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FORM 10-K

	x	Joint Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the Fiscal Year Ended December 31, 2002
	OR

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

	For the Transition Period from                     to

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

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

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

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

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

     As of June 30, 2002, the aggregate market value of the Registrants’ voting and non-voting common equity (for purposes of this Joint Annual Report only, includes all shares other than those held by the Registrants’ Directors, Trustees and executive officers) was $6,539,800,304.

     As of February 26, 2003, the Corporation had outstanding 199,744,218 Corporation Shares and the Trust had outstanding 199,744,218 Class B Shares and 100 Class A shares of beneficial interest, par value $0.01 per share (“Class A Shares”).

     For information concerning ownership of shares, see the Proxy Statement for the Corporation’s Annual Meeting of Stockholders that is currently expected to be held on May 9, 2003 (the “Proxy Statement”), which is incorporated by reference under various Items of this Joint Annual Report.

Document Incorporated by Reference:

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      This Joint Annual Report is filed by Starwood Hotels & Resorts Worldwide, Inc., a Maryland corporation (the “Corporation”), and its subsidiary, Starwood Hotels & Resorts, a Maryland real estate investment trust (the “Trust”). Unless the context otherwise requires, all references to the Corporation include those entities owned or controlled by the Corporation, including SLC Operating Limited Partnership, a Delaware limited partnership (the “Operating Partnership”), but excluding the Trust; all references herein to the Trust include the Trust and those entities owned or controlled by the Trust, including SLT Realty Limited Partnership, a Delaware limited partnership (the “Realty Partnership”); and all references to “Starwood” or the “Company” refer to the Corporation, the Trust and their respective subsidiaries, collectively. The shares of common stock, par value $0.01 per share, of the Corporation (“Corporation Shares”) and the Class B shares of beneficial interest, par value $0.01 per share, of the Trust (“Class B Shares”) are attached and trade together and may be held or transferred only in units consisting of one Corporation Share and one Class B Share (a “Share”). Prior to the reorganization of Starwood (the “Reorganization”) on January 6, 1999, the common shares of beneficial interest, par value $0.01 per share, of the Trust were traded together with the Corporation Shares as “Paired Shares,” just as the Class B Shares and the Corporation Shares are currently traded as Shares. Unless otherwise stated herein, all information with respect to Shares refers to Shares on and since January 6, 1999 and to Paired Shares for periods before January 6, 1999.

PART I

Forward-Looking Statements

      This Joint Annual Report contains statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in this Joint Annual Report, including, without limitation, the section of Item 1, “Business,” captioned “Business Strategy” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Such forward-looking statements may include statements regarding the intent, belief or current expectations of Starwood, its Directors or Trustees or its officers with respect to the matters discussed in this Joint Annual Report. All such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements including, without limitation, the risks and uncertainties set forth below. The Company undertakes no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.

Where you can find more information

      We file annual, quarterly and special reports, proxy statements and other information with the SEC. Our SEC filings are available to the public over the Internet at the SEC’s web site at http://www.sec.gov. Our SEC filings are also available on our website at http://www.starwood.com as soon as reasonably practicable following the time that they are filed with or furnished to the SEC. You may also read and copy any document we file with the SEC at its public reference rooms in Washington, D.C., New York, NY and Chicago, IL. Please call the SEC at (800) SEC-0330 for further information on the public reference rooms. Our filings with the SEC are also available at the New York Stock Exchange. For more information on obtaining copies of our public filings at the New York Stock Exchange, you should call (212) 656-5060. You may also obtain a copy of our filings free of charge by calling David Matheson, Vice President, Investor Relations at (914) 640-5204.

Risks Relating to Hotel, Resort and Vacation Ownership Operations

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

	•	changes in general economic conditions, including the severity and duration of the current economic downturn;
	•	decreases in the level of demand for transient rooms and related lodging services, including the recent reduction in business travel as a result of general economic conditions;

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	•	the impact of internet intermediaries on pricing;
	•	cyclical over-building in the hotel and vacation ownership industries;
	•	restrictive changes in zoning and similar land use laws and regulations or in health, safety and environmental laws, rules and regulations;
	•	changes in travel patterns;
	•	changes in operating costs including, but not limited to, energy, labor costs, insurance and unanticipated costs such as water damage and its consequences;
	•	disputes with owners of properties, franchisees and homeowner associations which may at times result in litigation;
	•	the availability of capital to allow us and potential hotel owners and franchisees to fund construction and investments;
	•	the financial condition of third-party property owners and franchisees; and
	•	the financial condition of the airline industry and the impact on air travel.

      We are also impacted by our relationships with owners and franchisees. Our hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace us if certain financial or performance criteria are not met. Our ability to meet these financial and performance criteria is subject to, among other things, the risks described in this section. Additionally, our operating results would be adversely affected if we could not maintain existing management, franchise or representation agreements or obtain new agreements on as favorable terms as the existing agreements.

      General Economic Conditions May Negatively Impact Our Results. Moderate or severe economic downturns or adverse conditions may negatively affect our operations. These conditions may be widespread or isolated to one or more geographic regions. Our worldwide results, primarily in North America, were negatively impacted by the significant drop in industry-wide lodging demand as a result of the current economic downturn. In addition, a tightening of the labor markets in one or more geographic regions may result in fewer and/or less qualified applicants for job openings in our facilities and higher wages, and the increasing cost trends in the insurance markets may negatively impact our results as the costs of premiums increase.

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

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

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

      Internet Reservation Channels. Some of our hotel rooms are booked through internet travel intermediaries such as Travelocity.com, Inc., Expedia, Inc. and Priceline.com, Inc. As the percentage of internet bookings increases, these intermediaries may be able to obtain higher commissions, reduced room rates or other significant contract concessions from us. Moreover, some of these internet travel intermediaries are attempting to commoditize hotel rooms, by increasing the importance of price and general indicators of quality

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      Reliance on Technology. The hospitality industry continues to demand the use of sophisticated technology and systems including technology utilized for property management, procurement, reservation systems, operation of our customer loyalty program, distribution and guest amenities. These technologies can be expected to require refinements and there is the risk that advanced new technologies will be introduced. There can be no assurance that as various systems and technologies become outdated or new technology is required we will be able to replace or introduce them as quickly as our competition or within budgeted costs for such technology. Further, there can be no assurance that we will achieve the benefits that may have been anticipated from any new technology or system.

      The Hotel and Vacation Ownership Businesses Are Capital Intensive. In order for our owned, managed and franchised properties to remain attractive and competitive, we and the property owners have to spend money periodically to keep them well maintained, modernized and refurbished. This creates an ongoing need for cash and, to the extent we and the property owners cannot fund expenditures from cash generated by operations, funds must be borrowed or otherwise obtained. In addition, in order to continue growing our vacation ownership business, we need to spend money developing new units. Accordingly, our financial results may be sensitive to the cost and availability of funds.

      Real Estate Investments Are Subject to Numerous Risks. Because we own and lease hotels and resorts, we are subject to the risks that generally relate to investments in real property. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the related properties, as well as the expenses incurred. In addition, a variety of other factors affect income from properties and real estate values, including governmental regulations, real estate, insurance, zoning, tax and eminent domain laws, interest rate levels and the availability of financing. For example, new or existing real estate zoning or tax laws can make it more expensive and/or time-consuming to develop real property or expand, modify or renovate hotels. When interest rates increase, the cost of acquiring, developing, expanding or renovating real property increases and real property values may decrease as the number of potential buyers decreases. Similarly, as financing becomes less available, it becomes more difficult both to acquire and to sell real property. Finally, governments can, under eminent domain laws, take real property. Sometimes this taking is for less compensation than the owner believes the property is worth. Any of these factors could have a material adverse impact on our results of operations or financial condition, as well as on our ability to make distributions to our shareholders. In addition, equity real estate investments, such as the investments we hold and any additional properties that we may acquire, are relatively difficult to sell quickly. If our properties do not generate revenue sufficient to meet operating expenses, including debt service and capital expenditures, our income will be adversely affected.

      Hotel and Resort Development Is Subject to Timing, Budgeting and Other Risks. We intend to develop hotel and resort properties, including VOIs and residential components, as suitable opportunities arise, taking into consideration the general economic climate. New project development has a number of risks, including risks associated with:

	•	construction delays or cost overruns that may increase project costs;
	•	receipt of zoning, occupancy and other required governmental permits and authorizations;
	•	development costs incurred for projects that are not pursued to completion;
	•	so-called acts of God such as earthquakes, hurricanes, floods or fires that could adversely impact a project;

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	•	ability to raise capital; and
	•	governmental restrictions on the nature or size of a project or timing of completion.

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

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

      International Operations Are Subject to Special Political and Monetary Risks. We have significant international operations which as of December 31, 2002 included 170 owned, managed or franchised properties in Europe, Africa and the Middle East (including 34 properties with majority ownership); 40 owned, managed or franchised properties in Latin America (including 13 properties with majority ownership); and 88 owned, managed or franchised properties in the Asia Pacific region (including 4 properties with majority ownership). International operations generally are subject to various political, geopolitical, and other risks that are not present in U.S. operations. These risks include the risk of war, terrorism or civil unrest, expropriation and nationalization. In addition, some international jurisdictions restrict the repatriation of non-U.S. earnings. Various international jurisdictions also have laws limiting the right and ability of non-U.S. entities to pay dividends and remit earnings to affiliated companies unless specified conditions have been met. In addition, sales in international jurisdictions typically are made in local currencies, which subject us to risks associated with currency fluctuations. Currency devaluations and unfavorable changes in international monetary and tax policies could have a material adverse effect on our profitability and financing plans, as could other changes in the international regulatory climate and international economic conditions. Other than Italy, where our risks are heightened due to the 18 properties we own, our international properties are geographically diversified and are not concentrated in any particular region.

