UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 18, 201017, 2011

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: 362,811,812352,902,263 shares of Class A Common Stock, par value $0.01 per share, outstanding at July 2, 2010.1, 2011.

MARRIOTT INTERNATIONAL, INC.

FORM 10-Q TABLE OF CONTENTS

PART I—I – FINANCIAL INFORMATION

Item 1.1. 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)

The abbreviation VIEs above means Variable Interest Entities.

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 inorder to make this report easier to read, we refer throughout to (i) our earnings per share, net incomeCondensed Consolidated Financial Statements as our “Financial Statements,” (ii) our Condensed Consolidated Statements of Income as our “Income Statements,” our Condensed Consolidated Balance Sheets as our “Balance Sheets,” (iii) our properties, brands, or markets in the United States and shareholders’ equity attributable to Marriott do not include noncontrolling interests (previously knownCanada as minority interests), which we report separately.“North America” or “North American,” and (iv) our properties, brands, or markets outside of the United States and Canada as “international.”

These 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”). Although we believe our disclosures are adequate to make the information presented not misleading, you should 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,December 31, 2010, (“20092010 Form 10-K”). Certain terms not otherwise defined in this quarterly reportForm 10-Q have the meanings specified in our 20092010 Form 10-K.

Preparation 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 2011 second quarter ended on June 17, 2011; our 2010 fourth quarter ended on December 31, 2010; and our 2010 second quarter ended on June 18, 2010; our 2009 fourth quarter ended on January 1, 2010; and our 2009 second quarter ended on June 19, 2009.2010. In our opinion, our condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly our financial position as of June 18, 2010,17, 2011, and January 1,December 31, 2010, the results of our operations for the twelve and twenty-four weeks ended June 18, 2010,17, 2011, and June 19, 2009,18, 2010, and cash flows for the twenty-four weeks ended June 18, 2010,17, 2011, and June 19, 2009.18, 2010. 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 20102011 presentation.

Adoption See Footnote No. 13, “Business Segments,” for additional information on the reclassification of New Accounting Standards Resulting in Consolidationsegment revenues, segment financial results, and segment assets to reflect movement 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,” or Accounting Standards Update No. 2009-16, “Transfers and Servicing (Topic 860): Accounting for Transfers of Financial Assets,” (“ASU No. 2009-16”) and Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R),” 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”).

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

As a result of adopting 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-tax reduction to shareholders’ equity of $146 million ($238 million pretax) in the 2010 first quarter, representing the cumulative effect of a change in accounting principle. The one-time non-cash after-tax

reduction to shareholders’ equity was approximately $41 million greater than we 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. This 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 reestablishing notes receivable (net of reserves) that had been transferred to special purpose entities as a result of the securitization transactions, eliminating 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 resale of inventory that we expect to acquire when we foreclose on defaulted notes.

Adopting these topics had the following impacts on 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. Adopting these topics also impacted our income statement by increasing interest income (reflected in Timeshare sales and services revenue) from notes sold and increasing 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 following the adoption of these topics.

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

Restricted Cash

We recorded restrictedRestricted cash totaling $118 million and $76 millionin our Balance Sheets at the end of the 20102011 second quarter and year-end 2009, respectively, in our Condensed Consolidated Balance Sheets2010 is recorded as $87$62 million and $54$55 million, respectively, in the “Other current assets” line and $31$114 million and $22$30 million, respectively, in the “Other long-term assets” line. Restricted cash primarily consists of cash proceeds of a note receivable that are restricted as collateral for other debt; cash held in a reserve account related to Timeshare segment notes receivable securitizations; cash held internationally that we have not repatriated due to accounting, statutory, tax and foreign currency risks; and deposits received, primarily associated with timeshare interval, fractional ownership, and residential sales that are held in escrow until the contract ishas 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 to be highly effective in offsetting the underlying hedged cash flows or fair value and we fulfill the hedge documentation standards 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 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,” for additional information.

