The changes in servicing assets measured using the fair value method were:

In June 2007, we sold $270 million of notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional products. In connection with the sale of the notes receivable, we received net proceeds of $270 million, retained residual interests of $46 million, and recorded a gain of $45 million. We used the following key assumptions to measure the fair value of the residual interests, excluding servicing assets, at the date of sale: average discount rate of 9.22 percent; average expected annual prepayments, including defaults, of 25.18 percent; expected weighted average life of prepayable notes receivable, excluding prepayments and defaults, of 75 months; and expected weighted average life of prepayable notes receivable, including prepayments and defaults, of 34 months. Our key assumptions are based on our experience with other Timeshare segment notes receivable that we originate.

13.	Long-Term Debt

Our long-term debt at March 23,June 15, 2007, and December 29, 2006, consisted of the following:

As of the end of our 2007 firstsecond quarter, all debt, other than mortgage debt and $1 million of other debt, is unsecured.

We are party to aDuring the second quarter of 2007, we amended and restated our multicurrency revolving credit agreement, that provides fororiginally entered into during the second quarter of 2005, to increase the aggregate borrowings and letters of up tocredit available under the facility from $2.0 billion whichto $2.5 billion and to extend the expiration of the facility from 2011 to 2012. The availability of revolving credit borrowings supports our commercial paper programprogram. Borrowings under the facility bear interest at the London Interbank Offered Rate (LIBOR) plus a spread, based on our public debt rating. Additionally, we pay quarterly fees on the facility at a rate also based on our public debt rating.

On June 20, 2007, subsequent to the end of the 2007 second quarter, we entered into a terms agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, Barclays Capital Inc., and lettersother underwriters to issue $350 million aggregate principal amount of credit.6.375 percent Series I Notes due 2017 (the “Notes”). The offering of the Notes closed on June 25, 2007. We received net proceeds of approximately $346 million from this offering, after deducting the underwriting discount and estimated expenses of the offering. We used these proceeds for general corporate purposes including the repayment of commercial paper borrowings.

Interest on the Notes will be paid on June 15 and December 15 of each year, commencing on December 15, 2007. The Notes will mature on June 15, 2017, and are redeemable, in whole or in part, at any time and from time to time under the terms provided in the form of note. The Notes were issued under an indenture with The Bank of New York, successor to JP Morgan Chase Bank, N.A. (formerly known as The Chase Manhattan Bank), as trustee, dated as of November 16, 1998.

Our total comprehensive income was $169$221 million and $74$202 million for the twelve weeks ended March 23,June 15, 2007, and March 24,June 16, 2006, respectively.respectively, and $390 million and $276 million for the twenty-four weeks ended June 15, 2007, and June 16, 2006. The principal difference between net income and comprehensive income for the twelve weeks ended June 15, 2007, 12-week period primarily relates to foreign currency translation adjustments; and for the twenty-four weeks ended June 15, 2007, foreign currency translation adjustments, partially offset by mark-to-market adjustments associated with available-for-sale securities, partially offset by foreign currency translation adjustments.securities. The principal difference between net income and comprehensive income for the 2006 12-week periodprior year primarily relates to mark-to-market adjustments associated with available-for-sale securities, but also includes foreign currency translation adjustments.

For the twelvetwenty-four weeks, ended March 23,June 15, 2007, approximately 3.77.2 million shares of our Class A Common Stock were issued as a resultupon conversion, exercise, or satisfaction of exercised options.required conditions. In addition, during the first quarterhalf of 2007 we repurchased approximately 9.518.2 million shares of our Class A Common Stock at an average price of $47.46$46.86 per share.

Guarantees

We issue guarantees to certain lenders and hotel owners primarily to obtain long-term management contracts. The guarantees generally have a stated maximum amount of funding and a term of five years or less.three to ten years. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at the end of the term. The terms of the guarantees to hotel owners generally require us to fund if the hotels do not attain specified levels of operating profit. Guarantee fundings to lenders and hotel owners are generally recoverable as loans repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. We also enter into project completion guarantees with certain lenders in conjunction with hotels and Timeshare segment properties that we or our joint venture partners are building.

The maximum potential amount of future fundings for guarantees where we are the primary obligor and the carrying amount of the liability for expected future fundings at March 23,June 15, 2007, are as follows:

Our guarantees of $262$270 million listed in the preceding table include $38$43 million of operating profit guarantees that will not be in effect until the underlying properties open and we begin to operate the properties.

The guarantees of $262$270 million in the preceding table do not include $274$263 million of guarantees related to Senior Living Services lease obligations and lifecare bonds for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor of the leases and a portion of the lifecare bonds and CNL Retirement Properties, Inc. (“CNL”), which subsequently merged with Health Care Property Investors, Inc., is the primary obligor of the remainder of the lifecare bonds. Prior to the sale of the Senior Living Services business in 2003, these pre-existing guarantees were guarantees by the Company of obligations of consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any guarantee fundings we may be called on to make in connection with these lease obligations and lifecare bonds. We do not expect to fund under the guarantees.

The table also does not include lease obligations for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $21$18 million and total remaining rent payments through the initial term of approximately $190$142 million. CTF Holdings Ltd. (“CTF”) had originally made available €35 million, in cash collateral in the event that we are required to fund under such guarantees (approximately €31€21 million remained at the end of the 2007 firstsecond quarter). As CTF obtains releases from the landlords and these hotels exit the system, our contingent liability exposure of approximately $190$142 million will decline. Since we assumed these guarantees, we have not funded any amounts and we do not expect to fund any amounts under these guarantees in the future.