Debt Financing

      As a result of our debt obligations, we are subject to the following risks: (i) the risk that cash flow from operations will be insufficient to meet required payments of principal and interest; and (ii) the risk that (to the extent that we maintain floating rate indebtedness) interest rates will increase. In addition, we have significant indebtedness maturing in 2003, and although we anticipate that we will be able to repay or refinance our existing indebtedness and any other indebtedness when it matures, there can be no assurance that we will be able to do so or that the terms of such refinancings will be favorable. Our leverage may have important consequences including the following: (i) our ability to obtain additional financing for acquisitions, working capital, capital expenditures or other purposes, if necessary, may be impaired or such financing may not be available on terms favorable to us; (ii) a substantial decrease in operating cash flow or an increase in our expenses could make it difficult for us to meet our debt service requirements and force us to sell assets and/or modify our operations; and (iii) our higher level of debt and resulting interest expense may place us at a competitive disadvantage with respect to certain competitors with lower amounts of indebtedness and/ or higher credit ratings. While our senior debt is currently rated investment grade by one of the two major rating agencies, there can be no assurance we will be able to maintain this rating. On December 20, 2002, that rating agency placed the Company’s investment grade rating on “CreditWatch with negative implications”. In the

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Risks Relating to Acts of God, Terrorist Activity and War

      Our financial and operating performance may be adversely affected by acts of God, such as natural disasters, in locations where we own and/or operate significant properties and areas of the world from which we draw a large number of customers. Some types of losses, such as from earthquake, hurricane, terrorism and environmental hazards may be either uninsurable or too expensive to justify insuring against. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a hotel or resort, as well as the anticipated future revenue from the hotel or resort. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. Similarly, wars (including the potential for war), terrorist activity (including threats of terrorist activity), political unrest and other forms of civil strife as well as geopolitical uncertainty have caused in the past, and may cause in the future, our results to differ materially from anticipated results.

Acquisitions

      We intend to make acquisitions that complement our business. There can be no assurance, however, that we will be able to identify acquisition candidates or complete acquisitions on commercially reasonable terms or at all. If additional acquisitions are made, there can be no assurance that any anticipated benefits will actually be realized. Similarly, there can be no assurance that we will be able to obtain additional financing for acquisitions, or that the ability to obtain such financing will not be restricted by the terms of our debt agreements.

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

      In addition to acquiring or developing hotels and resorts directly, we have from time to time invested, and expect to continue to invest, as a co-venturer. Joint venturers often have shared control over the operation of the joint venture assets. Therefore, joint venture investments may involve risks such as the possibility that the co-venturer in an investment might become bankrupt, or have economic or business interests or goals that are inconsistent with our business interests or goals, or be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. Consequently, actions by a co-venturer might subject hotels and resorts owned by the joint venture to additional risk. Although we generally seek to maintain sufficient control of any joint venture, we may be unable to take action without the approval of our joint venture partners. Alternatively, our joint venture partners could take actions binding on the joint venture without our consent. Additionally, should a joint venture partner become bankrupt, we could become liable for our partner’s share of joint venture liabilities.

Dispositions

      We periodically review our business with a view to identifying properties or other assets that we believe either are non-core, no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. We are focused on restructuring and enhancing real estate returns and monetizing investments. In the fourth quarter of 2002, we completed the sale of the Doubletree Minneapolis hotel for $47 million. Including this sale, we are targeting net proceeds of at least $500 million from domestic and/or international asset sales by the end of 2003. There can be no assurance, however, that we will be able to complete dispositions on commercially reasonable terms or at all.

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

      We market and sell VOIs, which typically entitle the buyer to ownership of a fully-furnished resort unit for a one-week period on either an annual or an alternate-year basis. We also acquire, develop and operate vacation ownership resorts, and provide financing to purchasers of VOIs. These activities are all subject to

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

Certain Interests

      Barry S. Sternlicht is the Chairman and Chief Executive Officer the Corporation and the Trust. Mr. Sternlicht also serves as the President and Chief Executive Officer of, and may be deemed to control, Starwood Capital Group, L.L.C. (“Starwood Capital”), a real estate investment firm. Starwood Capital and the Company have entered into a non-compete agreement whereby Starwood Capital may not purchase a hotel property in the United States until such opportunity is first presented to the Company. See Item 13, “Certain Relationships and Related Transactions.” Although Starwood Capital is not subject to a non-compete agreement with the Company for hotel properties outside of the United States, as a matter of practice, all opportunities to purchase such properties are also first presented to the Company. In each case, the Governance Committee of the Board of Directors (or other committee of independent directors) will make a decision as to whether or not the Company will pursue the opportunity. In addition, certain officers and directors of the Company have interests in businesses that may, from time to time, do business with the Company. To the extent such individuals have a material interest in such businesses, any agreements relating thereto are subject to Governance Committee (or other committee of independent directors) approval.

Ability to Manage Growth

      Our future success and our ability to manage future growth depend in large part upon the efforts of our senior management and our ability to attract and retain key officers and other highly qualified personnel. Competition for such personnel is intense. There can be no assurance that we will continue to be successful in attracting and retaining qualified personnel. Accordingly, there can be no assurance that our senior management will be able to successfully execute and implement our growth and operating strategies.

Tax Risks

      Failure of the Trust to Qualify as a REIT Would Increase Our Tax Liability. Qualifying as a real estate investment trust (a “REIT”) requires compliance with highly technical and complex tax provisions that courts and administrative agencies have interpreted only to a limited degree. Due to the complexities of our ownership, structure and operations, the Trust is more likely than are other REITs to face interpretative issues for which there are no clear answers. Also, facts and circumstances that we do not control may affect the Trust’s ability to qualify as a REIT. The Trust believes that since the taxable year ended December 31, 1995, it has qualified as a REIT under the Internal Revenue Code of 1986, as amended. The Trust intends to continue to operate so as to qualify as a REIT. However, the Trust cannot assure you that it will continue to qualify as a REIT. If the Trust failed to qualify as a REIT for any prior tax year, the Trust would be liable to pay a significant amount of taxes for those years. Similarly, if the Trust fails to qualify as a REIT in the future, our liability for taxes would increase.

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

      President Bush has proposed that dividends paid by corporations not be taxed at the shareholder level. The consequences, if any, of such a change in the tax law on our structure and the benefits derived from it cannot currently be determined. We will continue to monitor this potential legislation and its impact on us.

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

Risks Relating to Ownership of Our Shares

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

      At Least Two Annual Meetings Must Be Held Before a Majority of Our Board of Directors Can Be Changed. Our Board of Directors is divided into three classes. Each class is elected for a three-year term. At each annual meeting of shareholders, approximately one-third of the members of the Board of Directors are elected for a three-year term and the other directors remain in office until their three-year terms expire. Furthermore, our governing documents provide that no director may be removed without cause. Any removal for cause requires the affirmative vote of the holders of at least two-thirds of all the votes entitled to be cast for the election of directors.

      Thus, control of the Board of Directors cannot be changed in one year without removing the directors for cause as described above. Consequently, at least two annual meetings must be held before a majority of the members of the Board of Directors can be changed. Our charter provides that the charter cannot be amended without the approval of the holders of at least a majority of the outstanding Shares entitled to vote thereon.

      Our Board of Directors May Issue Preferred Stock and Establish the Preferences and Rights of Any Such Preferred Stock. Our charter provides that the total number of Shares of stock of all classes which the Corporation has authority to issue is 1,350,000,000, initially consisting of one billion Shares of common stock, 50 million Shares of excess common stock, 200 million Shares of preferred stock and 100 million Shares of

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      Certain Provisions of Our Charter May Require the Approval of Two-Thirds of Our Shares and Only Our Directors May Amend Our Bylaws. Our charter contains provisions relating to restrictions on transferability of the Corporation Shares, which may be amended only by the affirmative vote of our shareholders holding two-thirds of the votes entitled to be cast on the matter. As permitted under the Maryland General Corporation Law, our Bylaws provide that directors have the exclusive right to amend our Bylaws.

      Our Shareholder Rights Plan Would Cause Substantial Dilution to Any Shareholder That Attempts to Acquire Us on Terms Not Approved by Our Board of Directors. We adopted a shareholder rights plan which provides, among other things, that when specified events occur, our shareholders will be entitled to purchase from us a newly created series of junior preferred stock, subject to the ownership limit described above. The preferred stock purchase rights are triggered by the earlier to occur of (i) ten days after the date of a public announcement that a person or group acting in concert has acquired, or obtained the right to acquire, beneficial ownership of 15% or more of our outstanding Corporation Shares or (ii) ten business days after the commencement of or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the acquiring person becoming the beneficial owner of 15% or more of our outstanding Corporation Shares. The preferred stock purchase rights would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our Board of Directors.

Item 1.     Business.

