UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 26,September 10, 2010

OR

For the transition period from              to             

Commission File No. 1-13881

MARRIOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

(301) 380-3000

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 361,332,043364,245,305 shares of Class A Common Stock, par value $0.01 per share, outstanding at April 9,September 24, 2010.

MARRIOTT INTERNATIONAL, INC.

FORM 10-Q TABLE OF CONTENTS

PART I—I – FINANCIAL INFORMATION

Item 1.Financial Statements

MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

($ in millions, except per share amounts)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

See Notes to Condensed Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC. (“MARRIOTT”)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

($ in millions)

(Unaudited)

See Notes to Condensed Consolidated Financial Statements

MARRIOTT INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The condensed consolidated financial statements present the results of operations, financial position, and cash flows of Marriott International, Inc. (“Marriott,” and together with its subsidiaries “we,” “us,” or the “Company”). In accordance with the guidance for noncontrolling interests in consolidated financial statements, references in this report to our earnings per share, net income, and shareholders’ equity attributable to Marriott do not include noncontrolling interests (previously known as minority interests), which we report separately.

The accompanyingThese condensed consolidated financial statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. generally accepted accounting principles (“GAAP”). WeAlthough we believe our disclosures are adequate to make the information presented not misleading. Youmisleading, you should however, read the condensed consolidated financial statements in this report in conjunction with the consolidated financial statements and notes to those financial statements in our Annual Report on Form 10-K for the fiscal year ended January 1, 2010, (“2009 Form 10-K”). Certain terms not otherwise defined in this quarterly reportForm 10-Q have the meanings specified in our 2009 Form 10-K.

The preparationPreparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements, the reported amounts of revenues and expenses during the reporting periods, and the disclosures of contingent liabilities. Accordingly, ultimate results could differ from those estimates.

Our 2010 firstthird quarter ended on March 26,September 10, 2010; our 2009 fourth quarter ended on January 1, 2010; and our 2009 firstthird quarter ended on March 27,September 11, 2009. In our opinion, the accompanyingour condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of March 26,September 10, 2010, and January 1, 2010, and the results of our operations for the twelve and thirty-six weeks ended September 10, 2010, and September 11, 2009, and cash flows for the twelvethirty-six weeks ended March 26,September 10, 2010, and March 27,September 11, 2009. Interim results may not be indicative of fiscal year performance because of seasonal and short-term variations. We have eliminated all material intercompany transactions and balances between entities consolidated in these financial statements. We have also reclassified certain prior year amounts to conform to our 2010 presentation.

Adoption of New Accounting Standards Resulting in Consolidation of Special Purpose Entities

On January 2, 2010, the first day of the 2010 fiscal year, we adopted Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140” (“FAS No. 166”)140,” or Accounting Standards Update No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets”Assets,” (“ASU No. 2009-16”) and Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),” (“FAS No. 167”) or Accounting Standards Update No. 2009-17, “Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU No. 2009-17”).

WePrior to our adoption of these topics, we used certain special purpose entities to securitize Timeshare segment notes receivables, prior to the adoption of these topics, which we treated as off-balance sheet entities, and we retained the servicing rights and varying subordinated interests in the securitized notes. Pursuant to generally accepted accounting principles that existedGAAP in effect prior to fiscal 2010, we did not consolidate these special purpose entities in our financial statements because the securitization transactions qualified as sales of financial assets.

As a result of the adoption ofadopting both topics in the 2010 first quarter, we consolidated 13 existing qualifying special purpose entities associated with past securitization transactions. We recorded a one-time non-cash after-taxpretax reduction to shareholders’ equity of $146$238 million ($238 million pretax) in the

2010 first quarter, representing the cumulative effect of a change in accounting principle. Including the related $92 million decrease in

deferred tax liabilities, the after-tax reduction to shareholders’ equity totaled $146 million. The one-time non-cash after-tax reduction to shareholders’ equity was approximately $41 million greater than thewe had estimated for this charge, as disclosed in our 2009 Form 10-K, primarily due to increased notes receivable reserves recorded for the newly consolidated notes receivable. TheThis increase in reserves was due to a change in estimate of uncollectible accounts based on historical experience. We now reserve for 100 percent of notes that are in default in addition to the reserve we record on the remaining notes.