In addition to the guarantees described above, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability, or damage occurring as a result of the actions of the other joint venture owner or our own actions.

Furthermore, in addition to the project completion guarantees noted in the preceding table, we have provided a project completion guarantee to a lender for a project with an estimated aggregate total cost of $524 million. Payments for cost overruns for this project will be satisfied by the joint venture via contributions from the partners, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is 34 percent. We do not expect to fund under this guarantee. We have also provided a project completion guarantee to another lender for a project with an estimated aggregate total cost of $80 million. Payments for cost overruns for this project will be satisfied by the joint venture via contributions from the partners, and we are liable on a several basis with our partners in an amount equal to our pro rata ownership in the joint venture, which is 25 percent. We do not expect to fund under this guarantee.

Commitments and Letters of Credit

In addition to the guarantees noted previously, as of March 23,June 15, 2007, we had extended approximately $11$8 million of loan commitments to owners of lodging properties, under which we expect to fund approximately $6 million as follows: $5 million in one year and $1 million in two to three years. We do not expect to fund the remaining $5$2 million of commitments, which expire as follows: $1 million in four to five years; and $4 million after five years. At March 23,June 15, 2007, we also have commitments to invest up to $29$26 million of equity for minority interests in partnerships that plan to purchase North American full-service and limited-service properties, which expire as follows: $5 million within one year; $20$17 million in one to two years; and $4 million after five years. As of March 23,June 15, 2007, we also had a commitment to invest up to $27 million (20 million euros)(€20 million) in a joint venture of which we are a partner. There is no current expectation of funding this amount.

At March 23,June 15, 2007, we also had $104$141 million of letters of credit outstanding on our behalf, the majority of which related to our self-insurance programs. Surety bonds issued on our behalf as of March 23,June 15, 2007, totaled $651$594 million, the majority of which were requested by federal, state or local governments related to our lodging operations, including our Timeshare segment and self-insurance programs.

Synthetic Fuel

The tax credits available under the Internal Revenue Code for the production and sale of synthetic fuels were established by Congress to encourage the development of alternative domestic energy sources. Congress deemed that the incentives provided by the tax credits would not be necessary if the price of oil increased beyond certain thresholds as prices would then provide a more natural market for these alternative fuels. As a result, the tax credits available under the Internal Revenue Code for the production and sale of synthetic fuel in any given calendar year are phased out if the Reference Price of a barrel of oil for that year falls within a specified range. The Reference Price of a barrel of oil is an estimate of the annual average wellhead price per barrel of domestic crude oil and is determined for each calendar year by the Secretary of the Treasury by April 1 of the following year. In 2005 and 2006, the Reference Price was roughly equal to 89 percent and 90 percent, respectively, of the average price in those years of the benchmark NYMEX futures contract for a barrel of light, sweet crude oil. The price range within which the credit is phased out was set in 1980 and is adjusted annually for inflation. In 2006, the Reference Price phase-out range was $55.06 to $69.12. Because the Reference Price of a barrel of oil for 2006 was within that range, at $59.68, there was a 33 percent reduction of the tax credits available for synthetic fuel produced and sold in 2006.

Assuming a 2 percent inflation adjustment factor for 2007 and assuming that the ratio of the Reference Price to the average price of the benchmark NYMEX futures contract remains approximately the same in 2007 as it was in 2006, we currently estimate that the tax credits available for production and sale in 2007 would begin to be phased out if the average price of the benchmark NYMEX futures contract in 2007 exceeds approximately $62 and would be fully phased out if the average price of the benchmark NYMEX futures contract in 2007 exceeds approximately $78. The average price of the benchmark NYMEX futures contract for 2007, through April 18,July 11, 2007, was approximately $59.09.$62.24.

We cannot predict with any accuracy the future price of a barrel of oil. If the Reference Price of a barrel of oil in 2007 exceeds the applicable phase-out threshold, the tax credits generated by our synthetic fuel facilities could be reduced or eliminated. Late in 2006 and early in 2007, we entered into hedge agreements to minimize operating losses that could occur if more than a majority of the tax credits areis phased out in 2007.

Audit of Employee Stock Ownership Plan Transaction

In Footnote No. 18, “Contingencies,” to our 2006 Form 10-K we disclosed that the IRS is auditing the Company’s federal tax returns for the 2000, 2001, and 2002 fiscal years. As part of that audit, the IRS reviewed a leveraged employee stock ownership plan (“ESOP”) feature of the Company’s Employees’ Profit Sharing, Retirement and Savings Plan and Trust (the “Plan”) that was implemented in a transaction (the “ESOP transaction”) on June 13, 2000. Principal and interest on the debt related to the transaction was forgiven over a 26-month period as a mechanism for funding Company contributions of elective deferrals and matching contributions to the Plan. The Company claimed federal income tax deductions for the forgiven principal on the debt in the amount of $1 billion over that period, along with forgiven interest on the debt. The benefit related to the tax deductions was reflected in equity and did not flow through the provision for income taxes.