General

      Starwood is one of the world’s largest hotel and leisure companies. Starwood’s status as one of the leading hotel and leisure companies resulted from the 1998 acquisition of Westin Hotels & Resorts Worldwide, Inc. and certain of its affiliates (“Westin”) (the “Westin Merger”) and the acquisition of ITT Corporation (the “ITT Merger”), renamed Sheraton Holding Corporation (“Sheraton Holding”) and the acquisition of Vistana Inc. (renamed Starwood Vacation Ownership, Inc. or “SVO”) in October 1999. The Company conducts its hotel and leisure business both directly and through its subsidiaries. The Company’s brand names include St. Regis®, The Luxury Collection®, Sheraton®, Westin®, W® and Four Points® by Sheraton. Through these brands, Starwood is well represented in most major markets around the world. The Company’s operations are grouped into two business segments, hotels and vacation ownership operations.

      The Company’s revenue and earnings are derived primarily from hotel operations, which include the operation of the Company’s owned hotels; management and other fees earned from hotels the Company manages pursuant to management contracts; and the receipt of franchise and other fees.

      The Company’s hotel business emphasizes the global operation of hotels and resorts primarily in the luxury and upscale segment of the lodging industry. Starwood seeks to acquire interests in, or management or franchise rights with respect to properties in this segment. At December 31, 2002, the Company’s hotel portfolio included owned, leased, managed and franchised hotels totaling 748 hotels with approximately 227,000 rooms in 79 countries, and is comprised of 163 hotels that Starwood owns or leases or in which Starwood has a majority equity interest (substantially all of which hotels Starwood also manages), 277 hotels managed by Starwood on behalf of third-party owners (including entities in which Starwood has a minority equity interest) and 308 hotels for which Starwood receives franchise fees.

      The Company’s revenues and earnings are also derived from the development, ownership and operation of vacation ownership resorts, marketing and selling VOIs in the resorts and providing financing to customers

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      The Trust was organized in 1969, and the Corporation was incorporated in 1980, both under the laws of Maryland. Sheraton Hotels & Resorts and Westin Hotels & Resorts, Starwood’s largest brands, have been serving guests for more than 60 years. Starwood Vacation Ownership (and its predecessor, Vistana, Inc.) has been selling VOIs for more than 20 years.

      The Company’s principal executive offices are located at 1111 Westchester Avenue, White Plains, New York 10604, and its telephone number is (914) 640-8100.

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

Competitive Strengths

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

      Brand Strength. Starwood believes that it has strong brand leadership in major markets worldwide based on the global recognition of the Company’s lodging brands. With the Company’s well-known lodging brands, Starwood benefits from a luxury and upscale branding strategy that provides strong operating performance from new customer penetration and customer loyalty. The strength of the Company’s brands is evidenced, in part, by the superior ratings received from the Company’s hotel guests and from industry publications. Starwood was again designated as the “World’s Best Global Hotel Company” by Global Finance magazine in their November 2002 issue. Also, for the third time in four years, Starwood brands took top honors in Business Travel News’ 2003 Annual Top U.S. Hotel Chain Survey, with Westin Hotels & Resorts and W Hotels earning first and second place, respectively, in the upper-upscale category. Additionally, Four Points by Sheraton was voted number one in the mid-price category by this same publication.

      Frequent Guest Program. The Company’s loyalty program, Starwood Preferred Guest® (“SPG”) has over 15 million members and in 2002 was awarded the Hotel Program of the Year for the third year in a row by consumers via the prestigious Freddie Awards. SPG also received awards for Best Customer Service, Best Web Site, Best Elite-Level Program, Best Award Redemption and Best Newsletter. SPG, which was the first loyalty program in the hotel industry with a policy of no blackout dates and no capacity controls, enables members to redeem stays when they want and where they want. SPG yields repeat guest business due to rewarding frequent stays and purchasers of VOIs with points towards free hotel stays and other rewards, or airline miles with any of the participating 30 airline programs.

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

      Premier and Distinctive Properties. Starwood controls a distinguished and diversified group of hotel properties throughout the world, including the St. Regis in New York, New York; The Phoenician in Scottsdale, Arizona; the Hotel Gritti Palace in Venice, Italy; the St. Regis in Beijing, China; and the Westin Palace in Madrid, Spain. These are among the leading hotels in the industry and are at the forefront of providing the highest quality and service. Starwood’s properties are consistently recognized as the best of the best by readers of Condé Nast Traveler, who are among the world’s most sophisticated and discerning group of travelers. The Condé Nast Traveler Magazine January 2003 issue included 55 Starwood properties among its prestigious Gold List and Gold List Reserve, more than any other hotel company.

      Scale. As one of the largest hotel and leisure companies focusing on the luxury and upscale full-service lodging market, Starwood has the scale to support its core marketing and reservation functions. The Company

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

      While Starwood focuses on the luxury and upscale portion of the full-service lodging and vacation ownership market, the Company’s brands cater to a diverse group of sub-markets within this market. For example, the St. Regis hotels cater to high-end hotel and resort clientele while Four Points by Sheraton hotels deliver extensive amenities and services at more affordable rates.

      Starwood derives its cash flow from multiple sources within its hotel and vacation ownership segments, including owned hotels activity and management and franchise fees, and is geographically diverse with operations around the world. The following tables reflect the Company’s hotel and vacation ownership properties by type of revenue source and geographical presence by major geographic area as of December 31, 2002:

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

Business Segment and Geographical Information

      Incorporated by reference in Note 20, “Business Segment and Geographical Information,” in the notes to financial statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”

Business Strategy

      The Company’s primary business objective is to maximize earnings and cash flow by increasing the profitability of the Company’s existing portfolio; selectively acquiring interests in additional assets; increasing the number of the Company’s hotel management contracts and franchise agreements; acquiring, developing and selling VOIs; and maximizing the value of its owned real estate properties, including selectively disposing of non-core hotels and “trophy” assets that may be sold at significant premiums. The Company plans to meet these objectives by leveraging its global assets, broad customer base and other resources and by taking advantage of the Company’s scale to reduce costs. The weakness in the North American and European economies, combined with current political and economic environments in South America, the Middle East

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

	•	Continuing to expand the Company’s role as a third-party manager of hotels and resorts. This allows Starwood to expand the presence of its lodging brands and gain additional cash flow generally with modest capital commitment;
	•	Franchising the Sheraton, Westin, Four Points by Sheraton and Luxury Collection brands to selected third-party operators, thereby expanding the Company’s market presence, enhancing the exposure of its hotel brands and providing additional income through franchise fees;
	•	Expanding the Company’s internet presence and sales capabilities to increase revenue and improve customer service;
	•	Continuing to grow the Company’s frequent guest program, thereby increasing occupancy rates while providing the Company’s customers with benefits based upon loyalty to the Company’s hotels and vacation ownership resorts;
	•	Enhancing the Company’s marketing efforts by integrating the Company’s proprietary customer databases, so as to sell additional products and services to existing customers, improve occupancy rates and create additional marketing opportunities;
	•	Optimizing the Company’s use of its real estate assets to improve ancillary revenue, such as condominium sales and restaurant, beverage and parking revenue from the Company’s hotels and resorts;
	•	Continuing to build the “W” hotel brand to appeal to upscale business travelers and other customers seeking full-service hotels in major markets, and expanding the brand to resorts in non-urban areas;
	•	Innovations such as the Heavenly® Bed and Bath, the Sheraton Sweet Sleeper® Bed and the Sheraton Service Promise®;
	•	Renovating, upgrading and expanding the Company’s branded hotels to further its strategy of strengthening brand identity. By re-branding certain owned hotels to one of Starwood’s proprietary brands, Starwood will seek to further solidify its brand reputation and market presence, leading to enhanced revenue per available room (“REVPAR”), which we consider to be a meaningful indicator of our performance, as it measures the period-over-period growth in rooms revenue for comparable properties;
	•	Developing additional vacation ownership resorts and leveraging our hotel real estate assets where possible through VOI construction and residential or condominium sales; and
	•	Increasing operating efficiencies through increased use of technology.

      Starwood intends to explore opportunities to expand and diversify the Company’s hotel portfolio through minority investments and selective acquisitions of properties domestically and internationally that meet some or all of the following criteria:

	•	Luxury and upscale hotels and resorts in major metropolitan areas and business centers;
	•	Major tourist hotels, destination resorts or conference centers that have favorable demographic trends and are located in markets with significant barriers to entry or with major room demand generators such as office or retail complexes, airports, tourist attractions or universities;
	•	Undervalued hotels whose performance can be increased by re-branding to one of the Company’s hotel brands, the introduction of better and more efficient management techniques and practices and/or the injection of capital for renovating, expanding or repositioning the property;

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	•	Hotels or brands which would enable the Company to provide a wider range of amenities and services to customers; and
	•	Portfolios of hotels or hotel companies that exhibit some or all of the criteria listed above, where the purchase of several hotels in one transaction enables Starwood to obtain favorable pricing or obtain attractive assets that would otherwise not be available.

      Starwood may also selectively choose to develop and construct desirable hotels and resorts to help the Company meet its strategic goals, such as the ongoing development of the St. Regis Museum Tower Hotel in San Francisco, California which is expected to have approximately 269 rooms and 102 condominiums.

      Furthermore, the Company has developed plans for flexible new-build Sheraton and Westin prototypes, with the intent of expanding these brands into tertiary markets.

Competition

      The hotel industry is highly competitive. Competition is generally based on quality and consistency of room, restaurant and meeting facilities and services, attractiveness of locations, availability of a global distribution system, price and other factors. Management believes that Starwood competes favorably in these areas. Starwood’s properties compete with other hotels and resorts, including facilities owned by local interests and facilities owned by national and international chains, in their geographic markets. The principal competitors of Starwood include other hotel operating companies, ownership companies (including hotel REITs) and national and international hotel brands.