ASU No. 2009-16 and ASU No. 2009-17

We adopted ASU No. 2009-16 on the first day of our 2010 fiscal year, which amended FAS No. 140, “Accounting for 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 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 to evaluate entities that had been treated as QSPEs under previous accounting guidance for consolidation under the applicable current guidance. The topic also mandates that we supplement our disclosures about, among other things, our continuing involvement with transfers of financial assets previously accounted for as sales, the inherent risks in our retained financial assets, and the nature and financial effect of restrictions on the assets that we continue to report in our balance sheet.

We also adopted ASU No. 2009-17 on the first day of our 2010 fiscal year, which changed the consolidation guidance applicable to variable interest entities (“VIEs”). This topic also amended the

guidance on determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative, rather than the prior quantitative, analysis of the VIE. The new qualitative analysis includes, among other things, consideration of who has the power to direct those activities 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 mandates that the enterprise continually reassess whether it is the primary beneficiary of a VIE, in contrast to the prior standard that required the primary beneficiary only be reassessed when specific events occurred. This topic now also expressly applies to QSPEs, which were previously exempt, and requires additional disclosures about an enterprise’s involvement with a VIE.

See Footnote No. 1, “Basis of Presentation,” for the impact on our financial statements of adopting these topics.

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. Those provisions 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 in our Condensed Consolidated Balance Sheets. Our adoption did not have a material impact on our financial statements or disclosures, as we had no transfers between Level 1 and Level 2 fair value measurements and no material classes of assets and liabilities that required additional disclosure. See “Future Adoption of Accounting Standards” for the provisions of this topic that 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,” 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.” Our adoption did not have a material impact on our financial statements.

Future Adoption of Accounting Standards

Accounting Standards Update No. 2009-13 “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements” (“ASU No. 2009-13”)

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 existing guidance requires 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 will require a vendor to allocate arrangement consideration to each deliverable in multiple-deliverable arrangements based on each deliverable’s relative selling price. This update also expands disclosure requirements for multiple deliverable arrangements, can be applied either prospectively or retrospectively, and is effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. We are assessing the impact that adoption of ASU No. 2009-13 will have on our financial statements.

ASU No. 2010-06 – Provisions Effective in the 2011 First Quarter (“ASU No. 2010-06”)

Certain provisions of ASU No. 2010-06 arebecame effective for fiscal years beginning after December 15, 2010, which for us will beduring our 2011 first quarter. Those provisions, 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, in contrast to the currentprevious aggregate presentation as a single line item. Although this may change the appearance of our fair value reconciliations, we doThe adoption did not believe the adoption will have a material impact on our financial statements or disclosures.

Future Adoption of Accounting Standards

Accounting Standards Update No. 2011-04 – “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU No. 2011-04”)

ASU No. 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after December 15, 2011, which for us will be our 2012 first quarter. We are currently evaluating the impact ASU 2011-04 will have on our financial statements.

See the “Fair Value Measurements” caption of Footnote No. 1, “Summary of Significant Accounting Policies” of our 2010 Form 10-K for additional information on the three levels of fair value measurements.

Accounting Standards Update No. 2011-05 – “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU No. 2011-05”)

ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements. ASU No. 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 (for us this will be our 2012 first quarter), with early adoption permitted. We believe the adoption of this update will change the order in which certain financial statements are presented and provide additional detail on those financial statements when applicable, but will not have any other impact on our financial statements.

TheWe file income tax returns, including returns for our subsidiaries, in various jurisdictions around the world. We filed an Internal Revenue Service (“IRS”) refund claim relating to 2000 and 2001 for certain software development costs. The IRS disallowed the claims, and in July 2009, we protested the disallowance. This issue was settled in the 2011 second quarter. The IRS has examined our federal income tax returns, and we have settled all issues for tax years through 2004. 2009.

We filed a refund claim relating to 2000 and 2001. The IRS disallowed the claims, and in July 2009, we protested the disallowance. This issue is pendingparticipated in the IRS Appeals Division. The 2005, 2006, 2007, and 2008 field examinations have been completed, and the unresolved issues from those years are now also with the IRS Appeals Division. IRS examinations for 2009 and 2010 are ongoing as part of the IRS’s Compliance Assurance Program.Program (“CAP”) for the 2010 tax year, and are participating in CAP for 2011. This program accelerates the examination of key transactions with the

goal of resolving any issues before the tax return is filed. Various state, local, and foreign income tax returns are also under examination by foreign, state and local taxing authorities.