On March 1, 2007, the Company received Notices of Proposed Adjustment from the IRS challenging most of the ESOP related federal income tax deductions claimed by the Company and proposing substantial excise taxes and penalties. We believe that the IRS’ proposed adjustments are incorrect and we intend to vigorously defend our positions. We have entered into a process with the IRS to attempt to expeditiously settle this matter. If we cannot reach resolution through this process, we will continue our efforts to resolve the ESOP tax matter through traditional IRS administrative procedures, a process that could take several years.

16.	Business Segments

We are a diversified hospitality company with operations in six business segments:

As disclosed in our 2006 Form 10-K, in 2006 the Companywe analyzed itsour internal reporting process and implemented changes in the fourth quarter that were designed to improve efficiency and, as part of this process, we evaluated the impact on segment reporting. Accordingly, we now report six operating segments as compared to five before the change and no longer allocate indirect administrative expenses to our segments. The revised segment reporting is reflected throughout this report for all periods presented. Historical figures are presented in a manner that is consistent with the revised segment reporting. See also the Form 8-K that we filed on March 19, 2007, furnishing quarterly Revenues and Income from Continuing Operations for each of 2006 and 2005 in the new segment format.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense or indirect general, administrative, and other expenses. With the exception of the Synthetic Fuel segment, we do not allocate income taxes to our segments. With the exception of the Timeshare and Synthetic Fuel segments, we do not allocate interest income to our segments. Because note sales are an integral part of the Timeshare segment, we include note sale gains in our Timeshare segment results. We also allocate other gains or losses as well as equity earnings or losses from our joint ventures and divisional general, administrative, and other expenses to each of our segments. “Other unallocated corporate” expense represents that portion of our revenues, general, administrative, and other expenses, equity in earnings or losses, and other gains or losses that are not allocable to our segments.

We aggregate the brands presented within our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments considering their similar economic characteristics, types of customers, distribution channels, the regulatory business environment of the brands and operations within each segment, and our organizational and management reporting structure. We refer to these segments collectively as our lodging business.

Revenues

Income from Continuing Operations

Equity in (Losses) Earnings (Losses) of Equity Method Investees

Our tax provision of $14$42 million for the quarter ended March 23,June 15, 2007, includes a tax benefit and tax credits totaling $72$86 million associated with our Synthetic Fuel segment. Our tax provision of $85 million for the quarter ended June 16, 2006, included a tax benefit and tax credits totaling $17 million associated with our Synthetic Fuel segment. Our tax provision of $56 million for the quartertwenty-four weeks ended March 24, 2006, includedJune 15, 2007, includes a tax benefit and tax credits totaling $29of $158 million associated with our Synthetic Fuel segment. Our tax provision of $141 million for the twenty-four weeks ended June 16, 2006, includes a tax benefit and tax credits of $46 million associated with our Synthetic Fuel segment.

17.	Variable Interest Entities

We currently consolidate four entities that are variable interest entities under FIN 46, “Consolidation of Variable Interest Entities-revised” (“FIN 46(R)”). These entities were established with the same partner to lease four Marriott-branded hotels. At the end of the 2007 firstsecond quarter, the combined capital in the four variable interest entities is less than $1 million, which is used primarily to fund hotel working capital. Our equity at risk was $2 million and we held 55 percent of the common equity shares.

We have one other significant interest in an entity that is a variable interest entity under FIN 46(R). In February 2001, we entered into a shareholders’ agreement with an unrelated third party to form a joint venture to own and lease luxury hotels to be managed by us. In February 2002, the joint venture signed its first lease with a third-party landlord. We hold 35 percent of the equity and 65 percent of the debt. In addition, each equity partner entered into various guarantees with the landlord to guarantee lease payments. At the end of the 2007 first quarter, our maximum exposure to loss was $16 million. We do not consolidate the joint venture since we do not bear the majority of the expected losses or expected residual returns.

In conjunction with the transaction with CTF described more fully in our 2006 Form 10-K Footnote No. 8, “Acquisitions and Dispositions,” under the caption “2005 Acquisitions,” we manage 15certain hotels on behalf of four tenant entities 100 percent owned by CTF, which lease the 15 hotels from third-party owners. At the end of the 2007 second quarter, the number of hotels totaled 14. The entities have minimal equity and minimal assets comprised of hotel working capital. CTF has placed money in a trust account to cover cash flow shortfalls and to meet rent payments. The terms of the trust require that the cash flows for the four tenant entities be pooled for purposes of making rent payments and determining cash flow shortfalls. At the end of the 2007 firstsecond quarter, the trust account held approximately $47$40 million. The entities are variable interest entities under FIN 46(R). We do not consolidate the entities, as we do not bear the majority of the expected losses. We are secondarily liable for rent payments for nineeight of the 1514 hotels in the event that there are cash flow shortfalls and there is no money left in the trust. Future minimum lease payments through the end of the lease term for these nineeight hotels total approximately $136$124 million. In addition, we are also secondarily liable for rent payments of up to an aggregate cap of $40 million for the six other hotels in the event that there are cash flow shortfalls.

As further described in Footnote No. 21, “Variable Interest Entities,” in our 2006 Form 10-K, at year-end 2006, we managed one hotel on behalf of a tenant entity 100 percent owned by CTF, which leased the hotel from a third-party owner. The entity had minimal equity and minimal assets comprised of hotel working capital. CTF had placed money in a trust account to cover cash flow shortfalls and to meet rent payments. At year-end 2006, there was approximately $23 million in the trust, and the entity was a variable interest entity under FIN 46(R). We consolidated the entity as we bore the majority of the expected losses. We were secondarily liable for rent payments for this hotel in the event that there was a cash flow shortfall and there was not money left in the trust. At year-end 2006, future minimum lease payments through the end of the lease term were as follows: $8 million for each of 2007, 2008, 2009, 2010, and 2011; and $168 million thereafter, for a total of $208 million.

