statistics by applying exchange rates for the current period to the prior comparable period.

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

Lodging Results
Conditions for our lodging business continued to improve in the first three quarters of 2012, reflecting generally low supply growth, a favorable economic climate in many markets around the world, the impact of operating efficiencies across our company, and a year-over-year increase in the number of hotels. During this period, most markets in North and South America and Mexico experienced strong demand. However, some markets, particularly the greater Washington D.C. market experienced weak demand. In the greater Washington, D.C. market and particularly in the surrounding suburban markets, government spending restrictions reduced lodging demand as did a shorter congressional calendar earlier in 2012. The D.C. market also experienced customarily lower demand levels in 2012 associated with an election year, although leisure and group business were strong in the summer months. Economic growth in Europe was moderate during the first three quarters of 2012; reflecting strong demand in most international gateway cities, but weaker demand in markets dependent on more regional demand. In the 2012 third quarter, the business benefited from the Olympic Games in London and the Euro Cup Soccer Championship in Warsaw. In the first three quarters of 2012, demand was strong in the United Arab Emirates, but remained weak in Egypt, Jordan, Kuwait, and Oman. Demand in the Asia Pacific region continued to be strong in the first three quarters of 2012 particularly for properties in Thailand and China. Demand in China in the 2012 second and third quarters moderated somewhat as compared to the 2012 first quarter, particularly reflecting declines in government related travel ahead of the upcoming change in leadership there, moderating economic growth, and new supply in several markets. Lodging demand in gateway cities in China remained strong. RevPAR in India softened throughout 2012, reflecting the country's challenging economic environment and increased supply.

In the third quarter of 2012, as compared to the year ago quarter, worldwide average daily rates increased 4.7 percent on a constant dollar basis to $134.59 for comparable systemwide properties, with RevPAR increasing 6.0 percent to $100.40 and occupancy increasing 0.9 percentage points to 74.6 percent. For the first three quarters of 2012, as compared to the first three quarters of 2011, worldwide average daily rates increased 4.2 percent on a constant dollar basis to $136.51 for comparable systemwide properties, with RevPAR increasing 6.5 percent to $97.89 and occupancy increasing 1.6 percentage points to 71.7 percent.

We monitor market conditions and carefully price our rooms daily to meet individual hotel demand levels. We also modify the mix of our business to increase revenue as demand changes. Demand for higher rated rooms

continued to improve in most markets in the first three quarters of 2012, which allowed us to reduce discounting and special offers for transient business in many markets. This mix improvement benefited average daily rates. Our company-operated properties continuously monitor costs as we focus on enhancing property-level house profit margins and actively pursuing productivity improvements.

The hotels in our system serve both transient and group customers. Overall, business transient and leisure transient demand was strong in the first three quarters of 2012. Group demand remained strong in the first three quarters of 2012 and the group revenue booking pace for comparable North American Marriott Hotels & Resorts properties for the remainder of 2012 is up nearly 9 percent year-over-year. For 2013, group revenue booking pace for those properties is up over 7 percent with nearly 4 percent improvement in room rates over a strong 2012. Typically, two-thirds of group business is booked before the year of arrival and one-third is booked in the year of arrival. During an economic recovery, group pricing tends to lag transient pricing due to the significant lead times for group bookings. Group business booked in earlier periods at lower rates continues to roll off, and with improving group demand, is replaced with bookings reflecting generally higher rates. In the first three quarters of 2012, group customers spent more on their meetings and property-level food and beverage volumes improved. Additionally, we saw an increase in short-term bookings for both large and small groups during the first three quarters of 2012, and attendance at meetings frequently exceeded initial projections. In the 2012 third quarter, the booking window lengthened as meeting planners reserved meeting and guest room space further in advance to ensure availability.

Lodging System Growth and Pipeline

During the first three quarters of 2012, we added 13,166 rooms (gross) to our system. Approximately 42 percent of new rooms are located outside the United States and 28 percent of the room additions are conversions from competitor brands. At the end of the 2012 third quarter, we had over 120,000 rooms in our lodging development pipeline, which does not include the five hotels (approximately 8,100 rooms) from our acquisition of the Gaylord brand and hotel management company, which we completed early in the 2012 fourth quarter. For the full 2012 fiscal year, we expect to add approximately 28,000 rooms (gross) to our system, including 8,100 rooms from the Gaylord transaction. See the following paragraph for additional information regarding the Gaylord transaction. During the first three quarters of 2012, construction delays in Asia, the Middle East, and Mexico have pushed some hotel openings that were expected in 2012 into 2013. We expect approximately 10,000 rooms to exit the system during the 2012 full fiscal year, largely due to financial and quality issues. For the 2013 fiscal year, we expect to add 30,000 to 35,000 rooms
(gross) to our system. The figures in this paragraph do not include residential, timeshare, or ExecuStay units.

Lodging Transactions
In the second quarter of 2012, we entered into a definitive agreement with Gaylord Entertainment Company ("Gaylord Entertainment") to acquire the Gaylord brand and hotel management company. On October 1, 2012, after the end of the 2012 third quarter, we acquired the Gaylord brand and hotel management company for $210 million. Gaylord Entertainment continues to own the existing Gaylord hotels and we assumed management of these properties under the Gaylord Hotel brand subject to long-term management agreements. We added four hotels and approximately 7,800 rooms to our North American full-service portfolio on October 1, 2012 as part of this transaction. In addition, we agreed to manage four other attractions for Gaylord Entertainment, including another hotel with approximately 300 rooms. We assumed management of the attractions on October 1, 2012 with the exception of the hotel which we expect we will begin managing on December 1, 2012.
Also in the 2012 second quarter, we completed the sale of our ExecuStay corporate housing business. Neither the sales price nor the gain we recognized was material to our results of operations and cash flows. The revenues, results of operations, assets, and liabilities of our ExecuStay business also were not material to our financial position, results of operations or cash flows for any of the periods presented, and accordingly we have not reflected ExecuStay as a discontinued operation.
During the 2012 third quarter, we completed the sale of an equity interest in a North American Limited-Service joint venture and we amended certain provisions of the management agreements for the underlying hotel

portfolio. As a result of this transaction we received cash proceeds of $96 million, including $30 million of proceeds which is refundable over the term of the management agreements if the hotel portfolio does not meet certain quarterly hotel performance thresholds. To the extent the hotel portfolio meets the quarterly hotel performance thresholds, we will recognize the $30 million of proceeds over the remaining term of the management agreements as base fee revenue. In the 2012 third quarter, we recognized a gain of $41 million, which consisted of: (1) $20 million related to the recognition of gain we deferred in 2005 because we retained the equity interest following the original sale of land to one of the joint ventures and because there were contingencies associated with the 2005 transaction that expired with this sale; and (2) $21 million related to the gain on the sale of the equity interest. We also recognized base management fee revenue in the 2012 third quarter totaling $7 million, primarily that we deferred prior to the transaction.
See Footnote No. 14 "Acquisitions and Dispositions" of the Notes to our Financial Statements in this Form 10-Q for more information on these lodging transactions.

Timeshare Spin-off and Timeshare Strategy-Impairment Charges

On November 21, 2011 ("the spin-off date"), we completed a spin-off of our timeshare operations and timeshare development business through a special tax-free dividend to our shareholders of all of the issued and outstanding common stock of our wholly owned subsidiary Marriott Vacations Worldwide Corporation ("MVW"). We now earn license fees from MVW under license agreements that we include in franchise fees. We do not allocate MVW license fees to any of our segments and instead include them in "other unallocated corporate."

Because of our significant continuing involvement in MVW operations after the spin-off (by virtue of the license and other agreements between us and MVW), we continue to include the historical financial results before the spin-off of our former Timeshare segment in our historical financial results as a component of continuing operations. Please see Footnote No. 16, "Spin-off," and "Part II, Item 1A - Risk Factors; Other Risks" for more information.
As further detailed in Footnote No. 16, "Spin-off" of this Form 10-Q, prior to the spin-off we recorded a pre-tax non-cash impairment charge of $324 million ($234 million after-tax) in our 2011 third quarter Income Statements under the "Timeshare strategy-impairment charges" caption.

CONSOLIDATED RESULTS

As noted in the preceding "Business and Overview" section, we completed the spin-off of our timeshare operations and timeshare development business in late 2011. Accordingly, we no longer have a Timeshare segment and instead now earn license fees that we do not allocate to any of our segments and include in "other unallocated corporate." The following tables detail the components of our former Timeshare segment revenues and results as well as certain items that we did not allocate to our Timeshare segment for the twelve and thirty-six weeks ended September 9, 2011 and also shows the components of revenue, interest income and interest expense we received from MVW for the twelve and thirty-six weeks ended September 7, 2012.

                                    Twelve Weeks Ended                                Thirty-Six Weeks Ended
                       September 7,       September 9,        Change       September 7,      September 9,       Change
($ in millions)            2012               2011          2012/2011          2012              2011         2012/2011
Former Timeshare
segment revenues
Base fee revenue    $          -         $          14                    $           -     $         40
Total sales and
services revenue               -                   286                                -              850
Cost reimbursements            -                    77                                -              235
Former Timeshare
segment revenues               -                   377     $     (377 )               -            1,125     $   (1,125 )

Other base fee
revenue                        -                     2             (2 )               -                4             (4 )

Other unallocated
corporate revenues
from MVW
Franchise fee
revenue                       15                     -                               42                -
Cost reimbursements           33                     -                               93                -
 Revenues from MVW            48                     -             48               135                -            135

Total revenue
impact              $         48         $         379     $     (331 )   $         135     $      1,129     $     (994 )

                                    Twelve Weeks Ended                                   Thirty-Six Weeks Ended
                       September 7,       September 9,       Change        September 7,                                Change
                           2012               2011         2012/2011           2012           September 9, 2011      2012/2011
Former Timeshare
segment results
operating income
impact
Base fee revenue    $            -       $        14                     $           -       $             40
Timeshare sales and
services, net                    -                36                                 -                    130
Timeshare
strategy-impairment
charges                          -              (324 )                               -                   (324 )
General,
administrative, and
other expense                    -               (17 )                               -                    (50 )
Former Timeshare
segment results
operating income
impact 1                         -              (291 )    $      291                 -                   (204 )     $      204

Other base fee
revenue                          -                 2              (2 )               -                      4               (4 )
General,
administrative, and
other expenses
Timeshare spin-off
costs                            -                (8 )             8                 -                    (12 )             12
Other miscellaneous
expenses                         -                (2 )             2                 -                     (2 )              2

Other Unallocated
corporate operating
income impact from
MVW
Franchise fee
revenue                         15                 -              15                42                      -               42

Total operating
income (loss)
impact                          15              (299 )           314                42                   (214 )            256
Gains (losses) and
other income 1                   -                (1 )             1                 -                      -                -
Interest expense 1              (2 )             (10 )             8                (6 )                  (34 )             28
Capitalized
interest                         -                 2              (2 )               -                      5               (5 )
Interest income                  3                 -               3                 8                      -                8
Equity in earnings
(losses)                         -                 4              (4 )               -                      4               (4 )
Income (loss)
before income taxes
spin-off impact     $           16       $      (304 )    $      320     $          44       $           (239 )     $      283

1 Timeshare segment results for the twelve weeks ended September 9, 2011 totaled a loss of $302 million and consisted of $291 million of operating losses, $10 million of interest expense, and $1 million of other losses. Timeshare segment results for the thirty-six weeks ended September 9, 2011 totaled a loss of $238 million and consisted of $204 million of operating losses and $34 million of interest expense.

The following discussion presents an analysis of results of our operations for the twelve and thirty-six weeks ended September 7, 2012, compared to the twelve and thirty-six weeks ended September 9, 2011. The results for the first three quarters of 2011 include the results of the former Timeshare segment. Revenues
Twelve Weeks. Revenues decreased by $145 million (5 percent) to $2,729 million in the third quarter of 2012 from $2,874 million in the third quarter of 2011. As detailed in the preceding table, the spin-off contributed to a net $331 million decrease in revenues that was partially offset by a $186 million increase in revenues in our lodging

business.

The $186 million increase in revenues for our lodging business was a result of:
higher cost reimbursements revenue ($209 million), higher base management fees ($14 million), higher franchise fees ($10 million), and higher incentive management fees ($7 million (comprised of a $4 million increase for North America and a $3 million increase outside of North America)), partially offset by lower owned, leased, corporate housing, and other revenue ($54 million (which includes a $29 million reduction associated with our sold corporate housing business as further discussed below)).
Cost reimbursements revenue represents reimbursements of costs incurred on behalf of managed and franchised properties and relates, predominantly, to payroll costs at managed properties where we are the employer, but also includes reimbursements for other costs, such as those associated with our Marriott Rewards and Ritz-Carlton Rewards programs. As we record cost reimbursements based upon costs incurred with no added markup, this revenue and related expense has no impact on either our operating income or net income. We also receive cost reimbursements revenue from MVW for reimbursement of certain costs incurred in conjunction with transition services agreements and participation in our rewards program. The $165 million increase in total cost reimbursements revenue, to $2,210 million in the 2012 third quarter from $2,045 million in the 2011 third quarter, reflected a $209 million increase (allocated across our lodging business) as a result of the impact of higher property-level demand and growth across the system, partially offset by a net $44 million decline in timeshare-related cost reimbursements due to the spin-off. Since the end of the 2011 third quarter, our managed rooms decreased by 1,819 rooms net of hotels added to our system, primarily due to conversions to franchised rooms. We added 11,800 franchised rooms to our system, net of hotels exiting the system, since the end of the 2011 third quarter.
The $2 million decrease in total base management fees, to $134 million in the 2012 third quarter from $136 million in the 2011 third quarter, primarily reflected a decline of $16 million in former Timeshare segment and previously unallocated base management fees due to the spin-off, partially offset by a net increase of $14 million across our lodging business primarily as a result of stronger RevPAR ($6 million) as well as the recognition in the 2012 third quarter of $7 million of previously deferred base management fees in conjunction with the sale of our equity interest in a North American-Limited Service joint venture. The $25 million increase in total franchise fees, to $149 million in the 2012 third quarter from $124 million in the 2011 third quarter, primarily reflected an increase of $15 million in MVW license fees due to our arrangement with MVW that we entered into in connection with the spin-off and an increase of $10 million across our lodging business primarily as a result of stronger RevPAR ($6 million) and the impact of unit growth across the system ($3 million). The $7 million increase in incentive management fees from $29 million in the third quarter of 2011 to $36 million in the third quarter of 2012 primarily reflected higher net property-level income resulting from higher property-level revenue as well as recognition of $3 million of incentive management fees due to contract revisions for certain International segment properties, partially offset by the timing of fee recognition for two Luxury segment properties that earned incentive fees in the 2012 first, second, and third quarters as compared to just the 2011 third quarter in the prior year ($3 million) and unfavorable foreign exchange rates ($2 million). The increase in incentive management fees also reflected continued property-level cost controls and, to a lesser extent, new unit growth in international markets.
The $54 million decrease in owned, leased, corporate housing, and other revenue, to $200 million in the 2012 third quarter, from $254 million in the 2011 third quarter, primarily reflected $29 million of lower corporate housing revenue due to the sale of the ExecuStay corporate housing business in the 2012 second quarter, $18 million of lower owned and leased revenue, $7 million of lower hotel agreement termination fees, and $3 million of lower branding fees. The $18 million decrease in owned and leased revenue primarily reflected $6 million of lower revenue at a property that converted from leased to managed at year-end 2011 and $14 million of lower revenue at several owned and leased properties in our International segment, primarily driven by two hotels that left the system, unfavorable foreign exchange rates, and weaker demand at two other hotels. These decreases were partially offset by $6 million of increased revenue at our leased property in London due to strong demand, in part associated with the third quarter 2012 Olympic Games. Combined branding fees associated with card . . .