As noted in Footnote No. 1, “Basis of Presentation,” we recorded a one-time non-cash pre-tax reduction to shareholders’ equity of approximately $238 million in conjunction with our first quarter 2010 adoption of ASU Nos. 2009-16 and 2009-17. Including the related $92 million decrease in deferred tax liabilities, the after-tax reduction to shareholders’ equity totaled $146 million.

For the second quarter of 2010,2011, we increaseddecreased unrecognized tax benefits by $2$4 million (from $222from $38 million at the end of the 20102011 first quarter).quarter primarily due to the closing of the 2005 through 2008 IRS audit examinations. For the first half of 2010,2011, we decreased unrecognized tax benefits by $25$5 million (from $249from $39 million at year-end 2009),2010 primarily reflectingdue to the settlementclosing 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 2005 through 2008 IRS audit examinations. The unrecognized tax benefits balance of $224$34 million at the end of the 20102011 second quarter included $112$20 million of tax positions that, if recognized, would impact our effective tax rate.

As a large taxpayer, we are under continual audit by the IRS and other taxing authorities. Weauthorities continually audit us. Although we do not 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. Conclusion of these negotiations could havethat a materialsignificant impact onto our unrecognized tax benefit balances.balance will occur during the next 52 weeks as a result of these audits, it remains possible that the amount of our liability for unrecognized tax benefits could change over that time period.

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 (“SAR 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 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 $26$22 million and $22$26 million for the twelve weeks ended June 17, 2011 and June 18, 2010, respectively, and June 19, 2009, respectively,$43 million and $50 million for each of the twenty-four weeks ended June 17, 2011 and June 18, 2010, and June 19, 2009.respectively. Deferred compensation costs related to unvested awards totaled $173$171 million and $122$113 million at June 18, 201017, 2011 and January 1,December 31, 2010, respectively.

RSUs

We granted 3.72.5 million RSUs during the first half of 20102011 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. RSUs granted in the first half of 20102011 had a weighted average grant-date fair value of $27.$40.

SARs

We granted 1.10.7 million SARs to officers and key employees during the first half of 2010.2011. 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. These SARs had a weighted average grant-date fair value of $10,$16 and a weighted average exercise price of $27.$41.

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

We used the following assumptions to determine the fair value of the Employee SARs granted during the first half of 2010.2011.

In making these assumptions, we based the risk-free rates 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, and werate. We based the expected volatility on the weighted averageweighted-average historical volatility, with periods with atypical stock movement given a lower weight to reflect stabilized long-term mean volatility.

Other Information

At the end of the 20102011 second quarter, 6454 million shares were reserved under the Comprehensive Plan, including 3527 million shares under the Stock Option Program and the SAR Program.

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

We estimate the fair value of both ourthe securitized long-term loans to timeshare owners and a portion of our non-securitized long-term loans to timeshare ownersnotes receivable using a discounted cash flow model. We believe this is comparable to the model that an independent third party would use in the current market. Our model uses default rates, prepayment rates, coupon rates and loan terms for our sold notesecuritized notes receivable 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.

We estimate the fair value of the portion of our non-securitized notes receivable that we believe will ultimately be securitized in the same manner as securitized notes receivable. We value certainthe remaining non-securitized loans to timeshare ownersnotes receivable at their carrying value, rather than using our pricing model. We believe that the carrying value of such loansnotes receivable approximates fair value because the stated interest rates of these loans are consistent with current market rates and the reserve for these loansnotes receivable 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, wenotes receivable using internally generategenerated cash flow estimates derived by modeling all bond tranches for our active notes receivable securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in thisour analysis include default rates, prepayment rates, bond interest rates and other structural factors, which we use to estimate the projected cash flows. In order to estimate market credit spreads by rating, we reviewed market spreads from timeshare notenotes receivable securitizations and other asset-backed transactions that occurred duringin the fourth quarter of 2009 andmarket during the first half of 2011 and fiscal year 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. We have concluded that the fair value of the bonds reflects a marginal premium over the book value resulting from relatively low current swap rates and credit spreads.payable.