Early in the 2007 first quarter, we entered into a transaction whereby the landlord allowed us to assume the lease agreement for this property, which we had managed prior to the assumption, and accordingly, we became the primary obligor. In conjunction with this assignment, the lease was restructured. Under the new lease agreement, we are required to pay fixed minimum rents through 2033. Minimum lease payments relating to this lease are as follows: $8 million in 2007, $9 million for each of 2008, 2009, 2010, and 2011; and $195 million thereafter, for a total of $239 million. In conjunction with this transaction, we received a $16 million distribution from the trust, and the balance of the funds was distributed to the landlord. We accounted for our receipt of trust funds as a lease incentive, the reduction of which will be recorded on a straight-line basis as an adjustment to lease expense over the term expiring in 2033.

We are party to a venture that develops and markets fractional interests. During the 2007 second quarter, we issued a guarantee to the senior lender of the venture in support of the senior loan facility and reevaluated our variable interests in the venture under FIN 46(R). We determined that we are the primary beneficiary and as such, we consolidated the venture, which included assets of $241 million and liabilities of $224 million.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

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

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed in these forward-looking statements, including the risks and uncertainties described below and other factors we describe from time to time in our periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). We therefore caution you not to rely unduly on any forward-looking statements. The forward-looking statements in this report speak only as of the date of this report, and we undertake no obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

In addition, see the “Item 1A. Risk Factors” caption in the “Part II – OTHER INFORMATION” section of this report.

BUSINESS AND OVERVIEW

Lodging demand remained strong and increased through the first quartertwo quarters of 2007, driven by continued strength associated with worldwide business travel. In general, urban markets tend to be experiencing stronger demand than suburban markets and luxury, international, and full-service properties are experiencing stronger demand than limited-service properties. Lodging supply growth continued to remain relatively low. At the property level, these factorsStrong demand enabled us to increase rates and improve revenue mix at the property level, which resulted in solid year-over-year Revenue per Available Room (“RevPAR”) increases. Strong demand also enabled us to reduce available discounts and special rates. In addition, group rates continue to increase as business negotiated in earlier years at lower rates is replaced with business negotiated at higher rates.

Demand for our brands is strong in most markets around the world. For our North American comparable properties, comparable RevPAR increases in 2007, through the end of the firstsecond quarter, as compared to the year ago quarter,period, were particularly strong in Dallas, New York St. Louis, Austin, Dallas, Miami,City, San Antonio, and Orlando.San Francisco. Internationally, year-to-date RevPAR increases in 2007 versus the prior year were particularly strong in Australia, China, France, Eastern Europe,India, Mexico, Australia, and the Middle East.

Our consistent approach to reducingimproving property-level and above-property costsproductivity has benefited our profitability, as well as that of owners and franchisees. Driving room rate improvement, benchmarking successful performance, and leveraging our size have all contributed to property-level margin improvements and higher fees to us. We continue to enhance the appeal of our proprietary Website, Web site,www.Marriott.com, through functionality and service improvements, and we continue to capture an increasing proportion of property-level reservations via this cost efficient channel.

We currently have more than 100,000over 110,000 rooms in our development pipeline. During the first quarterhalf of 2007, we opened a total of 4,78311,759 rooms (gross) and expect to open nearly 30,000 rooms (gross) for the full 2007 year. We expect to remove approximately 11,000 rooms from our system for the 2007 fiscal year, largely as a result of quality issues. For the first quarterhalf of 2007, nearly 20approximately 16 percent of the rooms added to our system were conversions from competitor brands and 2425 percent of the new rooms were located outside the United States.

Our brands are strong as a result of superior customer service with an emphasis on guest satisfaction, the worldwide presence and quality of our brands, our Marriott Rewards loyalty program, an information-rich and

easy-to-use Web site, a multi-channel central reservations system, and desireddesirable property amenities. We, along with owners and franchisees, continue to invest in our brands by means of both new, refreshed and reinvented properties, new room and public space designs, enhanced amenities, and technology offerings.

In the second quarter of 2007, we announced our agreement with Nickelodeon and Miller Global Properties, LLC to co-develop a new lodging resort brand and concept for travelers seeking fun and adventure, “Nickelodeon Resorts by Marriott.” Also during the 2007 second quarter, we announced our agreement with Ian Schrager to create the first truly global boutique lifestyle hotel brand on a large scale.

CONSOLIDATED RESULTS

The following discussion presents an analysis of results of our operations for the twelve weeks and twenty-four weeks ended March 23,June 15, 2007, compared to the twelve weeks, and twenty-four weeks ended March 24,June 16, 2006.