      Starwood encounters strong competition as a hotel, resort and vacation ownership operator and developer. While some of the Company’s competitors are private management firms, several are large national and international chains that own and operate their own hotels, as well as manage hotels for third-party owners and develop and sell VOIs, under a variety of brands that compete directly with the Company’s brands. In addition, hotel management contracts are typically long-term arrangements, but most allow the hotel owner to replace the management firm if certain financial or performance criteria are not met.

Environmental Matters

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

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

      Although Starwood has incurred and expects to incur remediation and various environmental-related costs during the ordinary course of operations, management anticipates that such costs will not have a material adverse effect on the operations or financial condition of the Company.

Seasonality and Diversification

      The hotel industry is seasonal in nature; however, the periods during which the Company’s properties experience higher revenue activities vary from property to property and depend principally upon location. Other than 2001, which was dramatically impacted by the September 11, 2001 terrorist attacks in New York, Washington, D.C. and Pennsylvania (the “September 11 Attacks”) and their aftermath, the Company’s revenues and EBITDA⁽¹⁾ historically have been lower in the first quarter than in the second, third or fourth quarters.

Comparability of Owned Hotel Results

      Starwood continually updates and renovates its owned, leased and consolidated joint venture hotels. While undergoing renovation, these hotels are generally not operating at full capacity and, as such, these renovations can initially negatively impact Starwood’s revenues and EBITDA.

Employees

      At December 31, 2002, Starwood employed approximately 105,000 persons at its corporate offices, owned and managed hotels and vacation ownership resorts, of whom approximately 60% were employed in the United States. At December 31, 2002, approximately 28% of the U.S.-based employees were covered by various collective bargaining agreements providing, generally, for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, labor relations have been maintained in a normal and satisfactory manner, and management believes that the Company’s employee relations are good.

Item 2.     Properties.

      Starwood is one of the largest hotel and leisure companies in the world, with operations in 79 countries. Starwood considers its hotels and resorts, including vacation ownership resorts (together “Resorts”), generally to be premier establishments with respect to desirability of location, size, facilities, physical condition, quality and variety of services offered in the markets in which they are located. Although obsolescence arising from age and condition of facilities can adversely affect the Company’s Resorts, Starwood and third-party owners of managed and franchised Resorts expend substantial funds to renovate and maintain their facilities in order to remain competitive. For further information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Capital Expenditures,” in this Joint Annual Report.

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      The Company’s hotel business included 748 owned, managed or franchised hotels with approximately 227,000 rooms and its vacation ownership business included 18 vacation ownership resorts at December 31, 2002, predominantly under six brands. All brands are full-service properties that range in amenities from luxury hotels and resorts to more moderately priced hotels.

      The following table reflects the Company’s hotel and vacation ownership properties, by brand:

      St. Regis Hotels & Resorts (luxury full-service hotels and resorts) deliver the most discreet, personalized and anticipatory level of service to high-end leisure and business travelers. St. Regis hotels typically have individual design characteristics to accentuate each individual location and city. Most St. Regis hotels have spacious, luxurious rooms and suites with highly designed, residential surroundings and include a 4- or 5-Star restaurant on premises.

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

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

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

      W Hotels (stylish boutique full-service urban hotels) was inaugurated in December 1998 with the opening of the W New York. W hotels provide a unique hotel alternative to business travelers, combining the personality, style and distinctive flavor of an intimate hotel with the functionality, reliability and attentive service of a major business and leisure hotel. W hotels feature modern, sophisticated design with custom-made furnishings and accessories, fully wired rooms with the most advanced technology in the industry, and unique, high-quality signature restaurants and bars.

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

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Hotel Business

      Owned, Leased and Consolidated Joint Venture Hotels. The following table summarizes REVPAR⁽¹⁾, average daily rates (“ADR”) and average occupancy rates on a year-to-year basis for the Company’s 155 owned, leased and consolidated joint venture hotels (excluding 8 hotels without prior year results and 5 hotels sold during 2001 and 2002) (“Same-Store Owned Hotels”) for the years ended December 31, 2002 and 2001:

      During the years ended December 31, 2002 and 2001, the Company invested approximately $262 million and $460 million, respectively, for capital improvements primarily at owned hotel assets and capital expenditures on technology developments. These capital expenditures included significant new growth investment for the development of the St. Regis Museum Tower in San Francisco, California. Other major expenditures during 2002 included the renovations of the Sheraton New York, the Westin Excelsior in Rome, Italy, the Westin Galleria and Oaks in Houston, Texas and The Phoenician in Scottsdale, Arizona. During 2001, the Company completed the development of the W Times Square and the conversions of the Days Inn Chicago and Midland Hotel to the W Lakeshore and W Chicago, respectively.

      Managed and Franchised Hotels. Hotel and resort properties in the United States are often owned by entities that neither manage hotels nor own a brand name. Hotel owners typically enter into management contracts with hotel management companies to operate their hotels. When a management company does not offer a brand affiliation, the hotel owner often chooses to pay separate franchise fees to secure the benefits of brand marketing, centralized reservations and other centralized administrative functions, particularly in the sales and marketing area. Management believes that companies, such as Starwood, that offer both hotel management services and well-established worldwide brand names appeal to hotel owners by providing the full range of management and marketing services.

      Managed Hotels Starwood manages hotels worldwide, usually under a long-term agreement with the hotel owner (including entities in which Starwood has a minority equity interest). The Company’s responsibilities under hotel management contracts typically include hiring, training and supervising the managers and employees that operate these facilities. For additional fees, Starwood provides reservation services and coordinates national advertising and certain marketing and promotional services. Starwood prepares and implements annual budgets for the hotels it manages and is responsible for allocating property-owner funds for periodic maintenance and repair of buildings and furnishings. In addition to the Company’s owned and leased hotels, at December 31, 2002, Starwood managed an additional 277 hotels with approximately 94,000 rooms worldwide.

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      Management contracts typically provide for base fees tied to gross revenue and incentive fees tied to profits as well as fees for other services, including centralized reservations, sales and marketing, public relations and national and international media advertising. In the Company’s experience, owners seek hotel managers that can provide attractively priced base, incentive, marketing and franchise fees combined with demonstrated sales and marketing expertise and operations-focused management designed to enhance profitability. Some of the Company’s management contracts permit the hotel owner to terminate the agreement when the hotel is sold or otherwise transferred to a third party, as well as if Starwood fails to meet established performance criteria. In addition, many hotel owners seek equity, debt or other investments from Starwood to help finance hotel renovations or conversion to a Starwood brand so as to align the interests of the owner and the Company. The Company’s ability or willingness to make such investments may determine, in part, whether Starwood will be offered, will accept, or will retain a particular management contract. In 2002, the Company made numerous investments in management contracts, the most significant of which was a $25 million equity investment in the Westin Savannah Harbor resort in Savannah, Georgia. During 2002, the Company signed management agreements for 23 hotels with approximately 7,000 rooms.

      Brand Franchising Starwood franchises its Sheraton, Westin, Four Points by Sheraton and Luxury Collection brand names and generally derives licensing and other fees from franchisees based on a fixed percentage of the franchised hotel’s room revenue, as well as fees for other services, including centralized reservations, sales and marketing, public relations and national and international media advertising. In addition, a franchisee may also purchase hotel supplies, including brand-specific products, from certain Starwood-approved vendors. Starwood approves certain plans for, and the location of, franchised hotels and reviews their design. At December 31, 2002, there were 308 franchised properties with approximately 77,000 rooms operating under the Sheraton, Westin, Four Points by Sheraton and Luxury Collection brands. During 2002, the Company signed franchise agreements with 10 hotels with approximately 3,000 rooms.

Vacation Ownership Business

      The Company develops, owns and operates vacation ownership resorts, markets and sells the VOIs in the resorts and, in many cases, provides financing to customers who purchase such ownership interests. Owners of VOIs can trade their interval for intervals at other Starwood vacation ownership resorts or for intervals at certain vacation ownership resorts not otherwise sponsored by Starwood through an exchange company. From time to time, the Company securitizes or sells the receivables generated from its sales of VOIs as a form of a financing vehicle.

      At December 31, 2002, the Company had 18 vacation ownership resorts in its portfolio with 11 actively selling VOIs, one under construction, one expected to start construction shortly and five that had sold all existing inventory. During the year ended December 31, 2002, the Company invested approximately $96 million for capital expenditures, including VOI construction, at Westin Mission Hills Resort Villas in Rancho Mirage, California and Westin Ka’anapali Ocean Resort Villa in Maui, Hawaii, as well as the acquisition of 18.5 acres of zone 1 land for a new Westin vacation ownership development in Princeville, Hawaii. During 2001, the Company invested $66 million in vacation ownership capital expenditures, including VOI construction, primarily related to the VOI construction at the Mission Hills and Maui resorts noted above, as well as VOI construction at Sheraton’s Mountain Vista in Avon, Colorado.

Item 3.     Legal Proceedings.

      Incorporated by reference to the description of legal proceedings in Note 19, “Commitments and Contingencies,” in the notes to financial statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data.”

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

      Not applicable.

Executive Officers of the Registrants

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

PART II

Item 5.     Market for Registrants’ Common Equity and Related Stockholder Matters.

Market Information

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

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

Holders

      As of February 26, 2003, there were approximately 19,000 holders of record of Shares and one holder of record (the Corporation) of the Class A Shares.

Distributions Made/ Declared

      The following table sets forth the frequency and amount of distributions made by the Trust to holders of Shares for the years ended December 31, 2002 and 2001:

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(a)	The Company switched from a quarterly distribution to an annual distribution in 2002 and the Trust declared distributions in the fourth quarter of 2002 and 2001 to shareholders of record on December 31, 2002 and 2001, respectively. The distributions were paid in January 2003 and 2002, respectively.

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

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

Conversion of Securities; Sale of Unregistered Securities

      During 2002, approximately 4,000 shares of Class B Exchangeable Preferred Shares (“Class B EPS”) were exchanged by certain stockholders for an equal number of shares of Class A Exchangeable Preferred Shares (“Class A EPS”). Additionally, approximately 60,000 shares of Class A EPS were exchanged for an equal number of Shares. Through January 31, 2003, in accordance with the terms of the Class B EPS, which allow the shareholders to put these units back to the Company at $38.50 beginning on the fifth anniversary of the Westin acquisition, 422,753 units of Class B EPS were put back to the Company for approximately $16 million. Mr. Sternlicht held, individually and through various family trusts, an aggregate of 240,391 Class B EPS and limited partnership units of the Realty Partnership and Operating Partnership convertible to Class B EPS on a one-to-one basis. On January 2, 2003, Mr. Sternlicht redeemed all of these Class B EPS for $38.50 per Share.

      During 2002, the Company exchanged approximately 126,000 limited partnership units of the Realty Partnership and the Operating Partnership held by third parties for Shares on a one-for-one basis.

Item 6.     Selected Financial Data.

      The following financial and operating data should be read in conjunction with the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements of the Company and related notes thereto appearing elsewhere in this Joint Annual Report and incorporated herein by reference. The historical information represents the historical results of Sheraton Holding up to the date of the ITT Merger, because the ITT Merger was treated as a reverse purchase for accounting purposes. This income statement and operating data excludes the results of the discontinued lines of business, which include the Company’s gaming operations, ITT Educational Services, Inc. (“Educational Services”) and ITT World Directories (“WD”), all of which were substantially disposed of in 1999 and 1998.

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(a)	Excluding other revenues from managed and franchised properties.
(b)	Excludes approximately $3.0 billion of consideration paid to Sheraton Holding stockholders in connection with the ITT Merger.

      The following table presents systemwide revenues and a reconciliation of operating income to EBITDA (in millions):

(1)	Systemwide revenues include gross operating revenues generated by owned, leased, consolidated joint venture and managed hotels.
(2)	Includes the Company’s share of depreciation expense of unconsolidated joint ventures.
(3)	EBITDA is defined as income before interest expense, income tax expense, depreciation and amortization. Restructuring and other special items and gains and losses on asset dispositions and impairments are also excluded from EBITDA as these items do not impact operating results on a recurring basis. Management considers EBITDA to be one measure of the cash flows from operations of the Company before debt service that provides a relevant basis for comparison, and EBITDA is presented to assist investors and lenders in analyzing the performance of the Company. This information should not be considered as an alternative to any measure of

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	performance as promulgated under accounting principles generally accepted in the United States, nor should it be considered as an indicator of the overall financial performance of the Company. The Company’s calculation of EBITDA may be different from the calculation used by other companies and, therefore, comparability may be limited.

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

RESULTS OF OPERATIONS

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

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

      The Company believes the following to be its critical accounting policies:

      Revenue Recognition. The Company’s revenues are primarily derived from the following sources: (1) hotel and resort revenues at the Company’s owned, leased and consolidated joint venture properties; (2) management and franchise fees; (3) vacation ownership revenues; and (4) other revenues which are ancillary to the Company’s operations. Generally, revenues are recognized when the services have been rendered. The following is a description of the composition of revenues for the Company:

	•	Owned, Leased and Consolidated Joint Ventures — Represents revenue primarily derived from hotel operations, including the rental of rooms and food and beverage sales, from a worldwide network of owned, leased or consolidated joint venture hotels and resorts operated primarily under the Company’s proprietary brand names including St. Regis, The Luxury Collection, Sheraton, Westin, W and Four Points by Sheraton. Revenue is recognized when rooms are occupied and services have been rendered.
	•	Management and Franchise Fees — Represents fees earned on hotels managed worldwide, usually under long-term contracts with the hotel owner, and franchise fees received in connection with the franchise of the Company’s Sheraton, Westin, Four Points by Sheraton and Luxury Collection brand names. Management fees are comprised of a base fee, which is generally based on a percentage of gross revenues, and an incentive fee, which is generally based on the property’s profitability. Base fee revenues are recognized when earned in accordance with the terms of the contract. For any time during the year, incentive fees are recognized for the fees due and earned as if the contract was terminated at that date, exclusive of any termination fees due or payable. Franchise fees are generally based on a percentage of hotel room revenues and are recognized in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 45, “Accounting for Franchise Fee Revenue,” as the fees are earned and become due from the franchisee. Management and franchise fees are recognized in other hotel and leisure revenues in the consolidated statements of income.
	•	Vacation Ownership — The Company recognizes revenue from VOI sales in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.” The Company recognizes sales when a minimum of 10% of the purchase price for the VOI has been received in cash, the period of cancellation with refund has expired and receivables are deemed collectible. For sales that do not qualify for full revenue recognition as the project has progressed beyond the preliminary stages but has not yet reached

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		completion, all revenue and profit are initially deferred and recognized in earnings through the percentage-of-completion method. Vacation ownership revenues are recognized in other hotel and leisure revenues in the consolidated statements of income. From time to time, the Company may also securitize or sell its VOI receivables. These securitizations are accounted for as sales transactions under the guidance of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities — replacement of FASB Statement No. 125”. See Note 5 for additional discussion.

      Frequent Guest Program. SPG is the Company’s frequent guest incentive marketing program. SPG members earn points based on their spending at the Company’s properties and, to a lesser degree, through participation in affiliated partners’ programs, such as those offered by airlines. Points can be redeemed at most Company owned, leased, managed and franchised properties.

      SPG is provided as a marketing program to the Company’s properties, including as incentives to first time buyers of VOIs. The cost of operating the program, including the estimated cost of award redemption, is charged to properties based on members’ qualifying expenditures. Revenue is recognized by participating hotels and resorts when points are redeemed for hotel stays.

      The Company, through the services of third-party actuarial analysts, determines the fair value of the future redemption obligation based on statistical formulas which project the timing of future point redemption based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed. These factors determine the required liability for outstanding points. The Company’s management and franchise agreements require that the Company be reimbursed currently for the costs of operating the program, including marketing, promotion, communications with, and performing member services for the SPG members. Actual expenditures for SPG may differ from the actuarially determined liability.

      The liability for the SPG program is included in other long-term liabilities and accrued expenses in the accompanying consolidated balance sheets. The total actuarially determined liability as of December 31, 2002 and 2001 is $175 million and $159 million, respectively.

      Asset Valuations. The Company continually evaluates the carrying value of its assets for impairment. Asset impairment analysis is conducted on the following classes of assets: (1) long lived assets; (2) investments; and (3) goodwill and intangible assets.

	•	Long Lived Assets — The expected undiscounted future cash flows of the assets are compared to the net book value of the assets. If the expected undiscounted future cash flows are less than the net book value of the assets, the excess of the net book value over the estimated fair value is charged to current earnings. Fair value is based upon discounted cash flows of the assets at a rate deemed reasonable for the type of asset and prevailing market conditions, appraisals and, if appropriate, current estimated net sales proceeds from pending offers. The Company evaluates the carrying value of its long-lived assets based on its plans, at the time, for such assets. Changes to the Company’s plans, including a decision to dispose of an asset, can have a material impact on the carrying value of the asset, the Company’s financial position and the Company’s results from operations.
	•	Investments — The Company also assesses the carrying value of its long-term investments. The fair market value of investments is based on the market prices for the last day of the accounting period if the investment trades on quoted exchanges. For non-traded investments, fair value is estimated based on the underlying value of the investment, which is dependent on the performance of the companies or ventures in which the Company has invested, as well as the volatility inherent in external markets for these types of investments.

        In assessing potential impairment for these investments, the Company will consider these factors as well as forecasted financial performance of its investees. If these forecasts are not met, the Company may have to record impairment charges. Thus, fair value of investments, which is based on market prices or the value of the underlying collateral, exceeds the carrying value of investments at December 31, 2002 and 2001.

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

      Beneficial and Retained Interests. The Company periodically sells notes receivable originated by its vacation ownership business in connection with the sale of VOIs. The Company retains interests in the assets transferred to qualified and non-qualified special purpose entities which are accounted for as over-collateralizations and interest only strips (“Beneficial or Retained Interests”). These Beneficial or Retained Interests are treated as “trading” for transactions prior to 2002 and “available-for-sale” for transactions thereafter under the provisions of SFAS No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” The Company reports changes in the fair values of these Beneficial or Retained Interests through the accompanying consolidated statements of income for trading securities and through the accompanying consolidated statements of comprehensive income for available-for-sale securities. The Company had Beneficial and Retained Interests of $47 million and $31 million at December 31, 2002 and 2001, respectively.

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

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

      The following discussion presents an analysis of results of our operations for the years ended December 31, 2002, 2001 and 2000.

Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

Continuing Operations

      The Company’s operating results for the year ended December 31, 2002 were significantly impacted by the weakened worldwide economic environment, which has resulted in a dramatic slowdown in business and transient travel. The decrease in business transient demand, when compared to the same period of 2001, had an adverse impact on the Company’s majority owned hotels, many of which are located in major urban markets.

      Revenues. Total revenues, excluding other revenues from managed and franchised properties (“Total Revenues”), decreased 2.2% from $3.967 billion to $3.879 billion for the year ended December 31, 2002 when compared to the corresponding period in 2001. The decrease in Total Revenues reflects a 3.3% decrease in revenues from the Company’s owned, leased and consolidated joint venture hotels to $3.232 billion for the year

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      The decrease in revenues from owned, leased and consolidated joint venture hotels is due primarily to decreased revenues at the Company’s Same-Store Owned Hotels offset in part by revenues generated by the W Times Square, which opened in late December 2001, the Westin Dublin, which opened in September 2001, the W Lakeshore Drive in Chicago, Illinois which reopened in October 2001 after a significant renovation and repositioning, and the Sheraton Centre Toronto in Toronto, Canada of which the Company acquired the remaining 50% not previously owned in April 2001. Revenues at the Company’s Same-Store Owned Hotels decreased 6.0% to $3.013 billion for the year ended December 31, 2002 when compared to the same period of 2001 due primarily to a decrease in REVPAR. REVPAR at the Company’s Same-Store Owned Hotels decreased 5.9% to $95.46 for the year ended December 31, 2002 when compared to the corresponding 2001 period. The decrease in REVPAR at these Same-Store Owned Hotels was attributed to a decrease in occupancy to 63.5% in the year ended December 31, 2002 when compared to 65.1% in the same period of 2001 and a decrease in ADR at these Same-Store Owned Hotels. ADR decreased 3.4% to $150.42 for the year ended December 31, 2002 compared to $155.77 for the corresponding 2001 period. REVPAR at Same-Store Owned Hotels in North America decreased 6.0% for the year ended December 31, 2002 when compared to the same period of 2001. As discussed above, the decrease in REVPAR and revenues from owned, leased and consolidated joint venture hotels in North America was primarily due to the decline in business transient demand as a result of the weakened global economies. REVPAR at the Company’s international Same-Store Owned Hotels, which decreased by 5.6% for the year ended December 31, 2002 when compared to the same period of 2001, was also impacted by weakened global economies, the unfavorable effect of foreign currency translation and adverse political and economic conditions. REVPAR for Same-Store Owned Hotels in Europe decreased 0.3%, in Latin America decreased 22.7% and in Asia Pacific increased 6.8% when compared to 2001.

      The increase in other hotel and leisure revenues, for the year ended December 31, 2002 when compared to the same period in 2001, resulted from the increase in VOI sales of 14.0% to $276 million in 2002 compared to $242 million in 2001. Contract sales of VOI inventory increased 16.8% in the year ended December 31, 2002 when compared to the same period in 2001, primarily as a result of sales at the Westin Mission Hills Resort Villas in Rancho Mirage, California and the Westin Ka’anapali Ocean Resort Villas in Maui, Hawaii. These increases were partially offset by lower management fees, primarily due to reduced incentive management fees, and decreased equity earnings from joint ventures, as a result of the previously discussed weakened global economies and the construction remediation costs at an unconsolidated joint venture property. Other hotel and leisure revenues also include $16 million and $12 million, respectively, primarily related to gains from the sale of $133 million and $226 million of vacation ownership receivables during the years ended December 31, 2002 and 2001, respectively. Included in the $226 million of VOI receivable sales in 2001 are $145 million of VOI receivables which were repurchased from existing securitizations.

      Other revenues and expenses from managed and franchised properties were $780 million and $740 million for 2002 and 2001, respectively. These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where the Company is the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on the Company’s operating income, net income or profit margins.

      EBITDA. Total Company EBITDA (which excludes $7 million of restructuring and other special credits, $30 million of foreign exchange gains related to the devaluation of the Argentine Peso and $8 million of construction remediation charges in 2002 and $50 million of restructuring and other special charges and $24 million of foreign exchange gains related to the devaluation of the Argentine Peso in 2001) decreased 11.0% or $135 million to $1.095 billion for the year ended December 31, 2002 when compared to 2001, primarily due to EBITDA declines at the Company’s owned, leased and consolidated joint venture hotels. EBITDA for the Company’s owned, leased and consolidated joint venture hotels decreased $123 million or 12.6% to $855 million for the year ended December 31, 2002 when compared to the corresponding period in

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      Selling, General, Administrative and Other. Selling, general, administrative and other expenses were $426 million and $411 million for the year ended December 31, 2002 and 2001, respectively. The increase in selling, general, administrative and other expenses is due to the inclusion, in the year ended December 31, 2001, of a $14 million pretax gain resulting from the termination of a pension plan, compared to a $3 million pretax gain in 2002 offset by the net $30 million and $24 million of foreign exchange gain resulting from the devaluation of the Argentine Peso, included in the years ended December 31, 2002 and 2001, respectively.

      Restructuring and Other Special Charges (Credits). During the year ended December 31, 2002, the Company reversed $7 million of previously recorded restructuring and other special charges primarily related to adjustments to the severance liability established in connection with the cost containment efforts after the September 11 Attacks, sales of its investments in certain e-business ventures previously deemed impaired and the collection of receivables which were previously deemed uncollectible.

      Due to the September 11 Attacks and the weakening of the U.S. economy, in the third and fourth quarters of 2001, the Company implemented a cost reduction plan and conducted a comprehensive review of the carrying value of certain assets for potential impairment, resulting in 2001 restructuring charges of $15 million and noncash other special charges aggregating approximately $36 million. The restructuring charges were primarily for severance costs incurred as part of the cost reduction plan. The other special charges consisted primarily of employee retention costs associated with the accelerated vesting of 50% of restricted stock awards granted in February 2001 (approximately $11 million); bad debt expense associated with receivables no longer deemed collectible (approximately $17 million); impairments of certain investments and other assets (approximately $5 million); and abandoned pursuit projects (approximately $3 million).

      In addition, in early 2001, the Company wrote down its investments in various e-business ventures by approximately $19 million based on the market conditions for the technology sector at the time and management’s assessment that the impairment of these investments was other-than-temporary. This special charge was offset by the reversal of a $20 million restructuring charge taken in 1998 relating to a note receivable, which previously had been written down due to non-performance.

      Depreciation and Amortization. Depreciation expense increased to $476 million in the year ended December 31, 2002 compared to $433 million in the corresponding period of 2001. The increase was due to additional depreciation resulting from capital expenditures at the Company’s owned, leased and consolidated joint venture hotels including the opening of the W Times Square in December 2001 and the Westin Dublin in September 2001, as well as costs to reposition the W Lakeshore and the W Midland hotels in Chicago and capital expenditures on technology development. Amortization expense decreased to $20 million in the year ended December 31, 2002 compared to $93 million in the corresponding period of 2001. The decrease in the amortization expense was primarily attributable to the implementation of SFAS No. 142, “Goodwill and Other Intangible Assets,” which resulted in a $75 million pretax reduction in amortization expense.

      Net Interest Expense. Interest expense for the years ended December 31, 2002 and 2001, which is net of interest income of $2 million and $11 million, respectively, decreased to $338 million from $367 million. Excluding $30 million and $9 million related to the early extinguishment of debt for 2002 and 2001, respectively, and an $11 million reversal of accrued interest on tax liabilities that have now been settled in 2002, net interest expense decreased $39 million from the comparable period of the prior year. This decrease was due primarily to lower interest rates compared to 2001 and the impact of certain financing transactions during the past two years. The Company’s weighted average interest rate was 5.64% at December 31, 2002 versus 5.10% at December 31, 2001.

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      Gain (loss) on Asset Dispositions and Impairments, Net. During 2002, the Company sold its investment in Interval International, for a gain of $6 million. This gain is offset primarily by a net loss on the disposition of two hotels. In 2001, due to the September 11 Attacks and the weakening of the U.S. economy, the Company conducted a comprehensive review of the carrying value of certain assets for potential impairment. As a result, the Company recorded a net charge relating primarily to the impairment of certain investments totaling $57 million.

      Income Tax Expense. The effective income tax rate for the year ended December 31, 2002, excluding special items, decreased to 15.2% compared to 26.6% in the corresponding period in 2001. Including the $32 million net tax benefit on special items primarily related to approximately $39 million of various adjustments to federal and state tax liabilities resulting from the successful settlement of tax matters dating back to 1993, the Company’s effective tax rate was 1.6% for the year ended December 31, 2002 and 23.2% for the year ended December 31, 2001. The Company’s effective income tax rate is determined by the level and composition of pretax income subject to varying foreign, state and local taxes and other items. The tax rate for the year ended December 31, 2002 is significantly lower than the prior year due to the combination of lower pretax income, the distribution of $0.84 per share and the cessation of amortization of goodwill (as discussed above), which was not deductible for tax purposes.

Discontinued Operations

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

Year Ended December 31, 2001 Compared with Year Ended December 31, 2000

Continuing Operations

      The Company’s operating results for 2001 were dramatically impacted by the continued weakening of the general global economy and, in particular, the U.S. economy which was exacerbated by the September 11 Attacks, leading to an unprecedented decline in industry-wide demand in the U.S. and internationally. The initial closing of all airports in the United States and the significant decline in business and leisure travel following the September 11 Attacks resulted in significant decreases in revenues and earnings for September and the fourth quarter of 2001 when compared to the same periods in 2000. Immediately following the September 11 Attacks, the Company began developing operating plans commensurate with the reduced demand levels and began implementing cost reduction plans at all owned and managed hotels worldwide as well as corporate and division offices.

      Revenues. Total Revenues decreased 8.7% from $4.345 billion to $3.967 billion for the year ended December 31, 2001 when compared to the corresponding period in 2000. The decrease in Total Revenues reflects an 8.6% decrease in revenues from the Company’s owned, leased and consolidated joint venture hotels to $3.343 billion for the year ended December 31, 2001 when compared to $3.659 billion in the corresponding period of 2000 and a slight decrease in other hotel and leisure revenues to $624 million for the year ended December 31, 2001 when compared to $686 million in the corresponding periods of 2000 due primarily to a decline in management and franchise fees, offset by a slight increase in revenues from the sale of VOIs.

      The decrease in revenues from owned, leased and consolidated joint venture hotels is due primarily to decreased revenues at the Company’s hotels owned during both periods (“Comparable Owned Hotels”) (157 hotels for the year ended December 31, 2001, excluding 10 hotels sold and 8 hotels without comparable results during 2000 and 2001). Revenues at the Company’s Comparable Owned Hotels decreased 10.8% to

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      The decrease in other hotel and leisure revenue for the year ended December 31, 2001, when compared to the same period in 2000, resulted from lower management fees, primarily due to reduced incentive management fees, decreased equity earnings from joint ventures as a result of the previously discussed weakened global economies, offset by an increase in VOI volume sales of 3.5%, to $242 million in 2001 compared to $234 million in 2000. Other hotel and leisure revenues also include $12 million and $14 million for the years ended December 31, 2001 and 2000, respectively, primarily related to gains from the sale of VOI receivables.

      Other revenues and expenses from managed and franchised properties were $740 million and $695 million for 2001 and 2000, respectively. These revenues represent reimbursements of costs incurred on behalf of managed hotel properties and franchisees. These costs relate primarily to payroll costs at managed properties where the Company is the employer. Since the reimbursements are made based upon the costs incurred with no added margin, these revenues and corresponding expenses have no effect on the Company’s operating income, net income or profit margins.

      EBITDA. Total Company EBITDA (which excludes $50 million in restructuring and other special charges and $24 million of foreign exchange gains related to the devaluation of the Argentine Peso in 2001) decreased $343 million to $1.230 billion as of December 31, 2001, primarily due to EBITDA declines at the Company’s owned, leased and consolidated joint venture hotels. EBITDA for the Company’s owned, leased and consolidated joint venture hotels decreased $248 million to $978 million for the year ended December 31, 2001 when compared to the corresponding period in 2000. This decrease was primarily due to a $255 million or 21.0% decrease in EBITDA at the Company’s Comparable Owned Hotels, with North America accounting for most of this decline, ($209 million decrease over the same period in 2000) resulting primarily from the weakening U.S. economy and the September 11 Attacks. As mentioned above, the Company’s significant presence in New York contributed to the decline as EBITDA at seven owned hotels in this city decreased $73 million in 2001 when compared to 2000. The sale of nine hotels during 2000 and early 2001 and the effective closure of two hotels in Chicago which were being converted to W hotels also contributed to the decline in EBITDA. EBITDA was also impacted by a $29 million decrease in the vacation ownership segment.

      Selling, General, Administrative and Other. Selling, general, administrative and other expenses were $411 million and $403 million for the years ended December 31, 2001 and 2000, respectively. The increase in selling, general, administrative and other expenses was due primarily to increased expenses associated with SVO in connection with increased sales, offset by a $24 million foreign exchange gain as a result of the devaluation of the Argentinean Peso and reduced corporate overhead, including a $14 million pretax gain resulting from the termination of a pension plan for 2001.

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      Restructuring and Other Special Charges (Credits). During the year ended December 31, 2001, the Company recorded $50 million in restructuring and other special charges related primarily to the September 11 Attacks and the resulting decline in industry-wide demand.

      Due to the September 11 Attacks and the weakening of the U.S. economy, in the third and fourth quarter of 2001, the Company implemented a cost reduction plan and conducted a comprehensive review of the carrying value of certain assets for potential impairment, resulting in 2001 restructuring charges of $15 million and noncash other special charges aggregating approximately $36 million. The restructuring charges were primarily for severance costs incurred as part of the cost reduction plan. The other special charges consisted primarily of employee retention costs associated with the accelerated vesting of 50% of restricted stock awards granted in February 2001 (approximately $11 million); bad debt expense associated with receivables no longer deemed collectible (approximately $17 million); impairments of certain investments and other assets (approximately $5 million); and abandoned pursuit projects (approximately $3 million).

      In addition, in early 2001, the Company wrote down its investments in various e-business ventures by approximately $19 million based on the market conditions for the technology sector at the time and management’s assessment that impairment of these investments, was other-than-temporary. This special charge was offset by the reversal of a $20 million bad debt restructuring charge taken in 1998 relating to a note receivable, which is now fully performing.

      Depreciation and Amortization. Depreciation and amortization expense increased to $433 million and $93 million, respectively, in the year ended December 31, 2001 compared to $391 million and $90 million, respectively, in the corresponding period of 2000. The increase in depreciation expense for the year ended December 31, 2001 was primarily attributable to the additional depreciation resulting from capital expenditures at many of the Company’s owned, leased and consolidated joint venture hotels over the past two years.

      Net Interest Expense. Interest expense for the years ended December 31, 2001 and 2000, which is net of interest income of $11 million and $19 million, respectively, and discontinued gaming operations allocations of $6 million in the year ended December 31, 2000, decreased to $367 million from $423 million. These balances also include charges of $9 and $3 million for 2001 and 2000, respectively, related to debt extinguishment costs. This decrease was due primarily to lower interest rates compared to 2000 and the impact of certain financing transactions, including the issuance of zero coupon convertible debt in May 2001. The Company’s weighted average interest rate was 5.10% at December 31, 2001 versus 7.44% at December 31, 2000.

      Gain (Loss) on Asset Dispositions and Impairments, Net. Due to the September 11 Attacks and the weakening of the U.S. economy, the Company conducted a comprehensive review of the carrying value of certain assets for potential impairment. As a result, the Company recorded a net charge relating primarily to the impairment of certain investments in the fourth quarter of 2001 totaling $57 million. In 2000, the Company recorded a net gain of $2 million related primarily to seven hotel sales.

      Income Tax Expense. The effective income tax rate for the year ended December 31, 2001 decreased to 23.2% compared to 33.0% in the corresponding period in 2000. The Company’s effective income tax rate is determined by the level and composition of pretax income subject to varying foreign, state and local taxes and other items. The decrease from prior year is due to the combination of lower pretax income in 2001 due primarily to the weakening U.S. economy and the September 11 Attacks, while maintaining the Company’s normal dividend level.

LIQUIDITY AND CAPITAL RESOURCES

Cash from Operating Activities

      Cash flow from operating activities is the principal source of cash used to fund the Company’s operating expenses, interest payments on debt, maintenance capital expenditures and distribution payments by the Trust. Despite the weakened global economies, the Company anticipates that cash flow provided by operating activities will be sufficient to service these cash requirements. In 2002, the Company shifted from a quarterly distribution to an annual distribution, declaring a distribution of $0.84 per share to shareholders of record on

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Cash Used for Investing Activities

      In limited cases, the Company has made loans to owners of or partners in hotel or resort ventures for which the Company has a management or franchise agreement. Loans outstanding under this program totaled $156 million at December 31, 2002. The Company evaluates these loans for impairment, and at December 31, 2002, believes these loans are collectible. Unfunded loan commitments aggregating $33 million were outstanding at December 31, 2002, of which $7 million are expected to be funded in 2003 and $15 million are expected to be funded in total. These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects.

      The Company participates in programs with unaffiliated lenders in which the Company may partially guarantee loans made to facilitate third-party ownership of hotels that the Company manages or franchises. As of December 31, 2002, the Company was a guarantor for loans which could reach a maximum of $164 million relating to three projects: the St. Regis in Monarch Beach, California, which opened in mid-2001; the Westin Kierland Resort and Spa in Scottsdale, Arizona, which opened in November 2002; and the Westin in Charlotte, North Carolina, which is scheduled to open in the first quarter of 2003. In connection with the loan guarantee for the Westin Charlotte, the Company also entered into a guarantee to fund working capital shortfalls for this resort through 2005. No fundings are anticipated under this working capital guarantee. With respect to the Westin Kierland, the guarantee is joint and several with another equity partner. The Company does not anticipate any funding under these loan guarantees in 2003, as all projects are well capitalized. Furthermore, since each of these properties was funded with significant equity and subordinated debt financing, if the Company’s loan guarantees were to be called, the Company could take an equity position in these properties at values significantly below construction costs.

      Surety bonds issued on behalf of the Company as of December 31, 2002 totaled $119 million, the majority of which were required by state or local governments relating to our vacation ownership operations and by our insurers to secure large deductible insurance programs.

      Furthermore, in order to secure management and franchise contracts, the Company may provide performance guarantees to third-party owners. Most of these performance guarantees allow the Company to terminate the contract rather than fund shortfalls if certain performance levels are not met. In limited cases, the Company is obliged to fund shortfalls in performance levels. As of December 31, 2002, the Company had eight management contracts with performance guarantees with possible cash outlays of up to $74 million, $50 million of which, if required, would be funded over a period of 25 years and would be largely offset by management fees received under these contracts. Many of the performance tests are multi-year tests, are tied to the results of a competitive set of hotels, and have exclusions for force majeure and acts of war and terrorism. The Company does not anticipate any significant funding under the performance guarantees in 2003. In addition, the Company has agreed to guarantee certain performance levels at a managed property that has authorized VOI sales and marketing. The exact amount and nature of the guaranty is currently under dispute. However, the Company does not believe that any payments under this guaranty will be significant. Lastly, the Company does not anticipate losing a significant number of management or franchise contracts in 2003.

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      The Company had the following contractual obligations outstanding as of December 31, 2002 (in millions):

(1)	Included in these balances are commitments that may be satisfied by the Company’s managed and franchised properties.

     The Company had the following commercial commitments outstanding as of December 31, 2002 (in millions):

      The Company intends to finance the acquisition of additional hotel properties (including equity investments), hotel renovations, VOI construction, capital improvements, technology spend and other core business acquisitions and investments and provide for general corporate purposes through its credit facilities described below, through the net proceeds from dispositions and when market conditions warrant, through the issuance of additional equity or debt securities.

      The Company periodically reviews its business with a view to identifying properties or other assets that we believe either are non-core, no longer complement our business, are in markets which may not benefit us as much as other markets during an economic recovery or could be sold at significant premiums. The Company is focused on restructuring and enhancing real estate returns and monetizing investments. In the fourth quarter of 2002, the Company completed the sale of the Doubletree Minneapolis hotel for $47 million. Including this sale, the Company is targeting net proceeds of at least $500 million from domestic and/or international asset sales by the end of 2003. There can be no assurance, however, that the Company will be able to complete dispositions on commercially reasonable terms or at all.

Cash Used for Financing Activities

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

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

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      In April 2002, the Company sold $1.5 billion of senior notes in two tranches — $700 million principal amount of 7 3/8% senior notes due 2007 and $800 million principal amount of 7 7/8% senior notes due 2012 (the “Senior Notes Offering”). The Company used the proceeds to repay all of its senior secured notes facility and a portion of its previous Senior Credit Facility. In connection with the repayment of debt, the Company incurred charges of approximately $29 million including approximately $23 million for the early termination of interest rate swap agreements associated with repaid debt, and $6 million write-off of deferred financing costs and termination fees for the early extinguishment of debt.

      In December 2001, the Company entered into an 18-month 450 million Euro loan that automatically extended for six additional months until December 2003, as the lender group elected not to exercise its put option. The loan has an interest rate of Euribor plus 195 basis points. The proceeds of the Euro loan were drawn down in two tranches; the first 270 million Euros was drawn down in December 2001 and used to repay the previously outstanding 270 million Euro facility and the remaining 180 million Euros was drawn down in January 2002 and the proceeds were used to pay down a portion of the Company’s previous Senior Credit Facility.

      The Company maintains non-U.S.-dollar-denominated debt, which provides a hedge of the Company’s international net assets and operations but also exposes its debt balance to fluctuations in foreign currency exchange rates. During the years ended December 31, 2002 and 2001, the effect of changes in foreign currency exchange rates was a net increase in debt of approximately $135 million and a net decrease in debt of approximately $27 million, respectively. The Company’s debt balance is also affected by changes in interest rates as a result of the Company’s Fair Value Swaps. The fair market value of the Fair Value Swaps is recorded as an asset or liability and as the Fair Value Swaps are deemed to be effective, an adjustment is recorded against the corresponding debt. At December 31, 2002, the Company’s debt included an increase of approximately $75 million related to the unamortized gain on terminated fair value swaps and the fair market value of current Fair Value Swap assets. At December 31, 2001 the Company’s debt included a decrease of approximately $1 million related to Fair Value Swap liabilities.

      In May 2001, the Company sold an aggregate face amount of $816 million zero coupon convertible senior notes due 2021. The two series of notes had an initial blended yield to maturity of 2.35%. The notes are convertible, subject to certain conditions, into an aggregate 9,657,000 Shares. The Company received gross proceeds from these sales of approximately $500 million, which were used to repay a portion of its senior secured notes facility that bore interest at LIBOR plus 275 basis points. The Company incurred approximately $9 million of charges in connection with this early debt extinguishment. In May 2002, the Company repurchased all of the outstanding Series A convertible notes for $202 million in cash. Holders of Series B Notes may first put these notes to the Company in May 2004 for a purchase price of approximately $330 million.

      In addition to the $450 million Euro loan maturing in December 2003, approximately $250 million of the Sheraton Holdings public debt matures in November 2003. Based upon the current level of operations, management believes that the Company’s cash flow from operations, together with available borrowings under the Revolving Credit Facility (approximately $555 million at December 31, 2002), available borrowings from international revolving lines of credit (approximately $112 million at December 31, 2002), capacity from additional borrowings and proceeds from non-core asset sales, will be adequate to meet anticipated requirements for scheduled maturities, dividends, working capital, capital expenditures, marketing and advertising program expenditures, other discretionary investments, interest and scheduled principal payments for the foreseeable future. Starwood has a substantial amount of indebtedness and had a working capital deficiency of $1.249 billion at December 31, 2002. There can be no assurance that the Company will be able to refinance its indebtedness as it becomes due and, if so, on favorable terms, nor can there be assurance that the Company’s business will continue to generate cash flow at or above historical levels or that currently anticipated results will be achieved.

      While the Company’s senior debt is currently rated investment grade by one of the two major rating agencies, there can be no assurance the Company will be able to maintain this rating. On December 20, 2002, that rating agency placed the Company’s investment grade rating on “CreditWatch with negative implica-

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

      Following is a summary of the Company’s debt portfolio as of December 31, 2002:

(a)	Excludes approximately $355 million of the Company’s share of unconsolidated joint venture debt, all of which was non-recourse, except as noted earlier.
(b)	Maturity reflects the earliest date the debt can be put to the Company.
(c)	At December 31, 2002, LIBOR was 1.38%
(d)	At December 31, 2002, Euribor was 2.86%
(e)	Included approximately $27 million and $48 million at December 31, 2002 of fair value adjustments related to the fixed-to-floating interest rate swaps for the Sheraton Holding public debt and the Senior Notes, respectively.

     During each of the quarters of 2001, the Trust declared a distribution of $0.20 per Share. Total 2001 distributions were $156 million. In 2002, the Company shifted from a quarterly distribution to an annual distribution. A distribution of $0.84 per Share, representing a 5% increase over the aggregate 2001 distribution, was paid in January 2003 to shareholders of record as of December 31, 2002.

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Stock Sales and Repurchases

      At December 31, 2002, Starwood had outstanding approximately 200 million Shares, 1 million partnership units and 2 million Class A EPS, Class B EPS and exchangeable units. Through January 31, 2003, in accordance with the terms of the Class B EPS, which allow the shareholders to put these units back to the Company at $38.50 beginning on the fifth anniversary of the Westin acquisition, 422,753 units of Class B EPS were put back to the Company for approximately $16 million. Mr. Sternlicht held, individually and through various family trusts, an aggregate of 240,391 Class B EPS and limited partnership units of the Realty Partnership and Operating Partnership convertible to Class B EPS on a one-to-one basis. On January 2, 2003, Mr. Sternlicht redeemed all of these Class B EPS for $38.50 per Share.

      In 1998, the Board of Directors of the Company approved the repurchase of up to $1 billion of Shares under a Share repurchase program (the “Share Repurchase Program”). On April 2, 2001, the Company’s Board of Directors authorized the repurchase of up to an additional $500 million of Shares under the Share Repurchase Program, subject to the terms of the previous Senior Credit Facility. Pursuant to the Share Repurchase Program, Starwood repurchased 3.2 million Shares in the open market for an aggregate cost of $96 million during 2001. No shares were repurchased during 2002. As of December 31, 2002, approximately $633 million remains available under the Share Repurchase Program.

      During 2002, approximately 4,000 shares of Class B EPS were exchanged by certain stockholders for an equal number of shares of Class A EPS. Additionally, approximately 60,000 shares of Class A EPS were exchanged for an equal number of Shares.

      During 2002, the Company exchanged approximately 126,000 limited partnership units of the Realty Partnership and the Operating Partnership held by third parties for Shares on a one-for-one basis.

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

      Interest rate swap agreements are the primary instruments used to manage interest rate risk. At December 31, 2002, the Company had five outstanding long-term interest rate swap agreements under which the Company pays variable interest rates and receives fixed interest rates. At December 31, 2002, the Company also had one interest rate swap agreement under which the Company pays a fixed rate and receives a

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      Foreign currency forward transactions are used by the Company to hedge exposure to foreign currency exchange rate fluctuations. The gains or losses on the forward contracts are largely offset by the gains or losses of the underlying transactions, and consequently, a sudden significant change in foreign currency exchange rates would not have a material impact on future net income or cash flows on such underlying transactions. The Company monitors its foreign currency exposure on a monthly basis to maximize the overall effectiveness of its foreign currency hedge positions. Changes in the value of forward foreign exchange contracts designated as hedges of foreign currency denominated assets and liabilities are classified in the same manner as changes in the underlying assets and liabilities. At December 31, 2002, the notional amount of the Company’s open forward foreign exchange contract protecting the value of the Company’s foreign currency denominated assets and liabilities was approximately $2 million. A hypothetical 10% change in currency exchange rates under the remaining contracts would result in an increase or decrease of approximately $240,000 to the fair value of the forward foreign exchange contract at December 31, 2002, which would be offset by an opposite effect on the related hedged position.

      The Company enters into a derivative financial arrangement only to the extent it meets the objectives described above, and the Company does not engage in such transactions for trading or speculative purposes.

      See Note 17 in the notes to financial statements filed as part of this Joint Annual Report and incorporated herein by reference for further description of derivative financial instruments.

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

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      Not applicable.

PART III