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 the end of the 2011 second quarter the carrying value of our credit facility approximatescommercial paper approximated its fair value due to the short maturity dates of the draws we have executed to date.maturity. 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. We value these securities using directly observable Level 1 inputs. The carrying value of our marketable securities at the end of our 20102011 second quarter was $18$52 million, which included debt securities of the U.S. Government, its sponsored agencies and other U.S. corporations invested for our self-insurance programs. Theseprograms as well as shares of a publicly traded company. During the 2011 second quarter, a company in which we owned an investment that we accounted for using the cost method became a publicly traded company. Accordingly, we reclassified the investment to marketable securities are valued using directly observable Level 1 inputs as describedand now record our investment at fair value. As of the end of the 2011 second quarter, this investment had a fair value of $32 million, which was $10 million lower than our cost basis. We do not believe this investment is other-than-temporarily impaired based on the following factors: the operating performance of the underlying company; the relatively short time period that the company has been publicly traded; overall share price volatility in Footnote No. 1, “Basis of Presentation.”the lodging sector during the 2011 second quarter; and we have the intent and ability to hold this investment for the foreseeable future. We have reflected the unrealized loss in accumulated other comprehensive loss at June 17, 2011.

We are also required to carry our derivative assets and liabilities at fair value. As of the end of our 20102011 second quarter, we had derivative instruments in a current assetlong-term liability position of $1 million and $1 million in a current liability position valued using Level 1 inputs, $1 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 we calibrate to the initial trade prices, with subsequent valuations based on unobservable inputs to the valuation model, including interest rates and volatilities.

As discussed in more detail inSee the “Fair Value Measurements” caption of Footnote No. 1, “Basis for Presentation,” and Footnote No. 15, “Variable Interest Entities,” we periodically sell notes receivable originated by our Timeshare segment. We continue to service the notes after the sale, 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 under the then-applicable standards for accounting for certain investments in debt and equity securities. At the dates“Summary of sale and at the end of each reporting period, we estimated the fair valueSignificant Accounting Policies” of our residual interests using a discounted cash flow model using Level 3 inputs. With the adoption of the new accounting topics in the first quarter of 2010 we reestablished notes receivable (net of reserves)

associated with past securitization transactions, recorded the debt obligations associated with third-party interests held in these special purpose entities and correspondingly eliminated our residual interests (including servicing assets) associated with these transactions. The preceding table includes the carrying amounts and estimated fair valuesForm 10-K for the long-term portion of the securitized notes receivable and the associated debt obligations.additional information.

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

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. earnings.

In accordance with the applicable accounting guidance for calculating earnings per share, we didhave not includeincluded 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:

In addition, for both the twelve and twenty-four weeks periods ended June 19, 2009, we did not include 1.3 million RSUs in our calculation of diluted earnings per share attributable to Marriott shareholders because to do so would have been antidilutive.

7.

Inventory

Inventory, totaling $1,467 million and $1,444$1,365 million as of June 18,17, 2011 and $1,489 million as of December 31, 2010, and January 1, 2010, respectively, consists primarily of Timeshare segment interval, fractional ownership, and residential products totaling $1,450 million and $1,426$1,346 million as of June 18, 2010,17, 2011 and January 1, 2010, respectively.$1,472 million as of December 31, 2010. Inventory totaling $17$19 million and $18$17 million as of June 18, 2010,17, 2011 and January 1,December 31, 2010, respectively, primarily relates to hotel operating supplies for the limited number of properties we own or lease. We primarily valuerecord Timeshare segment interval, fractional ownership, and residential products at the lower of cost or fair market value, in accordance with applicable accounting guidance, 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 showsWe show the composition of our Timeshare segment inventory balances.balances in the following table:

The following table showsWe show the composition of our property and equipment balances.balances in the following table:

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 showsWe show the composition of our notes receivable balances (net of reserves).reserves and unamortized discounts) in the following table:

We classify notes receivable due within one year as current assets in the caption “Accounts and notes receivable” in our Condensed Consolidated Balance Sheets. TotalWe show the composition of our long-term notes receivable asbalances (net of June 18, 2010,reserves and January 1, 2010, of $1,230 million and $452 million, respectively, consisted of loans to timeshare owners of $1,137 million and $352 million, respectively, loans to equity method investees of

$2 million and $10 million, respectively, and other notes receivable of $91 million and $90 million, respectively.