Revenues

Twelve Weeks. Revenues increased 711 percent to $2,904$3,210 million in the firstsecond quarter of 2007 from $2,705$2,891 million in the firstsecond quarter of 2006, as a result of stronger demand for hotel rooms worldwide, which allowed us to increase room rates. Base management and franchise fees increased $16$22 million as a result of stronger RevPAR and unit growth. In the first quarter of 2006, we recognized $5 million of base management fees that were calculated based on prior period results, but not earned and due until 2006, versus no similar fees in the first quarter of 2007. Incentive management fees improved $12$39 million due to stronger RevPAR and property-level margin improvements associated with room rate increases and productivity improvements. Additionally, in the second quarter of 2007, we recognized $15 million of incentive management fees that were calculated based on prior period results, but not earned and due until the second quarter of 2007, versus no similar fees in the second quarter of 2006. In addition, 2007 incentive fees reflected $3 million of business interruption insurance proceeds associated with Hurricane Katrina. Owned, leased, corporate housing and other revenue decreased $4increased $40 million. The increase largely reflects strong RevPAR, the mix of owned and leased properties in 2007 as compared to the mix in 2006, and the receipt of termination fees totaling $6 million primarily as a result of owning fewer hotels induring the 2007 first quarter than we did in the firstsecond quarter of 2007 as compared to the receipt of virtually no termination fees during the second quarter of 2006.

Timeshare sales and services revenue increased $63$82 million (21(22 percent) over the year ago quarter. The increase largely reflects development revenue increases in the 2007 firstsecond quarter versus the prior year as some newer projects became reportable in 2007.reportable. During the firstsecond quarter of 2006, some projects were in the early stages of development and did not reach revenue recognition thresholds. Synthetic fuel revenue was $11$49 million higher in the firstsecond quarter of 2007 as compared to the year ago quarter, primarily reflecting increased production. Production in the 2006 firstsecond quarter reflected production suspensions for several weeks, early in the quarter, as a result of high oil prices.

The 711 percent increase in total revenue includes $101$87 million of increased cost reimbursements revenue to $1,921$1,992 million in the 2007 firstsecond quarter from $1,820$1,905 million in the year ago quarter. This revenue represents reimbursements of costs incurred on behalf of managed and franchised properties and relates, predominantly, to payroll costs at managed properties where we are the employer. As we record cost reimbursements based upon the costs incurred with no added markup, this revenue and related expense have no impact on either our operating income or net income. The increase in reimbursed costs is primarily attributable to the growth in the number of properties we manage and to wage increases. We added 13three managed properties (3,773(2,341 rooms), net, and 7184 franchised properties (7,794(9,233 rooms), net, to our system since the end of the 2006 second quarter.

Twenty-four Weeks. Revenues increased 9 percent to $6,114 million in the first quarter.half of 2007 from $5,596 million in the first half of 2006, as a result of stronger demand for hotel rooms worldwide, which allowed us to increase room rates. As compared to the prior year, base management and franchise fees increased $38 million as a result of stronger RevPAR and unit growth. Base management fees in the first half of 2006 included $5 million of fees that were calculated based on prior period results, but not earned and due until 2006, versus no similar fees in the first half of 2007. Incentive management fees improved $51 million due to stronger RevPAR and property-level margin improvements associated with room rate increases and productivity improvements. Additionally, in the first half of 2007, we recognized $15 million of incentive management fees that were calculated based on prior period results, but not earned and due until the first half of 2007, versus no similar fees in the first half 2006. Furthermore, 2007 incentive fees reflected $3 million of

business interruption insurance proceeds associated with Hurricane Katrina. Owned, leased, corporate housing and other revenue increased $36 million. The increase largely reflected strong RevPAR, the mix of owned and leased properties in 2007 as compared to the mix in 2006, and the recognition of $9 million of termination fees in the first half of 2007 versus the recognition of termination fees totaling $5 million in the first half of 2006.

Timeshare sales and services revenue increased $145 million (21 percent) over the year ago period. The increase largely reflected development revenue increases in the first half of 2007 versus the prior year as some newer projects became reportable. During the first half of 2006, some projects were in the early stages of development and did not reach revenue recognition thresholds. Synthetic fuel revenue was $60 million higher in the first half of 2007 as compared to the year ago period, primarily reflecting increased production. Synthetic fuel production in the first half of 2006 reflected production suspensions for several weeks beginning early in the period as a result of high oil prices, as compared to no production suspensions in 2007.

The 9 percent increase in total revenue for the first half of 2007 as compared to the first half of 2006, reflects $188 million of increased cost reimbursements revenue to $3,913 million in the first half of 2007 from $3,725 million in the year ago period. The increase in reimbursed costs is primarily attributable to the growth in the number of properties we manage and to wage increases.

Operating Income

Twelve Weeks. Operating income decreased $2increased $26 million to $201$300 million in the 2007 firstsecond quarter from $203$274 million in the year ago quarter. The decreaseincrease in operating income reflects weakerstronger combined base management, incentive management, and franchise fees of $61 million, stronger timeshares sales and services revenue net of direct expenses of $40 million, and increased owned, leased, corporate housing, and other revenue net of direct expenses of $15$8 million, partially offset by additional general, administrative, and other expenses of $66 million, and an additional synthetic fuel operating loss over the year ago quarter of $9$17 million.

The combined base management, incentive management, and franchise fee increase of $61 million reflected strong RevPAR growth and a decreaseunit growth and property-level margin improvements at company-operated properties. In the second quarter of 2007, we recognized $15 million of incentive management fees that were calculated based on prior period results, but not earned and due until the second quarter of 2007, versus no similar fees in the second quarter of 2006. The $40 million increase in timeshare sales and services revenue net of direct expenses primarily reflected increased development revenue associated with projects meeting revenue recognition thresholds. The increase in owned, leased, corporate housing and other revenue net of $9direct expenses of $8 million offset by stronger combined base, franchise, and incentiveis primarily due to the receipt of termination fees of $28$6 million in the second quarter of 2007 as compared to the receipt of virtually no termination fees during the second quarter of 2006.

Operating income was unfavorably impacted by general, administrative, and a decreaseother expenses, which increased $66 million to $207 million in the second quarter of 2007 from $141 million in the year ago quarter. The increase in general, administrative, and other expenses was primarily due to a charge of $3$35 million in the 2007 second quarter for excise taxes associated with the settlement of issues raised during the Internal Revenue Service (“IRS”) and Department of Labor examination of the employee stock ownership plan (“ESOP”) feature of our Employees’ Profit Sharing, Retirement and Savings Plan and Trust (the “Plan”). See Footnote No. 4, “Income Taxes,” for additional information on the ESOP settlement. Also unfavorably impacting general, administrative, and other expenses in the 2007 second quarter as compared to the prior year quarter were $9 million of higher deferred compensation expenses, $5 million of increased legal expenses and the reversal in 2006 of $5 million of guarantee charges as compared to no similar reversals in 2007. The additional increase of $12 million for general, administrative, and other expenses was attributable to, among other things, costs related to our unit growth and development and systems improvements.

Also impacting operating income were synthetic fuel operating losses of $35 million for 2007 versus an operating loss of $18 million in the year ago quarter, primarily reflecting increased production over the second quarter of 2006. For additional information, see our “Synthetic Fuel” segment discussion later in this report.

Twenty-four Weeks. Operating income increased $24 million to $501 million in the first half of 2007 from $477 million in the year ago period. The increase in operating income reflects stronger combined base management, incentive management, and franchise fees of $89 million, stronger timeshare sales and services revenue net of direct expenses of $31 million, partially offset by additional general, administrative, and other expenses of $63 million, an additional synthetic fuel operating loss over the year ago period of $26 million, and lower owned, leased, corporate housing, and other revenue net of direct expenses of $7 million.

The declinecombined base management, incentive management, and franchise fee increase of $89 million reflected strong RevPAR growth, unit growth, and property-level margin improvements. In the first half of 2007, we recognized $15 million of incentive management fees that were calculated based on prior period results, but not earned and due until the second quarter of 2007, versus no similar fees in the first half of 2006. The $31 million increase in timeshare sales and services revenue net of direct expenses primarily reflected increased development revenue associated with projects meeting revenue recognition thresholds.

As compared to 2006, operating income was unfavorably impacted by general, administrative, and other expenses, which increased $63 million to $354 million in the first half of 2007 from $291 million in the year ago period. The increase in general, administrative, and other expenses was primarily due to the excise tax ESOP settlement charge of $35 million in 2007. Also unfavorably impacting general, administrative, and other expenses in the 2007 first half as compared to the prior year period were $7 million of higher deferred compensation expenses, $6 million of increased legal expenses, and the reversal in 2006 of $5 million of guarantee charges as compared to no similar reversals in 2007. The additional increase of $10 million for general, administrative, and other expenses was attributable to, among other things, costs related to our unit growth and development and systems improvements.

The year-over-year change in operating income attributable to the synthetic fuel operations reflects an operating loss of $71 million in 2007 as compared to an operating loss of $45 million in the year ago period, primarily as a result of increased production in 2007. For additional information, see our “Synthetic Fuel” segment discussion later in this report.

The decrease in owned, leased, corporate housing, and other revenue net of direct expenses is primarily due to the sale of several properties since the 2006 first quarter negatively impacting results by $4 million, as well as depreciation charges totaling $4 million recorded in the first quarter of 2007 associated with one property that was reclassified from “held for sale” to “held and used,” during 2007 and, at the same property, renovations in the first half of 2007 that resulted in an additional $3 million unfavorable impact. The remaining $4 million decline primarily reflected other increased costs associated with properties that are currently held for sale. The depreciation charges totaling $4 million recognized in 2007 represented the amount that would have been recognized had the one property been continuously classified as “held and used.”

Operating income for the first quarter of 2007 included a synthetic fuelreduced operating loss of $36 million versus an operating loss of $27 million in the year ago quarter, primarily reflecting increased production. For additional information, see our “Synthetic Fuel” segment discussion later in this report. The $9 million decrease in Timeshare sales and services revenue net of direct expenses primarily reflected increased development expenses partially offset by increased development revenue reflecting projects meeting revenue recognition thresholds.

The combined base management, franchise, and incentive management fee increase of $28 million, reflected strong RevPAR growth, unit growth, and property-level margin improvements. Additionally, as compared to the year ago quarter, general, administrative, and other expenses decreased to $147 million in the first quarter of 2007 from $150 million in the year ago quarter. General, administrative, and other expenses in the 2007 first quarter reflected the reversal of $9 million of reserves that were no longer required while expenses in 2006 included a $4 million performance cure payment. The favorable variances were partially offset by a $5 million increase in development expenses and an increase of $5 million of other administrative costs.results.

Gains and Other (Expense) Income

The table below shows our gains and other income for the twelve and twenty-four weeks ended March 23,June 15, 2007, and March 24,June 16, 2006:

Gains on sale/income on redemptionThe increase in net earn-out payments made is primarily due to increased production in 2007 as compared to 2006 and to our 100 percent ownership of joint venture and other investments of $21 millionthe synthetic fuel operations in 2007. See the first quarter of 2007 represents an $11 million gain associated with the sale of stock we held, while $10 million represents a gain on the sale of one joint venture investment.“Synthetic Fuel” discussion later in this report for additional information regarding earn-out payments. The $9 million gain on

forgiveness of debt in the first half of 2007 was associated with a government incentive. The loan was forgiven in recognition of our contribution to job growth and economic development. Gains on sale/income on redemption of joint venture and other investments of $25$28 million in the 2006 second quarter reflect gains on the sale of joint venture investments. Gains on sale/income on redemption of joint venture and other investments of $21 million for the first half of 2007 reflect an $11 million gain associated with the sale of stock we held and net gains totaling $10 million on the sale of joint venture investments. Gains on sale/income on redemption of joint venture and other investments of $53 million in the first quarterhalf of 2006 reflectsrepresented $28 million of net gains associated with the sale of joint venture investments and the redemption of preferred stock we held in one investee which generated a gain of $25 million.

Interest Expense

Twelve Weeks. Interest expense increased $6$22 million (22(73 percent) to $33$52 million in the 2007 firstsecond quarter from $27$30 million in the year ago quarter. IncludedThe $22 million increase over 2006 was primarily attributable to a charge of $13 million for interest on the excise taxes associated with the ESOP settlement, $5 million of higher interest associated with our Series H Notes that were issued late in the 2006 second quarter, $5 million of higher expense reflecting a higher outstanding commercial paper balance and related interest rates, and a $2 million write-off of deferred financing costs associated with the second quarter 2007 refinancing of our revolving credit agreement. Also included within interest expense for the firstsecond quarters of 2007 and 2006 are charges totaling $12 million and $9$10 million, respectively, relatingrelated to interest on accumulated cash inflows in advance of our cash outflows for various programs that we operate on the owners’ behalf, including the Marriott Rewards, Gift Certificates, and Self-Insurance programs. The increase in interest on these programs over the year ago quarter is related to higher liability balances and higher interest rates. Interest expense in the 2007 first quarter also reflects interest expense of $5 million on our Series H Notes, which were issued in June 2006. Partially offsetting these interest expense increases over the prior year was a $3$5 million favorable variance to last year for capitalized interest associated with construction projects.

Twenty-four Weeks. Interest expense increased $28 million (49 percent) to $85 million in the first half of 2007 from $57 million in the year ago period. The $28 million increase over 2006 was primarily attributable to a charge of $13 million related to the ESOP settlement, $10 million of higher interest associated with our Series H Notes that were issued late in the 2006 second quarter, $6 million of higher interest reflecting a higher outstanding commercial paper balance and related interest rates, and we wrote off $2 million of deferred financing costs associated with the refinancing of our revolving credit agreement in the 2007 second quarter. Interest expense for the first half of 2007 and 2006 includes charges totaling $24 million and $19 million, respectively, relating to interest on accumulated cash inflows in advance of our cash outflows for various programs that we operate on the owners’ behalf, including the Marriott Rewards, Gift Certificates, and Self-Insurance programs. The increase in interest on these programs over the year ago period is related to higher liability balances and higher interest rates. Partially offsetting these interest expense increases over the prior year was an $8 million favorable variance to last year for higher capitalized interest associated with construction projects.

Interest Income, Provision for Loan Losses, and Income Tax

Twelve Weeks. Interest income, before the provision for loan losses, decreased $8$6 million (73(50 percent) to $3$6 million in the firstsecond quarter of 2007 from $11$12 million in the year ago quarter, reflecting a $5 million increase of mark-to-market expenses associated with hedges for our synthetic fuel operations and $1 million of lower interest associated with loans repaid to us. There were no loan loss provisions in the second quarter of 2007, as compared to a $1 million reversal of a loan loss provision in the second quarter of 2006.

Our tax provision totaled $42 million in the 2007 second quarter compared to a tax provision of $85 million in 2006. The difference of $43 million is attributable to $69 million of higher tax credits and tax benefit in the second quarter of 2007 associated with our synthetic fuel operations that generated a net tax benefit of $86 million in 2007 compared to a net tax benefit of $17 million in the year ago quarter, partially offset by $20 million of increased taxes in 2007 reflecting higher pretax income from our lodging operations and $6 million of mark-to-market expensestaxes in 2007 associated with additional interest on the ESOP settlement.

Twenty-four Weeks. Interest income, before the provision for loan losses, decreased $14 million (61 percent) to $9 million in the first half of 2007 from $23 million in the year ago period, reflecting an $11 million increase of mark-to-market expenses in 2007 associated with hedges for our synthetic fuel operations and a $2$3 million unfavorable impact associated with loans repaid to us. There were no loan loss provisions in the first half of 2007, as compared to a $2$3 million reversal of a loan loss provision in the first quarterhalf of 2006.

Our tax provision totaled $14$56 million in the 2007 first quarterhalf of 2007 compared to a tax provision of $56$141 million in 2006. The difference of $42$85 million is primarily attributable to $43$112 million of higher tax credits and tax benefit in the first quarterhalf of 2007 associated with our synthetic fuel operations that generated a net tax benefit of $72$158 million in 2007 compared to a net tax benefit of $29$46 million in the year ago quarter.period, partially offset by $21 million of increased taxes in 2007 reflecting higher pretax income from our lodging operations and $6 million of taxes in 2007 associated with additional interest on the ESOP settlement.

Equity in (Losses) Earnings (Losses)

Twelve Weeks. The $5$7 million increasedecrease from lossesearnings of $3$6 million in the firstsecond quarter of 2006 to earningslosses of $2$1 million in the firstsecond quarter of 2007 attributable to our equity investments reflected strongerweaker performance in the 2007 second quarter associated with two joint ventures and the mix of investments as some investments have been sold since the 2006 second quarter, partially offset by stronger results at other joint ventures reflecting the demand environment.

Twenty-four Weeks. Earnings of $3 million in the first quarter at several joint ventures.half of 2006 compared to earnings of $1 million in the first half of 2007.

Minority Interest

Minority interest decreased $6 million in the first quarterhalf of 2007 from a benefit of $6 million in the first quarterhalf of 2006. The decrease in minority interest is due to the fact that, in the firstsecond quarter of 2006, we had a joint venture partner in the synthetic fuel operations, while in the 2007 firstsecond quarter we owned 100 percent of the synthetic fuel operations.

Income from Continuing Operations

Twelve Weeks. Compared to the year ago quarter, income from continuing operations increased $12$21 million (7(11 percent) to $182$207 million in the firstsecond quarter of 2007, and diluted earnings per share from continuing operations increased $0.05 (13$0.08 (19 percent) to $0.44.$0.51. As discussed in more detail in the preceding sections beginning with “Operating Income,” the increase versus the year ago quarter is due to lower taxes ($42 million), higher fee income ($2861 million), lower taxes ($43 million), higher equity investment resultstimeshare sales and services revenue net of direct expenses ($540 million), and lower general, administrative,higher owned, leased, corporate housing, and other revenue net of direct expenses ($38 million). Partially offsetting these favorable variances were higher general, administrative, and other expenses ($66 million), higher interest expense ($22 million), higher synthetic fuel operating losses ($17 million), lower gains and other income ($12 million), lower equity investment results ($7 million), lower interest income ($6 million), and a lower loan loss provision reversal ($1 million).

Twenty-four Weeks. Compared to the year ago period, income from continuing operations increased $33 million (9 percent) to $389 million in the first half of 2007, and diluted earnings per share from continuing operations increased $0.14 (17 percent) to $0.95. As discussed in more detail in the preceding sections beginning with “Operating Income,” the increase versus the year ago period is due to higher fee income ($89 million), lower taxes ($85 million), and higher timeshare sales and services revenue net of direct expenses ($31 million). Partially offsetting these favorable variances were higher general, administrative, and other expenses ($63 million), higher interest expense ($28 million), higher synthetic fuel operating losses ($26 million), lower gains and other income ($23 million), lower interest income ($14 million), lower owned, leased, corporate housing, and other revenue net of direct expenses ($15 million), lower gains and other income ($11 million), higher synthetic fuel operating losses ($9 million), lower timeshare sales and services revenue net of direct expenses ($9 million), lower interest income ($8 million), higher interest expense ($67 million), a lower minority interest benefit ($6 million), and a lower loan loss provision reversals ($3 million), and lower equity investment results ($2 million).

Business Segments

We are a diversified hospitality company with operations in six business segments:

As disclosed in our 2006 Form 10-K, in 2006 the companywe analyzed itsour internal reporting process and implemented changes in the fourth quarter that were designed to improve efficiency and, as part of this process, we evaluated the impact on segment reporting. Accordingly, we now report six operating segments as compared to five before the change and no longer allocate indirect administrative expenses to our segments. The revised segment reporting is reflected throughout this report for all periods presented. Historical figures are presented in a manner that is consistent with the revised segment reporting. See also the Form 8-K that we filed on March 19, 2007, furnishing quarterly Revenues and Income from Continuing Operations for each of 2006 and 2005 in the new segment format.

We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses, interest expense or indirect general, administrative, and other expenses. With the exception of the Synthetic Fuel segment, we do not allocate income taxes to our segments. With the exception of the Timeshare and Synthetic Fuel segments, we do not allocate interest income to our segments. Because note sales are an integral part of the Timeshare segment, we include note sale gains in our Timeshare segment results. We also allocate other gains and losses as well as equity in earnings or losses from our joint ventures and divisional general, administrative, and other expenses to each of our segments. “Other unallocated corporate” expense represents that portion of our revenues, general, administrative, and other expenses, equity in earnings or losses, and other gains or losses that are not allocable to our segments.

We aggregate the brands presented within our North American Full-Service, North American Limited-Service, International, Luxury, and Timeshare segments considering their similar economic characteristics, types of customers, distribution channels, the regulatory business environment of the brands and operations within each segment, and our organizational and management reporting structure. We refer to these segments collectively as our lodging business.

Revenues

		Twelve Weeks Ended						Twenty-Four Weeks Ended
($ in millions)		June 15, 2007			June 16, 2006			June 15, 2007			June 16, 2006
North American Full-Service Segment		$	1,282		$	1,267		$	2,526		$	2,486
North American Limited-Service Segment			538			490			1,001			942
International Segment			382			326			713			601
Luxury Segment			370			329			709			660
Timeshare Segment			532			427			975			783
Total Lodging			3,104			2,839			5,924			5,472
Other unallocated corporate			18			13			34			28
Synthetic Fuel Segment			88			39			156			96
		$	3,210		$	2,891		$	6,114		$	5,596