We recorded the cumulative effect of the adoption of these topics to our financial statements in the 2010 first quarter. This consisted primarily of the reestablishment ofreestablishing notes receivable (net of reserves) that had been transferred to special purpose entities as a result of the securitization transactions, the elimination ofeliminating residual interests that we initially recorded in connection with those transactions (and subsequently revalued on a periodic basis), the impact of recording debt obligations associated with third-party interests held in the special purpose entities, and related adjustments to inventory balances accounted for using the relative sales value method. We adjusted the inventory balance to include anticipated future revenue from the expected resale of inventory that we expect to acquire when we foreclose on defaulted notes.

Our adoption ofAdopting these topics resulted inhad the following impacts inon our Condensed Consolidated Balance Sheet at January 2, 2010: (1) assets increased by $970 million, primarily representing the consolidation of notes receivable (and corresponding reserves) partially offset by the elimination of the Company’s retained interests; (2) liabilities increased by $1,116 million, primarily representing the consolidation of debt obligations associated with third party interests; and (3) shareholders’ equity decreased by approximately $146 million. Our adoption ofAdopting these topics also impacted our income statement and resulted in higherby increasing interest income (reflected in Timeshare sales and services revenue) from notes sold which we classify within Timeshare sales and services in our Condensed Consolidated Statements of Income, and increasedincreasing interest expense from consolidation of debt obligations, partially offset by the absence of accretion income on residual interests that were eliminated. We do not expect to recognize gains or losses from future securitizations of our timeshare notes followingas a result of the adoption of these topics.

Please also see the parenthetical disclosures on our Condensed Consolidated Balance Sheets regardingthat show the amounts of consolidated assets and liabilities associated with variable interest entities’entities (including Timeshare segment securitization variable interest entities) assets and liabilities that we consolidated.

Restricted Cash

We recorded restrictedRestricted cash totaling $115 million and $76 millionin our Condensed Consolidated Balance Sheets at the end of the 2010 firstthird quarter and year-end 2009 respectively, in the accompanying Condensed Consolidated Balance Sheetsis recorded as $79$68 million and $54 million, respectively, in the “Other current assets” line and $36$28 million and $22 million, respectively, in the “Other long-term assets” line. Restricted cash primarily consists of cash held in a reserve account related to Timeshare segment notes receivable securitizations,securitizations; cash held internationally that haswe have not been repatriated due to accounting, statutory, tax and foreign currency risks,risks; and deposits received, primarily associated with timeshare interval, fractional ownership, and residential sales that are held in escrow until the contract is closed.

Fair Value Measurements

We have various financial instruments we must measure at fair value on a recurring basis, including certain marketable securities and derivatives. See Footnote No. 5, “Fair Value of Financial Instruments,” for further information. We also apply the provisions of fair value measurement to various non-recurring measurements for our financial and non-financial assets and liabilities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure our assets and liabilities using inputs from the following three levels of the fair value hierarchy:

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.

Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.),

and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).

Level 3 includes unobservable inputs that reflect our assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.

Derivative Instruments

The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the change in fair value of the derivative instrument is reflected in our Condensed Consolidated Financial Statements. A derivative qualifies for hedge accounting if, at inception, we expect the derivative is expected to be highly effective in offsetting the underlying hedged cash flows or fair value and we fulfill the hedge documentation standards are fulfilled at the time we enter into the derivative contract. We designate a hedge as a cash flow hedge, fair value hedge, or a net investment in foreign operations hedge based on the exposure we are hedging. The asset or liability value of the derivative will change in tandem with its fair value. We record changes in fair value, for the effective portion of qualifying hedges, in other comprehensive income (“OCI”). We release the derivative’s gain or loss from OCI to match the timing of the underlying hedged cash flows’items’ effect on earnings.

We review the effectiveness of our hedging instruments on a quarterly basis, recognize current period hedge ineffectiveness immediately in earnings, and discontinue hedge accounting for any hedge that we no longer consider to be highly effective. We recognize changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, we release gains and losses from OCI based on the timing of the underlying cash flows or revenue recognized, unless the termination results from the failure of the intended transaction to occur in the expected timeframe. Such untimely transactions require us to immediately recognize in earnings gains and losses previously recorded in OCI.

Changes in interest rates, foreign exchange rates, and equity securities expose us to market risk. We manage our exposure to these risks by monitoring available financing alternatives, as well as through development and application of credit granting policies. We also use derivative instruments, including cash flow hedges, net investment in foreign operations hedges, fair value hedges, and other derivative instruments, as part of our overall strategy to manage our exposure to market risks. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk, and we do not use derivatives for trading or speculative purposes. See Footnote No. 5, “Fair Value of Financial Instruments”Instruments,” for additional information.

FAS No. 166 or ASU No. 2009-16 and FAS No. 167 or ASU No. 2009-17

We adopted FAS No. 166 or ASU No. 2009-16 onOn the first day of our 2010 fiscal year, we adopted ASU No. 2009-16, which amended FAS No. 140, “Accounting for TransfersTopic 860, “Transfers and Servicing, of Financial Assets and Extinguishments of Liabilities,” by: (1) eliminating the concept of a qualifying special-purpose entity (“QSPE”); (2) clarifying and amending the derecognition criteria for a transfer to be accounted for as a sale; (3) amending and clarifying the unit of account eligible for sale accounting; and (4) requiring that a transferor initially measure at fair value and recognize all assets obtained (for example beneficial interests) and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. In addition, this topic requires us as a reporting entity this topic requires us to evaluate existingentities that had been treated as QSPEs (as defined under previous accounting guidance)guidance for consolidation in accordance withunder the applicable consolidationcurrent guidance. The topic requires us toalso mandates that we supplement our disclosures about, among other things, our continuing involvement with transfers of

financial assets previously accounted for as sales, ourthe inherent risks in our retained financial assets, and the nature and financial effect of restrictions on ourthe assets that we continue to be reportedreport in our statement of financial position.balance sheet.

We also adopted FAS No. 167 or ASU No. 2009-17 on the first day of our 2010 fiscal year, which changeschanged the consolidation guidance applicable to variable interest entities (“VIEs”). ItThis topic also amendsamended the

guidance governing theon determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative, analysis rather than athe prior quantitative, analysis.analysis of the VIE. The new qualitative analysis includes, among other things, consideration of who has the power to direct thethose activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This topic also requires continuous reassessments ofmandates that the enterprise continually reassess whether an enterpriseit is the primary beneficiary of a VIE. Previously,VIE, in contrast to the applicableprior standard that required reconsideration of whether an enterprise was the primary beneficiary of a VIE only be reassessed when specific events had occurred. This topic now also expressly applies to QSPEs, which were previously exempt, from the application of this topic, are now subject to the provisions of this topic. The topic alsoand requires additional disclosures about an enterprise’s involvement with a VIE.

See FootnoteAccounting Standards Update No. 1, “Basis2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements” (“ASU No. 2009-13”)

We adopted ASU No. 2009-13 in the 2010 third quarter and applied it retrospectively to the first day of Presentation”our 2010 fiscal year, as required by the guidance. ASU No. 2009-13 addresses the accounting for multiple-deliverable arrangements (complex contracts or related contracts that require the separate delivery of multiple goods and/or services) by expanding the circumstances in which vendors may account for deliverables separately rather than as a combined unit. This update clarifies the guidance on how to separate such deliverables and how to measure and allocate consideration for these arrangements to one or more units of accounting. The previous guidance required a vendor to use vendor-specific objective evidence or third-party evidence of selling price to separate deliverables in multiple-deliverable arrangements. In addition to retaining this guidance, in situations where vendor-specific objective evidence or third-party evidence is not available, ASU No. 2009-13 requires a vendor to allocate arrangement consideration to each deliverable in multiple-deliverable arrangements based on each deliverable’s relative selling price. Our adoption did not have a material impact of the adoption of these topics.on our financial statements, and we do not expect it will have a material effect on our financial statements in future periods.

Accounting Standards Update No. 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”)

We adopted certain provisions of ASU No. 2010-06 in the 2010 first quarter. TheseThose provisions of ASU No. 2010-06 amended Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” by requiring additional disclosures for transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring fair value measurement disclosures for each “class” of assets and liabilities, a subset of the captions disclosed in our Condensed Consolidated Balance Sheets. TheOur adoption did not have a material impact on our financial statements or our disclosures, as we did not have anyhad no transfers between Level 1 and Level 2 fair value measurements and did not haveno material classes of assets and liabilities that required additional disclosure. See “Future Adoption of Accounting Standards” for the provisions of this topic applicablethat apply to future periods.

Accounting Standards Update No. 2010-09 “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements” (“ASU No. 2010-09”)

We adopted ASU No. 2010-09 in the 2010 first quarter. ASU No. 2010-09 amended Subtopic 855-10, “Subsequent Events – Overall”Overall,” by removing the requirement for a United States Securities and Exchange Commission (“SEC”) registrant to disclose a date, in both issued and revised financial statements, through which that filer had evaluated subsequent events. Accordingly, we removed the related disclosure from Footnote No. 1, “Basis of Presentation.” TheOur adoption did not have a material impact on our financial statements.

Future Adoption of Accounting Standards

ASU No. 2010-06 – Provisions Effective in the 2011 First Quarter

Certain provisions of ASU No. 2010-06 are effective for fiscal years beginning after December 15, 2010, which for us will be our 2011 first quarter. TheseThose provisions, of ASU No. 2010-06, which amended Subtopic 820-10, will require us to present as separate line items all purchases, sales, issuances, and

settlements of financial instruments valued using significant unobservable inputs (Level 3) in the reconciliation forof fair value measurements, whereas currently these are presented in contrast to the current aggregate presentation as onea single line item. Although this may change the appearance of our reconciliation,fair value reconciliations, we do not believe the adoption will have a material impact on our financial statements or disclosures.

Accounting Standards Update No. 2010-20 “Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (“ASU No. 2010-20”)

ASU No. 2010-20 amends existing guidance by requiring more robust and disaggregated disclosures by an entity about the credit quality of its financing receivables and its allowance for credit losses. These disclosures will provide financial statement users with additional information about the nature of credit risks inherent in our financing receivables, how we analyze and assess credit risk in determining our allowance for credit losses, and the reasons for any changes we may make in our allowance for credit losses. This update is generally effective for interim and annual reporting periods ending on or after December 15, 2010, which for us is the 2010 fourth quarter; however, certain aspects of the update pertaining to activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010, which for us is the 2011 first quarter. We believe the adoption of this update will primarily result in increased notes receivable disclosures, but will not have any other impact on our financial statements.

OurThe Internal Revenue Service (“IRS”) has examined our federal income tax returns, have been examined and we have settled all issues for tax years through 2004. We filed a refund claim relating to 2000 and 2001. The Internal Revenue Service (“IRS”)IRS disallowed the claims, and in July 2009, we protested the disallowance. This issue is pending in the IRS Appeals Division. The 2005, 2006, 2007, and 20072008 field examinations have been completed, and the unresolved issues from those years are now also with the IRS Appeals Division. The Revenue Agent’s ReportIRS examinations for 2008 has been received and that year is in the process of being sent to Appeals. The 2009 and 2010 IRS examinations are ongoing as part of the IRS’s Compliance Assurance Program. Various state, local, and foreign income tax returns are also under examination by taxing authorities.

As noted inSee Footnote No. 1, “Basis of Presentation,” we recorded afor additional information on the one-time non-cash pre-tax reduction to shareholders’ equity of approximately $238 millionand the related tax impact that we recorded in conjunction with theour first quarter 2010 adoption of ASU Nos. 2009-16 and 2009-17 in the 2010 first quarter. That amount included a $92 million reduction in net deferred taxes.2009-17.

For the firstthird quarter of 2010, we decreased unrecognized tax benefits by $2 million from $224 million at the end of the 2010 second quarter. For the thirty-six weeks ended September 10, 2010, we decreased unrecognized tax benefits by $27 million (fromfrom $249 million at year-end 2009),2009, primarily representingreflecting the settlement of an unfavorable U.S. Court of Federal Claims decision involving a refund claim associated with a 1994 transaction. The settlement resulted in no further outlay of cash tax, and we do not anticipate any further cash tax payments for this issue. The unrecognized tax benefits balance of $222 million at the end of the 2010 firstthird quarter included $110$109 million of tax positions that, if recognized, would impact theour effective tax rate.

As a large taxpayer, we are under continual audit by the IRS and other taxing authorities. We anticipate concluding U.S. federal appeals negotiations for the 2005, 2006, 2007, and 2008 tax years in the next 12 months where the items under consideration include the taxation of our loyalty and gift card programs and the treatment of funds received from foreign subsidiaries. The conclusionConclusion of thethese negotiations could have a material impact on our unrecognized tax benefit balances.

Under our 2002 Comprehensive Stock and Cash Incentive Plan (the “Comprehensive Plan”), we award: (1) stock options to purchase our Class A Common Stock (“Stock Option Program”); (2) stock appreciation rights (“SARs”) for our Class A Common Stock (“Stock Appreciation RightSAR Program”); (3) restricted stock units (“RSUs”) of our Class A Common Stock; and (4) deferred stock units. We grant awards at exercise prices or strike prices that are equal to the market price of our Class A Common Stock on the date of grant.

We recorded share-based compensation expense related to award grants of $27 million and $23 million for the twelve weeks ended September 10, 2010 and September 11, 2009, respectively, and $77 million and $73 million for the thirty-six weeks ended September 10, 2010 and September 11, 2009, respectively. Deferred compensation costs related to unvested awards totaled $147 million and $122 million at September 10, 2010 and January 1, 2010, respectively.

RSUs

We granted 3.7 million RSUs during the first quarter ofthirty-six weeks ended September 10, 2010, to certain officers and key employees, and those units vest generally over four years in equal annual installments commencing one year after the date of grant. TheRSUs granted in the first three quarters of 2010 had a weighted average grant-date fair value of the RSUs granted in the first quarter of 2010 was $27.

SARs

We granted 1.1 million SARs to officers and key employees during the 2010 first quarter.three quarters of 2010. These SARs expire 10 years after the date of grant and both vest and are exercisable in cumulative installments of one quarter at the end of each of the first four years following the date of grant. TheThese SARs had a weighted average grant-date fair value of these SARs was $10, and thea weighted average exercise price wasof $27.

To estimate the fair value of each SAR granted, we use a binomial method. Themethod, under which the weighted average expected SARs terms were aare calculated as the product of thea lattice-based binomial valuation model that uses suboptimal exercise factors to calculate the expected terms. Historicalfactors. We use historical data is used to estimate exercise behaviors for separate groups of retirement eligible and non-retirement eligible employees.

TheWe used the following assumptions forto determine the fair value of the Employee SARs granted during the first quarterthree quarters of 2010 are shown in the following table.2010.

TheIn making these assumptions, we based the risk-free rates are based on the corresponding U.S. Treasury spot rates for the expected duration at the date of grant, which we converted to a continuously compounded rate.

SARs granted duringrate, and we based the first quarter of 2010 utilized aexpected volatility on the weighted average historical volatility, wherewith periods with atypical stock movement were given a lower weight to reflect stabilized long-term mean volatility.

Other Information

At the end of the 2010 firstthird quarter, 65.663 million shares were reserved under the Comprehensive Plan, including 3633 million shares under the Stock Option Program and Stock Appreciation Rightthe SAR Program.

We believe that the fair values of our current assets and current liabilities approximate their reported carrying amounts. The following table shows the carrying values and the fair values of non-current financial assets and liabilities that qualify as financial instruments, determined in accordance with thecurrent guidance for disclosures abouton the fair value of financial instruments.

We estimate the fair value of both our securitized long-term loans to timeshare owners and a portion of our non-securitized long-term loans to timeshare owners using a discounted cash flow model. We believe this model is comparable to whatthe model that an independent third party would be useduse in the current market by an independent third party.market. Our model uses default rates, prepayment rates, coupon rates and loan terms for the legallyour sold note portfolio as key drivers of risk and relative value, that when applied in combination with pricing parameters, determines the fair value of the underlying notes receivable. For thoseWe value certain non-securitized loans to timeshare owners that we do notat their carrying value, rather than using our pricing model, wemodel. We believe theirthat the carrying value of such loans approximates fair value asbecause the loans’ stated interest rates of these loans are consistent with current market rates and the reserve for these loans appropriately accounts for risks in default rates, prepayment rates, and loan terms.

We estimate the fair value of our senior, mezzanine, and other loans by discounting cash flows using risk-adjusted rates.

We estimate the fair value of our cost method investments by applying a cap rate to stabilized earnings (a market approach). The carrying value of our restricted cash approximates its fair value.

We estimate the fair value of our non-recourse debt associated with securitized loans to timeshare owners by obtaining indicative bids from investment banks that actively issue and facilitate the secondary market for timeshare securities. As an additional measure, we internally generate cash flow estimates by modeling all bond tranches for our active securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in this analysis include default rates, prepayment rates, bond interest rates and other structural factors, which are usedwe use to estimate the projected cash flows. WeIn order to estimate market credit spreads by rating, we reviewed market spreads from timeshare note securitizations and other asset-backed transactions that occurred during the fourth quarter of 2009 and the first quarterthree quarters of 2010, in order to estimate market credit spreads by rating.2010. We then applied those estimated market spreads to swap rates in order to estimate an underlying discount rate for calculating the fair value of the active bonds. After comparing the results of our internal analysis to the bids we received from the investment banks, weWe have concluded that the fair value of the bonds approximatesreflects a marginal premium over the book value.value resulting from relatively low current swap rates and credit spreads.

We estimate the fair value of our other long-term debt, excluding leases, using expected future payments discounted at risk-adjusted rates, and we determine the fair value of our senior notes using quoted market prices. We believeAt year-end 2009 the carrying value of our credit facility approximatesapproximated its fair value due to the short maturity dates of the draws we have executed to date.had executed. Other long-term liabilities represent guarantee costs and reserves and deposit liabilities. The carrying values of our guarantee costs and reserves approximate their fair values. We estimate the fair value of our deposit liabilities primarily by discounting future payments at a risk-adjusted rate.

We are required to carry our marketable securities at fair value. The carrying value of our marketable securities at the end of our 2010 firstthird quarter of $18was $19 million, which included debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs. These securities are valued using directly observable Level 1 inputs as described in Footnote No. 1, “Basis of Presentation.”

We are also required to carry our derivative assets and liabilities at fair value. As of the end of our 2010 firstthird quarter, we had derivative instruments in a current asset position of $1$2 million which we valued using Level 1 inputs, $2 million in a current liability position valued using Level 2 inputs and $2 million in a long-term liability position valued using Level 3 inputs. We value our Level 3 input derivatives using valuations that are calibratedwe calibrate to the initial trade prices. Subsequentprices, with subsequent valuations are based on unobservable inputs to the valuation model, including interest rates and volatilities.

As discussed in more detail in Footnote No. 1, “Basis for Presentation”Presentation,” and Footnote No. 15,16, “Variable Interest Entities,” we periodically sellsecuritize notes receivable originated by our Timeshare segment. We continue to service the notes after the sale,securitization, and we retain servicing assets and other interests in the notes. Historically, we accounted for these residual interests, including the servicing assets, as trading securities according tounder the then-applicable standards for accounting for certain investments in debt and equity securities. At the dates of sale and at the end of each reporting period, we estimated the fair value of our residual interests using a discounted cash flow model using Level 3 inputs. However, duringWith the adoption of the new accounting topics in the first quarter of 2010, we adopted new accounting topics for accounting for transfers and servicing of financial assets and extinguishments of liabilities as discussed in Footnote No. 1, “Basis of Presentation.” As a result, we reestablished notes receivable (net of reserves) associated with past securitization transactions, we recorded the debt obligations associated with third-party interests held in these special purpose entities and we correspondingly eliminated our residual interests (including servicing assets) associated with these transactions. We have includedThe preceding table includes the carrying amounts and the estimated fair values for the long-term portion of the securitized notes receivable and the associated debt obligations in the preceding table.obligations.

6.	Earnings Per Share

The table below illustrates the reconciliation of the earnings (losses) and number of shares used in our calculations of basic and diluted earnings (losses) per share attributable to Marriott shareholders.

We compute the effect of dilutive securities using the treasury stock method and average market prices during the period. We determine dilution based on earnings attributable to Marriott shareholders. As there waswe recorded a loss attributable to Marriott shareholders for the twelve and thirty-six week periods ended September 11, 2009, first quarter,we did not include the following shares in the “Effect of dilutive securities” caption in the preceding table, does not include 3.9because it would have been antidilutive to do so: 7.4 million employee stock option and SARs plan shares, 1.71.4 million deferred stock incentive plan shares, or 2.0 million restricted stock unit shares for the twelve-week period and 6.7 million employee stock option and SARs plan shares, 1.5 million deferred stock incentive plans shares, or 0.51.5 million restricted stock units shares because including those shares would have been antidilutive.for the thirty-six week period.

Additionally, inIn accordance with the applicable accounting guidance for calculating earnings per share, we havedid not includedinclude the following stock options and SARs in our calculation of diluted earnings per share attributable to Marriott shareholders because the exercise prices were greater than the average market prices for the applicable periods:

Inventory, totaling $1,503$1,455 million and $1,444 million as of March 26,September 10, 2010, and January 1, 2010, respectively, consists primarily of Timeshare segment interval, fractional ownership, and residential

products totaling $1,485$1,437 million and $1,426 million as of March 26,September 10, 2010, and January 1, 2010, respectively. Inventory totaling $18 million as of both March 26,September 10, 2010, and January 1, 2010 primarily relates to hotel operating supplies for the limited number of properties we own or lease. We primarily value Timeshare segment interval, fractional ownership, and residential products at the lower of cost or fair market value, as defined in theaccordance with applicable accounting guidance, for the impairment or disposal of long-lived assets, and we generally value operating supplies at the lower of cost (using the first-in, first-out method) or market. Consistent with recognized industry practice, we classify Timeshare segment interval, fractional

ownership, and residential products inventory, which has an operating cycle that exceeds 12 months, as a current asset.

The following table detailsshows the composition of our Timeshare segment inventory balances at March 26, 2010, and January 1, 2010.balances:

The following table detailsshows the composition of our property and equipment balances at March 26, 2010, and January 1, 2010.balances:

As discussed in Footnote No. 1, “Basis of Presentation,” on the first day of fiscal year 2010, we consolidated certain entities associated with past timeshare notes receivable securitization transactions. Prior to the 2010 first quarter, we were not required to consolidate the special purpose entities utilized to securitize the notes.

The following table detailsshows the composition of our notes receivable balances (net of reserves) at March 26, 2010, and January 1, 2010.:

We classify notes receivable due within one year as current assets in the caption “Accounts and notes receivable” in the accompanyingour Condensed Consolidated Balance Sheets. Total long-term notes receivable as of March 26,September 10, 2010, and January 1, 2010, of $1,268$1,295 million and $452 million, respectively, consisted of loans to timeshare owners of $1,173$1,118 million and $352 million, respectively, loans to equity method investees of $6$2 million and $10 million, respectively, and other notes receivable of $89$175 million and $90 million, respectively.

The following tables provideshow future principal payments, net of reserves and unamortized discounts, as well as interest rates, reserves and unamortized discounts for our securitized and non-securitized notes receivable detail regarding: 1) future notes receivable principal payments due (net of reserves and unamortized discounts), weighted average interest rates and ranges of stated interest rates; 2) notes receivable reserves; and 3) unamortized discounts.receivable.

Notes Receivable Principal Payments (net of reserves and unamortized discounts) and Interest Rates

Notes Receivable Reserves

Notes Receivable Unamortized Discounts

Senior, Mezzanine, and Other Loans

We reflect interest income associated with “Senior, mezzanine, and other loans” in the “Interest income” caption in the accompanyingour Condensed Consolidated Statements of Income. For financial statement purposes, weWe generally do not accrue interest on “Senior, mezzanine, and other loans” that are impaired. At the end of the 2010 firstthird quarter, our recorded investment in impaired “Senior, mezzanine, and other loans” was $87$79 million. We had a $79$71 million notes receivable reserve representing an allowance for credit losses, leaving $8 million of our investment in impaired loans, for which we had no related allowance for credit losses. At year-end 2009, our recorded investment in impaired “Senior, mezzanine, and other loans” was $191 million. Wemillion, and we had a $183 million notes receivable reserve representing an allowance for credit losses, leaving $8 million of our investment in impaired loans, for which we had no related allowance for credit losses.

The following table summarizes the activity related to our “Senior, mezzanine, and other loans” notes receivable reserve for the 2010 first quarter:three quarters of 2010:

($ in millions)		Notes Receivable Reserve
Balance at year-end 2009		$	183
Additions			2
Write-offs			(120	)
Transfers and other			6
Balance at September 10, 2010		$	71

Loans to Timeshare Owners

We reflect interest income associated with “Loans to timeshare owners” of $45$41 million and $13$11 million for the 2010 and 2009 firstthird quarters, respectively, and $129 million and $34 million for the thirty-six weeks ended September 10, 2010 and September 11, 2009, respectively, in the accompanyingour Condensed Consolidated Statements of Income in the “Timeshare sales and services” revenue caption. ForOf the $45$41 million of interest income we recognized in the 2010 firstthird quarter, $36$30 million was associated with securitized loans and $9$11 million was associated with non-securitized loans, whereascompared with the $13$11 million recognized in the 2009 third quarter, which related solely to non-securitized loans. Of the $129 million of interest income we recognized in the first quarterthree quarters of 2010, $99 million was associated only with securitized loans and $30 million was associated with non-securitized loans, compared with the $34 million recognized in the first three quarters of 2009, which related solely to non-securitized loans.

The following table summarizes the activity related to our “Loans to timeshare owners” notes receivable reserve for the 2010 first quarter:three quarters of 2010:

We record an estimate of expected uncollectibility on notes receivable that we receive from timeshare purchasers as a reduction of revenue at the time we recognize profit on a timeshare sale. We have fully reserved all defaulted notes in addition to recording a reserve on the estimated uncollectible portion of the remaining notes. For those notes not in default, we assess collectibility based on pools of receivables because we hold large numbers of homogenous timeshare notes receivable. We estimate uncollectibles based on historical activity for similar timeshare notes receivable. In addition to a static pool analysis, which tracks uncollectibles for each year’s sales over the life of those notes, we utilized internal cash flow models to estimate future defaults. As of March 26,September 10, 2010, we estimated average remaining default rates of 9.1 percent and 7.19.6 percent for outstandingboth non-securitized and securitized timeshare notes receivable, respectively.receivable.

We do not record accrued interest on “Loans to timeshare owners” that are over 90 days past due.

Thedue, and the following table provides securitized and non-securitized timeshare notes receivable detail regardingshows our recorded investment in loans on nonaccrual status.such loans.

As discussed in Footnote No. 1, “Basis of Presentation,” on the first day of fiscal year 2010, we consolidated certain previously unconsolidated entities associated with past timeshare notes receivable securitization transactions, resulting in consolidation of the related debt obligations. Prior to the 2010 first quarter, we were not required to consolidate these entities. We securitized the notes receivable through bankruptcy-remote entities, and the entities’ creditors have no recourse to us.

OurThe following table provides detail on our long-term debt at March 26, 2010, and January 1, 2010, consisted of the following:balances:

At March 26, 2010, except for

The non-recourse debt associated with securitized notes receivable that was, and to the extent currently outstanding is, secured by the related notes receivable, allreceivable. All of our other long-term debt was, and to the extent currently outstanding is, recourse to us andbut unsecured. At March 26, 2010, we had long-term public debt ratings associated with our Senior Notes of BBB- from Standard and Poor’s and Baa3 from Moody’s Investor Service.

We are party to a multicurrency revolving credit agreement (the “Credit Facility”) that provides for $2.404 billion of aggregate effective borrowings to support general corporate needs, including working capital, and capital expenditures, and letters of credit that have supported our commercial paper program.credit. The Credit Facility expires on May 14, 2012. Borrowings under the Credit Facility bear interest at the London Interbank Offered Rate (LIBOR) plus a fixed spread. We also pay quarterly fees on the Credit Facility at a rate based on our public debt rating. While borrowings under our Credit Facility generally have short-term maturities, we classify outstanding borrowings as long-term based on our ability and intent to refinance the outstanding borrowings on a long-term basis.

Each of our 13 securitized notes receivable pools contains various triggers relating to the performance of the underlying notes receivable. If a pool of securitized notes receivable fails to perform within the pool’s established parameters (default or delinquency thresholds by deal) there are provisions pursuant tounder which the monthly excess spread we typically receive each month from that pool (related to the interests we retained) is effectively redirected to accelerate the principal payments to investors based on the subordination of the

different tranches until the performance trigger is cured. During the first quarter of 2010, one pool that reached a performance trigger at year-end 2009 returned to compliance while three others reached performance triggers. At the end of the first quarter of 2010, only one of these three pools was still out of compliance with applicable triggers. This pool continued to be under trigger through the end of the second quarter of 2010, but returned to compliance during the third quarter of 2010. No other pools reached performance triggers during the second quarter. During the third quarter of 2010, six pools reached performance triggers, and at the end of the third quarter, only three of these six pools were still out of compliance with applicable triggers. As a result an additional $2of performance triggers, a total of $6 million in cash of excess spread was used to pay down debt during the first quarterthree quarters of 2010. As of March 26, 2010, only one of our 13 securitized notes receivable pools was out of compliance with applicable triggers.

The following tables provideshow future principal payments, net of unamortized discounts, and unamortized discounts for our securitized and non-securitized debt detail regarding: 1) future debt principal payments due (net of unamortized discounts), and 2) unamortized debt discounts.debt.

Debt Principal Payments (net of unamortized discounts)

As the contractual terms of the underlying securitized notes receivable determine the maturities of the non-recourse debt associated with them, actual maturities may differ because ofoccur earlier due to prepayments by the notes receivable obligors.

Unamortized Debt Discounts

CashWe paid cash for interest, net of amounts capitalized, was $27of $98 million in the first three quarters of 2010 first quarter and $13$59 million in the 2009 first quarter.three quarters of 2009.

11.	Comprehensive Income and Capital Structure

The following tables detail comprehensive income attributable to Marriott, comprehensive income attributable to noncontrolling interests, and consolidated comprehensive income for the twelve weeks ended March 26, 2010, and March 27, 2009.income.