The following tables show future principal payments net(net of reserves and unamortized discounts,discounts) as well as interest rates, reserves and unamortized discounts for our securitized and non-securitized notes receivable.

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

Notes Receivable Reserves

Notes Receivable Unamortized Discounts⁽¹⁾

Senior, Mezzanine, and Other Loans

We reflect interest income associated with “Senior, mezzanine, and other loans” in the “Interest income” caption in our Condensed Consolidated Statements of Income. We generally do not accrue interest on “Senior, mezzanine, and other loans” that are impaired.Income Statements. At the end of the 20102011 second quarter, our recorded investment in impaired “Senior, mezzanine, and other loans” was $94$98 million. We had an $86a $78 million notes receivable reserve representing an allowance for credit losses, leaving $8$20 million of our investment in impaired loans, for which we had no related allowance for credit losses. At year-end 2009,2010, our recorded investment in impaired “Senior, mezzanine, and other loans” was $191$83 million, and we had a $183$74 million notes receivable reserve representing an allowance for credit losses, leaving $8$9 million of our investment in impaired loans, for which we had no related allowance for credit losses. During the 2011 and 2010 first halves, our average investment in impaired “Senior, mezzanine, and other loans” totaled $90 million and $143 million, respectively.

The following table summarizes the activity related to our “Senior, mezzanine, and other loans” notes receivable reserve for the first half of 2010:2011:

At the end of the 2011 second quarter, past due senior, mezzanine, and other loans totaled $6 million.

Loans to Timeshare Owners

We reflect interest income associated with “Loans to timeshare owners” of $43$37 million and $10$43 million for the 20102011 and 20092010 second quarters, respectively, and $88$76 million and $23$88 million for the twenty-four weeks ended June 18, 201017, 2011 and June 19, 2009,18, 2010, respectively, in our Condensed ConsolidatedIncome Statements of Income in the “Timeshare sales and services” revenue caption. Of the $43$37 million of interest income we recognized from these loans in the 2011 second quarter, $30 million was associated with securitized loans and $7 million was associated with non-securitized loans, compared with $33 million associated with securitized loans and $10 million associated with non-securitized loans recognized in the 2010 second quarter. Of the $76 million of interest income we recognized in the 2010 second quarter, $33first half of 2011, $62 million was associated with securitized loans and $10$14 million was associated with non-securitized loans, compared with the $10 million recognized in the 2009 second quarter which related solely to non-securitized loans. Of the $88 million of interest income we recognized in the 2010 first half, $69 million was associated with securitized loans and $19 million was associated with non-securitized loans compared with the $23 million recognized in the 2009 first half which related solely to non-securitized loans.of 2010.

The following table summarizes the activity related to our “Loans to timeshare owners” notes receivable reserve for the first half of 2010:2011:

We record an estimate of expected uncollectibility on notes receivable 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. As of June 18,17, 2011 and year-end 2010, we estimated average remaining default rates of 10.27.76 percent and 9.25 percent, respectively, for both outstanding non-securitized and securitized timeshare notes receivable, respectively.receivable.

We do not record accrued interest onshow our recorded investment in nonaccrual “Loans to timeshare owners” that are over 90 days past due, andloans in the following table shows ourtable:

We show the aging of the recorded investment (before reserves) in such loans.“Loans to timeshare owners” in the following table:

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. We securitized the notes receivable through bankruptcy-remote entities, and the entities’ creditors have no recourse to us.

The following table providesprovide detail on our long-term debt balances:balances in the following table: