<PAGE>   1
 
                       SECURITIES AND EXCHANGE COMMISSION
 
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
 
[X]   JOINT ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
 
                                       OR
 
[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934
 
          FOR THE TRANSITION PERIOD FROM ____________ TO ____________
 
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<S>                                                 <C>
          COMMISSION FILE NUMBER: 1-6828                      COMMISSION FILE NUMBER: 1-7959
                 STARWOOD HOTELS &                                   STARWOOD HOTELS &
                      RESORTS                                     RESORTS WORLDWIDE, INC.
   (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS       (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS
                     CHARTER)                                            CHARTER)
 
                     MARYLAND                                            MARYLAND
           (STATE OR OTHER JURISDICTION                        (STATE OR OTHER JURISDICTION
         OF INCORPORATION OR ORGANIZATION)                   OF INCORPORATION OR ORGANIZATION)
 
                    52-0901263                                          52-1193298
       (I.R.S. EMPLOYER IDENTIFICATION NO.)                (I.R.S. EMPLOYER IDENTIFICATION NO.)
 
              777 WESTCHESTER AVENUE                              777 WESTCHESTER AVENUE
              WHITE PLAINS, NY 10604                              WHITE PLAINS, NY 10604
          (ADDRESS OF PRINCIPAL EXECUTIVE                     (ADDRESS OF PRINCIPAL EXECUTIVE
           OFFICES, INCLUDING ZIP CODE)                        OFFICES, INCLUDING ZIP CODE)
 
                  (914) 640-8100                                      (914) 640-8100
          (REGISTRANT'S TELEPHONE NUMBER,                     (REGISTRANT'S TELEPHONE NUMBER,
               INCLUDING AREA CODE)                                INCLUDING AREA CODE)
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
 
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                TITLE OF EACH CLASS                      NAME OF EACH EXCHANGE ON WHICH REGISTERED
                -------------------                      -----------------------------------------
<S>                                                 <C>
     Common Stock, par value $0.01 per share,                     New York Stock Exchange
("Corporation Share") of Starwood Hotels & Resorts                   Pacific Exchange
 Worldwide, Inc. (the "Corporation"), the Class B
shares of beneficial interest, par value $0.01 per
  share ("Class B Shares"), of Starwood Hotels &
Resorts (the "Trust"), and Preferred Stock Purchase
    Rights of the Corporation, all of which are
    attached and trade together with as a Unit
</TABLE>
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
                                      None
 
    Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.  Yes [X]  No [ ]
 
    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of each Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.  [X]
 
    As of March 29, 1999, the aggregate market value of the Registrants' voting
and non-voting common equity held by non-affiliates (for purposes of this Joint
Annual Report only, includes all shares other than those held by the
Registrants' Directors, Trustees and executive officers) was $4,051,152,064.06.
 
    As of March 29, 1999, the Corporation had outstanding 176,864,503
Corporation Shares and the Trust had outstanding 176,864,503 Class B Shares and
100 Class A shares of beneficial interest, par value $0.01 per share ("Class A
Shares").
 
    For information concerning ownership of Units, see the Proxy Statement for
the Corporation's Annual Meeting of Stockholders that is currently expected to
be held on May 29, 1999 (the "Proxy Statement"), which is incorporated by
reference under various Items of this Joint Annual Report.
 
                      DOCUMENT INCORPORATED BY REFERENCE:
 
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<CAPTION>
                     DOCUMENT                                       WHERE INCORPORATED
                     --------                                       ------------------
<S>                                                 <C>
                  Proxy Statement                             Part III (Items 11, 12 and 13)
</TABLE>
<PAGE>   2
 
                               TABLE OF CONTENTS
 
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<CAPTION>
 ITEM
NUMBER                                                                   PAGE
------                                                                   ----
<C>      <S>                                                             <C>
                                    PART I
  1.     Business....................................................     10
  2.     Properties..................................................     25
  3.     Legal Proceedings...........................................     30
  4.     Submission of Matters to a Vote of Security Holders.........     30
         Executive Officers of the Registrants.......................     30
 
                                   PART II
  5.     Market for Registrants' Common Equity and Related
           Stockholder Matters.......................................     30
  6.     Selected Financial Data.....................................     32
  7.     Management's Discussion and Analysis of Financial Condition
           and Results of Operations.................................     36
 7A.     Quantitative and Qualitative Disclosures about Market
           Risk......................................................     48
  8.     Financial Statements and Supplementary Data.................     48
  9.     Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosure..................................     49
 
                                   PART III
 10.     Directors, Trustees and Executive Officers of the
           Registrants...............................................     49
 11.     Executive Compensation......................................     56
 12.     Security Ownership of Certain Beneficial Owners and
           Management................................................     56
 13.     Certain Relationships and Related Transactions..............     56
 
                                   PART IV
 14.     Exhibits, Financial Statements, Financial Statement
           Schedules and Reports on Form 8-K.........................     56
</TABLE>
<PAGE>   3
 
     This Joint Annual Report is filed by Starwood Hotels & Resorts Worldwide,
Inc., a Maryland corporation (the "Corporation"), and its subsidiary, Starwood
Hotels & Resorts, a Maryland real estate investment trust (the "Trust"). Unless
the context otherwise requires, all references to the Corporation include those
entities owned or controlled by the Corporation, including SLC Operating Limited
Partnership, a Delaware limited partnership (the "Operating Partnership"), but
excluding the Trust; all references herein to the Trust include the Trust and
those entities owned or controlled by the Trust, including SLT Realty Limited
Partnership, a Delaware limited partnership (the "Realty Partnership" and,
together with the Operating Partnership, the "Partnerships"); and all references
to "Starwood Hotels" or the "Company" refer to the Corporation, the Trust and
their respective subsidiaries, collectively. The shares of common stock, par
value $0.01 per share, of the Corporation ("Corporation Shares") and the Class B
shares of beneficial interest, par value $0.01 per share, of the Trust ("Class B
Shares") are attached and traded together and may be held or transferred only in
units consisting of one Corporation Share and one Class B Share (a "Unit").
Prior to the restructuring of Starwood Hotels (the "Restructuring") on January
6, 1999, the common shares of beneficial interest, par value $0.01 per share, of
the Trust ("Trust Shares") were traded together with the Corporation Shares as
"Paired Shares," just as the Class B Shares and the Corporation Shares are
currently traded as Units. Unless otherwise stated herein, all information with
respect to Units refers to Units since January 6, 1999 and to Paired Shares for
periods before January 6, 1999.
                            ------------------------
 
     This Joint Annual Report contains statements that constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements appear in a number of places in
this Joint Annual Report, including, without limitation, the section of Item 1,
"Business," captioned "Business Strategy" and Item 5, "Management's Discussion
and Analysis of Financial Condition and Results of Operations." Such
forward-looking statements may include statements regarding the intent, belief
or current expectations of Starwood Hotels, its Directors or Trustees or its
officers with respect to the matters discussed in this Joint Annual Report. All
such forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those projected in the forward-looking
statements including, without limitation, the risks and uncertainties set forth
below. The Company undertakes no obligation to publicly update or revise any
forward-looking statements to reflect current or future events or circumstances.
 
THE RESTRUCTURING
 
     On January 6, 1999, Starwood Hotels consummated the Restructuring pursuant
to an Agreement and Plan of Restructuring dated as of September 16, 1998, as
amended (the "Restructuring Agreement"), among the Corporation, ST Acquisition
Trust, a wholly owned subsidiary of the Corporation, and the Trust. Pursuant to
the Restructuring, the Trust became a subsidiary of the Corporation, which holds
all the outstanding Class A shares of beneficial interest, par value $0.01 per
share, of the Trust ("Class A Shares"). The Restructuring was proposed in
response to the Internal Revenue Service Restructuring and Reform Act of 1998
("H.R. 2676"), which made it difficult for Starwood Hotels to acquire and
operate additional hotels while still maintaining its former status as a
"grandfathered paired share real estate investment trust." While the Corporation
and the Trust believe that the Restructuring was the best alternative in light
of the legislation and that the new structure of Starwood Hotels does not raise
the same concerns that led Congress to enact such legislation, no assurance can
be given that additional legislation, regulations or administrative
interpretations will not be adopted that could eliminate or reduce certain
benefits of the Restructuring and have a material adverse effect on the results
of operations, financial condition and prospects of Starwood Hotels.
 
ABILITY TO MANAGE RAPID GROWTH
 
     The full benefits of the Company's acquisition of Westin Hotels & Resorts
Worldwide, Inc. ("Westin Worldwide") and certain of its affiliates
(collectively, "Westin"), of ITT Corporation ("ITT") and of the other hotel
properties acquired during 1998 and thereafter will require the integration of
administrative, finance, operations and marketing organizations; the
coordination of sales efforts; and the implementation of appropriate operations,
financial and management systems and controls in order to realize the
efficiencies,
 
                                        2
<PAGE>   4
 
revenue enhancements and cost reductions that are expected from such
acquisitions. Although the Company's management team has experience integrating
acquisitions, none of the prior acquisitions have been of comparable magnitude
to, or included the breadth of operations involved in, the acquisition of Westin
or ITT. The diversion of management attention, as well as any other difficulties
which may be encountered in the transition and integration process, could have
an adverse impact on the revenue and operating results of the Company. There can
be no assurance that the Company will be able to integrate successfully the
operations of the acquired properties with those of the Company or that
anticipated synergies will be fully realized or that such synergies will occur
when anticipated.
 
     The Company's future success and its ability to manage future growth depend
in large part upon the efforts of its senior management and its ability to
attract and retain key officers and other highly qualified personnel.
Competition for such personnel is intense. Since January 1996, the Company has
experienced significant changes in its senior management, including executive
officers. (See Item 10, "Directors, Trustees and Executive Officers of the
Registrants," of this Joint Annual Report.) There can be no assurance that the
Company will continue to be successful in attracting and retaining qualified
personnel. Accordingly, there can be no assurance that the Company's senior
management will be able to successfully execute and implement the Company's
growth and operating strategies.
 
ACQUISITION OPPORTUNITIES
 
     The Company intends to make acquisitions that complement its business.
There can be no assurance, however, that the Company will be able to identify
acquisition candidates on commercially reasonable terms or at all. If additional
acquisitions are made, there can also be no assurance that any anticipated
benefits will actually be realized. Similarly, there can be no assurance that
the Company will be able to obtain additional financing for acquisitions, or
that such financing will not be restricted by the terms of the Company's current
debt arrangements.
 
TAX RISKS
 
     ABILITY TO QUALIFY AS A REIT.  The Trust believes that it has operated so
as to qualify as a "real estate investment trust" (a "REIT") under the Internal
Revenue Code of 1986, as amended (the "Code"), commencing with the Trust's
taxable year ended December 31, 1995, and the Trust intends to continue to so
operate. No assurance, however, can be given that the Trust will remain
qualified as a REIT. Qualification as a REIT involves the application of highly
technical and complex Code provisions for which there are only limited judicial
or administrative interpretations. The complexity of these provisions is greater
in the case of a REIT that owns hotels and leases them to a corporation of which
it is a subsidiary. As a result, the Trust is likely to encounter a greater
number of interpretive issues under the REIT qualification rules, and more such
issues which lack clear guidance, than are other REITs. The determination of
various factual matters and circumstances not entirely within the Trust's
control may affect its ability to qualify as a REIT. In addition, no assurance
can be given that new legislation, new regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to qualification as a REIT or the federal income tax consequences
of such qualification. Furthermore, the qualification of the Trust as a REIT
will depend on the Trust's continuing ability to meet various requirements
concerning, among other things, the ownership of Units and other equity
securities of the Trust, the nature of the Trust's assets, the sources of its
income and the amounts of its distributions to its shareholders. In connection
with the acquisition of Westin in January 1998 and ITT in February 1998, the
Trust acquired new assets and operations (including the leasing of newly
acquired assets, loans to the Corporation and the ownership of certain
corporations that own hotels or intangible assets). By increasing the complexity
of the Company's operations, these assets and operations may make it more
difficult for the Trust to continue to satisfy the REIT qualification
requirements.
 
     Prior to the Restructuring, the Trust's ability to qualify as a REIT was
also dependent on its continued exemption from the anti-pairing rules of Section
269B(a)(3) of the Code. Section 269B(a)(3) would ordinarily prevent a company
such as the Trust from qualifying as a REIT if its stock is paired with the
stock of another company (such as the Corporation) whose activities are
inconsistent with REIT status. The "grandfathering rules" governing Section
269B(a)(3) generally provide, however, that (except to the extent
 
                                        3
<PAGE>   5
 
provided by H.R. 2676) Section 269B(a)(3) does not apply to a paired-share REIT
if the shares of the REIT and its paired operating company were paired on or
before June 30, 1983, and the REIT was taxable as a REIT on or before June 30,
1983. However, courts and administrative agencies have not interpreted Section
269B(a)(3) to any significant degree.
 
     If in any taxable year the Trust were to fail to qualify as a REIT, the
Trust would not be allowed a deduction for distributions to shareholders in
computing its taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain Code provisions, the Trust would also be disqualified from treatment as
a REIT for the four taxable years following the year during which qualification
was lost. The failure of the Trust to qualify as a REIT would reduce its net
earnings available for distribution to shareholders because of the additional
tax liability to the Trust for the year or years involved. In addition,
distributions would no longer be required to be made. To the extent that
distributions to shareholders would have been made in anticipation of the Trust
qualifying as a REIT, the Trust might be required to borrow funds or to
liquidate certain of its investments to pay the applicable tax. The failure to
qualify as a REIT would also constitute a default under certain debt obligations
of the Trust.
 
     REQUIRED DISTRIBUTIONS TO SHAREHOLDERS.  In order to obtain and retain REIT
status, the Trust must distribute to its shareholders (including the
Corporation) at least 95% of its REIT taxable income (excluding any net capital
gain). In addition, the Trust will be subject to tax on its undistributed net
taxable income and net capital gain, and a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by the Trust with respect to
any calendar year are less than the sum of (i) 85% of the Trust's ordinary
income, (ii) 95% of its capital gain net income for that year and (iii) 100% of
its undistributed income from prior years. The Trust intends to make
distributions to its shareholders to comply with the distribution requirements
of the Code and to minimize federal income taxes and the nondeductible federal
excise tax. The Trust (or the Realty Partnership) could be required to borrow
funds on a short-term basis to meet the REIT distribution requirements, which
borrowing may not otherwise be advisable for the Company.
 
     Distributions by the Corporation and Trust will be determined by the
Corporation's Board of Directors (the "Board of Directors") or the Trust's Board
of Trustees (the "Board of Trustees"), as applicable, and will depend on a
number of factors, including the amount of cash available for distributions, the
Company's financial condition, decisions by either such board to reinvest funds
rather than to distribute such funds, the Company's capital expenditures, the
annual distribution requirements under the REIT provisions of the Code (in the
case of the Trust) and such other factors as either Board deems relevant. For
federal income tax purposes, distributions paid to shareholders may consist of
ordinary income, capital gains (in the case of the Trust), nontaxable return of
capital, or a combination thereof. Subject to certain conditions, holders of
Class B Shares are entitled to receive a non-cumulative annual dividend, at an
initial annual rate of $0.60 per share, to the extent the dividend is authorized
by the Board of Trustees. The dividend may increase after 1999 pursuant to a
formula, and may not be paid under certain circumstances. Unless dividends for
the then current quarterly dividend period have been paid on the Class B Shares,
the Trust will not be permitted to pay a dividend on the Class A Shares (except
in certain circumstances), all of which are currently held by the Corporation.
 
DEBT FINANCING
 
     As a result of incurring debt, the Company is subject to the following
risks associated with debt financing: (i) the risk that cash flow from
operations will be insufficient to meet required payments of principal and
interest; (ii) the risk that (to the extent that the Company maintains floating
rate indebtedness) interest rates will fluctuate; and (iii) risks resulting from
the fact that the agreements governing the Company's loan and credit facilities
contain covenants imposing certain limitations on the Company's ability to
acquire and dispose of assets. In addition, although the Company anticipates
that it will be able to repay or refinance its existing indebtedness and any
other indebtedness when it matures, there can be no assurance that it will be
able to do so or that the terms of such refinancings will be favorable.
 
     In connection with the acquisitions of Westin and ITT, the Company incurred
a substantial amount of additional debt, thereby increasing its exposure to the
risks associated with debt financing. The Company's increased leverage may have
important consequences including the following: (i) the ability of the Company
 
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<PAGE>   6
 
to obtain additional financing for acquisitions, working capital, capital
expenditures or other purposes, if necessary, may be impaired or such financing
may not be available on terms favorable to the Company; (ii) a substantial
decrease in operating cash flow or an increase in expenses of the Company could
make it difficult for the Company to meet its debt service requirements and
force it to modify its operations; (iii) the Company's higher level of debt and
resulting interest expense may place it at a competitive disadvantage with
respect to certain competitors with lower amounts of indebtedness and/or higher
credit ratings; and (iv) the Company's greater leverage may make it more
vulnerable to a downturn in its business or in the economy generally.
 
LIMITS ON CHANGE OF CONTROL AND OWNERSHIP LIMITATION
 
     OWNERSHIP LIMITATION.  In order for the Trust to maintain its qualification
as a REIT, not more than 50% in value of its outstanding shares may be owned,
directly or indirectly, by five or fewer individuals (which term is defined in
the Code to include certain entities) at any time during the last half of the
Trust's taxable year. Furthermore, actual or constructive ownership of a
sufficient number of the Units could cause the Corporation to become a "related
party tenant" of the Trust, which would result in the loss of the Trust's REIT
status. In order to help preserve the Trust's REIT status, the Corporation's
charter (the "Articles of Incorporation"), and the Trust's declaration of trust,
as amended and restated (the "Declaration of Trust"), prohibit actual or
constructive ownership by any one person or group of related persons of more
than 8.0% of the shares of the Corporation or the Trust, whether measured by
vote, value or number of shares (the "Ownership Limit"). Generally, the Units
owned by related or affiliated persons will be aggregated and certain options
and warrants will be treated as exercised for purposes of the Ownership Limit.
Although the Class A Shares constitute more than 50% in value of the shares of
the Trust, all of which are held by the Corporation, this ownership is not
subject to the Ownership Limit and will not prevent the Trust from continuing to
qualify as a REIT. In addition, the leasing of the Trust's assets to the
Corporation does not constitute a lease to a related party for purposes of REIT
qualification.
 
     The constructive ownership rules of the Code are extensive and complex and
may cause Units owned, directly or indirectly, by certain direct or indirect
partners in any partnership, including the direct and indirect owners of
interests in the Realty Partnership and the Operating Partnership, and other
classes of related individuals and/or entities, to be deemed to be
constructively owned by one individual or entity. As a result, the acquisition
of less than 8.0% of the Units (or the acquisition of an interest in an entity
which owns Units) by an individual or entity could cause that individual or
entity (or another individual or entity) to own constructively in excess of 8.0%
of the Units, and thus subject such Units to the Ownership Limit. Direct or
constructive ownership in excess of the Ownership Limit would cause the
violative transfer or ownership to be void, or cause such shares to be converted
into "Excess Shares," which have limited economic rights, to the extent
necessary to ensure that the purported transfer or other event does not result
in a violation of the Ownership Limit. Notwithstanding the Ownership Limit,
given the breadth of the Code's constructive ownership rules and the inability
of the Trust and the Corporation to continuously monitor direct and constructive
ownership of Units, it is possible that an individual or entity could at some
time constructively own sufficient Units to cause termination of the Trust's
REIT status.
 
     LIMITS ON CHANGE OF CONTROL.  Certain provisions of the Articles of
Incorporation, the Corporation's Bylaws and the Declaration of Trust, including,
without limitation, the Ownership Limit, those providing for the ability to
issue preferred shares and the maintenance of staggered terms for Directors and
Trustees, may have the effect of discouraging a third party from making an
acquisition proposal for the Corporation and the Trust and may thereby delay,
defer or prevent a change in control under circumstances that could otherwise
give the holders of Units or other equity securities of the Company the
opportunity to realize a premium over then-prevailing market prices.
 
INFLUENCE BY STARWOOD CAPITAL
 
     Individuals employed by or otherwise affiliated with Starwood Capital
Group, L.L.C. ("Starwood Capital") hold two positions on the Board of Directors
and two positions on the Board of Trustees. Although the Company has a policy
requiring a majority of its Directors and Trustees to be "independent," Starwood
 
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<PAGE>   7
 
Capital may have the ability to exercise certain influence over the affairs of
the Company. Barry S. Sternlicht is the President and Chief Executive Officer
of, and controls, Starwood Capital. Mr. Sternlicht is a Director of the
Corporation and Chairman and Chief Executive Officer of the Corporation, and a
Trustee of the Trust and Chairman and Chief Executive Officer of the Trust.
Jonathan D. Eilian, a Director of the Corporation, and Madison F. Grose, a
Trustee of the Trust, are Senior Managing Directors of Starwood Capital. As a
consequence, Mr. Sternlicht has the ability to exercise certain influence over
the affairs of the Company. Starwood Capital and certain of its affiliates own
limited partnership interests in the Realty Partnership and the Operating
Partnership ("Partnership Units") that are exchangeable for Units. As a result,
and due to its different tax situation, prior to the exchange of its Partnership
Units into Units, Starwood Capital's objectives regarding the pricing, structure
and timing of any sale of certain properties or the restructuring or sale of
certain mortgage loans may differ from the objectives of the shareholders of the
Company or current management of the Company.
 
RISKS RELATING TO HOTEL OPERATIONS
 
     OPERATING RISKS.  The properties of the Company are subject to all
operating risks common to the hotel industry. These risks include changes in
general economic conditions (as described below); decreases in the level of
demand for rooms and related services; cyclical over-building in the hotel
industry; restrictive changes in zoning and similar land use laws and
regulations or in health, safety and environmental laws, rules and regulations;
the inability to obtain property and liability insurance fully to protect
against all losses or to obtain such insurance at reasonable rates; and changes
in travel patterns. In addition, the hotel industry is highly competitive. The
properties of the Company compete with other hotel properties in their
geographic markets, and some of the Company's competitors may have substantially
greater marketing and financial resources than the Company.
 
     SEASONALITY OF HOTEL BUSINESS.  The hotel industry is seasonal in nature;
however, the periods during which the Company's properties experience higher
hotel revenues or gaming activities vary from property to property and depend
principally on location. Although the Company's revenues historically have been
lower in the first quarter than in the second, third or fourth quarters, the
acquisitions of Westin and ITT are expected to affect, and future acquisitions
may further affect, seasonal fluctuations in revenues and cash flow.
 
     CAPITAL INTENSIVE BUSINESS.  The Company's properties are capital intensive
and, in order to remain attractive and competitive, must be well maintained as
well as periodically modernized and refurbished. This creates an ongoing need
for capital and, to the extent such capital expenditures may not be funded from
cash generated by the Company, financial results may be sensitive to the cost
and availability of funds.
 
REAL ESTATE INVESTMENT RISKS
 
     GENERAL RISKS.  Real property investments are subject to varying degrees of
risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the related properties as well as the expenses incurred.
 
     In addition, income from properties and real estate values are also
affected by a variety of other factors, such as governmental regulations and
applicable laws (including real estate, zoning, tax and eminent domain laws),
interest rate levels and the availability of financing. For example, existing or
new real estate, zoning or tax laws can make it more expensive and/or time
consuming to develop real property or expand, modify or renovate hotels.
 
     Governments can, under eminent domain laws, take real property, sometimes
for less compensation than the owner believes the property is worth. When
prevailing interest rates increase, the expense of acquiring, developing,
expanding or renovating real property increases, and values decrease as it
becomes more difficult to sell property because the number of potential buyers
decreases. Similarly, as financing becomes less available, it becomes more
difficult both to acquire real property and, because of the diminished number of
potential buyers, to sell real property. Any of these factors could have a
material adverse impact on the Company's results of operations or financial
condition, as well as on the Trust's ability to make distributions to its
shareholders.
 
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<PAGE>   8
 
     In addition, equity real estate investments, such as the investments held
by the Company and any additional properties that may be acquired by the
Company, are relatively illiquid. If the properties of the Company do not
generate revenue sufficient to meet operating expenses, including debt service
and capital expenditures, the income of the Company and the Trust's ability to
make distributions to shareholders will be adversely affected.
 
     HOTEL DEVELOPMENT.  The Company intends to develop hotel properties as
suitable opportunities arise and is currently developing several upscale hotels.
New project development is subject to a number of risks, including risks of
construction delays or cost overruns that may increase project costs; receipt of
zoning, occupancy and other required governmental permits and authorizations;
and the incurring of development costs for projects that are not pursued to
completion. There can be no assurance that any development project will be
completed in a timely manner or within budget.
 
     POSSIBLE LIABILITY RELATING TO ENVIRONMENTAL MATTERS.  Under various
federal, state, local and foreign environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may become
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in such property. Such laws often impose liability without regard
to whether the owner or operator knew of, or was responsible for, the presence
of such hazardous or toxic substances. The presence of hazardous or toxic
substances, or the failure properly to remediate such substances when present,
may adversely affect the owner's ability to sell or rent such real property or
to borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic wastes may be liable for the costs
of removal or remediation of such wastes at the disposal or treatment facility,
regardless of whether such facility is owned or operated by such person. Other
federal, state, local and foreign laws, ordinances and regulations require
abatement or removal of certain asbestos-containing materials in the event of
demolition or certain renovations or remodeling and govern emissions of and
exposure to asbestos fibers in the air. The operation and subsequent removal of
certain underground storage tanks also are regulated by federal, state, local
and foreign laws.
 
RISKS RELATING TO GAMING OPERATIONS
 
     REGULATION OF GAMING OPERATIONS.  The Company owns and operates a number of
casino gaming facilities, including Caesars Palace and the Desert Inn Resort &
Casino (the "Desert Inn") in Las Vegas, Nevada; Caesars Atlantic City in
Atlantic City, New Jersey; and Caesars Tahoe in Stateline, Nevada. Other gaming
facilities are located in Delaware, Indiana and Mississippi; in six foreign
countries; and on cruise ships operating in international waters. Each of these
gaming operations is subject to extensive licensing, permitting and regulatory
requirements administered by various governmental entities. Typically, gaming
regulatory authorities have broad powers with respect to the licensing of gaming
operations, and may revoke, suspend, condition or limit the gaming approvals and
licenses of the Company and its gaming subsidiaries, impose substantial fines
and take other actions, any of which could have a material adverse effect on the
business and the value of the Company's hotel/casinos. Directors, officers and
certain key employees of the Company and its gaming subsidiaries are subject to
licensing or suitability determinations by various gaming authorities. If any of
such gaming authorities were to find a person occupying any such position
unsuitable, the Company would be required to sever its relationship with that
person.
 
     INCREASED GAMING COMPETITION.  The Company faces significant domestic and
international competition from both established casinos and newly emerging
gaming operations. Proposals have been made for a significant number of casinos,
both land-based and those involving vessels on navigable waters, in a number of
jurisdictions and large metropolitan areas. Legalization of gaming in additional
jurisdictions may also provide opportunities for expansion by the Company's
competitors that could adversely affect the Company's existing gaming
operations. The Company believes that the adoption of legalized gaming in any
jurisdiction near Nevada (particularly California or other states in the
southwestern United States) or near New Jersey (particularly New York or
Pennsylvania) or the advent of gaming on nearby Native American lands could have
a material adverse effect on the Company's operations in Las Vegas and Atlantic
City. In November 1998, California voters approved a ballot initiative that
mandates that the California governor sign compacts relating to gaming on tribal
lands with California tribes upon their request. The initiative also
 
                                        7
<PAGE>   9
 
amended current California law to permit gambling devices, including slot
machines, banked card games and lotteries, at tribal casinos. The Supreme Court
of California has stayed the implementation of this initiative and its ultimate
impact on the Company's gaming operations is uncertain.
 
     RISKS ASSOCIATED WITH HIGH-END GAMING.  There are risks associated with the
high end gaming business that currently comprises a portion of the Company's
Caesars Palace and Desert Inn operations. High-end gaming is more volatile than
other forms of gaming, and variances attributable to high-end gaming could,
under certain circumstances, have a positive or negative impact on cash flow,
earnings and other financial measures in a particular quarter. In addition, a
substantial portion of the Company's table gaming revenues from its Caesars
Palace and Desert Inn operations is attributable to the play of a relatively
small number of international customers. The loss of, or a reduction in play of,
the most significant of such customers could have an adverse effect on the
Company's future operating results. In addition, the Company may extend credit
to certain high-end gaming customers at its casinos. Although the Company takes
appropriate measures to confirm the creditworthiness of these customers, the
failure of such customers to repay amounts borrowed from the Company, whether as
a result of gaming losses or otherwise, could have an adverse effect on the
Company's results of gaming operations.
 
FOREIGN OPERATIONS AND CURRENCY FLUCTUATIONS
 
     The Company has significant international operations, including, as of
December 31, 1998, majority ownership interest in 31 properties in Europe, five
properties in Africa and the Middle East, 17 properties in Latin America and
five properties in the Asia-Pacific region. In addition, the Company manages
approximately 135 properties in these regions. International operations
generally are subject to various political and other risks that are not present
in U.S. operations, including, among other things, the risk of war or civil
unrest, expropriation and nationalization. In addition, certain international
jurisdictions restrict the repatriation of non-U.S. earnings. Various
international jurisdictions also have laws limiting the right and ability of
non-U.S. entities to pay dividends and remit earnings to affiliated companies
unless specified conditions have been met. In addition, sales in international
jurisdictions typically are made in local currencies, which subjects the Company
to risks associated with currency fluctuations. Currency devaluations and
unfavorable changes in international monetary and tax policies and other changes
in the international regulatory climate and international economic conditions
could materially adversely affect the Company's profitability and financing
plans. The Company is subject to certain risks due to currency fluctuations.
Other than in Italy, the Company's properties are geographically diversified and
not concentrated in any particular region.
 
EUROPEAN UNION CURRENCY CONVERSIONS
 
     On January 1, 1999, 11 of the 15 member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies and the Euro. Following the introduction of the
Euro, the legacy currencies of the Participating Countries will remain legal
tender during a transition period ending on January 1, 2002. During the
transition period, both the legacy currency and the Euro will be legal tender in
the respective Participating Countries. During the transition period, currency
conversions will be computed by triangulation with reference to conversion rates
between the respective currencies and the Euro. The Company currently operates
in 10 of the 11 Participating Countries. The effect on the Company of the
adoption of the Euro by the Participating Countries in which it operates is
currently uncertain. However, it is possible that the Euro adoption will result
in increased competition within the European market. In addition, the Company is
currently evaluating and updating its information systems to make them Euro
compliant; however, there is no assurance that the Company or third-party
vendors of applications used by the Company will successfully bring all of its
systems into compliance. Failure of the Company to do so could result in
disruptions in the processing of transactions in Euros or computed by reference
to the Euro.
 
POSSIBLE LIABILITY OF TRUST SHAREHOLDERS
 
     Both the Maryland statute governing real estate investment trusts formed
under the laws of that state (the "Maryland REIT Law") and the Declaration of
Trust provide that no shareholder of the Trust will be
 
                                        8
<PAGE>   10
 
personally liable for any obligation of the Trust solely as a result of such
shareholder's status as a shareholder of the Trust. The Declaration of Trust
further provides that the Trust shall indemnify each shareholder against any
claim or liability to which the shareholder may become subject by reason of
being or having been a shareholder. In addition, it is the Trust's policy to
include a clause in its contracts which provides that shareholders assume no
personal liability for obligations entered into on behalf of the Trust. However,
with respect to tort claims, contractual claims where shareholder liability is
not so negated, claims for taxes and certain statutory liabilities, the
shareholders may, in some jurisdictions, be personally liable to the extent that
such claims are not satisfied by the Trust. Inasmuch as the Trust does and will
carry public liability insurance that it considers adequate, any risk of
personal liability to shareholders is limited to situations in which the Trust's
assets plus its insurance coverage would be insufficient to satisfy the claims
against the Trust and its shareholders.
 
RISKS RELATING TO GENERAL ECONOMIC CONDITIONS
 
     The Company's hotel and gaming operations may be adversely affected by
moderate or severe economic downturns, including conditions that may be isolated
to one or more geographic regions. As a result, the Company's ability to achieve
or sustain substantial improvements in operating income and other important
financial tests may be adversely affected by general economic conditions.
 
     Further, an economic downturn in the countries from which the Company's
gaming operations draw high-end international customers could cause a reduction
in the frequency of visits and the revenues generated by such customers.
Similarly, the collectibility of receivables from international gaming customers
could be adversely affected by future business or economic trends, or by
significant events, in the countries in which such customers reside.
 
     Large parts of the world economy, including Asia, are currently in moderate
to severe recession. In addition, the United States could experience a recession
in the near or medium term. A continued recession overseas or a recession in the
United States would likely have a material adverse effect on the results of
operations of the Company.
 
RISKS RELATED TO THE YEAR 2000
 
     Since all major computerized central facilities reservation systems and
applications have been tested and reservations for the year 2000 have been
accepted, Starwood Hotels believes that it has addressed all significant risks
related to the Company's reservation function. The remaining risks relate to the
non-critical business applications, support hardware for the central facilities
and embedded systems at the properties owned or managed by the Company. A
failure of certain of these systems to become Year 2000 Compliant could disrupt
the timeliness or the accuracy of management information provided by the central
facilities.
 
     There can be no assurance that the efforts related to the gaming and hotel
properties will be sufficient to make these properties' computerized systems and
applications Year 2000 Compliant in a timely manner or that the allocated
resources will be sufficient. A failure to become Year 2000 Compliant could
affect the integrity of the gaming and hotel property guest check-in, billing
and accounting functions. Certain physical hotel property machinery and
equipment could also fail resulting in safety risks and customer
dissatisfaction. Additionally, failure of the gaming properties' systems to
become Year 2000 Compliant could result in the inefficient processing of
operational gaming information and the malfunction of computerized gaming
machines.
 
     Starwood Hotels has asked substantially all of its significant vendors and
service providers to provide reasonable assurances as to those parties' Year
2000 state of readiness. Risk assessments and contingency plans, where required,
will be finalized in the first six months of 1999. To the extent that vendors
and service providers do not provide satisfactory evidence that their products
and services are Year 2000 Compliant, the Company will seek to obtain the
necessary products and services from alternative sources. There can be no
assurance, however, that Year 2000 remediation by vendors and service providers
will be completed timely or that qualified replacement vendors and service
providers will be available, and any failure of such third parties' systems
could have a material adverse impact on the Company's computer systems and
operations.
 
                                        9
<PAGE>   11
 
RISKS RELATING TO ACTS OF GOD AND WAR
 
     The Company's financial and operating performance may be adversely affected
by acts of God, such as natural disasters, in both the locations in which the
Company owns and/or operates significant properties and areas of the world from
which the Company draws a large number of customers. Similarly, wars, political
unrest and other forms of civil strife have in the past, and may in the future,
cause the Company's results to differ materially from predicted results.
 
RISKS INVOLVED IN INVESTMENTS THROUGH PARTNERSHIPS OR JOINT VENTURES
 
     Instead of purchasing hotel properties directly, the Company may invest as
a co-venturer. Joint venturers often have shared control over the operation of
the joint-venture assets. Therefore, such investments may, under certain
circumstances, involve risks such as the possibility that the co-venturer in an
investment might become bankrupt, or have economic or business interests or
goals that are inconsistent with the Company's business interests or goals, or
be in a position to take action contrary to the Company's instructions or
requests or contrary to the Company's policies or objectives.
 
     Consequently, actions by a co-venturer might subject hotel properties owned
by the joint venture to additional risk. Although the Company generally seeks to
maintain sufficient control of any joint venture, the Company may be unable to
take action without the approval of its joint-venture partners. Alternatively,
the Company's joint-venture partners could take actions binding on the joint
venture without the Company's consent. Additionally, should a joint-venture
partner become bankrupt, the Company could become liable for such partner's
share of joint-venture liabilities.
 
                                     PART I
 
ITEM 1.  BUSINESS.
 
GENERAL
 
     Starwood Hotels is one of the world's largest hotel operating companies.
The Company conducts its hotel business both directly and through its
subsidiaries, including ITT Sheraton Corporation ("Sheraton"), the Trust and
Ciga, S.p.A. ("Ciga"), and engages in the gaming business principally through
its subsidiary Caesars World, Inc. ("Caesars"). The Company's brand names
include Sheraton(TM), Westin(TM), The Luxury Collection(TM), St. Regis(TM),
W(TM), Ciga(TM), Four Points(TM) and Caesars(TM). Through these brands, Starwood
Hotels is well represented in most major markets around the world.
 
     The Company's revenue and earnings are derived primarily from two sources:
 
     - Hotel operations, which include the operation of the Company's owned
       hotels, the operation of other hotels for a management fee pursuant to
       long-term management contracts and the receipt of franchise fees; and
 
     - Gaming operations, which include the operation of the Company's owned,
       partially owned and managed casinos.
 
     The Company's hotel business emphasizes the global operation of
full-service hotels in the luxury and upscale segment of the lodging industry.
Starwood Hotels seeks to acquire interests in or management rights with respect
to hotels in this segment. In the first quarter of 1998, Starwood Hotels
completed two major transactions: the acquisition of Westin (the "Westin
Merger") and the acquisition of ITT (the "ITT Merger"). As a result, at December
31, 1998, the Company's portfolio of owned, managed or franchised hotels totaled
694 hotels with approximately 225,000 rooms in 70 countries. This portfolio is
comprised of 171 hotels that Starwood Hotels owns or leases or in which Starwood
Hotels has a majority equity interest (substantially all of which hotels
Starwood Hotels also manages), approximately 226 hotels managed by Starwood
Hotels on behalf of third-party owners (including entities in which Starwood
Hotels has a minority equity interest), approximately 280 hotels for which
Starwood Hotels receives franchise fees and 17 hotels
 
                                       10
<PAGE>   12
 
with gaming operations. For further discussion of the ITT Merger and the Westin
Merger, see the notes to the combined consolidated financial statements of this
Joint Annual Report.
 
     The Trust was organized in 1969, and the Corporation was incorporated in
1980, both under the laws of Maryland.
 
     The Company's principal place of business is 777 Westchester Avenue, White
Plains, New York, 10604, and its telephone number is (914) 640-8100.
 
     For a discussion of the revenues, profits and assets of each industry and
geographical segment of the Company's business, see notes to the combined
consolidated financial statements of this Joint Annual Report. For additional
information concerning the Company's business, see Item 2, "Properties," of this
Joint Annual Report.
 
RECENT DEVELOPMENTS
 
     In June 1998, Starwood Hotels sold approximately 13 million shares of ITT
Educational Services, Inc. ("Educational Services") in a public offering for net
proceeds of approximately $304 million. In February 1999, Starwood Hotels sold
its remaining interest of approximately 9.5 million shares of Educational
Services for net proceeds of approximately $310 million.
 
     Caesars Indiana's "Glory of Rome" Riverboat, a floating casino in Harrison
County, Indiana, commenced operations in November 1998, near the Louisville,
Kentucky border. The 93,000 square foot casino is the largest riverboat casino
in the United States.
 
COMPETITIVE STRENGTHS
 
     Management believes that the following factors contribute to the Company's
position as a leader in the lodging and gaming industries and provide a
foundation for the Company's business strategy:
 
     BRAND STRENGTH.  Starwood Hotels believes that it has strong brand
leadership in major markets worldwide based on the global recognition of the
Company's lodging and gaming brands. The strength of the Company's brands is
evidenced, in part, by the superior ratings received from the Company's hotel
guests and from industry publications. For example, the Conde Nast Traveler
Magazine 1999 Gold List Readers' Choice Poll included 50 Starwood Hotels
properties as part of the top 500 places to stay in the world. Starwood Hotels
owns or manages more Gold List winners than any other hotel company in the
world. Additionally, Westin was ranked as the premier upscale hotel chain in the
1997 Frequent Flyer Magazine/JD Power and Associates Domestic Hotels Guest
Satisfaction Survey. With the Company's well known lodging and gaming brands,
Starwood Hotels benefits from a luxury and upscale branding strategy that
provides strong operating performance from new customer penetration and customer
loyalty. During 1998, Starwood Hotels selected approximately 25 of its owned
hotels, which had been operated on a non-branded or non-proprietary-branded
basis, and converted them to proprietary brands owned by the Company. In 1998,
the Company also added an additional 32 hotels with approximately 7,400 rooms to
its branded-hotel system. This program has enhanced and expanded the Company's
global presence and brand recognition.
 
     SIGNIFICANT PRESENCE IN TOP MARKETS.  The Company's luxury and upscale
full-service hotel assets are well positioned in the United States, Canada,
Europe, Asia and Latin America. These assets are primarily located in major
cities and resort areas that management believes have historically demonstrated
a strong breadth, depth and growing demand for luxury and upscale full-service
hotels, in which the supply of sites suitable for hotel development has been
limited and in which development of such sites is relatively expensive.
 
     PREMIER AND DISTINCTIVE PROPERTIES.  Starwood Hotels controls a
distinguished and diversified group of hotel properties throughout the world,
including The St. Regis Hotel in New York City, the Phoenician in Scottsdale,
Arizona, the Westin St. Francis in San Francisco, the Danieli in Venice, Italy,
and the Palace in Madrid, Spain. These are among the leading hotels in the
industry and are at the forefront of providing the highest quality and service.
 
                                       11
<PAGE>   13
 
     SCALE.  As the largest hotel company focusing on the luxury and upscale
full-service lodging segment of the market, Starwood Hotels has the scale to
support its core marketing and reservation functions. The Company also believes
that its scale will contribute to lowering its cost of operations through
purchasing economies in such areas as insurance, telecommunications, employee
benefits, food and fixture supplies.
 
     DIVERSIFICATION OF CASH FLOW AND ASSETS.  Management believes that the
diversity of the Company's brands, market segments served, revenue sources and
geographic locations provides a broad base from which to enhance revenue and
profits and to strengthen the Company's global brands. This diversity limits the
Company's exposure to any particular lodging or gaming asset, brand, market
segment or geographic region.
 
     While Starwood Hotels focuses on the luxury and upscale portion of the
full-service hotel segment, the Company's brands cater to a diverse group of
sub-markets within this segment. For example, The Luxury Collection caters to
high-end hotel and resort clientele while Four Points hotels deliver
full-service hotel amenities at more affordable rates. Management believes that
the diversity of the Company's brands and customer base reduces the likelihood
of competition for customers at any one of the Company's hotels from other
hotels within its portfolio. Instead, management believes that this diversity
serves to increase the Company's market share within markets where Starwood
Hotels operates more than one brand.
 
     Starwood Hotels derives its cash flow from multiple sources, including
owned hotels, management and franchise fees and gaming operations, and is
geographically diverse with operations in five continents. The following table
reflects the Company's properties by revenue source for the year ended December
31, 1998:
 
<TABLE>
<CAPTION>
                                                              NUMBER OF
                                                              PROPERTIES
                                                              ----------
<S>                                                           <C>
Owned Hotels(1).............................................     171(1)
Managed and franchised hotels...............................     506
Gaming......................................................      17
                                                                 ---
          Total.............................................     694
                                                                 ===
</TABLE>
 
---------------
(1)Includes wholly owned, majority owned and leased hotels.
 
     The following table shows the Company's geographical presence by major
geographic area for the year ended December 31, 1998:
 
<TABLE>
<CAPTION>
                                                              NUMBER OF
                                                              PROPERTIES
                                                              ----------
<S>                                                           <C>
North America...............................................     432
Europe......................................................      97
Latin America(1)............................................      39
Asia Pacific................................................      79
Africa and the Middle East..................................      47
                                                                 ---
          Total.............................................     694
                                                                 ===
</TABLE>
 
---------------
(1)Includes Mexico and the Caribbean basin.
 
     GAMING OPERATIONS.  Starwood Hotels has a significant presence in the
gaming industry, primarily under the Caesars brand name. Starwood Hotels
conducts gaming operations not only in the United States but also in six foreign
countries and on two cruise ships while they are in international waters. The
Company's gaming operations provide revenue and cash flow separate from the
Company's hotel operations. Starwood Hotels recently made significant
investments in many of its gaming properties, including the addition of 1,130
rooms and 110,000 square feet of meeting space in Caesars Palace and the
addition of 620 rooms and 30,000 square feet of casino space in Caesars Atlantic
City.
 
                                       12
<PAGE>   14
 
BUSINESS STRATEGY
 
     The Company's primary business objective is to maximize earnings and cash
flow by increasing the profitability of the Company's existing portfolio,
selectively acquiring interests in additional assets and increasing the number
of the Company's hotel management contracts and franchise agreements. The
Company plans to increase revenue by leveraging its global assets, broad
customer base and other resources by taking advantage of the Company's scale to
reduce costs. The Company's specific business strategies include the following:
 
     FOCUS ON LUXURY AND UPSCALE FULL-SERVICE HOTEL SEGMENT.  The luxury and
upscale full-service segment of the lodging industry has benefited in recent
years from a favorable supply and demand relationship. Increases in occupancy
rates and average daily rate ("ADR") indicate that rising demand for luxury and
upscale hotel rooms has not been met by a similar rate of growth in supply.
According to Smith Travel Research, growth in supply of luxury and upscale hotel
rooms in the United States decreased from approximately 2% to 3% annually from
1988 through 1991 to an average of approximately 1% from 1991 to 1997.
Management believes that this slower increase in the supply growth rate was
attributable to many factors, including:
 
     - The limited availability of attractive building sites for full-service
       hotels;
 
     - The limited availability of financing for new full-service hotel
       construction due to a perception that projected returns did not justify
       new construction; and
 
     - The ability to purchase existing full-service properties at a discount to
       their replacement cost.
 
     The Company's hotels have benefited from these favorable trends, which have
allowed Starwood Hotels to increase ADR primarily by replacing discounted
business with higher-rated business and by selectively raising room rates. As a
result, revenue per available room ("REVPAR") for the Company's 151 comparable
owned full-service hotels increased by approximately 7.6% for the year ended
December 31, 1998, as compared with the corresponding period in 1997. The
Company cannot provide any assurances, however, that these trends will continue.
 
     INTERNAL GROWTH OPPORTUNITIES.  The combination of the Company's historical
businesses with ITT's and Westin's properties and operations provides Starwood
Hotels with the opportunity to leverage ITT's and Westin's market presence,
reputation and the scale of the combined companies, thereby strengthening the
performance of the Company's hotel and gaming assets. Management has identified
several internal growth opportunities that are expected to enhance the Company's
operating performance and profitability, including:
 
     - Refining the positioning of the Company's brands to further its strategy
       of strengthening brand identity. By re-branding certain owned hotels to
       the Sheraton, Westin, Four Points or new St. Regis flags, Starwood Hotels
       will seek to further solidify its brand reputation and market presence,
       leading to enhanced REVPAR performance;
 
     - Expanding the Company's role as a third-party manager of hotel
       properties. This allows Starwood Hotels to expand the presence of its
       lodging brands and gain additional cash flow generally with modest
       capital commitment;
 
     - Franchising the Sheraton, Westin and Four Points brands to selected
       third-party operators, thereby expanding the Company's market presence,
       enhancing the exposure of its hotel brands and providing additional
       income through franchise fees;
 
     - Integrating the Company's owned, managed and franchised hotels into a
       single, multi-brand reservations system, coordinating the global sales
       office, and expanding the Company's Internet presence and sales
       capabilities to drive revenue, enhance profitability and improve customer
       service;
 
     - Launching the Company's new Preferred Guest Program in February 1999,
       which the Company believes will increase occupancy rates and provide the
       Company's customers with benefits covering the spectrum of its lodging
       and gaming portfolios;
 
                                       13
<PAGE>   15
 
     - Enhancing the Company's marketing efforts by integrating the Company's
       proprietary customer databases, so as to sell additional products and
       services to existing customers, improve occupancy rates and create
       additional marketing opportunities;
 
     - Optimizing the Company's use of its real estate assets to improve
       ancillary revenue, such as restaurant, beverage and parking revenue from
       the Company's hotel and gaming properties; and
 
     - Creating the new "W" hotel brand to appeal to upscale business travelers
       and other customers seeking full-service boutique hotels in major
       markets, such as New York, where the first W hotel opened in December
       1998, Atlanta, where the second W hotel opened in February 1999, and San
       Francisco, Chicago, Los Angeles and New Orleans, where future W hotels
       are currently planned.
 
     EXTERNAL GROWTH OPPORTUNITIES.  Starwood Hotels intends to explore
opportunities to expand and diversify the Company's hotel and gaming portfolios
through minority investments and selective acquisitions in properties
domestically and internationally that meet some or all of the following
criteria:
 
     - Luxury and upscale full-service hotels in major metropolitan areas and
       business centers;
 
     - Major tourist hotels, destination resorts or conference centers that have
       favorable demographic trends and are located in markets with significant
       barriers to entry or with major room demand generators such as office or
       retail complexes, airports, tourist attractions or universities;
 
     - Undervalued hotels whose performance can be increased by re-branding to
       one of the Company's hotel brands, the introduction of more professional
       and efficient management techniques and practices and/or the injection of
       capital for renovating, expanding or repositioning the property; and
 
     - Portfolios of hotels or hotel companies that exhibit some or all of the
       criteria listed above, where the purchase of several hotels in one
       transaction enables Starwood Hotels to obtain favorable pricing or obtain
       attractive assets that would otherwise not be available.
 
     In addition, Starwood Hotels intends to enhance its gaming portfolio by
expanding the Caesars brand internationally, as in the instances of the
Philippines and South Africa. Starwood Hotels may also selectively choose to
develop and construct desirable hotel and gaming properties to help the Company
meet its strategic goals. Currently, Starwood Hotels has hotel properties under
construction in Seattle and San Francisco, which the Company expects to complete
by mid-1999.
 
     INTEGRATING HOTEL OPERATIONS.  Management believes that the ongoing
integration of the Company's historic operations with those of Westin and ITT
has given rise to a number of opportunities for long-term cost reductions (e.g.,
taking advantage of new economies of scale to reduce purchasing and insurance
costs and eliminating general and administrative redundancies). This ongoing
integration includes the recent adoption of a comprehensive frequent guest
program and reservation system and improves performance through the application
of certain operating practices consistently to all the Company's assets (e.g.,
applying the "best practices" from Westin, Sheraton and the Company's other
hotels).
 
COMPETITION
 
     The hotel and gaming industries are highly competitive. Competition is
generally based on quality and consistency of room, restaurant, casino,
entertainment and convention facilities and services, attractiveness of
locations, availability of a global distribution system, price and other
factors. Management believes that Starwood Hotels competes favorably in these
areas. The properties of Starwood Hotels compete with other hotel and casino
properties, including facilities owned by local interests and facilities owned
by national and international chains, in their geographic markets. The principal
competitors of Starwood Hotels include other hotel operating and gaming
companies (including hotel REITs) and national hotel brands.
 
     Starwood Hotels also encounters strong competition as a hotel operator and
developer. There are over 500 hotel management companies in the United States,
including several that operate more than 100 properties. While some of the
Company's competitors are private management firms, several are large national
and international chains that own and operate their own hotels, as well as
manage hotels for third-party owners,
 
                                       14
<PAGE>   16
 
under a variety of brands that compete directly with the Company's brands. In
addition, hotel management contracts are typically long-term arrangements, but
most allow the hotel owner to replace the management firm if certain financial
or performance criteria are not met.
 
     To the extent that hotel capacity is expanded by others in a city where one
of the Company's hotels is located, competition will increase. The completion of
a number of room expansion projects and the opening of new hotel casinos led to
an increase in hotel capacity in Las Vegas in 1998 compared to 1997, thereby
increasing competition in all segments of the Las Vegas market. Certain of the
Company's competitors have also announced, or are developing, new casino
projects in Las Vegas and Atlantic City that, if completed, will add significant
casino space and hotel rooms to these markets. Certain new casino projects in
Atlantic City are subject to continuing litigation that may preclude completion
of contemplated projects. Such new capacity additions to the Las Vegas and
Atlantic City markets could adversely impact the Company's gaming income.
 
     Numerous states are currently considering the legalization of casino gaming
in their jurisdictions. In November 1998, California voters approved a ballot
initiative that mandates that the California governor sign compacts relating to
gaming on tribal lands with California tribes upon their request. The initiative
also amended current California law to permit gambling devices, including slot
machines, banked card games and lotteries, at tribal casinos. The Supreme Court
of California has stayed the implementation of this initiative, and its ultimate
impact is uncertain.
 
     The competitive impact on Nevada gaming establishments, in general, and the
Company's operations, in particular, from the continued growth of gaming in
jurisdictions outside of Nevada cannot be determined at this time. The business
of the Company's Nevada casinos might also be adversely affected if gaming
operations of the type conducted in Nevada were to be permitted under the laws
of other states, particularly California. Similarly, legalization of gaming
operations in any jurisdiction located near Atlantic City, New Jersey, or the
establishment of new large-scale gaming operations on nearby Native American
tribal lands, could adversely affect the Company's Atlantic City casino. The
expansion of riverboat gaming or of casino gaming on Native American tribal
lands could also adversely impact the Company's gaming operations.
 
OTHER ASSETS AND OPERATIONS; CERTAIN RECENT DEVELOPMENTS
 
     EDUCATIONAL SERVICES.  As a consequence of its acquisition of ITT, Starwood
Hotels acquired 83.3% (approximately 22.5 million shares) of the outstanding
shares of Educational Services. The shares of common stock of Educational
Services are traded on the New York Stock Exchange (the "NYSE") under the symbol
"ESI." In June 1998, Starwood Hotels completed the sale of approximately 13
million shares of common stock of Educational Services in an underwritten public
offering for total net proceeds of approximately $304 million. The proceeds from
this transaction were used to repay a portion of the Company's outstanding debt.
In February 1999, Starwood Hotels completed the sale of approximately 8 million
shares of common stock of Educational Services in an underwritten public
offering. Concurrently, Educational Services repurchased the Company's remaining
1.5 million shares of Educational Services common stock. Starwood Hotels
received aggregate net proceeds of approximately $310 million from these
transactions. The proceeds were used to repay a portion of the Company's
outstanding debt.
 
     MADISON SQUARE GARDEN.  In August 1994, subsidiaries of ITT and Cablevision
Systems Corporation ("Cablevision") formed Madison Square Garden, L.P. ("MSG"),
to acquire and operate the New York Knickerbockers, the New York Rangers,
Madison Square Garden and the MSG cable television network, among other
businesses.
 
     As a consequence of several redemptions and contributions, ITT's interest
in MSG has been reduced to 7.81%, which Cablevision has agreed to purchase for
net proceeds of $87 million. This transaction is expected to close in April
1999.
 
GOVERNMENTAL REGULATION AND LICENSING
 
     GENERAL.  Starwood Hotels' gaming operations include Caesars Palace and the
Desert Inn, both in Las Vegas, Nevada; Caesars Atlantic City in Atlantic City,
New Jersey; Caesars Tahoe in Stateline, Nevada;
 
                                       15
<PAGE>   17
 
Caesars "Glory of Rome" riverboat casino, which began operations on the Ohio
River in Harrison County, Indiana in late 1998; the Sheraton Casino in Tunica
County, Mississippi; the Sheraton Lima Hotel and Casino in Lima, Peru; the
Sheraton Halifax Hotel and Casino in Halifax, Nova Scotia; the Sheraton Casino
Sydney in Sydney, Cape Breton, Nova Scotia. Caesars also owns one-half of a
management company that operates Casino Windsor, a casino in Windsor, Canada,
which is owned by Government of the Province of Ontario. A Caesars subsidiary
operates small casinos on two cruise ships as well. Sheraton also operates
casinos in Australia and Egypt. Another subsidiary of the Corporation, Hotel
Investors Corporation of Nevada ("HICN"), leased and operated the King 8 Hotel
in Las Vegas, Nevada; the Trust sold the King 8 in 1996 pursuant to an
arrangement in which HICN continued to operate the hotel and casino until June
30, 1998. The Desert Inn is owned and operated by Sheraton Desert Inn
Corporation ("SDI"), which is a wholly owned subsidiary of Sheraton Gaming
Corporation ("SGC"), which is a wholly owned subsidiary of Sheraton (Sheraton,
SGC and SDI are collectively referred to as the "Sheraton Desert Inn
Companies"). Sheraton Casino & Hotel in Tunica County, Mississippi, is owned and
operated by Sheraton Tunica Corporation ("STC"), which is a wholly owned
subsidiary of SDI.
 
     Caesars' casino gaming operations in Las Vegas, Nevada and Stateline,
Nevada are conducted by Desert Palace, Inc. ("DPI"), which is a wholly owned
subsidiary of Caesars Palace Corporation ("CPC"), which is a wholly owned
subsidiary of Caesars (Caesars, CPC and DPI are hereinafter collectively
referred to as the "Caesars Nevada Companies"). Caesars is a wholly owned
subsidiary of Sheraton. Caesars' casino gaming operations in Atlantic City are
conducted by Boardwalk Regency Corporation ("BRC"), which is a wholly owned
subsidiary of Caesars New Jersey, Inc. ("CNJ"), which is a wholly owned
subsidiary of Caesars (as required by the context, Caesars, CNJ and BRC are
collectively referred to as the "Caesars New Jersey Companies"). In addition,
DPI owns all of the issued and outstanding capital stock of Tele/Info, Inc.
("Tele/ Info"), which is a Nevada licensed disseminator of horse race simulcasts
for the purpose of receiving and disseminating live telecasts of horse racing
information.
 
     The ownership and/or operation of casino gaming facilities in the United
States are subject to extensive Federal, state and local regulations. Under
Federal law, Starwood Hotels' casino gaming operations are specifically subject
to the compliance with the Gambling Devices Act of 1962, as amended, and the
Bank Secrecy Act, as amended. These statutes govern the ownership, possession,
manufacture, distribution and transportation in interstate commerce of gaming
devices, and the recording and reporting of currency transactions, respectively.
Starwood Hotels' Nevada casino gaming operations are subject to the Nevada
Gaming Control Act and the regulations promulgated thereunder (the "Nevada
Act"), and the licensing and regulatory control of the Nevada Gaming Commission
(the "Nevada Commission") and the Nevada State Gaming Control Board (the "Nevada
Board"), as well as certain county government agencies (collectively referred to
as the "Nevada Gaming Authorities"). Due to the development of a riverboat
gaming facility located on the Ohio River in Harrison County, Indiana, Starwood
Hotels' casino gaming operations in Indiana are subject to the Indiana Gaming
Control Act (the "Indiana Act"), and the licensing and regulatory control of the
Indiana Gaming Commission, as well as various local, county and state regulatory
agencies. Starwood Hotels' New Jersey casino gaming operations are subject to
the New Jersey Casino Control Act (the "New Jersey Act"), and the licensing and
regulatory control of the New Jersey Casino Control Commission (the "New Jersey
Commission"), and the New Jersey Department of Law & Public Safety, Divisions of
Gaming Enforcement (the "New Jersey DGE"), as well as various local, county and
state regulatory agencies (collectively referred to as the "New Jersey Gaming
Authorities"). Starwood Hotels' Mississippi casino gaming operations are subject
to the Mississippi Gaming Control Act (the "Mississippi Act"), and the licensing
and regulatory control of the Mississippi Gaming Commission (the "Mississippi
Commission"), as well as various local, county and state regulatory agencies
(collectively referred to as the "Mississippi Gaming Authorities"). Starwood
Hotels' Ontario casino gaming operations are subject to the Ontario Gaming
Control Act (the "Ontario Act"), and the licensing and regulatory control of the
Ontario Gaming Control Commission (the "Ontario Commission"), as well as various
local, provincial and federal regulatory agencies (collectively referred to as
the "Ontario Gaming Authorities"). Starwood Hotels' Nova Scotia casino gaming
operations are subject to the Nova Scotia Gaming Control Act (the "Nova Scotia
Act"), and the licensing and regulatory control of the Nova Scotia Gaming
Control Commission (the "Nova Scotia Commission"), as
 
                                       16
<PAGE>   18
 
well as various local, provincial and federal regulatory agencies (collectively
referred to as the "Nova Scotia Gaming Authorities").
 
     The casino gaming laws, regulations and supervisory procedures of Nevada,
New Jersey, Indiana, Mississippi, Ontario and Nova Scotia are extensive and
reflect certain public policy considerations as to (i) the integrity of casino
gaming operations and their participants; (ii) the need for strict governmental
and regulatory control of casino gaming operations; (iii) the creation of
economic development, taxes and employment; and (iv) the maintenance and
development of public confidence and trust in casino gaming regulation and
control. Changes to these laws, regulations and supervisory procedures could
have an adverse effect on Starwood Hotels' casino gaming operations.
 
     NEVADA GAMING REGULATION.  The gaming laws, regulations and supervisory
procedures of Nevada seek to (i) prevent unsavory or unsuitable persons from
having any direct or indirect involvement with gaming at any time or in any
capacity; (ii) establish and maintain responsible accounting practices and
procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and the safeguarding of assets and revenues, providing reliable record-keeping,
and making periodic reports to the applicable casino gaming authority; (iv)
prevent cheating and fraudulent practices; and (v) provide a source of state and
local revenues through taxation and licensing fees.
 
     Starwood Hotels, ITT and Caesars are registered with the Nevada Commission
as publicly traded corporations and Starwood Hotels has been found suitable by
the Nevada Gaming Authorities to own all of the outstanding capital stock of
ITT. The Nevada Gaming Authorities have found suitable ITT as the sole
shareholder of Sheraton. Sheraton is registered with the Nevada Commission as an
intermediary company and been found suitable by the Nevada Gaming Authorities to
own all the outstanding capital stock of Caesars and SGC. Similarly, SGC is
registered with the Nevada Commission as an intermediary company and been found
suitable by the Nevada Gaming Authorities to own all the outstanding capital
stock of SDI. SDI operates the Desert Inn and DPI operates both Caesars Palace
and Caesars Tahoe pursuant to licenses granted by the Nevada Gaming Authorities.
These casino gaming licenses are not transferable and must be renewed
periodically by the payment of various gaming license fees and taxes.
 
     No person may become a stockholder of, or receive any percentage of profits
from SDI or DPI without first obtaining certain required licenses and approvals
from the Nevada Gaming Authorities. The Nevada Gaming Authorities may
investigate any individual who has a material relationship to, or material
involvement with, a corporation which is involved in gaming activities.
Officers, directors and key employees of each of SDI and DPI must be
individually licensed by, and changes in corporate positions must be reported to
the Nevada Gaming Authorities, which changes may be disapproved by the Nevada
Gaming Authorities. Certain of Starwood Hotels' officers, directors and key
employees and those of Starwood Hotels' subsidiaries who are actively and
directly involved in Starwood Hotels' gaming activities have been, and others
may be, required to be licensed or found suitable by the Nevada Gaming
Authorities. The Nevada Gaming Authorities may deny an application for licensing
for any cause which they deem reasonable. A finding of suitability is comparable
to licensing, and both require submission of detailed personal and financial
information followed by a thorough investigation. If the Nevada Gaming
Authorities find an officer, director or key employee unsuitable for licensing
or unsuitable to continue having a relationship with Starwood Hotels, ITT, the
Sheraton Desert Inn Companies, or the Caesars Nevada Companies, the companies
involved would be required to sever all relationships with such person. In
addition, the Nevada Gaming Authorities may require a registered company or
licensee to terminate the employment of any person who refuses to file
appropriate applications or disclosures.
 
     Starwood Hotels, ITT, the Sheraton Desert Inn Companies, and the Caesars
Nevada Companies are required to submit detailed financial and operating reports
to the Nevada Commission. Substantially all loans, leases, sales of securities
and similar financing transactions by either SDI or DPI must be reported to or
approved by the Nevada Commission. Nevada law prohibits a corporation registered
by the Nevada Commission from making a public offering of its securities without
the prior approval of the Nevada Commission if any part of the proceeds of the
offering of the securities is, or the securities themselves are, to
 
                                       17
<PAGE>   19
 
be used either to (i) finance the construction, acquisition or operation of
gaming facilities in Nevada; or (ii) retire or extend obligations incurred for
one or more such purposes.
 
     If it were determined that the Nevada Act was violated by SDI or DPI, the
gaming license each holds could be limited, conditioned, suspended or revoked.
In addition, at the discretion of the Nevada Commission, Starwood Hotels, ITT,
the Sheraton Desert Inn Companies and the persons involved could be subject to
substantial fines for each separate violation of the Nevada Act by the Desert
Inn. Similarly, and also at the discretion of the Nevada Commission, Starwood
Hotels, ITT, the Caesars Nevada Companies and the persons involved could be
subject to substantial fines for each separate violation of the Nevada Act by
either Caesars Palace or Caesars Tahoe. Furthermore, a supervisor could be
appointed by the Nevada Commission to operate the gaming property of SDI or DPI
and, under certain circumstances, earnings generated during the supervisor's
appointment (except for the reasonable rental value of the affected gaming
property) could be forfeited to the State of Nevada. Any suspension or
revocation of the licenses or approvals, or the appointment of a supervisor,
would have a material adverse effect on SDI or DPI, as the case may be.
 
     The Nevada Gaming Authorities may investigate and require a finding of
suitability of any holder of any class of Starwood Hotels' voting securities at
any time. Nevada law requires any person who acquires more than 5% of any class
of Starwood Hotels' voting securities to report the acquisition to the Nevada
Commission and such person may be investigated and found suitable or not
suitable. Any person who becomes a beneficial owner of more than 10% of any
class of Starwood Hotels' voting securities must apply for a finding of
suitability by the Nevada Commission within 30 days after the Nevada Board
Chairman mails a written notice requiring such filing, and must pay the costs
and fees incurred by the Nevada Board in connection with the investigation.
Under certain circumstances, an "institutional investor," as defined by the
Nevada Act, that acquires more than 10% but not more than 15% of Starwood
Hotels' voting securities may apply to the Nevada Commission for a waiver of
such finding of suitability requirements if such institutional investor holds
the voting securities for investment purposes only. An institutional investor
will not be deemed to hold voting securities for investment purposes unless the
voting securities were acquired and are held in the ordinary course of business
as an institutional investor and not for the purpose of causing, directly or
indirectly, the election of a majority of the members of either the Board of
Directors or the Board of Trustees, any change in Starwood Hotels' corporate
charter, bylaws, management, policies or operations or any of Starwood Hotels'
casino gaming operations, or any other action which the Nevada Commission finds
to be inconsistent with holding Starwood Hotels' voting securities for
investment purposes only. Activities which are not deemed to be inconsistent
with holding voting securities for investment purposes only include (i) voting
on all matters voted on by stockholders; (ii) making financial and other
inquiries of management of the type normally made by securities analysts for
informational purposes and not to cause a change in its management, policies or
operations; and (iii) such other activities as the Nevada Commission may
determine to be consistent with such investment intent. If the stockholder who
must be found suitable is a corporation, partnership or trust, it must submit
detailed business and financial information, including a list of beneficial
holders of its ownership interests. Any person who fails or refuses to apply for
a finding of suitability or a license within 30 days after being ordered to do
so by the Nevada Commission or by the Chairman of the Nevada Board may be found
unsuitable. Any person found unsuitable who holds, directly or indirectly, any
beneficial ownership of Starwood Hotels' debt or equity voting securities beyond
such period or periods of time as may be prescribed by the Nevada Commission may
be guilty of a gross misdemeanor. Starwood Hotels, ITT, the Desert Inn Companies
or the Caesars Nevada Companies could be subject to disciplinary action if,
without the prior approval of the Nevada Commission and after receipt of notice
that a person is unsuitable to be an equity or debt security holder or to have
any other relationship with Starwood Hotels, ITT, the Sheraton Desert Inn
Companies or the Caesars Nevada Companies, any of such entities either (i) pays
to the unsuitable person any dividend, interest or any distribution whatsoever;
(ii) recognizes any voting right by such unsuitable person in connection with
such securities; (iii) pays the unsuitable person remuneration in any form; (iv)
makes any payment to the unsuitable person by way of principal, redemption,
conversion, exchange, liquidation or similar transaction; or (v) fails to pursue
all lawful efforts to require such unsuitable person to relinquish his
securities including, if necessary, the immediate purchase of such securities
for cash at fair market value.
 
                                       18
<PAGE>   20
 
     Regulations of the Nevada Commission provide that control of a registered
publicly traded corporation cannot be changed through merger, consolidation,
acquisition of assets, management or consulting agreements, or any form of
takeover without the prior approval of the Nevada Commission. Persons seeking
approval to control a registered publicly traded corporation must satisfy the
Nevada Commission as to a variety of stringent standards prior to assuming
control of such corporation. The failure of a person to obtain such approval
prior to assuming control over the registered publicly traded corporation may
constitute grounds for finding such person unsuitable. Regulations of the Nevada
Commission also prohibit certain repurchases of securities by registered
publicly traded corporations without the prior approval of the Nevada
Commission. Transactions covered by these regulations are generally aimed at
discouraging repurchases of securities at a premium over market price from
certain holders of more than 3% of the outstanding securities of the registered
publicly traded corporation. The regulations of the Nevada Commission also
require prior approval for a "plan of recapitalization." Generally, a plan of
recapitalization is a plan proposed by the management of a registered publicly
traded corporation that contains recommended action in response to a proposed
corporate acquisition opposed by management of the corporation if such
acquisition would require the prior approval of the Nevada Commission.
 
     Any person who is licensed, required to be licensed, registered, required
to be registered, or is under common control with such persons (collectively
"Licensees"), and who proposes to become involved in a gaming operation outside
the State of Nevada is required to deposit with the Nevada Control Board, and
thereafter maintain, a revolving fund in the amount of $10,000 to pay the
expenses of investigation by the Nevada Board of the Licensees' participation in
such foreign gaming; the revolving fund is subject to increase or decrease in
the discretion of the Nevada Commission. Once such revolving fund is
established, the Licensees may engage in gaming activities outside the State of
Nevada without seeking the approval of the Nevada Commission provided (i) such
activities are lawful in the jurisdiction where they are to be conducted; and
(ii) the Licensees comply with certain reporting requirements imposed by the
Nevada Act. Licensees are subject to disciplinary action by the Nevada
Commission if they (i) knowingly violate any laws of the foreign jurisdiction
pertaining to the foreign gaming operation; (ii) fail to conduct the foreign
gaming operation in accordance with the standards of honesty and integrity
required of Nevada gaming operations; (iii) engage in activities that are
harmful to the State of Nevada or its ability to collect gaming taxes and fees;
or (iv) employ a person in the foreign operation who has been denied a license
or finding of suitability in Nevada on the ground of personal unsuitability.
 
     NEW JERSEY GAMING REGULATION.  The New Jersey gaming laws and regulations
primarily concern (a) the financial stability and character of casino operators,
their employees, their security holders and others financially interested in
casino operations; and (b) the operating methods and the financial and
accounting procedures used in connection with casino operations. The New Jersey
gaming laws and regulations include, among other requirements, detailed
provisions concerning (i) the type, manner and number of applications and
licenses required to conduct casino gaming and ancillary activities; (ii) the
licensing, regulation and curricula of gaming schools; (iii) the establishment
of minimum standards of accounting and internal control, including the issuance
and enforceability of casino credit; (iv) the manufacture, sale, distribution
and possession of gaming equipment; (v) the rules of the games; (vi) the
exclusion of undesirable persons; (vii) the use, regulation and reporting of
junket activities; (viii) the possession, sale and distribution of alcoholic
beverages; (ix) the regulation and licensing of suppliers to licensed casino
operators; (x) the conduct of entertainment within licensed casino facilities;
(xi) equal employment opportunity for employees of licensed casino operators,
contractors for casino facilities and other entities; (xii) the payment of gross
revenue taxes and similar fees and expenses; (xiii) the conduct of casino
simulcasting; and (xiv) the imposition and discharge of casino reinvestment
development obligations. A number of these regulations require practices which
are different from those in many casinos elsewhere and some of them result in
casino operating costs greater than those in comparable facilities elsewhere. As
a prerequisite to being licensed, a New Jersey hotel/casino facility must meet
certain facilities requirements concerning, among other things, the size and
number of guest rooms.
 
     BRC is licensed to operate Caesars Atlantic City by the New Jersey
Commission, which has broad discretion with regard to the issuance, renewal,
revocation or suspension of licenses. A New Jersey casino
 
                                       19
<PAGE>   21
 
license is not transferable and must be renewed at designated periods of up to
four years. Renewal is not automatic and involves an extensive review by the New
Jersey DGE, a report by the New Jersey DGE to the New Jersey Commission, an
independent review by the New Jersey Commission, and the affirmative vote of at
least four of the five sitting Commissioners of the New Jersey Commission. The
casino license to operate Caesars Atlantic City was renewed on November 30,
1996, and expires on November 30, 2000. As a prerequisite to BRC holding a
license, ITT, Caesars and CNJ have been and are approved by the New Jersey
Commission due to their corporate relationship to BRC. Starwood Hotels also is
required to be approved by the New Jersey Commission, and has received interim
casino authorization.
 
     Except for certain banking and lending institutions exempted under the New
Jersey Act, all financial backers, investors, mortgagees, debt holders,
landlords under leases relating to Starwood Hotels' New Jersey hotel/casino
facilities, all lenders to BRC, all officers and directors of BRC and all
employees who work at Caesars Atlantic City have to be qualified, licensed,
approved or registered by or with the New Jersey Commission. In addition, all
contracts and leases entered into by BRC are subject to approval by the New
Jersey Commission.
 
     Any holder of the debt or equity securities of Starwood Hotels, Caesars or
CNJ must be found qualified; the qualification requirement may be waived based
on an express finding by the New Jersey Commission, with the consent of the
Director of the New Jersey DGE, that the security holder either (a)(i) is not
significantly involved in the activities of BRC; (ii) does not have the ability
to control Starwood Hotels, ITT, Caesars, CNJ or BRC; and (iii) does not have
the ability to elect one or more members of the Board of Directors, the Board of
Trustees, or the respective boards of directors of ITT, Caesars, CNJ or BRC; or
(b) is an "institutional investor." The New Jersey Act presumes that any
security holder that is not an "institutional investor" who owns or beneficially
holds 5% or more of Starwood Hotels' equity securities has the ability to
control Starwood Hotels, ITT, Caesars, CNJ or BRC, unless such presumption is
rebutted by clear and convincing evidence.
 
     The New Jersey Act and regulations define an "institutional investor" as
(i) any retirement fund administered by a public agency for the exclusive
benefit of Federal, state or local public employees; (ii) an investment company
registered under the Investment Company Act of 1940; (iii) a collective
investment trust organized by banks under Part Nine of the Rules of the
Comptroller of the Currency; (iv) a closed end investment trust; (v) a chartered
or licensed life insurance company or property and casualty insurance company;
(vi) banking or other licensed or chartered lending institutions; (vii) an
investment advisor registered under the Investment Advisors Act of 1940; or
(viii) such other persons as the New Jersey Commission may determine for reasons
consistent with the policies of the New Jersey Act. In the absence of a prima
facie showing by the Director of the DGE that there is any cause to believe that
such institutional investor may be found unqualified, upon application and for
good cause shown, an institutional investor holding either (a) less than 10% of
Starwood Hotels' equity securities; or (b) debt securities constituting less
than 20% of Starwood Hotels' outstanding debt and less than 50% of the issue
involved may be granted a waiver of qualification as to such holdings if (i)
such securities are those of a publicly traded corporation; (ii) the
institutional investor's holdings of such securities were purchased for
investment purposes only; and (iii) upon request by the New Jersey Commission,
the institutional investor files with the New Jersey Commission a certified
statement to the effect that the institutional investor has no intention of
influencing or affecting the affairs of Starwood Hotels, ITT, Caesars, CNJ or
BRC; notwithstanding the foregoing, the institutional investor is permitted to
vote on matters put to the vote of the outstanding security holders of Starwood
Hotels.
 
     If an institutional investor who has been granted a waiver subsequently
determines to influence or affect Starwood Hotels' affairs, the institutional
investor must provide to the New Jersey Commission not less than 30 days' prior
notice of such intent and the institutional investor must file with the New
Jersey Commission an application for qualification before taking any action that
may influence or affect Starwood Hotels' affairs; notwithstanding the foregoing,
the institutional investor is permitted to vote on matters put to the vote of
Starwood Hotels' outstanding security holders. If an institutional investor
changes its investment intent, or if the New Jersey Commission finds reasonable
cause to believe that the institutional investor may be found unqualified, no
action other than divestiture shall be taken by that institutional investor
until there has been
 
                                       20
<PAGE>   22
 
compliance with the interim casino authorization provisions of the New Jersey
Act, including the execution of a trust agreement. Starwood Hotels, ITT,
Caesars, CNJ and BRC are required to immediately notify the New Jersey
Commission and the New Jersey DGE of any information about, or action of an
institutional investor holding Starwood Hotels' equity or debt securities where
such information or action may impact on the eligibility of such institutional
investor for a waiver. If the New Jersey Commission finds an institutional
investor unqualified or if the New Jersey Commission finds that, by reason of
the extent or nature of its holdings, an institutional investor is in the
position to exercise a substantial impact on the controlling interests of BRC so
that qualification of the institutional investor is necessary to protect the
public interest, the New Jersey Act vests in the New Jersey Commission the power
to take all necessary action to protect the public interest, including the power
to require that the institutional investor submit to qualification and become
qualified under the New Jersey Act.
 
     Any holder of Starwood Hotels' debt or equity securities, including an
institutional investor, who is required to be found qualified by the New Jersey
Commission must submit an application for qualification within 30 days after
being ordered to do so or divest all security holdings within 120 days after the
New Jersey Commission determines such qualification is required. The application
for qualification must include a trust agreement by which the security holder
places its interest in Starwood Hotels' securities in trust with a trustee
qualified by the New Jersey Commission. If the security holder is ultimately
found qualified, the trust agreement is terminated. In connection with the ITT
Merger, Starwood Hotels petitioned for, and on January 28, 1998 received,
interim casino authorization under the provisions of the New Jersey Act,
including the execution of a trust agreement; on October 22, 1998, the New
Jersey Commission found Starwood Hotels plenarily qualified without condition
and, as a result, the interim casino authorization trust was dissolved.
 
     If the security holder is not found qualified or withdraws its application
for qualification, the trustee will be empowered with all rights of ownership
pertaining to such security holder's securities, including all voting rights and
the power to sell the securities; in any event, the unqualified security holder
will not be entitled to receive in exchange for its securities an amount in
excess of the lower of (i) the actual cost the security holder incurred in
acquiring the securities; or (ii) the value of such securities, calculated as if
the investment had been made on the date the trust became operative. If the
security holder is not found qualified, it is unlawful for the security holder
to (i) receive any dividends or interest on such securities; (ii) exercise,
directly or through any trustee or nominee, any right conferred by such
securities; or (iii) receive any remuneration in any form from Starwood Hotels,
ITT, Caesars, CNJ or BRC for services rendered or otherwise.
 
     Each officer, director, lender and certain other persons of Starwood
Hotels, ITT, Caesars and CNJ must be found qualified unless the New Jersey
Commission, with the consent of the Director of the New Jersey Commission, with
the consent of the Director of the New Jersey DGE, finds that such officer,
director, lender or other person is not significantly involved in the affairs of
BRC and is thus waived from qualification. New Jersey law requires that an
officer or director of Starwood Hotels, ITT, Caesars or CNJ must apply for
temporary qualification at least 30 days before assuming any duties.
 
     The New Jersey Act requires that each of Starwood Hotels, ITT, Caesars, CNJ
and BRC maintain financial stability and capability. For purposes of these
requirements, the New Jersey Commission has adopted regulations defining
"financial stability" and has set forth certain standards for determining
compliance with the financial stability regulations. Under the regulations of
the New Jersey Commission, "financial stability" has been defined as (i) the
ability to assure the financial integrity of casino operations by the
maintenance of a casino bankroll or equivalent provisions adequate to pay
winning wagers to casino patrons when due; (ii) the ability to meet ongoing
operating expenses which are essential to the maintenance of continuous and
stable casino operations; (iii) the ability to pay, as and when due, all local,
state and Federal taxes and any and all fees imposed by the New Jersey Act; (iv)
the ability to make necessary capital and maintenance expenditures in a timely
manner which are adequate to insure maintenance of a superior first class
facility of exceptional quality as required by the New Jersey Act; and (v) the
ability to pay, exchange, refinance or extend debts, including long-term and
short-term principal and interest and capital lease obligations, which will
mature or otherwise come due and payable during either the license term or
within 12 months after the end of the license term or to otherwise manage such
debts and any default with respect to the debts. The New Jersey Commission
regulations provide that the financial stability standards concerning casino
bankroll, operating
 
                                       21
<PAGE>   23
 
expenses and capital and maintenance expenditures are met if the following is
shown by clear and convincing evidence: (i) casino bankroll -- the maintenance,
on a daily basis, of a casino bankroll at least equal to the average daily
casino bankroll, calculated on a monthly basis, for the corresponding month in
the previous year; (ii) operating expenses -- the demonstration of the ability
to achieve positive gross operating profit measured on an annual basis; and
(iii) capital and maintenance expenditures -- the demonstration that its capital
and maintenance expenditures over the five-year period, which includes the
previous 36 calendar months and the upcoming license period, average at least 5%
of net revenue per annum. Starwood Hotels believes that, at current operating
levels, BRC will have no difficulty in complying with these requirements. The
New Jersey Commission has the authority to restrict or prohibit the transfer of
cash or the assumption of liabilities by BRC if such action will adversely
impact the financial stability of BRC and the prior approval of the New Jersey
Commission is required to incur indebtedness and guarantees of affiliated
indebtedness by BRC involving amounts greater than $25 million.
 
     If it were determined that New Jersey gaming laws were violated by BRC, BRC
could be subject to fines or its casino license could be limited, conditioned,
suspended or revoked. In addition, if a security holder of Starwood Hotels, ITT,
Caesars, CNJ or BRC is found disqualified but does not dispose of the
securities, the New Jersey Commission is authorized to take any necessary action
to protect the public interest, including the suspension or revocation of the
casino license. The New Jersey Commission, however, will not take any action
against Starwood Hotels, ITT, Caesars, CNJ or BRC in connection with a
disqualified holder if the New Jersey Commission finds that (i) Starwood Hotels
has provided in its corporate and trust charters that Starwood Hotels'
securities are held subject to the condition that, if a holder is found to be
disqualified by the New Jersey Commission pursuant to the provisions of the New
Jersey Act, such holder shall dispose of its interest in Starwood Hotels; (ii)
Starwood Hotels has made a good faith effort, including the prosecution of all
legal remedies, to comply with any order of the New Jersey Commission requiring
the divestiture of the interest held by the disqualified holder; and (iii) such
disqualified holder does not have the ability to control Starwood Hotels, ITT,
Caesars, CNJ or BRC or to elect one or more members of the Board of Directors,
the Board of Trustees or the respective boards of directors of ITT, Caesars, CNJ
or BRC. If BRC's license is revoked, not renewed or suspended for a period in
excess of 120 days, the New Jersey Commission is empowered to appoint a
conservator to operate, and to dispose of, BRC's casino/hotel facilities. If a
conservator operates the casino/hotel facilities, payments to shareholders would
be limited to a "fair return" on their investment, with any excess going to the
State of New Jersey. If a conservator is appointed, the conservator's charges
and expenses become a lien against the property which has priority over all
prior and subsequent liens. Any suspension or revocation of the licenses or
approvals, or the appointment of a conservator would have a material adverse
effect on BRC.
 
     MISSISSIPPI GAMING REGULATION.  Gaming in Mississippi can be legally
conducted only on vessels of a certain minimum size either in navigable waters
of counties bordering the Mississippi River or in the waters of the State of
Mississippi which lie adjacent to the coastline of the three counties bordering
the Gulf of Mexico. STC possesses a license for the ownership and operation of
The Sheraton Casino & Hotel in Robinsonville, Tunica County, Mississippi issued
by the Mississippi Commission pursuant to the Mississippi Act. The Mississippi
Act does not restrict the amount or percentage of space on a vessel that may be
utilized for casino gaming; the Mississippi Act also does not limit the number
of licenses that the Mississippi Commission can grant for a particular area.
 
     Starwood Hotels, ITT and STC are required to submit detailed financial,
operating and other reports to the Mississippi Commission. Substantially all
loans, leases, sales of securities and similar financing transactions entered
into by Starwood Hotels, ITT or by STC must be reported to or approved by the
Mississippi Commission. Starwood Hotels, ITT and STC are also required
periodically to submit detailed financial and operating reports to the
Mississippi Commission and to furnish any other information which the
Mississippi Commission may require.
 
     Each of the directors, officers and certain key employees of Starwood
Hotels, ITT and STC who are actively and directly engaged in the administration
or supervision of casino gaming in Mississippi, or who have any other
significant involvement with the activities of STC, must be found suitable
therefor and may be required to be licensed by the Mississippi Commission. A
finding of suitability is comparable to licensing, and
 
                                       22
<PAGE>   24
 
both require the submission of detailed personal and financial information
followed by a thorough investigation. An application for licensing may be denied
for any cause deemed reasonable by the Mississippi Commission. Changes in
licensed positions must be reported to the Mississippi Commission. In addition
to its authority to deny an application for a license, the Mississippi
Commission has the authority to disapprove a change in corporate position. If
the Mississippi Commission finds a director, officer or key employee of Starwood
Hotels, ITT or STC unsuitable for licensing or unsuitable to continue having a
relationship with Starwood Hotels, ITT or STC, such entity is required to
suspend, dismiss and sever all relationships with such person. Starwood Hotels,
ITT and STC have similar obligations with regard to any person who fails or
refuses to file appropriate applications. Each gaming employee must obtain a
work permit; the Mississippi Commission may refuse to issue a work permit to a
gaming employee (i) if the employee has committed larceny, embezzlement or any
other crime of moral turpitude or knowingly violated the Mississippi Act or the
regulations of the Mississippi Commission; or (ii) for any other reasonable
cause.
 
     Mississippi gaming licenses are not transferable and must be renewed
periodically. The Mississippi Commission is empowered to deny, limit, condition,
revoke and/or suspend any license, finding of suitability or registration, and
to fine any person as it deems reasonable and in the public interest, subject to
the due process considerations of notice and an opportunity for a hearing. The
Mississippi Commission may fine any licensee or other person that is subject to
the Mississippi Act up to $100,000 for each violation of the Mississippi Act
that is the subject of an initial complaint and up to $250,000 for each
violation of the Mississippi Act that is the subject of any subsequent
complaint.
 
     License fees and taxes, computed in various ways depending on the type of
casino gaming involved, are payable to the State of Mississippi and to the
counties and cities in which gaming operations are located. Generally, these
fees and taxes are based on a percentage of the gross gaming revenues received
by the casino operation, the number of slot machines operated by such casino, or
the number of table games operated by such casino. Moreover, several local
governments have been authorized to impose either additional gross fees on
adjusted gross gaming revenues or, alternatively, per person boarding fees and
annual license fees based on the number of gaming devices aboard the vessel.
License fees paid to the State of Mississippi are allowed as a credit against
Mississippi state income taxes.
 
     In all other material respects, casino gaming regulation in Mississippi is
similar to the regulation of casino gaming in Nevada and New Jersey.
 
     ONTARIO GAMING REGULATION.  Windsor Casino Limited ("WCL"), which is
half-owned by Caesars and which operates the casino in Windsor, Ontario, Canada,
is required to comply with licensing requirements similar to Nevada and New
Jersey and is also subject to operational regulation by the Province of Ontario.
 
     Pursuant to the Ontario Act, the Registrar of the Ontario Commission must
approve any change in the directors or officers of WCL. The Ontario Act also
provides that the Ontario Commission may require the submission of certain
disclosures and informational material from any person who has an interest in
WCL. Starwood Hotels has submitted to the Registrar all required disclosures and
informational material.
 
     Under the Ontario Act, no person may provide goods or services for a casino
or other business operated by, on behalf of or under contract with the Ontario
Casino Corporation unless, among other things, that person is registered as a
supplier under the Ontario Act. The Registrar has the power, subject to the
Ontario Act, to grant, renew, suspend or revoke registrations. The Registrar is
entitled to make such inquiries and conduct such investigations as are necessary
to determine that applicants for registration meet the requirements of the
Ontario Act and to require information or material from any person who has an
interest in an applicant for registration as a registrant. The criteria to be
considered in connection with registration under the Ontario Act include
financial responsibility, integrity, honesty and the public interest. The
Registrar may, at any time, subject to the provisions of the Ontario Act,
revoke, suspend or refuse to renew WCL's registration under the Ontario Act.
 
     NOVA SCOTIA GAMING REGULATION.  Sheraton Casino Nova Scotia ("SCNS"), the
subsidiary of ITT that owns and operates the casino in the City of Halifax, Nova
Scotia, and operates the casino in the City of
 
                                       23
<PAGE>   25
 
Sydney, Nova Scotia, is required to comply with licensing requirements similar
to the Province of Ontario and is also subject to operational regulation by the
Province of Nova Scotia.
 
     Under the Nova Scotia Act, the Director of Registration of the Nova Scotia
Commission must be notified, within 15 days, of any change in the officers or
directors of SCNS. SCNS is also required to file a disclosure form with the
Director of Registration within 15 days of (i) a person acquiring a beneficial
interest in the business of SCNS; (ii) a person exercising control, either
directly or indirectly, over the business of SCNS; or (iii) a person providing
financing, either directly or indirectly, to the business of SCNS. The Nova
Scotia Act also provides that the Director of Registration may require
information or material from SCNS or any person who has an interest in SCNS.
Starwood Hotels has submitted all required disclosure forms and informational
materials as applicable.
 
     INDIANA GAMING REGULATION.  Because Caesars began operating the Caesars
Indiana riverboat casino in Harrison County, Indiana on November 16, 1998,
Starwood Hotels and ITT are subject to the gaming regulations in force in that
state. Indiana currently imposes regulations on gaming companies similar to, and
in Starwood Hotels' opinion, no more restrictive than, the gaming regulations in
force in Nevada and New Jersey.
 
     The riverboat also must comply with U.S. Coast Guard requirements as to
boat design, on-board facilities, equipment, personnel and safety and must hold
a Certificate of Seaworthiness or must be approved by the American Bureau of
Shipping for stabilization and flotation. The U.S. Coast Guard requirements
establish design standards, set limits on the operation of the vessel and
require individual licensing of all personnel involved with the operation of the
vessel. Loss of the vessel's Certificate of Seaworthiness or the American Bureau
of Shipping approval would preclude its use as a floating casino. The land-based
facilities developed and used in connection with the riverboat are subject to
local zoning and building codes.
 
     Under the Indiana Act and regulations prior approval of the ITT Merger was
not required; however, Starwood Hotels was required to and did file for approval
of the ITT Merger within 45 days of the closing of the ITT Merger. On November
16, 1998, the Indiana Commission granted the application of Starwood Hotels for
approval of the ITT Merger and, immediately thereafter, issued a riverboat
owner's license to Caesars Indiana, thereby enabling Caesars Indiana to commence
gaming operations.
 
     PROVISIONS OF THE CORPORATION'S ARTICLES OF INCORPORATION RELATED TO CASINO
GAMING.  The Articles of Incorporation provide that (i) all Starwood Hotels'
securities are subject to redemption to the extent necessary to prevent the
loss, or to secure the reinstatement, of any casino gaming license held by any
of Starwood Hotels' subsidiaries in any jurisdiction within or without the
United States; (ii) all Starwood Hotels' securities are held subject to the
condition that if a holder is found by a gaming authority in any jurisdiction to
be disqualified or unsuitable pursuant to any gaming law, such holder will be
required to dispose of all such securities; failing such disposition, the
Corporation may redeem the securities at the lesser of their market price or the
disqualified holder's original purchase price; and (iii) it is unlawful for any
such disqualified person to (a) receive payments of interest or dividends on any
such securities; (b) exercise, directly or indirectly, any rights conferred by
any such securities; or (c) receive any remuneration in any form, for services
rendered or otherwise, from the subsidiary that holds the gaming license in the
applicable jurisdiction.
 
ENVIRONMENTAL MATTERS
 
     Starwood Hotels is subject to certain requirements and potential
liabilities under various federal, state and local environmental laws,
ordinances and regulations ("Environmental Laws"). For example, a current or
previous owner or operator of real property may become liable for the costs of
removal or remediation of hazardous or toxic substances on, under or in such
property. Such laws often impose liability without regard to whether the owner
or operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The presence of hazardous or toxic substances may adversely
affect the owner's ability to sell or rent such real property or to borrow using
such real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic wastes may be liable for the costs of removal or
remediation of such wastes at the treatment, storage or disposal facility,
regardless of whether such facility is owned or operated by such person.
Starwood Hotels uses certain substances and generates certain wastes that may be
deemed hazardous
 
                                       24
<PAGE>   26
 
or toxic under applicable Environmental Laws, and Starwood Hotels from time to
time has incurred, and in the future may incur, costs related to cleaning up
contamination resulting from historic uses of certain of the Company's current
or former properties or the Company's treatment, storage or disposal of wastes
at facilities owned by others. Other Environmental Laws require abatement or
removal of certain asbestos-containing materials ("ACMs") (limited quantities of
which are present in various building materials such as spray-on insulation,
floor coverings, ceiling coverings, tiles, decorative treatments and piping
located at certain of the Company's hotels) in the event of damage or
demolition, or certain renovations or remodeling. These laws also govern
emissions of and exposure to asbestos fibers in the air. Environmental Laws also
regulate polychlorinated biphenyls ("PCBs"), which may be present in electrical
equipment. A number of the Company's hotels have underground storage tanks
("USTs") and equipment containing chlorofluorocarbons ("CFCs"); the operation
and subsequent removal or upgrading of certain USTs and the use of equipment
containing CFCs also are regulated by Environmental Laws. In connection with the
Company's ownership, operation and management of its properties, Starwood Hotels
could be held liable for costs of remedial or other action with respect to PCBs,
USTs or CFCs.
 
     Environmental Laws are not the only source of environmental liability.
Under the common law, owners and operators of real property may face liability
for personal injury or property damage because of various environmental
conditions such as alleged exposure to hazardous or toxic substances (including,
but not limited to, ACMs, PCBs and CFCs), poor indoor air quality, radon or poor
drinking water quality.
 
     Although Starwood Hotels has incurred and expects to incur remediation and
other environmental costs during the ordinary course of operations, management
anticipates that such costs will not have a material adverse effect on the
operations or financial condition of the Company.
 
EMPLOYEES
 
     At December 31, 1998, Starwood Hotels employed approximately 130,000
persons (including 12,000 employees in its gaming operations) at its owned and
managed hotels, of whom approximately 52% were employed in the United States. At
December 31, 1998, approximately 34% of the U.S.-based employees (other than
gaming facility employees) were covered by various collective bargaining
agreements providing, generally, for basic pay rates, working hours, other
conditions of employment and orderly settlement of labor disputes. Generally,
labor relations have been maintained in a normal and satisfactory manner, and
management believes that the Company's employee relations are good.
 
ITEM 2.  PROPERTIES.
 
     Starwood Hotels is one of the largest hotel and resort companies in the
world, with operations throughout the United States and in approximately 70
countries around the world. In addition, through its Sheraton and Caesars
subsidiaries, Starwood Hotels operates casinos or other gaming facilities in the
United States and Canada and overseas in Australia, Egypt (two), Peru, the
Philippines and South Africa. Starwood Hotels considers its hotels and casinos
generally to be premier establishments with respect to desirability of location,
size, facilities, physical condition, quality and variety of services offered in
the markets in which they are located. Although obsolescence arising from age
and condition of facilities can adversely effect the Company's hotel and gaming
properties, Starwood Hotels expends substantial funds to renovate and maintain
its facilities in order to remain competitive. For further information, see Item
7, "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Capital Expenditures," in this
Joint Annual Report.
 
LODGING
 
     The Company's lodging business included 694 owned, operated, managed or
franchised hotels with approximately 225,000 rooms at December 31, 1998,
predominantly under eight brands: St. Regis (luxury full-service hotels and
resorts), The Luxury Collection (luxury full-service hotels and resorts), Ciga
(classic European luxury hotels and resorts), Westin (luxury and upscale
full-service hotels and resorts), Sheraton (full-service hotels and resorts), W
(stylish boutique full-service urban hotels), Caesars (full-service hotels
 
                                       25
<PAGE>   27
 
and casinos) and Four Points (moderately-priced hotels). At December 31, 1998,
171 of these hotels were owned or leased by Starwood Hotels or an entity in
which Starwood Hotels has a majority equity interest, approximately 226 were
managed by Starwood Hotels on behalf of third-party owners (including entities
in which Starwood Hotels has a minority equity interest), approximately 280 were
owned and operated by franchisees using one of the Company's brands or were
otherwise represented by Starwood Hotels and 17 were associated with gaming
operations.
 
     The following table sets forth the number of hotels, number of rooms, ADR,
average occupancy rate and REVPAR achieved by the Company's owned, leased and
consolidated joint venture hotels with comparative results by region and
worldwide at December 31, 1998, and for the year ended December 31, 1998.
 
<TABLE>
<CAPTION>
                                             AT DECEMBER 31,      YEAR ENDED DECEMBER 31, 1998
                                                 1998(1)         -------------------------------
                                             ----------------                AVERAGE
                                             HOTELS    ROOMS       ADR      OCCUPANCY    REVPAR
                                             ------    ------    -------    ---------    -------
<S>                                          <C>       <C>       <C>        <C>          <C>
North America..............................   104      35,237    $137.99      70.8%      $ 97.72
Europe.....................................    29       6,304    $194.52      71.5%      $139.03
Latin America(2)...........................    13       5,179    $128.97      68.1%      $ 87.82
Asia Pacific...............................     3       1,116    $127.23      74.8%      $ 95.19
Africa and the Middle East.................     2         776    $ 64.63      69.7%      $ 45.07
                                              ---      ------
Worldwide..................................   151      48,612    $143.11      70.7%      $101.15
                                              ===      ======
</TABLE>
 
---------------
(1) Excludes 18 hotels under significant renovation in 1998 or 1997 and 2 hotels
    held for disposition at December 31, 1998.
 
(2) Includes Mexico and the Caribbean basin.
 
HOTEL MANAGEMENT AND FRANCHISING
 
     Hotel and resort properties in the United States are often owned by
entities that neither manage hotels nor own a brand name. Hotel owners typically
enter into management contracts with hotel management companies to operate their
hotels. When a management company does not offer a brand affiliation, the hotel
owner often chooses to pay separate franchise fees to secure the benefits of
brand marketing, centralized reservations and other centralized administrative
functions, particularly in the sales and marketing area. Management believes
that companies, such as Starwood Hotels, that offer both hotel management
services and well-established worldwide brand names appeal to hotel owners by
providing the full range of management and marketing services.
 
     MANAGED HOTELS.  Through its subsidiaries, Starwood Hotels manages a number
of hotels worldwide, usually under a long-term agreement with the hotel owner.
The Company's responsibilities under hotel management contracts typically
include hiring, training and supervising the managers and employees that operate
these facilities. For additional fees, Starwood Hotels provides reservation
services and coordinates national advertising and certain marketing and
promotional services. Starwood Hotels prepares and implements annual budgets for
the hotels it manages and is responsible for allocating property-owner funds for
periodic maintenance and repair of buildings and furnishings.
 
     Management contracts typically provide for base fees tied to gross revenue
and incentive fees tied to profits. In the Company's experience, owners seek
hotel managers that can provide attractively priced base, incentive, marketing
and franchise fees combined with demonstrated sales and marketing expertise and
operations-focused management designed to enhance profitability. Some of the
Company's management contracts permit the hotel owner to terminate the agreement
when the hotel is sold or otherwise transferred to a third party, as well as if
Starwood Hotels fails to meet established performance criteria. In addition,
many hotel owners seek an equity or debt investment from Starwood Hotels to help
finance hotel renovations or conversion to the new brand and to align the
interests of the owner and the Company. The Company's ability or willingness to
make such investments may determine, in part, whether Starwood Hotels will be
offered, will accept, or will retain a particular management contract.
 
                                       26
<PAGE>   28
 
     BRAND FRANCHISING.  Starwood Hotels franchises its Sheraton, Westin and
Four Points brand names and generally derives licensing and other fees from
franchisees based on a fixed percentage of franchise hotel room revenue, as well
as fees for other services, including centralized reservations, sales and
marketing, public relations and national and international media advertising. In
addition, a franchisee may also purchase hotel supplies, including
brand-specific products, from certain Starwood Hotels-approved vendors. Starwood
Hotels approves certain plans for, and the location of, franchised hotels and
reviews their design.
 
     As of December 31, 1998, there were approximately 238 franchised properties
with approximately 60,000 rooms operating under the Sheraton brand (including
Four Points) and approximately 29 franchised properties with approximately 9,000
rooms operating under the Westin brand.
 
GAMING
 
     Starwood Hotels operates casinos or other gaming facilities in the United
States, Canada, the Philippines and South Africa, generally under the Caesars
and Sheraton brand names. The following table sets forth information for certain
of the Company's hotel/casinos at December 31, 1998.
 
<TABLE>
<CAPTION>
                                                                            AT DECEMBER 31, 1998
                                                                          -------------------------
CASINO                                                 LOCATION           ROOMS   CASINO (SQ. FEET)
------                                        --------------------------  -----   -----------------
<S>                                           <C>                         <C>     <C>
Caesars Palace..............................  Las Vegas, NV               2,456        129,000
Caesars Atlantic City.......................  Atlantic City, NJ           1,144        117,000
Caesars Indiana.............................  Harrison County, IN            --         93,000
Caesars Tahoe...............................  Stateline, NV                 440         40,000
Sheraton Casino & Hotel.....................  Robinsonville, MS             140         33,000
The Desert Inn Resort & Casino..............  Las Vegas, NV                 715         32,000
Dover Downs.................................  Dover, DE                      --         25,000
Casino Windsor..............................  Windsor, Canada               389        100,000
Caesars Gauteng.............................  Kempton Park, South            --         70,000
                                              Africa
Sheraton Casino Sydney......................  Cape Breton, Canada            --         12,000
Caesars Manila..............................  Manila, Philippines            --          7,000
Caesars Palace at Sea.......................  S.S. Crystal Harmony            *              *
                                              S.S. Crystal Symphony           *              *
</TABLE>
 
---------------
* Starwood Hotels operates the Caesars Palace at Sea casinos only while the
  cruise ships on which they are located are in international waters.
 
     GAMING FACILITIES IN THE UNITED STATES.  Caesars Palace in Las Vegas is one
of the premier gaming properties in the world, attracting patrons from all over
the world to its 129,000 square foot casino. Significant capital investments
have been made in Caesars Palace over the past three years to create a more
exciting gaming environment, to add additional rooms and a new hotel tower and
to construct other facilities for conventions, meetings and banquets. Starwood
Hotels also owns and operates Caesars Atlantic City, a hotel/casino complex with
more than 117,000 square feet of casino space, located at the center of the
boardwalk in Atlantic City, New Jersey. Caesars Atlantic City has undergone
extensive renovation since 1996 to enhance its convention, meeting and banquet
facilities, including expanded dining facilities, a multi-function grand
ballroom and a four-story atrium. These renovations are expected to enhance the
appeal of Caesars Atlantic City as a convention site, as well as attract more
walk-in patrons from the boardwalk.
 
     Caesars Indiana's "Glory of Rome" Riverboat, a floating casino in Harrison
County, Indiana, commenced operations in November 1998, near the Louisville,
Kentucky, border. The 93,000 square foot casino is the largest riverboat casino
in the United States. In addition, Starwood Hotels owns and operates Caesars
Tahoe, a hotel/casino complex on the Nevada-California border adjacent to Lake
Tahoe, the Sheraton Casino & Hotel in Tunica County, Mississippi, and the Desert
Inn in Las Vegas, which is currently held for sale.
 
                                       27
<PAGE>   29
 
     INTERNATIONAL GAMING FACILITIES.  Starwood Hotels owns a 50% interest in
Casino Windsor Limited, which operates a hotel/casino complex (owned by the
Province of Ontario) comprising a 100,000 square foot casino and approximately
400 rooms in Windsor, Ontario, directly across the river from Detroit, Michigan.
Starwood Hotels also operates a casino at the Sheraton Halifax Hotel & Casino in
Halifax, Nova Scotia, and operates the Sheraton Casino Sydney (which is a
stand-alone casino) in Sydney, Cape Breton, Nova Scotia. In addition, Starwood
Hotels operates the Caesars Gauteng in Kempton Park, Johannesburg, South Africa,
Caesars Manila in Manila, Philippines, and Caesars Palace at Sea, located on two
cruise ships while they are in international waters.
 
EXTERNAL GROWTH
 
     During the first quarter of 1998, in addition to the ITT Merger and the
Westin Merger, Starwood Hotels acquired four full-service, luxury hotel
properties located in Aspen, Colorado; New York City, New York; Washington,
D.C.; and Houston, Texas for a total purchase price of approximately $348
million consisting of $164 million in cash and 3.7 million Units (valued at
approximately $184 million). In May 1998, Starwood Hotels acquired the 242-room
Danbury Hilton in Danbury, Connecticut for approximately $20 million in cash. In
August 1998, Starwood Hotels acquired a 95% non-controlling interest in the
760-room Westin Maui in Maui, Hawaii, for approximately $132 million in cash.
 
INTERNAL GROWTH
 
     The following tables summarize average occupancy rates, ADR and REVPAR on a
year-to-year basis for the Company's 151 comparable owned, leased and
consolidated joint venture hotel properties for the year ended December 31, 1998
(excluding two hotels held for sale at December 31, 1998, 11 hotels under
significant renovation during 1998 and seven hotels under renovation during
1997).
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                         ------------------------      PERCENTAGE
                                                           1998            1997          CHANGE
                                                         --------        --------      ----------
<S>                                                      <C>             <C>           <C>
WORLDWIDE
ALL HOTELS
Number of hotels.......................................      151             151
Number of rooms........................................   48,612          48,612
REVPAR.................................................  $101.15         $ 94.04           7.6%
ADR....................................................  $143.11         $133.86           6.9%
Occupancy..............................................     70.7%           70.3%          0.4%
SHERATON(1)
Number of hotels.......................................       83              83
Number of rooms........................................   27,833          27,833
REVPAR.................................................  $109.50         $102.15           7.2%
ADR....................................................  $155.50         $145.55           6.8%
Occupancy..............................................     70.4%           70.2%          0.2%
WESTIN
Number of hotels.......................................       26              26
Number of rooms........................................   10,345          10,345
REVPAR.................................................  $ 95.93         $ 88.51           8.4%
ADR....................................................  $133.05         $124.64           6.7%
Occupancy..............................................     72.1%           71.0%          1.1%
OTHER(2)
Number of hotels.......................................       42              42
Number of rooms........................................   10,434          10,434
REVPAR.................................................  $ 84.26         $ 78.14           7.8%
ADR....................................................  $120.42         $112.13           7.4%
Occupancy..............................................     70.0%           69.7%          0.3%
</TABLE>
 
                                       28
<PAGE>   30
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                         ------------------------      PERCENTAGE
                                                           1998            1997          CHANGE
                                                         --------        --------      ----------
<S>                                                      <C>             <C>           <C>
NORTH AMERICA
ALL HOTELS
Number of hotels.......................................      104             104
Number of rooms........................................   35,237          35,237
REVPAR.................................................  $ 97.72         $ 90.53           7.9%
ADR....................................................  $137.99         $128.37           7.5%
Occupancy..............................................     70.8%           70.5%          0.3%
SHERATON(1)
Number of hotels.......................................       40              40
Number of rooms........................................   15,460          15,460
REVPAR.................................................  $108.37         $100.78           7.5%
ADR....................................................  $153.85         $142.97           7.6%
Occupancy..............................................     70.4%           70.5%         (0.1)%
WESTIN
Number of hotels.......................................       22              22
Number of rooms........................................    9,343           9,343
REVPAR.................................................  $ 94.87         $ 87.15           8.9%
ADR....................................................  $131.00         $121.85           7.5%
Occupancy..............................................     72.4%           71.5%          0.9%
OTHER(2)
Number of hotels.......................................       42              42
Number of rooms........................................   10,434          10,434
REVPAR.................................................  $ 84.26         $ 78.14           7.8%
ADR....................................................  $120.42         $112.13           7.4%
Occupancy..............................................     70.0%           69.7%          0.3%
 
INTERNATIONAL
ALL HOTELS
Number of hotels.......................................       47              47
Number of rooms........................................   13,375          13,375
REVPAR.................................................  $110.46         $103.59           6.6%
ADR....................................................  $157.09         $149.03           5.4%
Occupancy..............................................     70.3%           69.5%          0.8%
SHERATON(1)
Number of hotels.......................................       43              43
Number of rooms........................................   12,373          12,373
REVPAR.................................................  $110.98         $103.96           6.8%
ADR....................................................  $157.67         $149.00           5.8%
Occupancy..............................................     70.4%           69.8%          0.6%
WESTIN
Number of hotels.......................................        4               4
Number of rooms........................................    1,002           1,002
REVPAR.................................................  $104.78         $ 99.70           5.1%
ADR....................................................  $150.83         $149.25           1.1%
Occupancy..............................................     69.5%           66.8%          2.7%
</TABLE>
 
---------------
(1) Includes Sheraton, The Luxury Collection, St. Regis, Ciga and Four Points
    branded properties.
 
(2) Represents non-proprietary branded properties.
 
                                       29
<PAGE>   31
 
ITEM 3.  LEGAL PROCEEDINGS.
 
     There are various lawsuits pending against the Company, some of which
involve claims for substantial amounts. However, the Company does not consider
its ultimate liability with respect to these actions to be material in relation
to the consolidated financial condition or operations of the Company.
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 
     Not applicable.
 
EXECUTIVE OFFICERS OF THE REGISTRANTS
 
     See Part III, Item 10, of this Joint Annual Report for information
regarding the executive officers of the Registrants, which information is
incorporated herein by reference.
 
                                    PART II
 
ITEM 5.  MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
 
MARKET INFORMATION
 
     The Units are traded on the NYSE and the Pacific Exchange under the symbol
"HOT." The Class A Shares are all currently held by the Corporation and have
never been traded.
 
     The following table sets forth, for the fiscal periods indicated, the high
and low sale prices per Unit on the NYSE Composite Tape.
 
<TABLE>
<CAPTION>
                                                               HIGH      LOW
                                                              ------    ------
<S>                                                           <C>       <C>
1998
Fourth quarter..............................................  $31.38    $18.75
Third quarter...............................................  $49.19    $29.19
Second quarter..............................................  $54.38    $44.44
First quarter...............................................  $57.88    $49.50
1997
Fourth quarter..............................................  $60.38    $52.13
Third quarter...............................................  $57.44    $41.56
Second quarter..............................................  $42.81    $34.25
First quarter...............................................  $45.88    $34.50
</TABLE>
 
HOLDERS
 
     As of March 25, 1999, there were approximately 37,500 holders of record of
Units and one holder of record (the Corporation) of the Class A Shares.
 
                                       30
<PAGE>   32
 
DISTRIBUTIONS MADE/DECLARED
 
     The following table sets forth certain information with respect to
distributions made by the Trust to holders of Units during the years ended
December 31, 1997 and 1998:
 
<TABLE>
<CAPTION>
                                                              DISTRIBUTIONS    RETURN OF CAPITAL
                                                                  MADE          GAAP Basis (a)
                                                              -------------    -----------------
<S>                                                           <C>              <C>
1998
Fourth quarter..............................................      $0.15(b)              --
Third quarter...............................................      $0.52              $0.52
Second quarter..............................................      $0.52                 --
First quarter...............................................      $0.52                 --
1997
Fourth quarter..............................................      $0.48(c)           $0.23
Third quarter...............................................      $0.48              $0.48
Second quarter..............................................      $0.39              $0.01
First quarter...............................................      $0.39              $0.21
</TABLE>
 
---------------
(a) Represents distributions per Unit in excess of net income per Unit on a
    generally accepted accounting principles ("GAAP") basis, and is not the same
    as return of capital on a tax basis. The net income per Unit used to
    calculate the return of capital GAAP basis represents the results of the
    Corporation and the Trust for 1997 and the results of the Company for 1998.
 
(b) The Trust declared a distribution for the fourth quarter of 1998 to
    shareholders of record on December 31, 1998. The distribution was paid in
    January 1999.
 
(c) The Trust declared a distribution for the fourth quarter of 1997 to
    shareholders of record on December 31, 1997. The distribution was paid in
    January 1998.
 
     The Corporation has not paid any cash dividends since its organization and
does not anticipate that it will make any such distributions in the foreseeable
future.
 
     As a consequence of the Restructuring, holders of Class B Shares are now
entitled, subject to certain conditions, to receive a non-cumulative annual
dividend, at an initial rate of $0.60 per share, to the extent the dividend is
authorized by the Board of Trustees of the Trust. The dividend may increase
after 1999 pursuant to a formula, and may not be paid under certain
circumstances. Unless dividends for the then current quarterly dividend period
have been paid on the Class B Shares, the Trust is not permitted to pay a
dividend on the Class A Shares (except in certain circumstances). Under the
terms of the Company's current credit facilities, the Trust is generally
permitted to distribute to its shareholders on an annual basis cash in an amount
equal to the greater of (i) 55% of adjusted funds from operations (as defined)
for any four consecutive calendar quarters and (ii) the minimum amount necessary
to maintain the Trust's tax status as a REIT.
 
CONVERSION OF SECURITIES; SALE OF UNREGISTERED SECURITIES
 
     During 1998, the Trust consented to the exchange of approximately 1.3
million shares of Class B Exchangeable Preferred Shares ("Class B EPS") by
certain stockholders for an equal number of shares of Class A Exchangeable
Preferred Shares ("Class A EPS"); stockholders thereafter exchanged
approximately 3.2 million shares of Class A EPS for an equal number of Units.
 
     During 1998, the Company exchanged approximately 1.5 million Partnership
Units held by third parties for Units on a one-for-one basis.
 
     In January 1998, Starwood Hotels completed the acquisition of four
full-service, luxury properties located in Aspen, Colorado; New York, New York;
Washington, D.C., and Houston, Texas for total consideration of approximately
$348 million, consisting of $164 million in cash and 3.7 million Units, valued
for purposes of these transactions at approximately $184 million. These Units
were issued to New Remington Partners, Savannah Limited Partnership, N.Y.
Overnight Partners, L.P. and D.C. Overnight Partners, L.P. The Units were issued
without registration in reliance upon the exemption provided by Section 4(2) of
the Securities Act of 1933, as amended.
 
                                       31
<PAGE>   33
 
ITEM 6.  SELECTED FINANCIAL DATA.
 
     The following financial and operating data should be read in conjunction
with the information set forth under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and related notes thereto appearing elsewhere in this
Joint Annual Report. The historical information represents the historical
information for ITT up to the date of the ITT Merger, because the ITT Merger was
treated as a reverse purchase for accounting purposes. This financial and
operating data do not include the results of the discontinued lines of business,
which include Educational Services and ITT World Directories ("WD").
 
<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                ----------------------------------------------
                                                 1998       1997     1996     1995      1994
                                                -------    ------   ------   -------   -------
                                                     (IN MILLIONS, EXCEPT PER UNIT DATA)
<S>                                             <C>        <C>      <C>      <C>       <C>
INCOME STATEMENT DATA
Revenues......................................  $ 4,710    $2,974   $2,931   $ 2,838   $ 1,385
Income (loss) from continuing operations......  $   141    $ (270)  $  226   $   161   $    44
Basic earnings (loss) per Unit from continuing
  operations..................................  $  0.68    $(2.14)  $ 1.81   $  1.27   $  0.35
OPERATING DATA
Cash from continuing operations...............  $   224    $   73   $  420   $   444   $   164
Cash from/(used for) investing activities.....  $ 1,915    $  361   $ (595)  $(2,606)  $(1,450)
Cash from/(used for) financing activities.....  $(2,050)   $ (426)  $  250   $ 2,024   $   610
Aggregate cash dividend distributions.........  $   324(1) $   --   $   --   $    --   $    --
Cash dividend per Unit........................  $  1.71    $   --   $   --   $    --   $    --
</TABLE>
 
<TABLE>
<CAPTION>
                                                                 AT DECEMBER 31,
                                                   -------------------------------------------
                                                    1998      1997     1996     1995     1994
                                                   -------   ------   ------   ------   ------
                                                                  (IN MILLIONS)
<S>                                                <C>       <C>      <C>      <C>      <C>
BALANCE SHEET DATA
Total assets.....................................  $16,101   $8,525   $8,922   $8,225   $4,873
Long-term debt, net of current maturities,
  including capital leases and redeemable Class B
  EPS............................................  $ 8,260   $1,070   $1,989   $1,729   $  599
</TABLE>
 
---------------
(1) Excludes $3.0 million of dividends paid to ITT stockholders in connection
    with the ITT Merger.
 
                                       32
<PAGE>   34
 
                   UNAUDITED CONDENSED COMBINED CONSOLIDATED
                         PRO FORMA STATEMENT OF INCOME
                      FOR THE YEAR ENDED DECEMBER 31, 1998
     The following unaudited condensed combined consolidated pro forma statement
of income for the year ended December 31, 1998 gives effect as of January 1,
1998 to the ITT Merger, the acquisition of Westin and certain actual and planned
asset dispositions. The pro forma information is based upon historical
information as described in the notes to the combined consolidated financial
statements and does not purport to present what actual results would have been
had such transactions, in fact, occurred at January 1, 1998, or to project
results for any future period. Historical results are for the year ended
December 31, 1998.
     The Company accounted for the ITT Merger as a reverse purchase in
accordance with Accounting Principles Board Opinion No. 16. Purchase accounting
for a combination is similar to the accounting treatment used in the acquisition
of any asset group. Although the Trust and the Corporation issued Units to ITT
stockholders and survived the ITT Merger, Starwood Hotels is considered the
acquired company for accounting purposes because the former ITT stockholders
held a majority of the outstanding Units after the ITT Merger was consummated.
     Because the ITT Merger was accounted for using reverse purchase accounting,
the historical statement of income for the year ended December 31, 1998 includes
the accounts of the Trust and the Corporation for the period from the closing of
the ITT Merger on February 23, 1998 through December 31, 1998, and the accounts
of ITT for the twelve months ended December 31, 1998.
 
<TABLE>
<CAPTION>
                                                                        PRO FORMA ADJUSTMENTS
                                                                     ---------------------------
                                                                     STARWOOD    DESERT
                                                        HISTORICAL   HOTELS(A)   INN(B)   OTHERS      PRO FORMA
                                                        ----------   ---------   ------   ------      ---------
                                                                  (IN MILLIONS, EXCEPT PER UNIT DATA)
<S>                                                     <C>          <C>         <C>      <C>         <C>
REVENUES
Hotels:
  Owned, leased and consolidated joint venture
     hotels...........................................    $2,983       $241      $  --     $ --        $3,224
  Management and franchise fees.......................       234          6         --       --           240
  Unconsolidated joint ventures and other.............       116         14         --       --           130
Gaming................................................     1,377          2       (116)      --         1,263
                                                          ------       ----      -----     ----        ------
                                                           4,710        263       (116)      --         4,857
                                                          ------       ----      -----     ----        ------
COSTS AND EXPENSES
Hotels:
  Owned, leased and consolidated joint venture
     hotels...........................................     2,030        176         --       --         2,206
  Other...............................................       120          5         --       --           125
Gaming................................................     1,103          2       (120)      --           985
Selling, general and administrative...................        96          6         --      (42)(h)(i)      60
Restructuring and other special charges...............       204         --         --       --           204
Depreciation and amortization.........................       556         43        (14)      13(g)          598
                                                          ------       ----      -----     ----        ------
                                                           4,109        232       (134)     (29)        4,178
                                                          ------       ----      -----     ----        ------
                                                             601         31         18       29           679
Interest expense, net.................................      (613)       (25)        --      (39)(c)      (588)
                                                                                             70(d)
                                                                                              3(e)
                                                                                             16(f)
Gain on sale of real estate...........................        55         --         --       --            55
Miscellaneous income, net.............................        --         --          3       --             3
                                                          ------       ----      -----     ----        ------
                                                              43          6         21       79           149
Income tax benefit (expense)..........................       108         (2)        (6)     (32)           68
Minority equity.......................................       (10)         1         --       --            (9)
                                                          ------       ----      -----     ----        ------
Income from continuing operations.....................    $  141       $  5      $  15     $ 47        $  208
                                                          ======       ====      =====     ====        ======
Basic earnings per Unit:
  Income from continuing operations...................    $ 0.68                                       $ 1.04
                                                          ======                                       ======
Diluted earnings per Unit:
  Income from continuing operations...................    $ 0.67                                       $ 1.03
                                                          ======                                       ======
Weighted average number of Units......................       185                                          185
                                                          ======                                       ======
Weighted average number of Units assuming dilution....       187                                          187
                                                          ======                                       ======
</TABLE>
 
  The accompanying notes to the unaudited financial statements are an integral
                     part of the above pro forma statement.
                                       33
<PAGE>   35
 
               NOTES TO UNAUDITED CONDENSED COMBINED CONSOLIDATED
                         PRO FORMA STATEMENT OF INCOME
 
(a) Represents the historical results of the Trust and the Corporation,
    including Westin, for the period from January 1, 1998 through the closing of
    the ITT Merger on February 23, 1998.
 
(b) Represents the elimination of Desert Inn from continuing operations. The
    Company has announced its intention to sell the Desert Inn and, as a result,
    has excluded its results from continuing operations.
 
(c) Represents interest expense as if the ITT Merger had occurred on January 1,
    1998, using an average rate of 7.5%, on the additional debt incurred to
    finance (i) the $2.991 billion cash portion of the purchase price of the
    shares of ITT common stock acquired from the ITT stockholders; (ii) the $312
    million in cash used to retire ITT stock options; and (iii) the $102 million
    of fees and expenses incurred in connection with the ITT Merger including
    amounts paid as commitment fees for advisory services and finders fees.
 
(d) Represents reduction of interest expense, using an average rate of 7.5%, for
    the paydown of the term loans with proceeds from actual or planned asset
    dispositions as if the dispositions had occurred on January 1, 1998. The
    actual dispositions include the disposition of WD for gross proceeds of $2.1
    billion to VNU International B.V. ("VNU") in February 1998; the sale of
    ITT's interest in WBIS+, Channel 31 in New York City, to Paxson
    Communications Corporation ("Paxson") for gross proceeds of $128 million in
    March 1998; the exercise of one of the two put options in April 1998
    pursuant to which Cablevision purchased one-half of ITT's remaining interest
    in MSG for gross proceeds of $94 million; the sale of an aircraft for gross
    proceeds of $39 million in April 1998; and the sale of approximately 13
    million shares of Educational Services for net proceeds of $304 million in
    June 1998. The planned asset dispositions include the sale of ITT's
    remaining interest in MSG (which is expected to close in April 1999), the
    sale of the Company's remaining 35% interest in Educational Services through
    a registered public offering of its shares (which occurred in February 1999)
    and the sale of the Desert Inn. The pro forma net proceeds of the planned
    dispositions, after certain costs and income taxes, would reduce debt by
    approximately $722 million. The Company believes that the planned
    dispositions are probable as required by Regulation S-X, Rule 11-01(a).
 
(e) Represents the reduction of interest expense, using an average rate of 7.5%,
    for the paydown of term loans with the proceeds of $245 million, net of
    costs of $6 million, from the sale of 4.6 million Units on February 24, 1998
    as if such offering had taken place on January 1, 1998.
 
(f) Represents a reduction of the amortization recognized on the deferred loan
    fees which were incurred in connection with the one-year $1.0 billion term
    loan facility as if the asset dispositions had occurred on January 1, 1998.
    This reduction is net of the increased amortization on deferred loan fees
    recognized for the period of January 1, 1998 through the closing of the ITT
    Merger on February 23, 1998 for the costs incurred in connection with the
    additional debt (see Note (c) above).
 
(g) Represents the depreciation and amortization expense related to the excess
    value recorded as a result of the purchase consideration exceeding the fair
    market value of the combined net assets of Starwood Hotels and Westin as if
    the transactions had taken place on January 1, 1998.
 
(h) Represents effects of termination of certain executives under contractual
    severance agreements, net of additional costs for new executives under
    employment contracts, removal of duplicate third-party consulting fees and
    termination of certain advertising contracts and rental agreements, less
    related termination fees.
 
(i) Represents the effects of the combination of certain identified benefit
    plans as a result of the ITT Merger as if the new combined plans had been in
    place as of January 1, 1998.
 
                                       34
<PAGE>   36
 
                   UNAUDITED PRO FORMA FUNDS FROM OPERATIONS
 
     Management believes that funds from operations ("FFO") (as defined by the
National Association of Real Estate Investment Trusts)(1) is one measure of
financial performance of an equity REIT such as the Trust. Because ITT was never
an equity REIT, it did not calculate FFO. Accordingly, set forth below is pro
forma FFO for the year ended December 31, 1998 (see the unaudited condensed
combined consolidated pro forma statement of income and the notes thereto for an
explanation of the pro forma adjustments).
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                DECEMBER 31, 1998
                                                                    PRO FORMA
                                                                  (IN MILLIONS)
                                                                -----------------
<S>                                                             <C>
Income from continuing operations before minority
  interest..................................................          $217
Minority interest in consolidated joint ventures............           (19)
Depreciation and amortization...............................           598
Deferred taxes..............................................           (68)
Gain on sale of real estate.................................           (55)
Preopening costs............................................            41
Restructuring and other special charges.....................           204
Interest rate swap and treasury lock settlement.............            40
Other non-recurring items(2)................................            21
                                                                      ----
Funds from Operations.......................................          $979
                                                                      ====
</TABLE>
 
---------------
(1) Management and industry analysts generally consider FFO to be one measure of
    the financial performance of an equity REIT that provides a relevant basis
    for comparison among REITs, and FFO is presented to assist investors in
    analyzing the performance of the Company. FFO is defined as income (computed
    in accordance with GAAP), excluding gains (losses) from debt restructuring
    and sales of property, real estate related depreciation and amortization
    (excluding amortization of financing costs) and other non-recurring items.
    FFO does not represent cash generated from operating activities in
    accordance with GAAP and is not necessarily indicative of cash available to
    fund cash needs. FFO should not be considered an alternative to net income
    as an indication of the Company's financial performance or as an alternative
    to cash flows from operating activities as a measure of liquidity.
 
(2) Other non-recurring items consist primarily of costs associated with the
    vesting of certain restricted stock awards.
 
                                       35
<PAGE>   37
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.
 
     To facilitate a meaningful comparison between periods, this Management's
Discussion and Analysis of Financial Condition and Results of Operations focuses
on pro forma information for the periods covered, which the Company's management
believes provides the most meaningful comparability among periods presented. The
historical information excludes the results of the Desert Inn in Las Vegas,
Nevada which is held for sale, preopening costs and certain non-recurring items
and therefore differs from the historical financial information found elsewhere
in this Joint Annual Report. For information regarding the foregoing adjustments
to historical financial information, see the notes to the unaudited condensed
combined consolidated pro forma statement of income included in this Joint
Annual Report. The pro forma information reflects the ITT Merger, the Westin
Merger and certain actual and planned asset dispositions as if they had occurred
on January 1, 1997. The pro forma data, therefore, includes the historical
results of Starwood Hotels and Westin prior to the ITT Merger and certain pro
forma adjustments as more fully described in the notes to the unaudited
condensed combined consolidated pro forma statement of income. In addition, the
following pro forma data for the year ended December 31, 1997 reflects the 44
hotel properties acquired by Starwood Hotels in 1997 and two hotel properties
acquired by Westin in 1997 (the "1997 Acquisitions"), the sale, by ITT, of five
hotel properties during 1997 (the "1997 Dispositions") and the sale, by the
Company, of 12 hotel properties during 1998 (the "1998 Dispositions") as if all
such transactions had occurred on January 1, 1997. The pro forma data is not
necessarily indicative of the results that would have been achieved had such
transactions actually occurred on January 1, 1997, nor are they necessarily
indicative of the Company's future results. Year-to-year comparisons of the
Company's historical information are, in management's view, less relevant to an
understanding of Starwood Hotels due to the significance of the ITT Merger and
the Westin Merger.
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                             ----------------------------------
                                                                HISTORICAL         PRO FORMA
                                                             ----------------   ---------------
                                                              1998    1997(1)    1998     1997
                                                             ------   -------   ------   ------
                                                                       (IN MILLIONS)
<S>                                                          <C>      <C>       <C>      <C>
REVENUE
Hotel:
  Owned, leased and consolidated joint venture hotels(2)...  $2,852   $1,465    $3,050   $2,847
  Management and franchise fees............................     239      174       245      222
  Unconsolidated joint ventures and other(3)...............     162       57       176       91
Gaming.....................................................   1,263    1,123     1,263    1,123
                                                             ------   ------    ------   ------
          Total revenue....................................  $4,516   $2,819    $4,734   $4,283
                                                             ======   ======    ======   ======
COSTS AND EXPENSES
Hotel:
  Owned, leased and consolidated joint venture hotels(2)...  $1,944   $1,045    $2,092   $2,022
  Other....................................................     120       91       125       98
Gaming.....................................................     945      868       945      868
Selling, general and administrative........................      72       66        34      106
                                                             ------   ------    ------   ------
          Total costs and expenses.........................  $3,081   $2,070    $3,196   $3,094
                                                             ======   ======    ======   ======
</TABLE>
 
                                       36
<PAGE>   38
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                             ----------------------------------
                                                                HISTORICAL         PRO FORMA
                                                             ----------------   ---------------
                                                              1998    1997(1)    1998     1997
                                                             ------   -------   ------   ------
                                                                       (IN MILLIONS)
<S>                                                          <C>      <C>       <C>      <C>
EBITDA(4)(5)
Hotel:
  Owned, leased and consolidated joint venture hotels......  $  908   $  420    $  958   $  825
  Management and franchise fees............................     239      174       245      222
  Other....................................................      42      (34)       51       (7)
Gaming.....................................................     318      255       318      255
Selling, general and administrative........................     (72)     (66)      (34)    (106)
                                                             ------   ------    ------   ------
          Same-store EBITDA................................   1,435      749     1,538    1,189
          EBITDA from 1998 Dispositions....................      --       --        15       --
                                                             ------   ------    ------   ------
          EBITDA...........................................  $1,435   $  749    $1,553   $1,189
                                                             ======   ======    ======   ======
</TABLE>
 
---------------
(1) Represents the historical results of ITT, excluding Starwood Hotels and
    Westin.
 
(2) Reflects the Company's share of revenues and expenses from consolidated
    joint ventures.
 
(3) Includes unconsolidated joint ventures, interest income, and miscellaneous
    income.
 
(4) EBITDA is defined as income before minority interest, interest expense,
    income tax expense and depreciation and amortization expense. Non-recurring
    items and gains and losses from sales of real estate and investments are
    also excluded from EBITDA as these items do not impact operating results on
    a recurring basis. Management considers EBITDA to be one measure of the cash
    flows from operations of the Company before debt service that provides a
    relevant basis for comparison, and EBITDA is presented to assist investors
    in analyzing the performance of the Company. This information should not be
    considered as an alternative to any measure of performance as promulgated
    under GAAP, nor should it be considered as an indicator of the overall
    financial performance of the Company. The Company's calculation of EBITDA
    may be different from the calculation used by other companies and,
    therefore, comparability may be limited.
 
                                       37
<PAGE>   39
 
                   YEAR ENDED DECEMBER 31, 1998 COMPARED WITH
                          YEAR ENDED DECEMBER 31, 1997
 
CONTINUING OPERATIONS
 
  Revenue
 
     PRO FORMA.  On a pro forma basis, revenue for the Company's owned, leased
and consolidated joint venture hotels increased 7.1% to approximately $3.1
billion for the year ended December 31, 1998 when compared to the corresponding
period of 1997. The increase in hotel revenue at these 171 owned, leased and
consolidated joint venture hotels resulted from an increase in REVPAR of 6.8% to
$99 for the year ended December 31, 1998 when compared to the corresponding
period of 1997. The increase in REVPAR reflected an increase in ADR of 7.6% to
$143 for the year ended December 31, 1998 when compared to the corresponding
1997 period and a decrease of 0.5 percentage points in average occupancy rates
to 69% for the year ended December 31, 1998. REVPAR at the Company's 52
international majority owned and leased hotels for the year ended December 31,
1998 grew by 7.6% when compared to the corresponding period of 1997. REVPAR at
owned, leased and consolidated joint venture hotels in North America for the
year ended December 31, 1998 increased by 6.3% when compared to the
corresponding period of 1997.
 
     Management and franchise fees earned by Starwood Hotels increased 10.4% to
$245 million for the year ended December 31, 1998 when compared to the
corresponding period of 1997. The increase resulted from stronger performance at
the Company's managed and franchised hotels, the addition of 33 hotels to the
management and franchise system, and termination fees related to the termination
of certain management and franchise agreements.
 
     Income from unconsolidated joint ventures and other income increased to
$176 million for the year ended December 31, 1998 from $91 million in the same
period in 1997. The increase resulted primarily from an increase in earnings
from unconsolidated joint ventures and the gains on sale of certain non-real
estate investments.
 
     Gaming revenue, which excludes the results of the Desert Inn, which is held
for disposition, increased 12.5% to $1.3 billion for the year ended December 31,
1998 when compared to the corresponding period of 1997. The increase in revenue
from the opening of an additional 1,130 rooms and 110,000 square feet of
convention space at Caesars Palace and the addition of 620 rooms and 30,000
square feet of casino space at Caesars Atlantic City was partially offset by the
adverse impact of recent declines in the Asian financial markets on high-end
baccarat play.
 
     HISTORICAL.  On a historical basis, revenue for owned, leased and
consolidated joint venture hotels increased to $2.9 billion for the year ended
December 31, 1998 from $1.5 billion in the corresponding period of 1997. Since
the ITT Merger is accounted for as a reverse purchase and the reflected
historical amounts accordingly are those of ITT, the increase in hotel revenue
was due primarily to the inclusion, beginning February 23, 1998 (the date of the
ITT Merger), of the results of approximately 120 hotels owned by Starwood Hotels
as of the date of the ITT Merger, including hotels acquired as a result of the
Westin Merger.
 
     Management and franchise fees increased 37.4% to $239 million for the year
ended December 31, 1998 when compared to the same period of 1997. The increase
resulted primarily from the inclusion of approximately 50 hotels managed by
Starwood Hotels and Westin and approximately 30 hotels franchised by Westin as
of the date of the ITT Merger.
 
     Income from unconsolidated joint ventures and other income increased to
$162 million for the year ended December 31, 1998 from $57 million in the
corresponding period of 1997. The increase was due primarily to the inclusion,
beginning February 23, 1998, of investments in unconsolidated joint venture
hotels owned by Starwood Hotels and Westin as of the date of the ITT Merger.
 
     Because Starwood Hotels was not in the gaming business to any material
extent prior to the acquisition of ITT, its historical gaming revenue is the
same as its pro forma gaming revenue described above.
 
                                       38
<PAGE>   40
 
  Costs and Expenses
 
     PRO FORMA.  Pro forma costs and expenses for owned, leased and consolidated
joint venture hotels increased 3.5% for the year ended December 31, 1998 to $2.1
billion when compared to the corresponding period of 1997. The increase in costs
and expenses is due primarily to the re-opening of hotels in 1998 that were
closed for renovations in 1997.
 
     Gaming costs and expenses for the year ended December 31, 1998 increased
8.9% to $945 million when compared to the same period in 1997. The increase is
due to the opening of the additional rooms and convention space discussed above.
 
     Selling, general and administrative expenses decreased to $34 million in
the year ended December 31, 1998 from $106 million in the corresponding period
of 1997. The decrease is primarily due to savings associated with the ITT Merger
and Westin Merger that resulted in the ITT World Headquarters closure in New
York and significant reduction in the Westin office in Seattle, Washington.
 
     HISTORICAL.  Historical costs and expenses for owned, leased and
consolidated hotels increased to $1.9 billion for the year ended December 31,
1998 from $1.0 billion in the corresponding period in 1997. The increase was due
primarily to the reverse purchase accounting treatment and the inclusion,
beginning February 23, 1998, of the results of approximately 120 hotels leased
and consolidated by Starwood Hotels (including Westin).
 
     Because Starwood Hotels was not in the gaming business to any material
extent prior to the acquisition of ITT, its historical costs and expenses are
the same as its pro forma gaming costs and expenses described above.
 
     Selling, general and administrative expenses increased 9.1% to $72 million
for the year ended December 31, 1998 when compared to the same period in 1997.
Selling, general and administrative expenses for 1998 exclude a non-recurring
charge of approximately $30 million primarily associated with the vesting,
during 1998, of certain restricted stock previously granted to the President and
Chief Operating Officer of the Corporation.
 
  EBITDA
 
     PRO FORMA.  The Company's pro forma EBITDA increased 29.4% to $1.5 billion
in the year ended December 31, 1998 when compared to the corresponding period of
1997. The increase was primarily due to the improved results at the Company's
owned, leased and consolidated joint venture hotels. EBITDA at these hotels
increased by $133 million to $958 million in the year ended December 31, 1998
when compared to the corresponding period of 1997. The pro forma EBITDA
improvement at these hotels of approximately 16% in the year ended December 31,
1998 was due primarily to the increase in ADR discussed above. Pro forma EBITDA
margins for these hotels increased 2.4 percentage points to 31.4% in the year
ended December 31, 1998 when compared to 1997. Starwood Hotels believes that the
improvement in the pro forma EBITDA margin is attributable in part to the
continued implementation of cost containment steps and the Company's ability to
realize purchasing synergies as a result of the ITT Merger and the Westin
Merger.
 
     Gaming EBITDA, which excludes the Desert Inn and preopening costs, for the
year ended December 31, 1998 was $318 million compared to $255 million in 1997.
The increase in gaming EBITDA resulted from positive results at Caesars Palace
and Caesars Atlantic City. Pro forma EBITDA at Caesars Palace was $129 million
for the year ended December 31, 1998 compared to $107 million in 1997, as the
addition of 1,130 rooms and 110,000 square feet of meeting space had a positive
effect on all areas of the casino and hotel operations. Pro forma EBITDA at
Caesars Atlantic City was $129 million for the year ended December 31, 1998
compared to $100 million in 1997, as the addition of 620 new rooms and 30,000
square feet of casino space had a positive effect on all areas of this
property's casino and hotel operations.
 
     HISTORICAL.  On a historical basis, the Company's EBITDA increased $686
million to $1.4 billion in the year ended December 31, 1998 when compared to
1997, due primarily to the reverse purchase accounting treatment of the ITT
Merger and the inclusion, beginning February 23, 1998, of results of
approximately 120
 
                                       39
<PAGE>   41
 
hotels owned, leased and consolidated by Starwood Hotels (including Westin) as
of the date of the ITT Merger.
 
  Depreciation and Amortization
 
     Depreciation and amortization has not been presented on a pro forma basis
because management believes that such a presentation would not be informative
due to the many adjustments and assumptions that would need to be made for such
calculations.
 
     On a historical basis, depreciation and amortization expense increased to
$556 million in the year ended December 31, 1998 when compared to $281 million
in 1997. The increase was primarily due to depreciation expense, beginning
February 23, 1998, with the inclusion of approximately 120 hotels owned, leased
and consolidated by Starwood Hotels (including Westin) prior to the ITT Merger,
the amortization of goodwill related to the ITT Merger and the commencement of
depreciation on certain newly completed hotel and gaming projects.
 
  Net Interest Expense
 
     Net interest expense has not been presented on a pro forma basis because
management believes that such a presentation would not be informative due to the
many adjustments and assumptions that would need to be made for such
calculations.
 
     On a historical basis, interest expense for the year ended December 31,
1998, which is net of interest income of $26 million and excludes a
non-recurring charge recognized in connection with the settlement of certain
forward interest swap agreements of $40 million (see notes to the combined
consolidated financial statements of this Joint Annual Report), increased to
$573 million as compared to $94 million in 1997. The increase relates primarily
to the debt incurred to finance the ITT Merger and Westin Merger.
 
RESTRUCTURING AND OTHER SPECIAL CHARGES
 
     During 1998, the Company recorded pretax charges totaling approximately
$204 million relating to restructuring and other special charges. The charges
represent a portion of the restructuring and other special charges announced by
the Company in August 1998.
 
     The 1998 restructuring and other special charges consist of the following
(in millions):
 
<TABLE>
<CAPTION>
                                                   NON-CASH        CASH        EXPENDITURES
                                                   CHARGES     EXPENDITURES      ACCRUED       TOTAL
                                                   --------    ------------    ------------    -----
<S>                                                <C>         <C>             <C>             <C>
Write-down of assets.............................    $115          $--             $ --        $115
ITT Merger-related costs.........................      10           59               43         112
Adjustment to ITT 1997 other special charges.....      --           --              (23)        (23)
                                                     ----          ---             ----        ----
          Total..................................    $125          $59             $ 20        $204
                                                     ====          ===             ====        ====
</TABLE>
 
     WRITE-DOWN OF ASSETS.  The restructuring and other special charges for the
write-down of assets include an investment in a hotel in Kuala Lampur, Malaysia;
a mortgage note receivable secured by a hotel in Paris, France; an investment in
a shared services center established by ITT in 1997 which was closed by the
Company following the ITT Merger; and certain receivable balances in the
Company's gaming division primarily related to Asian customers. Substantially
all of these assets were ITT assets and were written down primarily as a result
of certain worldwide economic conditions indicating a reduced value for these
assets.
 
     ITT MERGER-RELATED COSTS.  The restructuring and other special charges
include costs related to the ITT Merger consisting primarily of severance
payments and relocation costs for ITT employees and certain costs to integrate
the companies, including costs to integrate the Company's frequent guest
programs and to close down duplicate facilities. The Company expects to pay out
the remaining balance of $43 million during 1999.
 
     ADJUSTMENT TO ITT 1997 OTHER SPECIAL CHARGES.  During the fourth quarter of
1998, the Company reversed approximately $23 million related to a liability set
up during 1997 by ITT for tax reimbursements that
 
                                       40
<PAGE>   42
 
will not be paid due to modifications of contractual agreements with certain
former employees. The remaining balance of $62 million will be paid out in 1999
subject to resolution of certain contract terms.
 
     1998 OTHER SPECIAL CHARGES.  In addition, during 1998, the Company recorded
a non-recurring charge to selling, general and administrative expense of
approximately $30 million primarily associated with the vesting, during the
quarter, of certain restricted stock granted earlier in the year to the new
President and Chief Executive Officer of the Corporation. Also during 1998, the
Company recorded a $40 million non-recurring charge to interest expense
associated with the settlement of certain forward interest swap agreements.
 
DISPOSITIONS
 
     The Desert Inn, the gaming property held for disposition, experienced a $4
million EBITDA loss in the year ended December 31, 1998 compared to an EBITDA
loss of $30 million in 1997. The improved performance was due to a normalized
hold percentage in baccarat (which percentage in 1997 was negative) and a
significantly higher ADR due to improvements made to the property in 1997. These
improvements were offset by the Asian economic crisis which negatively impacted
results at the Desert Inn by significantly reducing the amount of high-end
baccarat volume.
 
DISCONTINUED OPERATIONS
 
     Results from discontinued operations were a loss of $8 million for the year
ended December 31, 1998 compared to net income of $25 million in 1997. The
decrease in net income results from the disposition on February 19, 1998, of WD,
the subsidiary through which ITT conducted its telephone directories publishing
business. Gains for the year ended December 31, 1998, resulting from the
disposition of WD and the sale of shares of Educational Services, were $1.1
billion, net of $661 million of taxes and minority interest.
 
MADISON SQUARE GARDEN
 
     In June 1998, MSG redeemed one-half of ITT's interest in MSG for $94
million. In March 1999, Cablevision agreed to purchase, or to cause MSG to
redeem, ITT's remaining 7.81% interest in MSG for net proceeds of $87 million.
This disposition is expected to close in April 1999.
 
SEASONALITY AND DIVERSIFICATION
 
     The hotel and gaming industries are seasonal in nature; however, the
periods during which the Company's properties experience higher hotel revenue or
gaming activities vary from property to property and depend principally upon
location. Although the Company's revenue historically has been lower in the
first quarter than in the second, third or fourth quarters, the acquisitions of
Westin and ITT and future acquisitions may affect seasonal fluctuations in
revenue and cash flow.
 
                   YEAR ENDED DECEMBER 31, 1997 COMPARED WITH
                          YEAR ENDED DECEMBER 31, 1996
 
     The following discussion of the year ended December 31, 1997 compared with
the year ended December 31, 1996 includes the historical results of ITT only,
because the ITT Merger was treated as a reverse purchase for accounting
purposes.
 
CONTINUING OPERATIONS
 
     REVENUE.  Revenues for owned, leased and consolidated joint venture hotels
increased 7.6% to $1.6 billion for the year ended December 31, 1997 when
compared to the corresponding period of 1996. The increase relates primarily to
strong gains in ADR and the full year impact of certain acquisitions made during
1996 totaling approximately $371 million.
 
                                       41
<PAGE>   43
 
     Management and franchise fees increased 5.5% to $174 million for the year
ended December 31, 1997 when compared to the same period of 1996. The increase
resulted from improved results at managed hotels and fees earned from management
and franchise contracts added during 1997.
 
     Gaming revenues decreased 5.7% to $1.2 billion for the year ended December
31, 1997 when compared to the corresponding period of 1996. The decrease was
primarily a result of the ongoing construction activity at both Caesars Palace
in Las Vegas, Nevada and Caesars Atlantic City in Atlantic City, New Jersey.
 
     COSTS AND EXPENSES.  Costs and expenses for owned, leased and consolidated
hotels increased 5.4% to $1.1 billion for the year ended December 31, 1997 when
compared to the corresponding period in 1996. The increase primarily reflects
the costs of the hotel properties acquired during 1996.
 
     Gaming costs and expenses increased 2.5% to $1.0 billion for the year ended
December 31, 1997 when compared to the corresponding period of 1996.
 
     Selling, general and administrative expenses decreased 13.2% to $66 million
for the year ended December 31, 1997 when compared to the same period in 1996.
The decrease resulted primarily from the reduction in personnel at the ITT
headquarters in New York in May 1997.
 
     EBITDA.  The Company's EBITDA, excluding non-recurring charges and the
results of the Desert Inn, which was held for sale, increased 8.0% to $807
million in the year ended December 31, 1997 when compared to 1996. The increase
was primarily due to the improved results at the Company's owned, leased and
consolidated joint venture hotels. The improvement at these hotels reflects
significant increases in ADR, an increase in EBITDA margins from 26% in 1996 to
28% in 1997 and the full year results of hotel properties acquired during 1996.
 
     Including preopening costs of $19 million related to the openings of the
new towers at Caesars Palace and Caesars Atlantic City, a reserve for bad debts
of $21 million related to the economic crisis in Asia and a charge of $6 million
related to the restructuring of the gaming headquarters operations, gaming
EBITDA declined 22.7% to $225 million for the year ended December 31, 1997 when
compared to the corresponding period of 1996. The decline in EBITDA was
primarily related to the significant construction activity at Caesars Palace,
which was completed by year-end, and in Caesars Atlantic City, which completed
construction of a new tower.
 
     DEPRECIATION AND AMORTIZATION.  Depreciation and amortization expense
increased to $281 million in the year ended December 31, 1997 when compared to
$261 million in 1996. The increase was primarily due to the commencement of
depreciation on certain newly completed hotel and gaming projects and the
acquired hotel properties discussed above.
 
     NET INTEREST EXPENSE.  Interest expense for the year ended December 31,
1997, net of interest income, decreased to $94 million when compared to $96
million in 1996. The decrease was due principally to the lower average debt
balance as well as slightly lower overall interest rates.
 
RESTRUCTURING AND OTHER SPECIAL CHARGES
 
     As a result of the ITT Merger, ITT recorded the following special charges
in 1997: (1) conversion of the accounting for ITT's stock option plan to
variable accounting due to limited stock appreciation rights subject to exercise
and related charges for tax reimbursements to employees of $431 million, and (2)
other costs including legal fees, investment banking fees and asset write-offs
totaling $169 million which are included in miscellaneous expense, net. The
employee-related costs and the restructuring charges are included as a component
of operating income in the accompanying financial statements, while the other
costs are included in miscellaneous expense, net.
 
     Additionally, during 1997, ITT recorded pretax charges totaling $260
million ($169 million after tax) to restructure and rationalize operations at
its World Headquarters and the headquarters of its field operations. Of the
total pretax charge, approximately $196 million represented severance and other
related employee termination costs associated with the elimination of nearly 370
positions worldwide. The balance of the
 
                                       42
<PAGE>   44
 
restructuring charge ($64 million pretax) related primarily to asset write-offs,
lease commitments and termination penalties.
 
     At December 31, 1998, the Company has remaining accruals related to these
restructuring and other special charges of approximately $163 million primarily
related to remaining lease commitments which expire through 2006, the settlement
of certain employee benefits scheduled to be completed in the first quarter of
2000 and the tax reimbursements to certain former employees discussed
previously.
 
DISPOSITIONS
 
     The Desert Inn, the gaming property held for disposition, experienced a $37
million EBITDA loss in the year ended December 31, 1997 due to a negative win
percentage in baccarat and construction disruption. The EBITDA loss includes a
$7 million charge for preopening costs.
 
                        LIQUIDITY AND CAPITAL RESOURCES
 
CAPITAL EXPENDITURES
 
     The Company's capital expenditures for the year ended December 31, 1998
(excluding the acquisition of properties and including conversion costs),
totaled $832 million. Starwood Hotels incurs capital expenditures for upgrading
and ongoing maintenance of acquired and existing hotels to the Company's
standards.
 
CASH FLOW FROM OPERATING ACTIVITIES
 
     Cash flow from operating activities is the principal source of cash to be
used to fund the Company's operating expenses, interest expense, capital
expenditures and distribution payments by the Trust. Starwood Hotels anticipates
that cash flow provided by operating activities will be sufficient to service
short- and long-term indebtedness, fund maintenance requirements and capital
expenditures and meet operating cash requirements, including distributions to
shareholders by the Trust. During the first quarter of 1998, the Trust paid a
distribution of $0.48 per Unit for the quarter ended December 31, 1997. During
each of the second, third and fourth quarters of 1998, the Trust paid a
distribution of $0.52 per Unit for the quarters ended March 31, June 30, and
September 30, 1998, respectively. In connection with the Restructuring, Starwood
Hotels has reduced the annual dividend to be paid by the Trust to $0.60 per
Unit. The dividend may increase after 1999 pursuant to a formula, and may not be
paid under certain circumstances. Accordingly, during the first quarter of 1999,
the Trust paid a distribution of $0.15 per Unit for the quarter ended December
31, 1998.
 
CASH FLOW FROM INVESTING AND FINANCING ACTIVITIES
 
     In addition to cash flow from operating activities, Starwood Hotels intends
to finance the acquisition of additional hotel properties, hotel renovations and
capital improvements and provide for general corporate purposes through the
Company's credit facilities described below, through dispositions of certain
non-core assets and, when market conditions warrant, through the issuance of
additional equity or debt securities. Since the ITT and Westin transactions were
completed in early 1998 through the date of this filing, Starwood Hotels has
completed over $3.2 billion of non-core asset divestitures, the proceeds of
which were used primarily to reduce existing debt. Management expects to
complete approximately $450 million of additional divestitures by year-end 1999,
the proceeds of which will also be used primarily to retire debt.
 
     As a result of the Restructuring, Starwood Hotels will pay significantly
more in federal income taxes, and will have the ability to retain significantly
more earnings than was previously the case. Starwood Hotels anticipates that its
enhanced ability to retain earnings will allow it to utilize cash flow from
operating activities to fund both maintenance, capital expenditures and
acquisitions.
 
     LOANS AND CREDIT FACILITIES.  On February 23, 1998, Starwood Hotels
obtained two credit facilities ($5.6 billion in total) with Lehman Brothers,
Bankers Trust Company and The Chase Manhattan Bank to fund the cash portion of
the ITT Merger consideration, to refinance a portion of the Company's existing
indebtedness
 
                                       43
<PAGE>   45
 
and to provide funds for general corporate purposes. These facilities are
comprised of the Senior Credit Facility and the Senior Secured Notes Facility.
 
     Following is a summary of the Company's debt portfolio as of December 31,
1998:
 
<TABLE>
<CAPTION>
                                                AMOUNT
                                            OUTSTANDING AT
                                AMOUNT OF    DECEMBER 31,                      INTEREST RATE AT     AVERAGE
                                FACILITY         1998         INTEREST TERMS   DECEMBER 31, 1998    MATURITY
                                ---------   ---------------   --------------   -----------------   ----------
                                   (DOLLARS IN MILLIONS)
<S>                             <C>         <C>               <C>              <C>                 <C>
FLOATING RATE DEBT
Senior Credit Facility:
  One-Year Term Loan..........   $1,000         $   542         LIBOR+1.25%          6.31%          0.1 years(1)
  Five-Year Term Loan.........    1,000           1,000         LIBOR+1.25%          6.31%          4.2 years
  Revolving Credit Facility...    1,100             814         LIBOR+1.25%          6.31%          4.2 years
Senior Secured Notes Facility:
  Tranche One Loans...........    2,500           2,500         LIBOR+3.25%          8.31%          4.2 years
  Tranche Two Loans...........    1,000           1,000         LIBOR+2.75%          7.81%          4.2 years
Mortgage and other............                      502            Various           6.29%          4.4 years
Starwood Hotels interest rate
  swaps.......................                   (1,031)                             6.30%                 --
                                                -------
          Total/Average.......                  $ 5,327                              7.53%          3.8 years
                                                =======                              ====          ==========
FIXED RATE DEBT
ITT public debt...............                  $ 2,000                              6.79%          8.6 years
Caesars public debt...........                      150                              8.88%          3.6 years
Mortgage and other............                      297                              8.23%         17.4 years
Starwood Hotels interest rate
  swaps.......................                    1,031                              7.33%                 --
                                                -------
          Total/Average.......                  $ 3,478                              7.16%          9.4 years
                                                =======                              ====          ==========
TOTAL DEBT
Total Debt and Average
  Terms.......................                  $ 8,805                              7.39%          5.4 years
                                                =======                              ====          ==========
</TABLE>
 
---------------
(1) A portion of the Senior Credit Facility that was scheduled to mature on
    February 23, 1999, in the aggregate amount of $542 million, was refinanced
    primarily with the proceeds from a commercial mortgage backed security
    transaction ("CMBS Loan") that was completed in February 1999. The CMBS Loan
    matures on February 1, 2009, is secured by 11 hotel assets and bears
    interest at a blended rate of 6.98%.
 
     Starwood Hotels has a substantial amount of indebtedness. Based upon the
current level of operations, management believes that the Company's cash flow
from operations, together with available borrowings under the Senior Credit
Facility, will be adequate to meet the Company's anticipated requirements for
working capital, capital expenditures, marketing and advertising expenditures,
program and other discretionary investments, interest payments and scheduled
principal payments for the foreseeable future, including at least the next three
years. There can be no assurance, however, that the Company's business will
continue to generate cash flow at or above current levels or that currently
anticipated improvements will be achieved. If Starwood Hotels is unable to
generate sufficient cash flow from operations in the future to service the
Company's debt, the Company may be required to sell assets, reduce capital
expenditures, refinance all or a portion of its existing debt or obtain
additional financing. The Company's ability to make scheduled principal
payments, to pay interest on or to refinance the Company's indebtedness depends
on its future performance and financial results, which, to a certain extent, are
subject to general conditions in or affecting the hotel and gaming industries
and to general economic, political, financial, competitive, legislative and
regulatory factors beyond the Company's control. There can be no assurance that
sufficient funds will be available to enable Starwood Hotels to service its
indebtedness or to make necessary capital expenditures, marketing and
advertising expenditures and program and other discretionary investments.
                                       44
<PAGE>   46
 
STOCK SALES AND REPURCHASES
 
     At December 31, 1997, ITT had approximately 180 million shares outstanding.
 
     On February 23, 1998, Starwood Hotels completed the ITT Merger. Each
outstanding share of ITT Common Stock, other than those that were converted into
cash pursuant to a cash election by the holder (and other than shares owned
directly or indirectly by ITT or Starwood Hotels, which shares were canceled),
was converted into 1.543 Units. Pursuant to cash election procedures,
approximately 35 million (pre-reverse acquisition) shares of ITT Common Stock,
representing approximately 30% of the outstanding shares prior to the ITT
Merger, were converted into $85 in cash per share. In addition, each share of
ITT Common Stock was converted into additional cash consideration in the amount
of $0.37493151.
 
     Pursuant to a Purchase Agreement dated as of October 10, 1997, the
Corporation and the Trust sold to UBS Ltd. ("UBS") 2.185 million Units (the "UBS
Shares") at a cash price of $57.25 per Unit, and paid to Warburg Dillon Read
LLC, an affiliate of UBS, a placement fee equal to 2.5% of the gross proceeds to
Starwood Hotels from such sale of shares. Concurrently therewith, Starwood
Hotels entered into an agreement that provided for a settlement payment to be
made, in the form of Units or cash, by Starwood Hotels to another affiliate of
UBS, or by that affiliate to Starwood Hotels, based on the market price of the
Units over a specified "unwind" period, as compared to a specified "forward
price." Starwood Hotels settled its obligation under this agreement on September
22, 1998, by repurchasing the UBS Shares for approximately $130 million in cash.
As a result of this settlement, Units outstanding were reduced by approximately
2.185 million.
 
     On February 24, 1998, the Corporation and the Trust sold an aggregate of
4.641 million Units to Merrill Lynch International, NMS Services, Inc., Lehman
Brothers Inc. and certain of their affiliates for a cash purchase price of
$52.798 per Unit, which reflected a 2% discount from the last reported sale
price of the Units on the date of purchase. Concurrently with these sales, the
Trust and the Corporation entered into agreements pursuant to which each of
these purchasers or their respective affiliates agreed to sell, as directed by
the Trust and the Corporation, in an underwritten fixed price offering or other
specified methods, a sufficient number of Units to achieve net sales proceeds
equal to the aggregate market value of the Units purchased in February 1998,
plus a forward accretion component, minus an adjustment for dividends paid on
the purchased Units. Additional Units were required to be delivered by Starwood
Hotels as security in the event the market prices of the Units dropped below
certain specified levels. In October 1998, Starwood Hotels settled its
obligations under these agreements by repurchasing all the Units issued to these
purchasers for an aggregate of approximately $255 million in cash. As a result
of this settlement, Units outstanding were reduced by approximately 7.379
million (4.641 million original Units issued and 2.738 million Units previously
issued as security).
 
     In 1998, the Board of Directors of the Company approved the repurchase of
up to $1 billion of the Units (the "Share Repurchase Program"). Pursuant to the
Share Repurchase Program, Starwood Hotels repurchased approximately 10.1 million
Units in the open market at an average purchase price of $36.70 per Unit during
the year ended December 31, 1998.
 
     In the third quarter of 1998, Starwood Hotels sold put options for an
aggregate of one million Units to BT Alex. Brown Incorporated for an aggregate
cash price of $1.8 million. Each such option entitles the holder to sell to the
Company, at the option's expiration date, a specified number of Units at a
specified strike price. These options have expiration dates through March 1999;
the strike prices range from $30.24 to $32.95. In the first quarter of 1999, the
Company settled certain of its put options by purchasing 500,000 outstanding
Units at an average strike price of $32.04.
 
     During 1998, the Trust consented to the exchange of 1.3 million shares of
Class B EPS into an equal number of shares of Class A EPS; certain shareholders
thereafter exchanged 3.2 million shares of Class A EPS for an equal number of
Units.
 
                                       45
<PAGE>   47
 
                                 OTHER MATTERS
 
YEAR 2000
 
     Many computer systems were originally designed to recognize calendar years
by the last two digits in the date code field. Beginning with dates in the year
2000, these date code fields need to accept four-digit entries to distinguish
twenty-first century dates from twentieth century dates. As a result, the
computerized systems, which include information technology and non-information
technology systems, and applications used by the Company need to be reviewed,
evaluated and modified or replaced, if necessary, to ensure all such financial,
information and operational systems are Year 2000 Compliant.
 
     STATE OF READINESS.  Starwood Hotels is addressing the Year 2000 Compliance
issue by separately focusing on the Company's central facilities, which include
all of its non-operating facilities, and on the Company's gaming and hotel
properties.
 
     Starwood Hotels has identified the critical central facility business
applications that may be affected by the Year 2000, such as the reservation
system application, including the frequent stay programs, and communication
system applications. The Company has conducted the discovery and assessment
stages on the reservations and communication system applications and assembled a
team to implement modifications or upgrades, as necessary, and to test results.
The majority of the Company's core business applications passed the final
testing, which was performed by internal personnel and independent third parties
in the second quarter of 1998. This testing process consisted of testing of the
internal code and conducting over 9,000 test cases on the applicable systems.
The specific testing included a three-step process comprised of baseline tests,
Year 2000 date tests and code enhancement tests.
 
     Starwood Hotels is in the process of communicating with others with whom it
does significant business to determine their Year 2000 Compliance. During 1998,
Starwood Hotels and an independent third-party reservation information service
provider with whom the Company has a material relationship began testing to
ensure the compatibility of the Company's reservation system with the service
provider's reservation services. Starwood Hotels and this service provider
expect to complete their compatibility validation testing in April 1999.
 
     Starwood Hotels is also assessing its hardware components at its central
facilities, all of which are expected to be modified or upgraded, as necessary,
to ensure Year 2000 Compliance by the third quarter of 1999.
 
     An independent third party performed an inventory and assessment of all of
the Company's computerized systems and applications for its gaming operations in
1998. This inventory and assessment determined the resources needed, necessary
modifications or upgrades, vendor Year 2000 Compliance, remediation plan and the
time frame for the gaming operations to become Year 2000 Compliant.
 
     Starwood Hotels has completed the initial assessment of the applications
and hardware at the Company's owned and managed hotel properties. In the third
quarter of 1998, validation tools and resources were deployed to the hotel
properties. The validation tools consisted of asset management tools for
analysis of all applications and data checking tools for testing and patch
application purposes. The domestic Year 2000 team, which is scheduled to visit
each domestic hotel property, is comprised of independent consultants and five
individuals from Starwood Hotels that are dedicated to the Year 2000 project.
Each of the international properties has appointed internal personnel to address
Year 2000 Compliance and has access to such independent consultants, if
necessary. Once the test statistics for the hotel property applications and
hardware are collected, the information will be sent to an independent third
party for Year 2000 Compliance verification. Based on the results of the
compliance verification, Starwood Hotels expects to address remediation efforts
by the third quarter of 1999.
 
     YEAR 2000 PROJECT COSTS.  Starwood Hotels estimates that total costs for
the Year 2000 Compliance review, evaluation, assessment and remediation efforts
for the central facilities and owned hotel and gaming properties should not
exceed $30 million, although there can be no assurance that actual costs will
not exceed this amount. Of this amount, $4 million had been expended as of
December 31, 1998.
 
                                       46
<PAGE>   48
 
     STARWOOD HOTELS YEAR 2000 RISKS.  Since all major computerized central
facilities reservation systems and applications have been tested and
reservations for the year 2000 have been accepted, Starwood Hotels believes that
it has addressed all significant risks related to the Company's reservation
function. The remaining risks relate to the non-critical business applications,
support hardware for the central facilities and embedded systems at the
properties owned or managed by the Company. A failure of certain of these
systems to become Year 2000 Compliant could disrupt the timeliness or the
accuracy of management information provided by the central facilities.
 
     There can be no assurance that the efforts related to the gaming and hotel
properties will be sufficient to make these properties' computerized systems and
applications Year 2000 Compliant in a timely manner or that the allocated
resources will be sufficient. A failure to become Year 2000 Compliant could
affect the integrity of the gaming and hotel property guest check-in, billing
and accounting functions. Certain physical hotel property machinery and
equipment could also fail resulting in safety risks and customer
dissatisfaction. Additionally, failure of the gaming properties' systems to
become Year 2000 Compliant could result in the inefficient processing of
operational gaming information and the malfunction of computerized gaming
machines.
 
     Starwood Hotels has asked substantially all of its significant vendors and
service providers to provide reasonable assurances as to those parties' Year
2000 state of readiness. Risk assessments and contingency plans, where required,
will be finalized in the first six months of 1999. To the extent that vendors
and service providers do not provide satisfactory evidence that their products
and services are Year 2000 Compliant, the Company will seek to obtain the
necessary products and services from alternative sources. There can be no
assurance, however, that Year 2000 remediation by vendors and service providers
will be completed timely or that qualified replacement vendors and service
providers will be available, and any failure of such third parties' systems
could have a material adverse impact on the Company's computer systems and
operations.
 
     CONTINGENCY PLAN.  Starwood Hotels is in the process of developing its
contingency plan for the central facilities and the gaming and hotel properties
to provide for the most reasonably likely worst case scenarios regarding Year
2000 Compliance. This contingency plan is expected to be completed in September
1999.
 
REVENUE RECOGNITION
 
     Emerging Issues Task Force ("EITF") 97-2, Application of SFAS No. 94 and
Accounting Principles Board ("APB") Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Management
Arrangements, addresses the circumstances in which a management entity may
include the revenues and expenses of a managed entity in its financial
statements. As a result of EITF 97-2, the Company changed its accounting policy
for its managed hotels beginning in the fourth quarter of 1998. As such,
revenues and expenses of non-owned managed hotels are no longer included in the
Company's financial statements, and the results for all periods presented herein
reflect this change in accounting policy. Management fees earned by the Company
for the hotels are included in management and franchise fees in the accompanying
combined consolidated financial statements. Management and franchise fees are
generally based on a percentage of hotel room revenues. Application of EITF 97-2
for the years ended December 31, 1998, 1997 and 1996 reduced each of revenues
and operating expenses by approximately $4.2 billion, $2.8 billion and $2.8
billion, respectively. There was no impact on operating income, net income,
working capital, earnings per Unit or stockholders' equity as a result of this
change in accounting policy.
 
EUROPEAN UNION CURRENCY CONVERSIONS
 
     On January 1, 1999, 11 of the 15 member countries of the European Union
(the "Participating Countries") established fixed conversion rates between their
existing sovereign currencies and the Euro. Following the introduction of the
Euro, the legacy currencies of the Participating Countries will remain legal
tender during a transition period ending on January 1, 2002. During the
transition period, both the legacy currency and the Euro will be legal tender in
the respective Participating Countries. During the transition period, currency
conversions will be computed by a triangulation with reference to conversion
rates between the respective currencies and the Euro. The Company currently
operates in 10 of the 11 Participating
 
                                       47
<PAGE>   49
 
Countries. The effect on the Company of the adoption of the Euro by the
Participating Countries in which it operates is currently uncertain. However, it
is possible that the Euro adoption will result in increased competition within
the European market. In addition, a number of the Company's information systems
are not currently Euro compliant. The Company is currently evaluating and
updating its information systems to make them Euro compliant; however, there is
no assurance that the Company or third-party vendors of applications used by the
Company will successfully bring all of its systems into compliance. Failure of
the Company to do so could result in disruptions in the processing of
transactions in Euros or computed by reference to the Euro.
 
ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
     The Company seeks to reduce earnings and cash flow volatility associated
with changes in interest rates and foreign currency exchange rates by entering
into financial arrangements intended to provide a hedge against a portion of the
risks associated with such volatility. The Company continues to have exposure to
such risks to the extent they are not hedged.
 
     Interest rate swap agreements are the primary instruments used to manage
interest rate fluctuation affecting the Company's variable rate debt. The
Company currently has five outstanding interest rate swap agreements under which
the Company pays a fixed interest rate and receives variable interest rates. The
following table sets forth the scheduled maturities and the total fair value of
the Company's debt portfolio:
 
<TABLE>
<CAPTION>
                                                                                                            TOTAL FAIR
                                                         AT DECEMBER 31,                      TOTAL AT       VALUE AT
                                        -------------------------------------------------   DECEMBER 31,   DECEMBER 31,
                                        1999   2000   2001    2002     2003    THEREAFTER       1998           1998
                                        ----   ----   ----   ------   ------   ----------   ------------   ------------
<S>                                     <C>    <C>    <C>    <C>      <C>      <C>          <C>            <C>
LIABILITIES
Fixed rate (in millions)..............  $ 13   $704   $ 32   $  156   $  254     $1,288        $2,447         $2,366
Average interest rate.................                                                           7.18%
Floating rate (in millions)...........  $681   $206   $219   $  624   $4,580     $   48        $6,358         $6,358
Average interest rate.................                                                           7.32%
INTEREST RATE SWAPS
Variable to fixed (in millions).......                       $1,031                            $1,031         $1,031
Average pay rate......................                                                           6.08%
Average receive rate..................                                                          LIBOR
</TABLE>
 
     Foreign currency forward transactions are used by the Company to hedge
exposure to foreign currency exchange rate fluctuations. As of December 31,
1998, the British pound and French franc were the principal currencies hedged by
the Company. Changes in the value of forward foreign exchange contracts
designated as hedges of foreign currency denominated assets and liabilities are
classified in the same manner as changes in the underlying assets and
liabilities. At December 31, 1998, the notional amount of the Company's open
forward foreign exchange contracts protecting the value of the Company's foreign
currency denominated assets and liabilities was approximately $54.9 million. A
hypothetical 10% change in currency exchange rates would result in an increase
or decrease of approximately $5 million to the fair value of the forward foreign
exchange contracts at December 31, 1998, which would be offset by an opposite
effect on the related hedged positions.
 
     The Company enters into a derivative financial arrangement only to the
extent it meets the objectives described above, and the Company does not engage
in such transactions for speculative purposes.
 
     See "Derivative Financial Instruments" and "Equity Put Options" in the
notes to financial statements filed as part of this Joint Annual Report and
incorporated herein by reference for further description of derivative financial
instruments.
 
ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
     The financial statements and supplementary data required by this Item are
included in Item 14 of this Joint Annual Report and are incorporated herein by
reference.
 
                                       48
<PAGE>   50
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.
 
     Not applicable.
 
                                    PART III
 
ITEM 10.  DIRECTORS, TRUSTEES AND EXECUTIVE OFFICERS OF THE REGISTRANTS.
 
DIRECTORS OF THE CORPORATION
 
     The Board of Directors of the Corporation currently comprises nine members,
each of whom is elected for a three-year term. The following table sets forth,
for each of the members of the Corporation's Board of Directors as of the date
of this Joint Annual Report, the class of Directors to which such Director has
been elected and certain other information regarding such Director.
 
DIRECTORS WHOSE TERMS EXPIRE AT THE 2001 ANNUAL MEETING
 
<TABLE>
<CAPTION>
NAME (AGE)                             PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE    DIRECTOR SINCE
----------                             --------------------------------------------    ---------------
<S>                                    <C>                                             <C>
Earle F. Jones (72)..................  Chairman of the Board of Directors of the       September 1985
                                       Corporation from February 1989 to September
                                       1997. He has been Co-Chairman since 1988 of
                                       MMI Hotel Group, a hotel company, and is the
                                       Co-Chairman of MMI Dining Systems. From 1967
                                       to 1968, Mr. Jones was President of the
                                       International Association of Holiday Inns
                                       and served two terms as a director. Mr.
                                       Jones is a member of the board of trustees
                                       for each of the National Multiple Sclerosis
                                       Society, Mississippi Chapter, Millsap
                                       College and Jackson 2000, and is Co-Chairman
                                       of the Mississippi Olympic Committee. Mr.
                                       Jones is a general partner of Orlando Plaza
                                       Suite Hotel, Ltd-A, which filed a petition
                                       under Chapter 11 of the U.S. Bankruptcy Code
                                       in May 1996. An order confirming the
                                       debtor's plan of restructuring was issued by
                                       the court on January 27, 1997.
 
Daniel W. Yih (39)...................  General partner of Chilmark Partners, L.P.      August 1995
                                       since June 1995. Mr. Yih served as interim
                                       Chief Financial Officer of Midway Airlines
                                       (from September 1995 to December 1995),
                                       President of Merco-Savory, Inc., a
                                       manufacturer of food preparation equipment
                                       (from March 1995 to June 1995), and as a
                                       senior executive of Welbilt Corporation
                                       (from September 1993 to March 1995).
</TABLE>
 
                                       49
<PAGE>   51
 
<TABLE>
<CAPTION>
NAME (AGE)                             PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE    DIRECTOR SINCE
----------                             --------------------------------------------    ---------------
<S>                                    <C>                                             <C>
DIRECTORS WHOSE TERMS EXPIRE AT THE 2000 ANNUAL MEETING
 
Juergen Bartels (58).................  Chief Executive Officer of Starwood Hotels'     January 1998
                                       Hotel Group since March 1998. From May 1995
                                       to March 1998, Mr. Bartels was the Chairman
                                       and Chief Executive Officer of Westin
                                       Worldwide. Prior to joining Westin
                                       Worldwide, Mr. Bartels was the President and
                                       Chief Executive Officer of Carlson
                                       Hospitality Group, Inc. ("Carlson"), which
                                       controls Radisson Hotels International,
                                       T.G.I. Friday's restaurants and Country Inns
                                       and Suites. Prior to joining Carlson in
                                       1983, Mr. Bartels was the President of
                                       Ramada's worldwide holding company and
                                       founder of Ramada Renaissance Hotels.
 
Jonathan D. Eilian (31)..............  Senior Managing Director, Managing Director     August 1995
                                       or executive officer of Starwood Capital and
                                       its predecessor entities since its formation
                                       in 1991. Prior to being a founding member of
                                       Starwood Capital, Mr. Eilian served as an
                                       Associate for JMB Realty Corporation, a real
                                       estate investment firm, and for The Palmer
                                       Group, L.P., a private investment firm
                                       specializing in corporate acquisitions. Mr.
                                       Eilian is currently a Trustee of Starwood
                                       Financial Trust (a specialized real estate
                                       finance company organized as a REIT) and is
                                       a member of the board of the Wharton Real
                                       Estate Center.
 
Richard D. Nanula (38)...............  President and Chief Operating Officer of the    June 1998
                                       Corporation and President of the Trust since
                                       January 1999. Mr. Nanula joined the
                                       Corporation as its President and Chief
                                       Executive Officer in June 1998 and served in
                                       such capacity until January 1999. Prior to
                                       joining the Corporation, Mr. Nanula was the
                                       Chief Financial Officer of The Walt Disney
                                       Co. ("Disney") from 1996 through 1998 and
                                       from 1991 through 1995. Mr. Nanula was the
                                       President of Disney Stores, a division of
                                       Disney, from 1995 through 1996 and a Senior
                                       Executive Vice President of Disney from
                                       1996. Prior to 1991, Mr. Nanula worked in
                                       the strategic planning department at Disney.
</TABLE>
 
                                       50
<PAGE>   52
 
<TABLE>
<CAPTION>
NAME (AGE)                             PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE    DIRECTOR SINCE
----------                             --------------------------------------------    ---------------
<S>                                    <C>                                             <C>
Barry S. Sternlicht (38).............  Chairman (since September 1997) and Chief       December 1994
                                       Executive Officer (since January 1999) of
                                       the Corporation. Mr. Sternlicht has served
                                       as Chairman and Chief Executive Officer of
                                       the Trust since January 1995. Mr. Sternlicht
                                       also has been the President and Chief
                                       Executive Officer of Starwood Capital and
                                       its predecessor entities since its formation
                                       in 1991. Mr. Sternlicht is currently the
                                       Chairman of the Board of Trustees of
                                       Starwood Financial Trust (a specialized real
                                       estate finance company organized as a REIT)
                                       and a Director of U.S. Franchise Systems.
                                       Mr. Sternlicht is a member of the Urban Land
                                       Institute and of the National Multi-Family
                                       Housing Council. Mr. Sternlicht is a member
                                       of the Board of Directors of the Juvenile
                                       Diabetes Foundation International and the
                                       Council for Christian and Jewish
                                       Understanding, is a member of the Young
                                       Presidents Organization and is on the Board
                                       of Directors of Junior Achievement for
                                       Fairfield County, Connecticut.
 
DIRECTORS WHOSE TERMS EXPIRE AT THE 1999 ANNUAL MEETING
 
Brenda C. Barnes (45)................  Director of Sears, Roebuck & Company, the       April 1998
                                       New York Times Company, Avon Products, Inc.,
                                       LucasArts Entertainment Company and Digital
                                       Equipment Corporation. Ms. Barnes was the
                                       President and Chief Executive Officer of
                                       Pepsi-Cola North America from April 1996 to
                                       January 1998, and was the Chief Operating
                                       Officer of Pepsi-Cola North America from
                                       January 1993 to March 1996. Ms. Barnes is
                                       also a member of the Advisory Board of The
                                       For All Kids Foundation and of the Board of
                                       Trustees of Augustana College.
 
Michael A. Leven (61)................  Chairman of the Board, President and Chief      August 1995
                                       Executive Officer of U.S. Franchise Systems,
                                       a hotel franchising and development company,
                                       since September 1995. From October 1990 to
                                       September 1995, Mr. Leven was President and
                                       Chief Operating Officer of Holiday Inn
                                       Worldwide. Mr. Leven is a director of U.S.
                                       Franchise Systems and Servico, Inc. Mr.
                                       Leven is also a member of the Board of
                                       Governors and the Chairman of the BioMedical
                                       Services Board of the American Red Cross.
</TABLE>
 
                                       51
<PAGE>   53
 
<TABLE>
<CAPTION>
NAME (AGE)                             PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE    DIRECTOR SINCE
----------                             --------------------------------------------    ---------------
<S>                                    <C>                                             <C>
Daniel H. Stern (37).................  President of Reservoir Capital Group,           November 1997
                                       L.L.C., a New York-based investment
                                       management firm, since July 1997. Mr. Stern
                                       was a Trustee of the Trust from August 1995
                                       to November 1997. From December 1992 to July
                                       1997, Mr. Stern was President of Ziff
                                       Brothers Investments, L.L.C., a diversified
                                       investment management firm.
</TABLE>
 
TRUSTEES OF THE TRUST
 
     The Board of Trustees currently comprises seven members, each of whom was
elected for a three-year term. The following table sets forth, for each of the
members of the Board of Trustees as of the date of this Joint Annual Report, the
class of Trustees to which such Trustee has been elected and certain other
information regarding the Trustees and executive officers of the Trust.
 
TRUSTEES WHOSE TERMS EXPIRE AT THE 2001 ANNUAL MEETING
 
<TABLE>
<CAPTION>
NAME (AGE)                             PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE    DIRECTOR SINCE
----------                             --------------------------------------------    ---------------
<S>                                    <C>                                             <C>
Madison F. Grose (45)................  Managing Director or Senior Managing            December 1994
                                       Director and General Counsel or Co-General
                                       Counsel of Starwood Capital (and its
                                       predecessor entities) since July 1992. From
                                       November 1983 through June 1992, he was a
                                       Partner in the law firm of Pircher, Nichols
                                       & Meeks.
 
George J. Mitchell (65)..............  Special Counsel to the law firm of Verner,      November 1997
                                       Liipfert, Bernhard, McPherson and Hand since
                                       January 1995. Senator Mitchell served as a
                                       United States Senator from January 1980 to
                                       January 1995, and was the Majority Leader
                                       from 1989 to 1995. Senator Mitchell serves
                                       as a director of Disney, Federal Express
                                       Corporation, Xerox Corporation, UNUM
                                       Corporation, KTI, Inc. and Staples, Inc. In
                                       addition, Senator Mitchell serves as
                                       Chairman of the International Crisis Group,
                                       a non-profit organization dedicated to the
                                       prevention of crises in international
                                       affairs. From 1995 to 1997, Senator Mitchell
                                       served as the Special Advisor to the
                                       President of the United States on economic
                                       initiatives in Ireland. At the request of
                                       the British and Irish Governments, he served
                                       as Chairman of the International Commission
                                       on Disarmament in Northern Ireland, and as
                                       Chairman of the peace negotiations in
                                       Northern Ireland. Senator Mitchell serves as
                                       Chairman of the Ethics Committee of the U.S.
                                       Olympic Committee and as Chairman of the
                                       National Health Care Commission created by
                                       the Pew Charitable Foundation.
</TABLE>
 
                                       52
<PAGE>   54
 
<TABLE>
<CAPTION>
NAME (AGE)                             PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE    DIRECTOR SINCE
----------                             --------------------------------------------    ---------------
<S>                                    <C>                                             <C>
TRUSTEES WHOSE TERMS EXPIRE AT THE 2000 ANNUAL MEETING
 
Jean-Marc Chapus (39)................  Managing Director and Portfolio Manager of      November 1997
                                       Trust Company of the West and President of
                                       TCW/Crescent Mezzanine L.L.C., a private
                                       investment fund, since March 1995. Prior to
                                       that time, Mr. Chapus was a Managing
                                       Director and Principal of Crescent Capital
                                       Corporation with primary responsibility for
                                       the firm's private lending and private
                                       placement activities. Mr. Chapus was a
                                       Director of the Corporation from August 1995
                                       to November 1997, and is currently a member
                                       of the Board of Directors of Home Asset
                                       Management Company and Firstamerica
                                       Automotive, Inc.
 
Bruce W. Duncan (47).................  Chairman, President and Chief Executive         August 1995
                                       Officer of The Cadillac Fairview Corporation
                                       Limited, a real estate operating company,
                                       since December 1995. From October 1994 to
                                       December 1995, Mr. Duncan was President of
                                       Blakely Capital, Inc., a private firm
                                       focusing on investments in real estate and
                                       telecommunications. From 1992 to April 1994,
                                       Mr. Duncan was President and Co-Chief
                                       Executive Officer of JMB Institutional
                                       Realty Corporation providing advice and
                                       management for investments in real estate by
                                       tax-exempt investors and from 1978 to 1992,
                                       he worked for JMB Realty Corporation where
                                       he served as Executive Vice-President and a
                                       member of the Board of Directors. Mr. Duncan
                                       is a trustee of Amresco Capital Trust and
                                       Kenyon College and is a member of the Board
                                       of Directors of The Cadillac Fairview
                                       Corporation Limited and the Canadian
                                       Institute of Public Real Estate Companies.
                                       In addition, Mr. Duncan is a member of the
                                       Urban Land Institute and a member and past
                                       trustee of the International Council of
                                       Shopping Centres.
</TABLE>
 
                                       53
<PAGE>   55
 
<TABLE>
<CAPTION>
NAME (AGE)                             PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE    DIRECTOR SINCE
----------                             --------------------------------------------    ---------------
<S>                                    <C>                                             <C>
Barry S. Sternlicht (38).............  Chairman (since September 1997) and Chief       December 1994
                                       Executive Officer (since January 1999) of
                                       the Corporation. Mr. Sternlicht has served
                                       as Chairman and Chief Executive Officer of
                                       the Trust since January 1995. Mr. Sternlicht
                                       also has been the President and Chief
                                       Executive Officer of Starwood Capital and
                                       its predecessor entities since its formation
                                       in 1991. Mr. Sternlicht is currently the
                                       Chairman of the Board of Trustees of
                                       Starwood Financial Trust (a specialized real
                                       estate finance company organized as a REIT)
                                       and a Director of U.S. Franchise Systems.
                                       Mr. Sternlicht is a member of the Urban Land
                                       Institute and of the National Multi-Family
                                       Housing Council. Mr. Sternlicht is a member
                                       of the Board of Directors of the Juvenile
                                       Diabetes Foundation International and the
                                       Council for Christian and Jewish
                                       Understanding, is a member of the Young
                                       Presidents Organization and is on the Board
                                       of Directors of Junior Achievement for
                                       Fairfield County, Connecticut.
 
TRUSTEES WHOSE TERMS EXPIRE AT THE 1999 ANNUAL MEETING
 
Stephen R. Quazzo (39)...............  Managing Director, Chief Executive Officer      August 1995
                                       and co-founder of Transwestern Investment
                                       Company, L.L.C., a real estate principal
                                       investment firm, since March 1996. From
                                       April 1991 to March 1996, Mr. Quazzo was
                                       President of Equity Institutional Investors,
                                       Inc., a subsidiary of Equity Group
                                       Investments, Inc., a Chicago-based holding
                                       company controlled by Samuel Zell. Mr.
                                       Quazzo is an advisory board member of City
                                       Year Chicago.
 
Raymond S. Troubh (72)...............  Financial consultant in New York City and a     April 1998
                                       former Governor of the American Stock
                                       Exchange. He was also a general partner of
                                       Lazard Freres & Co., an investment banking
                                       firm. Mr. Troubh is a director of ARIAD
                                       Pharmaceuticals, Inc., Becton, Dickinson and
                                       Company, Diamond Offshore Drilling, Inc.,
                                       Foundation Health Systems, Inc., General
                                       American Investors Company, Olsten
                                       Corporation, Triarc Companies, Inc. and WHX
                                       Corporation and is a Trustee of MicroCap
                                       Liquidating Trust and Petrie Stores
                                       Liquidating Trust.
</TABLE>
 
                                       54
<PAGE>   56
 
EXECUTIVE OFFICERS OF THE REGISTRANTS
 
     The following table includes certain information with respect to each of
Starwood Hotels' current executive officers.
 
<TABLE>
<CAPTION>
                NAME                   AGE               POSITION(S) WITH THE CORPORATION
                ----                   ---               --------------------------------
<S>                                    <C>   <C>
Barry S. Sternlicht..................  38    Chairman, Chief Executive Officer and a Director of the
                                               Corporation and Chairman, Chief Executive Officer and
                                               a Trustee of the Trust
Richard D. Nanula....................  38    President, Chief Operating Officer and a Director of the
                                               Corporation and President of the Trust
Susan R. Bolger......................  45    Executive Vice President of Human Resources of the
                                               Corporation and Vice President of the Trust
Ronald C. Brown......................  44    Executive Vice President and Chief Financial Officer of
                                             the Corporation and Vice President, Chief Financial
                                               Officer and Chief Accounting Officer of the Trust
Steven R. Goldman....................  36    Executive Vice President, Acquisitions and Development
                                             of the Corporation and Vice President of the Trust
Thomas C. Janson, Jr. ...............  43    Executive Vice President, General Counsel and Secretary
                                             of the Corporation and Vice President, General Counsel
                                               and Assistant Secretary of the Trust
</TABLE>
 
     BARRY S. STERNLICHT.  Mr. Sternlicht has been Chairman (since September
1997) and Chief Executive Officer (since January 1999) of the Corporation. Mr.
Sternlicht has served as Chairman and Chief Executive Officer of the Trust since
January 1995. Mr. Sternlicht also has been the President and Chief Executive
Officer of Starwood Capital and its predecessor entities since its formation in
1991. Mr. Sternlicht is currently the Chairman of the Board of Trustees of
Starwood Financial Trust (a specialized real estate finance company organized as
a REIT) and a Director of U.S. Franchise Systems.
 
     RICHARD D. NANULA.  Mr. Nanula has been President and Chief Operating
Officer of the Corporation and President of the Trust since January 1999. Mr.
Nanula joined the Corporation as its President and Chief Executive Officer in
June 1998, and served in such capacity until January 1999. Prior to joining the
Corporation, Mr. Nanula was the Chief Financial Officer of Disney from 1996
through 1998 and from 1991 through 1995. Mr. Nanula was the President of Disney
Stores, a division of Disney, from 1995 through 1996 and a Senior Executive Vice
President of Disney from 1996. Prior to 1991, Mr. Nanula worked in the strategic
planning department at Disney.
 
     SUSAN R. BOLGER.  Ms. Bolger has been Executive Vice President of Human
Resources of the Corporation since March 1998 and Vice President of the Trust
since January 1999 and was Senior Vice President of Human Resources of the
Corporation from September 1996 to March 1998. From November 1994 to September
1996, she was Corporate Vice President of Human Resources for Wyndham Hotels and
Resorts; prior to that time she was Vice President for Human Resources for Arrow
Industries, a division of ConAgra.
 
     RONALD C. BROWN.  Mr. Brown has been Vice President, Chief Financial
Officer and Chief Accounting Officer of the Trust since January 1999 and
Executive Vice President and Chief Financial Officer of the Corporation since
March 1998 and was Senior Vice President and Chief Financial Officer of the
Trust from July 1995 through March 1998. Prior to joining the Trust, Mr. Brown
was President of Sonoran Hotel Advisors, L.L.C., a hotel REIT advisory firm,
from August 1994 to July 1995. From December 1990 to August 1994, Mr. Brown held
various positions with Doubletree Corporation, a hotel operating company,
including Chief Financial Officer and President. From March 1988 to April 1992,
Mr. Brown was Chief Financial Officer for Canadian Pacific Hotels Corporation, a
hotel operating company. Mr. Brown is also a Director of Phoenix Children's
Hospital.
 
     STEVEN R. GOLDMAN.  Mr. Goldman has been a Vice President of the Trust and
the Executive Vice President, Acquisitions and Development, of the Corporation
since January 1999 and was Executive Vice President of the Trust from March 1998
to January 1999. Mr. Goldman was Senior Vice President of the
 
                                       55
<PAGE>   57
 
Trust from September 1996 through March 1998 and Senior Vice President of the
Corporation from March 1995 to September 1996. Mr. Goldman was a Vice President
of Starwood Capital, specializing in hotel acquisitions and hotel asset
management from August 1993 to February 1995. From 1990 to 1993, he was Senior
Development Manager of Disney Development Company, the real estate investment
development and management division of Disney.
 
     THOMAS C. JANSON, JR.  Mr. Janson joined the Corporation as Executive Vice
President, General Counsel and Secretary in October 1998 and became Vice
President, General Counsel and Assistant Secretary of the Trust in January 1999.
Prior to joining the Corporation, Mr. Janson practiced law as a partner with
Skadden, Arps, Slate, Meagher & Flom LLP for more than five years.
 
     The executive officers of Starwood Hotels serve at the pleasure of the
Board of Directors or the Board of Trustees, as applicable. There is no family
relationship among any of the Directors, Trustees or executive officers of the
Corporation or the Trust.
 
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
 
     Section 16(a) of the Exchange Act requires the Directors, Trustees and
executive officers of Starwood Hotels, and persons who own more than 10 percent
of the outstanding Units, to file with the SEC (and provide a copy to Starwood
Hotels) certain reports relating to their ownership of Units and other equity
securities of Starwood Hotels.
 
     To Starwood Hotels' knowledge, based solely on a review of the copies of
these reports furnished to Starwood Hotels during the fiscal year ended December
31, 1998, and written representations that no other reports were required, all
Section 16(a) filing requirements applicable to its Directors, Trustees,
executive officers and greater than 10 percent beneficial owners were complied
with for the most recent fiscal year.
 
ITEM 11.  EXECUTIVE COMPENSATION.
 
     The information called for by Item 11 is incorporated by reference from the
information under the following captions in the Proxy Statement: "Summary of
Cash and Certain Other Compensation," "Executive Compensation," "Option Grants,"
"Option Exercises and Holdings," "Compensation of Directors and Trustees,"
"Employment and Compensation Agreements with Executive Officers," "Compensation
Committee Interlocks and Insider Participation" and "Certain Relationships and
Related Transactions."
 
ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
     The information called for by Item 12 is incorporated by reference from the
information under the caption "Security Ownership of Certain Beneficial Owners
and Management" in the Proxy Statement.
 
ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
 
     The information called for by Item 13 is incorporated by reference from the
information under the caption "Certain Relationships and Related Transactions"
in the Proxy Statement.
 
                                    PART IV
 
ITEM 14.  EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.
 
     (a) The following documents are filed as a part of this Joint Annual
Report:
 
          1.  The financial statements and financial statements schedules listed
     in the Index to Financial Statements and Financial Statements Schedules
     following the signature pages hereof.
 
                                       56
<PAGE>   58
 
          2.  Exhibits:
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
 2.1      Formation Agreement, dated as of November 11, 1994, among
          the Trust, the Corporation, Starwood Capital and the
          Starwood Partners (incorporated by reference to Exhibit 2 to
          the Trust's and the Corporation's Joint Current Report on
          Form 8-K dated November 16, 1994). (The SEC file numbers of
          all filings made by the Corporation and the Trust pursuant
          to the Securities Act of 1934, as amended, and referenced
          herein are: 1-7959 (the Corporation) and 1-6828 (the
          Trust)).
 2.2      Form of Amendment No. 1 to Formation Agreement, dated as of
          July 1995, among the Trust, the Corporation and the Starwood
          Partners (incorporated by reference to Exhibit 10.23 to the
          Trust's and the Corporation's Joint Registration Statement
          on Form S-2 filed with the SEC on June 29, 1995
          (Registration Nos. 33-59155 and 33-59155-01)).
 2.3      Transaction Agreement, dated as of September 8, 1997, by and
          among the Trust, the Corporation, Realty Partnership,
          Operating Partnership, WHWE L.L.C., Woodstar Investor
          Partnership ("Woodstar"), Nomura Asset Capital Corporation,
          Juergen Bartels, Westin Worldwide, W&S Lauderdale Corp., W&S
          Seattle Corp., Westin St. John Hotel Company, Inc., W&S
          Denver Corp., W&S Atlanta Corp. and W&S Hotel L.L.C.
          (incorporated by reference to Exhibit 2 to the Trust's and
          the Corporation's Joint Current Report on Form 8-K dated
          September 9, 1997, as amended by the Form 8-K/A dated
          December 18, 1997).
 2.4      Amended and Restated Agreement and Plan of Merger, dated as
          of November 12, 1997, by and among the Corporation, the
          Trust, Chess Acquisition Corp. ("Chess") and ITT
          (incorporated by reference to Exhibit 2.1 to the Trust's and
          the Corporation's Joint Current Report on Form 8-K dated
          November 13, 1997).
 2.5      Agreement and Plan of Restructuring dated as of September
          16, 1998, and amended as of November 30, 1998, among the
          Corporation, ST Acquisition Trust ("ST Trust") and the Trust
          (incorporated by reference to Annex A to the Trust's and the
          Corporation's Joint Proxy Statement dated December 3, 1998
          (the "1998 Proxy Statement")).
 2.6      Form of Stock Purchase Agreement, dated as of February 23,
          1998, between the Trust and the Corporation (incorporated by
          reference to Exhibit 10.4 to the Trust's and the
          Corporation's Joint Annual Report on Form 10-K for the year
          ended December 31, 1997 (the "1997 Form 10-K")).
 3.1      Amended and Restated Declaration of Trust of the Trust,
          amended and restated as of January 6, 1999 (incorporated by
          reference to Exhibit 1 to the Trust's Registration Statement
          on Form 8-A filed on December 21, 1998 (the "Trust Form
          8-A"), except that the following changes were made on
          January 6, 1999, upon the filing by the Trust and ST Trust
          of the Articles of Merger of ST Trust into the Trust (the
          "Articles of Merger") with, and the acceptance thereof for
          record by, the State Department of Assessments and Taxation
          of the State of Maryland (the "SDAT"): Section 6.14
          specifies January 6, 1999 as the date of the Intercompany
          Agreement; Section 6.19.1 specifies January 6, 1999 as the
          date of the acceptance for record by the SDAT of the
          Articles of Merger; and the definition of "Intercompany
          Agreement" in Section 6.19.2 specifies January 6, 1999 as
          the date of the Intercompany Agreement).
 3.2      Charter of the Corporation, amended and restated as of
          February 1, 1995, as amended through March 26, 1999.(2)
 3.3      Bylaws of the Trust, as amended through November 19, 1998
          (incorporated by reference to Exhibit 2 to the Trust Form
          8-A).
 3.4      Bylaws of the Corporation, as amended through March 15, 1999
          (incorporated by reference to Exhibit 3 to the Trust's and
          the Corporation's Joint Current Report on Form 8-K dated
          March 15, 1999 (the "March 15 Form 8-K")).
 4.1      Amended and Restated Intercompany Agreement dated as of
          January 6, 1999, between the Corporation and the Trust
          (incorporated by reference to Exhibit 3 to the Trust Form
          8-A, except that on January 6, 1999, the Intercompany
          Agreement was executed and dated as of January 6, 1999).
 4.2      Rights Agreement dated as of March 15, 1999 between the
          Corporation and Chase Mellon Shareholder Services, L.L.C.,
          as Rights Agent (incorporated by reference to Exhibit 4 to
          the March 15 Form 8-K).
 4.3      Amended and Restated Indenture dated as of November 15,
          1995, as Amended and Restated as of December 15, 1995
          between ITT Corporation (formerly known as ITT Destinations,
          Inc.) and the First National Bank of Chicago, as trustee
          (incorporated by reference to Exhibit 4.A.IV to the First
          Amendment to ITT's Registration Statement on Form S-3, filed
          November 13, 1996).
</TABLE>
 
                                       57
<PAGE>   59
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
 4.4      First Indenture Supplement dated as of December 31, 1998
          among ITT, the Corporation and the Bank of New York
          (incorporated by reference to Exhibit 4.1 to the Trust's and
          the Corporation's Joint Current Report on Form 8-K filed
          January 8, 1999).
 4.5      The Registrants hereby agree to file with the Commission a
          copy of any instrument, including indentures, defining the
          rights of long-term debt holders of the Registrants and
          their consolidated subsidiaries upon the request of the
          Commission.
10.1      Third Amended and Restated Limited Partnership Agreement for
          Realty Partnership, dated January 6, 1999, among the Trust
          and the limited partners of Realty Partnership.(2)
10.2      Third Amended and Restated Limited Partnership Agreement for
          Operating Partnership, dated January 6, 1999, among the
          Corporation and the limited partners of Operating
          Partnership.(2)
10.3      Form of Amended and Restated Lease Agreement, entered into
          as of January 1, 1993, between the Trust as Lessor and the
          Corporation (or a subsidiary) as Lessee (incorporated by
          reference to Exhibit 10.19 to the Trust's and the
          Corporation's Joint Annual Report on Form 10-K for the year
          ended December 31, 1992).
10.4      Amended and Restated Employment Agreement, dated as of
          February 17, 1998, between the Trust and Barry S.
          Sternlicht, together with an amendment, dated as of March
          11, 1998 (incorporated by reference to Exhibit 10.5 to the
          1997 Form 10-K).(1)
10.5      Non-Qualified Stock Option Agreement, dated as of February
          17, 1998, between the Trust and Barry S. Sternlicht
          (incorporated by reference to Exhibit 10.6 to the 1997 Form
          10-K).(1)
10.6      Amended and Restated Employment Agreement, dated April 15,
          1998, between the Corporation and Richard D. Nanula
          (incorporated by reference to Exhibit 10.1 to the Trust's
          and the Corporation's Joint Quarterly Report on Form 10-Q
          for the quarterly period ended June 30, 1998 (the "1998 Form
          10-Q2")).(1)
10.7      Employment Agreement, dated March 2, 1998, between the
          Corporation and Susan R. Bolger (incorporated by reference
          to Exhibit 10.7 to the 1997 Form 10-K).(1)
10.8      Employment Agreement, dated March 25, 1998, between the
          Corporation and Ronald C. Brown (incorporated by reference
          to Exhibit 10.8 to the 1997 Form 10-K).(1)
10.9      Employment Agreement, dated October 1, 1998, between the
          Corporation and Thomas C. Janson, Jr.(1)(2)
10.10     Indemnification Agreement dated as of August 24, 1998
          between the Corporation and Thomas C. Janson, Jr., as
          amended by Amendment Nos. 1 and 2 thereto (incorporated by
          reference to Exhibit 10.1 to the Trust's and the
          Corporation's Joint Quarterly Report on Form 10-Q for the
          quarterly period ended September 30, 1998, as amended by the
          Form 10-Q/A filed November 30, 1998 (as so amended, the
          "1998 Form 10-Q3")).
10.11     Employment Agreement, dated March 25, 1998, between the
          Corporation and Juergen Bartels (incorporated by reference
          to Exhibit 10.9 to the 1997 Form 10-K).(1)
10.12     Employment Agreement, dated March 25, 1998, between the
          Trust and Steven R. Goldman (incorporated by reference to
          the Exhibit 10.11 to the 1997 Form 10-K).(1)
10.13     Employment Agreement, dated June 27, 1996, between the
          Corporation and Eric A. Danziger (incorporated by reference
          to Exhibit 10.4 to the Trust's and the Corporation's Joint
          Quarterly Report on Form 10-Q for the quarterly period ended
          June 30, 1996 (the "1996 Form 10-Q2")).(1)
10.14     Starwood Hotels & Resorts 1995 Long-Term Incentive Plan
          (Amended and Restated as of December 3, 1998) (incorporated
          by reference to Annex D to the 1998 Proxy Statement).(1)
10.15     Starwood Hotels & Resorts Worldwide, Inc., 1995 Long-Term
          Incentive Plan (Amended and Restated as of December 3, 1998)
          (incorporated by reference to Annex E to the 1998 Proxy
          Statement).(1)
10.16     Incentive and Non-Qualified Share Option Plan (1986) of the
          Trust (incorporated by reference to Exhibit 10.8 to the
          Trust's and the Corporation's Joint Annual Report on Form
          10-K for the year ended August 31, 1986 (the "1986 Form
          10-K")).(1)
10.17     Corporation Stock Non-Qualified Stock Option Plan (1986) of
          the Trust (incorporated by reference to Exhibit 10.9 to the
          1986 Form 10-K).(1)
10.18     Stock Option Plan (1986) of the Corporation (incorporated by
          reference to Exhibit 10.10 to the 1986 Form 10-K).(1)
</TABLE>
 
                                       58
<PAGE>   60
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
10.19     Trust Shares Option Plan (1986) of the Corporation
          (incorporated by reference to Exhibit 10.11 to the 1986 Form
          10-K).(1)
10.20     Form of Indemnification Agreement and Amendment No. 1 to
          Indemnification Agreement between the Trust and each of its
          Trustees and executive officers (incorporated by reference
          to Exhibit 10.7 to the Trust's and the Corporation's Joint
          Annual Report on Form 10-K for the year ended December 31,
          1995 (the "1995 Form 10-K")).(1)
10.21     Form of Indemnification Agreement and Amendment No. 1 to
          Indemnification Agreement between the Corporation and each
          of its Directors and executive officers (incorporated by
          reference to Exhibit 10.8 to the 1995 Form 10-K).(1)
10.22     Form of Amendment No. 2 to Indemnification Agreement, dated
          June 26, 1997, between the Trust and each of its Trustees
          and executive officers (incorporated by reference to Exhibit
          10.1 to the Trust's and the Corporation's Joint Quarterly
          Report on Form 10-Q for the quarterly period ended June 30,
          1997 (the "1997 Form 10-Q2")).(1)
10.23     Form of Amendment No. 2 to Indemnification Agreement, dated
          June 26, 1997, between the Corporation and each of its
          Directors and executive officers (incorporated by reference
          to Exhibit 10.2 to the 1997 Form 10-Q2).(1)
10.24     Form of Trademark License Agreement, dated as of December
          10, 1997, between Starwood Capital and the Trust
          (incorporated by reference to Exhibit 10.22 to the 1997
          10-K).
10.25     Exchange Rights Agreement, dated as of January 1, 1995,
          among the Trust, the Corporation, Realty Partnership,
          Operating Partnership and the Starwood Partners
          (incorporated by reference to Exhibit 2B to the Trust's and
          the Corporation's Joint Current Report on Form 8-K dated
          January 31, 1995 (the "Formation Form 8-K")).
10.26     Registration Rights Agreement, dated as of January 1, 1995,
          among the Trust, the Corporation and Starwood Capital
          (incorporated by reference to Exhibit 2C to the Formation
          Form 8-K).
10.27     Exchange Rights Agreement, dated as of June 3, 1996, among
          the Trust, the Corporation, Realty Partnership, Operating
          Partnership, Philadelphia HIR Limited Partnership and
          Philadelphia HSR Limited Partnership (incorporated by
          reference to Exhibit 10.1 to the 1996 Form 10-Q2).
10.28     Registration Rights Agreement, dated as of June 3, 1996,
          among the Trust, the Corporation and Philadelphia HSR
          Limited Partnership (incorporated by reference to Exhibit
          10.2 to the 1996 Form 10-Q2).
10.29     Asset Purchase Agreement, dated as of March 25, 1996,
          between Hotels of Distinction, Inc., and Realty Partnership
          (effective July 3, 1996) (incorporated by reference to
          Exhibit 10.7 to the Trust's and the Corporation's Joint
          Annual Report on Form 10-K for the year ended December 31,
          1996, as amended by the Form 10-K/A dated April 25, 1997,
          and by the Form 10-K/A dated December 18, 1997.
10.30     Contribution Agreement, dated as of January 15, 1997, by and
          among HEI Hotels, L.L.C., Westport Management, L.L.C.,
          Savior Limited Partnership, Judith Rushmore, Orna L.
          Shulman, Murray Dow, Steve Mendell, Gary Mendell, Zapco
          Communications, Inc., Westport Hospitality, Inc., the
          Corporation and Operating Partnership (incorporated by
          reference to Exhibit 10.3 to the Trust's and the
          Corporation's Joint Quarterly Report on Form 10-Q for the
          quarterly period ended March 31, 1997 (the "1997 Form
          10-Q1")).
10.31     Contribution Agreement, dated as of January 15, 1997, by and
          among, inter alia, Realty Partnership, Operating
          Partnership, the Trust, the Corporation, Prudential HEI
          Joint Venture and Gary M. Mendell (incorporated by reference
          to Exhibit 10.4 to the 1997 Form 10-Q1).
10.32     Units Exchange Rights Agreement, dated as of February 14,
          1997, by and among, inter alia, the Trust, the Corporation,
          Realty Partnership, Operating Partnership and the Starwood
          Partners (incorporated by reference to Exhibit 10.34 to the
          1997 Form 10-K).
10.33     Class A Exchange Rights Agreement, dated as of February 14,
          1997, by and among, inter alia, the Trust, the Corporation,
          Operating Partnership and the Starwood Partners
          (incorporated by reference to Exhibit 10.35 to the 1997 Form
          10-K).
10.34     Exchange Rights Agreement, dated as of March 11, 1997, among
          the Corporation, the Trust, Realty Partnership, Operating
          Partnership and the Hermitage, L.P. (incorporated by
          reference to Exhibit 10.41 to the 1997 Form 10-K).
10.35     Registration Rights Agreement, dated as of March 11, 1997,
          among the Corporation, the Trust, Realty Partnership,
          Operating Partnership and the Hermitage, L.P. (incorporated
          by reference to Exhibit 10.42 to the 1997 Form 10-K).
</TABLE>
 
                                       59
<PAGE>   61
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
10.36     Credit Agreement, dated as of September 10, 1997, between
          Realty Partnership and the Trust and Bankers Trust Company
          ("BTC"), Lehman Brothers Holdings Inc. d/b/a Lehman Capital,
          a division of Lehman Brothers Holdings Inc. ("Lehman
          Capital"), BankBoston, N.A., and Bank of Montreal
          (incorporated by reference to Exhibit 10.1 to the Trust's
          and the Corporation's Joint Quarterly Report on Form 10-Q
          for the quarterly period ended September 30, 1997, as
          amended by the Form 10-Q/A dated November 10, 1997.
10.37     Exchange Rights Agreement, dated as of January 2, 1998,
          among, inter alia, the Trust, Realty Partnership and
          Woodstar (incorporated by reference to Exhibit 10.50 to the
          1997 Form 10-K).
10.38     Exchange Rights Agreement, dated as of January 2, 1998,
          among, inter alia, the Corporation, Operating Partnership
          and Woodstar (incorporated by reference to Exhibit 10.51 to
          the 1997 Form 10-K).
10.39     Registration Rights Agreement, dated as of January 2, 1998,
          among, inter alia, the Trust, the Corporation, and Woodstar
          (incorporated by reference to Exhibit 10.52 to the 1997 Form
          10-K).
10.40     Stock Agreement and Registration Rights Agreement, each
          dated as of January 15, 1998 by and among the Corporation,
          the Trust and New Remington Partners (incorporated by
          reference to Exhibit 10.54 to the 1997 Form 10-K).
10.41     Stock Agreement and Registration Rights Agreement, each
          dated as of January 15, 1998, by and among the Corporation,
          the Trust and Savannah Limited Partnership (incorporated by
          reference to Exhibit 10.56 to the 1997 Form 10-K).
10.42     Stock Agreement and Registration Rights Agreement, each
          dated as of January 15, 1998, by and among the Corporation,
          the Trust and N.Y. Overnight Partners, L.P. (incorporated by
          reference to Exhibit 10.58 to the 1997 Form 10-K).
10.43     Stock Agreement and Registration Rights Agreement, each
          dated as of January 15, 1998, by and among the Corporation,
          the Trust and D.C. Overnight Partners, L.P. (incorporated by
          reference to Exhibit 10.60 to the 1997 Form 10-K).
10.44     Credit Agreement, dated as of February 23, 1998, among the
          Trust, Realty Partnership, the Corporation, Chess (and ITT
          as its successor by merger), certain additional borrowers,
          various lenders, BTC and Chase Bank, as Administrative
          Agents, and Lehman Commercial Paper Inc. ("Lehman Paper")
          and Bank of Montreal, as Syndication Agents (incorporated by
          reference to Exhibit 10.1 to the Trust's and the
          Corporation's Joint Current Report on Form 8-K dated
          February 23, 1998 (the "ITT Form 8-K")).
10.45     First Amendment to the Credit Agreement, dated as of March
          3, 1998, among the Trust, Realty Partnership, the
          Corporation, ITT, the lenders party to the Credit Agreement,
          BTC and Chase Bank, as Administrative Agents, and Lehman
          Paper and Bank of Montreal, as Syndication Agents, and the
          new lenders (incorporated by reference to Exhibit 10.2 to
          the ITT Form 8-K).
10.46     Second Amendment to the Credit Agreement, dated as of April
          30, 1998, among the Trust, Realty Partnership, the
          Corporation, ITT, the lenders party to the Credit Agreement,
          BTC and Chase Bank, as Administrative Agents, and Lehman
          Paper and Bank of Montreal, as Syndication Agents
          (incorporated by reference to Exhibit 10.2 to the 1998 Form
          10-Q2).
10.47     Third Amendment to the Credit Agreement, dated as of June
          15, 1998, among the Trust, Realty Partnership, the
          Corporation, ITT, the lenders party to the Credit Agreement,
          BTC and Chase Bank, as Administrative Agents, and Lehman
          Paper and Bank of Montreal, as Syndication Agents
          (incorporated by reference to Exhibit 10.3 to the 1998 Form
          10-Q2).
10.48     Fourth Amendment to the Credit Agreement, dated as of July
          15, 1998, among the Trust, Realty Partnership, the
          Corporation, ITT, the lenders party to the Credit Agreement,
          BTC and Chase Bank, as Administrative Agents, and Lehman
          Paper and Bank of Montreal, as Syndication Agents
          (incorporated by reference to Exhibit 10.4 to the 1998 Form
          10-Q2).
10.49     Fifth Amendment to the Credit Agreement, dated as of August
          26, 1998, among the Trust, Realty Partnership, the
          Corporation, ITT, the lenders party to the Credit Agreement,
          BTC and Chase Bank, as Administrative Agents, and Lehman
          Paper and Bank of Montreal, as Syndication Agents
          (incorporated by reference to Exhibit 10.2 to the 1998 Form
          10-Q3).
10.50     Sixth Amendment to the Credit Agreement, dated as of
          December 15, 1998, among the Trust, Realty Partnership, the
          Corporation, ITT, the lenders party to the Credit Agreement,
          BTC and Chase Bank, as Administrative Agents, and Lehman
          Paper and Bank of Montreal, as Syndication Agents.(2)
</TABLE>
 
                                       60
<PAGE>   62
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
10.51     Seventh Amendment to the Credit Agreement, dated as of
          February, 1999, among the Trust, Realty Partnership, the
          Corporation, ITT, the lenders party to the Credit Agreement,
          BTC and Chase Bank, as Administrative Agents, and Lehman
          Paper and Bank of Montreal, as Syndication Agents.(2)
10.52     Pledge and Security Agreement, dated as of February 23,
          1998, executed and delivered by the Trust, the Corporation
          and the other Pledgors party thereto, in favor of BTC as
          Collateral Agent (incorporated by reference to Exhibit 10.63
          to the 1997 Form 10-K).
10.53     Senior Secured Increasing Rate Note Agreement, dated as of
          February 23, 1998, by and among the Corporation, the Trust,
          the Guarantors named therein and the Lenders named therein
          (incorporated by reference to Exhibit 10.3 to the ITT Form
          8-K).
10.54     Amended and Restated Senior Secured Note Agreement dated
          August 27, 1998 among the Corporation, the Trust, the
          guarantors listed therein, the lenders listed therein,
          Lehman Paper, as Arranger and Administrative Agent, and Alex
          Brown and Chase Securities Inc., as Syndication Agents
          (incorporated by reference to Exhibit 10.3 to the 1998 Form
          10-Q3).
10.55     Loan Agreement, dated as of February 23, 1998, between the
          Trust and the Corporation, together with Promissory Note
          executed in connection therewith, by the Corporation to the
          order of the Trust, in the principal amount of
          $3,282,000,000 (incorporated by reference to Exhibit 10.65
          to the 1997 Form 10-K).
10.56     Loan Agreement, dated as of February 23, 1998, between the
          Trust and the Corporation, together with Promissory Note
          executed in connection therewith, by the Corporation to the
          order of the Trust, in the principal amount of $100,000,000
          (incorporated by reference to Exhibit 10.66 to the 1997 Form
          10-K).
10.57     Loan Agreement, dated as of February 23, 1998, between the
          Trust and the Corporation, together with Promissory Note
          executed in connection therewith, by the Corporation to the
          order of the Trust, in the principal amount of $50,000,000
          (incorporated by reference to Exhibit 10.67 to the 1997 Form
          10-K).
10.58     Loan Agreement, dated as of January 27, 1999, among the
          Borrowers named therein, as Borrowers, Starwood Operator I
          LLC, as Operator, and Lehman Capital.(2)
10.59     Aircraft Dry Lease Agreement entered into as of February 6,
          1998, between Star Flight, L.L.C. and ITT Flight Operation,
          Inc., as amended by First Amendment thereto, dated as of
          August 25, 1998 (incorporated by reference to Exhibit 10.4
          to the 1998 Form 10-Q3).
12.1      Calculation of Ratio of Earnings to Total Fixed Charges.(2)
21.1      Subsidiaries of the Registrants.(2)
23.1      Consent of Arthur Andersen LLP.(2)
27.1      Financial Data Schedule for the Corporation for the twelve
          months ended December 31, 1998.(2)
27.2      Financial Data Schedule for the Trust for the twelve months
          ended December 31, 1998.(2)
27.3      Restated Financial Data Schedule for the Corporation for the
          nine months ended September 30, 1998.(2)
27.4      Restated Financial Data Schedule for the Trust for the nine
          months ended September 30, 1998.(2)
27.5      Restated Financial Data Schedule for the Corporation for the
          six months ended June 30, 1998.(2)
27.6      Restated Financial Data Schedule for the Trust for the six
          months ended June 30, 1998.(2)
27.7      Restated Financial Data Schedule for the Corporation for the
          three months ended March 31, 1998.(2)
27.8      Restated Financial Data Schedule for the Trust for the three
          months ended March 31, 1998.(2)
27.9      Restated Financial Data Schedule for the Corporation for the
          twelve months ended December 31, 1997.(2)
27.10     Restated Financial Data Schedule for the Corporation for the
          nine months ended September 30, 1997.(2)
27.11     Restated Financial Data Schedule for the Corporation for the
          six months ended June 30, 1997.(2)
</TABLE>
 
                                       61
<PAGE>   63
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                       DESCRIPTION OF EXHIBIT
-------                      ----------------------
<C>       <S>
27.12     Restated Financial Data Schedule for the Corporation for the
          three months ended March 31, 1997.(2)
27.13     Restated Financial Data Schedule for the Corporation for the
          twelve months ended December 31, 1996.(2)
</TABLE>
 
---------------
(1) Management contract or compensatory plan or arrangement required to be filed
    as an exhibit hereto pursuant to Item 14(c) of Form 10-K.
 
(2) Filed herewith.
 
    (b) Reports on Form 8-K.
 
    The Company did not file any Current Reports on Form 8-K during the fourth
quarter of 1998.
 
                                       62
<PAGE>   64
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          STARWOOD HOTELS & RESORTS
                                          WORLDWIDE, INC.
 
                                          By:    /s/ BARRY S. STERNLICHT
                                            ------------------------------------
                                                    Barry S. Sternlicht
                                            Chairman and Chief Executive Officer
 
Date: March 26, 1999
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                     SIGNATURE                                     TITLE                     DATE
                     ---------                                     -----                     ----
<C>                                                  <S>                                <C>
 
              /s/ BARRY S. STERNLICHT                Chairman, Chief Executive Officer  March 29, 1999
---------------------------------------------------  and Director (Principal Executive
                Barry S. Sternlicht                  Officer)
 
                /s/ RONALD C. BROWN                  Executive Vice President and       March 29, 1999
---------------------------------------------------  Chief Financial Officer
                  Ronald C. Brown                    (Principal Financial and
                                                     Accounting Officer)
 
               /s/ BRENDA C. BARNES                  Director                           March 29, 1999
---------------------------------------------------
                 Brenda C. Barnes
 
                /s/ JUERGEN BARTELS                  Director                           March 29, 1999
---------------------------------------------------
                  Juergen Bartels
 
              /s/ JONATHAN D. EILIAN                 Director                           March 29, 1999
---------------------------------------------------
                Jonathan D. Eilian
 
                /s/ EARLE F. JONES                   Director                           March 29, 1999
---------------------------------------------------
                  Earle F. Jones
 
               /s/ MICHAEL A. LEVEN                  Director                           March 29, 1999
---------------------------------------------------
                 Michael A. Leven
 
               /s/ RICHARD D. NANULA                 Director                           March 29, 1999
---------------------------------------------------
                 Richard D. Nanula
 
                /s/ DANIEL H. STERN                  Director                           March 29, 1999
---------------------------------------------------
                  Daniel H. Stern
 
                                                     Director                           March   , 1999
---------------------------------------------------
                   Daniel W. Yih
</TABLE>
 
                                       63
<PAGE>   65
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
                                          STARWOOD HOTELS & RESORTS
 
                                          By: /s/  BARRY S. STERNLICHT
 
                                            ------------------------------------
                                                    Barry S. Sternlicht
                                            Chairman and Chief Executive Officer
 
Date: March 26, 1999
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                     SIGNATURE                                     TITLE                     DATE
                     ---------                                     -----                     ----
<C>                                                  <S>                                <C>
 
              /s/ BARRY S. STERNLICHT                Chairman, Chief Executive Officer  March 29, 1999
---------------------------------------------------  and Trustee (Principal Executive
                Barry S. Sternlicht                  Officer)
 
                /s/ RONALD C. BROWN                  Executive Vice President and       March 29, 1999
---------------------------------------------------  Chief Financial Officer
                  Ronald C. Brown                    (Principal Financial and
                                                     Accounting Officer)
 
               /s/ JEAN-MARC CHAPUS                  Trustee                            March 29, 1999
---------------------------------------------------
                 Jean-Marc Chapus
 
                /s/ BRUCE W. DUNCAN                  Trustee                            March 29, 1999
---------------------------------------------------
                  Bruce W. Duncan
 
               /s/ MADISON F. GROSE                  Trustee                            March 29, 1999
---------------------------------------------------
                 Madison F. Grose
 
              /s/ GEORGE J. MITCHELL                 Trustee                            March 29, 1999
---------------------------------------------------
                George J. Mitchell
 
               /s/ STEPHEN R. QUAZZO                 Trustee                            March 29, 1999
---------------------------------------------------
                 Stephen R. Quazzo
 
               /s/ RAYMOND S. TROUBH                 Trustee                            March 29, 1999
---------------------------------------------------
                 Raymond S. Troubh
</TABLE>
 
                                       64
<PAGE>   66
 
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................   F-2
STARWOOD HOTELS & RESORTS AND STARWOOD HOTELS & RESORTS
  WORLDWIDE, INC.:
     Combined Consolidated Balance Sheets as of December 31,
      1998 and 1997.........................................   F-3
     Combined Consolidated Statements of Operations for the
      Years Ended December 31, 1998, 1997 and 1996..........   F-4
     Combined Consolidated Statements of Comprehensive
      Income for the Years Ended December 31, 1998, 1997 and
      1996..................................................   F-5
     Combined Consolidated Statements of Equity for the
      Years Ended December 31, 1998, 1997 and 1996..........   F-6
     Combined Consolidated Statements of Cash Flows for the
      Years Ended December 31, 1998, 1997 and 1996..........   F-7
STARWOOD HOTELS & RESORTS:
     Consolidated Balance Sheet as of December 31, 1998.....   F-8
     Consolidated Statement of Operations for the Period
      from February 23, 1998 to December 31, 1998...........   F-9
     Consolidated Statement of Cash Flows for the Period
      from February 23, 1998 to December 31, 1998...........  F-10
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.:
     Consolidated Balance Sheets as of December 31, 1998 and
      1997..................................................  F-11
     Consolidated Statements of Operations for the Years
      Ended December 31, 1998, 1997 and 1996................  F-12
     Consolidated Statements of Comprehensive Income for the
      Years Ended December 31, 1998, 1997 and 1996..........  F-13
     Consolidated Statements of Cash Flows for the Years
      Ended December 31, 1998, 1997 and 1996................  F-14
NOTES TO FINANCIAL STATEMENTS...............................  F-15
SCHEDULES:
     Schedule II -- Valuation and Qualifying Accounts.......   S-1
     Schedule III -- Real Estate and Accumulated
      Depreciation..........................................   S-2
     Schedule IV -- Mortgage Loans on Real Estate...........   S-7
</TABLE>
 
                                       F-1
<PAGE>   67
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Starwood Hotels & Resorts and Starwood Hotels & Resorts Worldwide, Inc.:
 
     We have audited the accompanying combined consolidated balance sheets of
Starwood Hotels & Resorts (a Maryland real estate investment trust) and its
subsidiaries (the "Trust") and Starwood Hotels & Resorts Worldwide, Inc. (a
Maryland corporation) and its subsidiaries (the "Corporation," collectively with
the Trust, the "Company") as of December 31, 1998 and 1997 and the consolidated
balance sheet of the Trust as of December 31, 1998 and the consolidated balance
sheets of the Corporation as of December 31, 1998 and 1997, and the related
combined consolidated statements of operations, comprehensive income, equity,
and cash flows for each of the three years ended December 31, 1998 of the
Company and the consolidated statements of operations, comprehensive income, and
cash flows for the period from February 23, 1998 to December 31, 1998 of the
Trust and for each of the three years in the period ended December 31, 1998 for
the Corporation as set forth in the accompanying Index to Financial Statements
and Schedules. These financial statements and schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the separate and combined financial statements referred to
above present fairly, in all material respects, the financial position of the
Company, the Trust, and the Corporation at December 31, 1998, and the Company
and the Corporation at December 31, 1997, and the results of the Company's and
the Corporation's operations and cash flows for each of the three years in the
period ended December 31, 1998 and the Trust's operations and cash flows for its
respective period ended December 31, 1998 in conformity with generally accepted
accounting principles.
 
     As explained in the Notes to the financial statements, effective January 1,
1997, the Corporation changed its method of accounting for start-up costs.
 
     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index to
Financial Statements and Schedules are presented for purposes of complying with
the Securities and Exchange Commission's rules and are not a part of the basic
financial statements. These schedules have been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly state in all material respects the financial data required to be
set forth therein in relation to the basic financial statements taken as a
whole.
 
                                          Arthur Andersen LLP
 
New York, New York
February 3, 1999
 
                                       F-2
<PAGE>   68
 
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                      COMBINED CONSOLIDATED BALANCE SHEETS
                        (IN MILLIONS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................  $   290    $  201
  Accounts receivable, net of allowance for doubtful
     accounts of $74 and $112...............................      607       424
  Inventories...............................................       73        63
  Prepaid expenses and other................................      107       105
                                                              -------    ------
          Total current assets..............................    1,077       793
Investments.................................................      384       368
Plant, property and equipment, net..........................    9,850     4,832
Goodwill and intangible assets, net.........................    3,698     1,257
Other assets................................................      647       731
Net assets held for sale....................................      409       471
Net assets of discontinued operations.......................       36        73
                                                              -------    ------
                                                              $16,101    $8,525
                                                              =======    ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $   284    $  273
  Accrued expenses..........................................      889     1,078
  Short-term borrowings and current maturities of long-term
     debt...................................................      694       898
  Other current liabilities.................................      207       161
                                                              -------    ------
          Total current liabilities.........................    2,074     2,410
Long-term debt..............................................    8,111     1,070
Deferred income taxes.......................................      609        97
Other liabilities...........................................      415       423
Net liabilities of discontinued operations..................       --     1,600
Minority interest...........................................      509       181
                                                              -------    ------
                                                               11,718     5,781
                                                              -------    ------
Equity put options..........................................       32        --
                                                              -------    ------
Class B exchangeable preferred shares, at redemption
  value.....................................................      149        --
                                                              -------    ------
Commitments and contingencies
Stockholders' equity:
  Class A exchangeable preferred shares.....................       --        --
  Corporation common stock; $0.01 par value; authorized
     1,050,000,000 and 308,600,000 shares; outstanding
     175,574,135 and 126,653,880 shares at December 31, 1998
     and 1997, respectively.................................        2         1
  Trust common shares of beneficial interest; $0.01 par
     value; authorized 1,200,000,000 and 308,600,000 shares;
     outstanding 175,574,135 and 126,653,880 shares at
     December 31, 1998 and 1997, respectively...............        2         1
  Additional paid-in capital................................    4,363     2,934
  Cumulative translation and marketable securities
     adjustments............................................     (120)     (135)
  Accumulated deficit.......................................      (45)      (57)
                                                              -------    ------
          Total stockholders' equity........................    4,202     2,744
                                                              -------    ------
                                                              $16,101    $8,525
                                                              =======    ======
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
 
                                       F-3
<PAGE>   69
 
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                 COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN MILLIONS, EXCEPT PER UNIT DATA)
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              --------------------------
                                                               1998      1997      1996
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
REVENUES
Hotels:
  Owned, leased and consolidated joint venture hotels.......  $2,983    $1,550    $1,440
  Management and franchise fees.............................     234       174       165
  Unconsolidated joint ventures and other...................     116        38        41
Gaming......................................................   1,377     1,212     1,285
                                                              ------    ------    ------
                                                               4,710     2,974     2,931
                                                              ------    ------    ------
COSTS AND EXPENSES
Hotels:
  Owned, leased and consolidated joint venture hotels.......   2,030     1,116     1,059
  Other.....................................................     120        69        72
Gaming......................................................   1,103     1,019       994
Selling, general and administrative.........................      96        66        76
Restructuring and other special charges.....................     204       691        --
Depreciation and amortization...............................     556       281       261
                                                              ------    ------    ------
                                                               4,109     3,242     2,462
                                                              ------    ------    ------
                                                                 601      (268)      469
Interest expense, net of interest income of $26, $19 and
  $68.......................................................    (613)      (94)      (96)
Gain on sale of real estate and investments.................      55       432        42
Miscellaneous expense, net..................................      --      (172)       (9)
                                                              ------    ------    ------
                                                                  43      (102)      406
Income tax benefit (expense)................................     108      (159)     (173)
Minority equity.............................................     (10)       (9)       (7)
                                                              ------    ------    ------
Income (loss) from continuing operations....................     141      (270)      226
Discontinued operations:
  Net income (loss) from operations, net of taxes and
    minority interest.......................................      (8)       25        23
  Gain on sale of Educational Services, Inc. shares, net of
    taxes and minority interest of $103.....................     150        --        --
  Gain on disposition of World Directories, net of taxes of
    $558....................................................     972        --        --
Extraordinary item, net of taxes............................      --       (42)       --
Cumulative effect of accounting change, net of taxes........      --       (11)       --
                                                              ------    ------    ------
  Net income (loss).........................................  $1,255    $ (298)   $  249
                                                              ======    ======    ======
EARNINGS PER UNIT -- BASIC
Income (loss) from continuing operations....................  $ 0.68    $(2.14)   $ 1.81
Discontinued operations.....................................    6.02      0.20      0.18
Extraordinary item..........................................      --     (0.33)       --
Cumulative effect of accounting change......................      --     (0.09)       --
                                                              ------    ------    ------
  Net income (loss).........................................  $ 6.70    $(2.36)   $ 1.99
                                                              ======    ======    ======
EARNINGS PER UNIT -- DILUTED
Income (loss) from continuing operations....................  $ 0.67    $(2.14)   $ 1.78
Discontinued operations.....................................    5.96      0.20      0.18
Extraordinary item..........................................      --     (0.33)       --
Cumulative effect of accounting change......................      --     (0.09)       --
                                                              ------    ------    ------
  Net income (loss).........................................  $ 6.63    $(2.36)   $ 1.96
                                                              ======    ======    ======
Weighted average number of Units............................     185       126       125
                                                              ======    ======    ======
Weighted average number of Units assuming dilution..........     187       126       127
                                                              ======    ======    ======
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
 
                                       F-4
<PAGE>   70
 
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
            COMBINED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                               1998     1997     1996
                                                              ------    -----    ----
<S>                                                           <C>       <C>      <C>
Net income (loss)...........................................  $1,255    $(298)   $249
 
Other comprehensive income:
Foreign currency translation adjustments --
  Foreign currency translation arising during the period....     (18)    (133)     (2)
  Reclassification adjustment for losses included in net
     income (loss)..........................................      32       --      --
Unrealized gains (losses) on securities --
  Unrealized holding gains (losses) arising during the
     period.................................................       1      176     (62)
  Reclassification adjustment for gains included in net
     income (loss)..........................................      --     (114)     --
                                                              ------    -----    ----
                                                                  15      (71)    (64)
                                                              ------    -----    ----
Comprehensive income (loss).................................  $1,270    $(369)   $185
                                                              ======    =====    ====
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
 
                                       F-5
<PAGE>   71
 
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                   COMBINED CONSOLIDATED STATEMENTS OF EQUITY
                                 (IN MILLIONS)
<TABLE>
<CAPTION>
                                                                                                                   CUMULATIVE
                                     FORWARD                                                                       TRANSLATION
                                     EQUITY                                                                            AND
                                    CONTRACTS      CLASS B EPS       CLASS A EPS        UNITS(1)      ADDITIONAL   MARKETABLE
                                   AND EQUITY    ---------------   ---------------   --------------    PAID-IN     SECURITIES
                                   PUT OPTIONS   SHARES   AMOUNT   SHARES   AMOUNT   UNITS   AMOUNT    CAPITAL     ADJUSTMENTS
                                   -----------   ------   ------   ------   ------   -----   ------   ----------   -----------
<S>                                <C>           <C>      <C>      <C>      <C>      <C>     <C>      <C>          <C>
Balance at December 31, 1995.....     $  --        --      $ --      --      $--      127      $2      $ 2,942        $  --
  Net income.....................        --        --        --      --       --       --      --           --           --
  Stock option transactions......        --        --        --      --       --       --      --           10           --
  Common stock repurchases.......        --        --        --      --       --       (1)     --          (57)          --
  Foreign currency translation...        --        --        --      --       --       --      --           --           (2)
  Unrealized loss on securities,
    net..........................        --        --        --      --       --       --      --           --          (62)
                                      -----        --      ----      --      ---      ---      --      -------        -----
Balance at December 31, 1996.....        --        --        --      --       --      126       2        2,895          (64)
  Net loss.......................        --        --        --      --       --       --      --           --           --
  Stock option transactions......        --        --        --      --       --        1      --           39           --
  Foreign currency translation...        --        --        --      --       --       --      --           --         (133)
  Unrealized gain on securities,
    net..........................        --        --        --      --       --       --      --           --           62
                                      -----        --      ----      --      ---      ---      --      -------        -----
Balance at December 31, 1997.....        --        --        --      --       --      127       2        2,934         (135)
  Net income.....................        --        --        --      --       --       --      --           --           --
  ITT reverse purchase...........       125         5       212       6       --       57       2        4,022           --
  Cash dividend to ITT
    stockholders.................        --        --        --      --       --       --      --       (2,144)          --
  Stock option and restricted
    stock award transactions.....        --        --        --      --       --        1      --           31           --
  Unit repurchases...............        --        --        --      --       --      (10)     --         (371)          --
  Issuance of forward equity
    contracts....................       245        --        --      --       --        8      --           --           --
  Settlement of forward equity
    contracts....................      (370)       --        --      --       --      (10)     --           --           --
  Issuance of equity put
    options......................        32        --        --      --       --       --      --          (30)          --
  Conversion and cancellation of
    Class A EPS and Class B
    EPS..........................        --        (1)      (63)     (2)      --        3      --           50           --
  Change in minority interest....        --        --        --      --       --       --      --         (129)          --
  Foreign currency translation...        --        --        --      --       --       --      --           --           14
  Unrealized gain on securities,
    net..........................        --        --        --      --       --       --      --           --            1
  Dividends declared.............        --        --        --      --       --       --      --           --           --
                                      -----        --      ----      --      ---      ---      --      -------        -----
Balance at December 31, 1998.....     $  32         4      $149       4      $--      176      $4      $ 4,363        $(120)
                                      =====        ==      ====      ==      ===      ===      ==      =======        =====
 
<CAPTION>
 
                                     RETAINED
                                     EARNINGS
                                   (ACCUMULATED
                                     DEFICIT)
                                   ------------
<S>                                <C>
Balance at December 31, 1995.....     $   (8)
  Net income.....................        249
  Stock option transactions......         --
  Common stock repurchases.......         --
  Foreign currency translation...         --
  Unrealized loss on securities,
    net..........................         --
                                      ------
Balance at December 31, 1996.....        241
  Net loss.......................       (298)
  Stock option transactions......         --
  Foreign currency translation...         --
  Unrealized gain on securities,
    net..........................         --
                                      ------
Balance at December 31, 1997.....        (57)
  Net income.....................      1,255
  ITT reverse purchase...........         --
  Cash dividend to ITT
    stockholders.................       (890)
  Stock option and restricted
    stock award transactions.....         --
  Unit repurchases...............         --
  Issuance of forward equity
    contracts....................         --
  Settlement of forward equity
    contracts....................         --
  Issuance of equity put
    options......................         --
  Conversion and cancellation of
    Class A EPS and Class B
    EPS..........................         --
  Change in minority interest....         --
  Foreign currency translation...         --
  Unrealized gain on securities,
    net..........................         --
  Dividends declared.............       (353)
                                      ------
Balance at December 31, 1998.....     $  (45)
                                      ======
</TABLE>
 
---------------
(1) Represents common stock of ITT prior to the ITT Merger and the Corporation
    common stock and Trust shares of beneficial interest subsequent to the ITT
    Merger.
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
 
                                       F-6
<PAGE>   72
 
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                 COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1998       1997      1996
                                                              -------    -------    -----
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net income (loss)...........................................  $ 1,255    $  (298)   $ 249
Exclude:
Discontinued operations --
 Net (income) loss from operations..........................        8        (25)     (23)
 Gain on disposition of World Directories and Educational
   Services, Inc............................................   (1,122)        --       --
Extraordinary item..........................................       --         42       --
Cumulative effect of accounting change......................       --         11       --
                                                              -------    -------    -----
Income (loss) from continuing operations....................      141       (270)     226
Adjustments to income (loss) from continuing operations:
 Depreciation and amortization..............................      556        281      261
 Amortization of deferred loan costs........................       22         --       --
 Non-cash portion of restructuring and other special
   charges..................................................      140         --       --
 Provision for doubtful receivables.........................       52         65       39
 Minority equity in net income..............................       10          9        7
 Equity income, net of dividends received...................      (16)       (10)      (6)
 Gain on sale of real estate and investments -- pretax......      (55)      (432)     (42)
Changes in working capital:
 Accounts receivable........................................      (61)      (102)    (102)
 Inventories................................................       (4)        (8)     (11)
 Accounts payable...........................................       25         (5)     (33)
 Accrued expenses...........................................     (596)       630        6
Accrued and deferred income taxes...........................       11        (65)      41
Other, net..................................................       (1)       (20)      34
                                                              -------    -------    -----
 Cash from continuing operations............................      224         73      420
 Cash used for discontinued operations......................       --         (9)     (12)
                                                              -------    -------    -----
 Cash from operating activities.............................      224         64      408
                                                              -------    -------    -----
INVESTING ACTIVITIES
Additions to plant, property and equipment..................     (832)    (1,003)    (528)
Proceeds from sale of real estate and investments...........    2,854      1,641      282
Collection of notes receivable..............................      156        217       81
Acquisitions, net of acquired cash..........................      (60)      (287)    (364)
Employee benefit trust......................................      143       (166)      --
Other, net..................................................     (346)       (41)     (66)
                                                              -------    -------    -----
 Cash from (used for) investing activities..................    1,915        361     (595)
                                                              -------    -------    -----
FINANCING ACTIVITIES
Short-term debt, net........................................      487       (153)      77
Long-term debt issued.......................................    4,154        145      454
Long-term debt issued by discontinued operations............       --        546       --
Long-term debt repaid.......................................   (2,790)      (995)    (303)
Settlement of forward equity contracts......................     (125)        --       --
Cancellation of Class B EPS.................................      (13)        --       --
Stock option exercises......................................       15         --       --
Dividends paid..............................................   (3,357)        --       --
Unit repurchases............................................     (371)        --       --
Other, net..................................................      (50)        31       22
                                                              -------    -------    -----
 Cash from (used for) financing activities..................   (2,050)      (426)     250
                                                              -------    -------    -----
Exchange rate effect on cash and cash equivalents...........       --         (3)       1
                                                              -------    -------    -----
Increase (decrease) in cash and cash equivalents............       89         (4)      64
Cash and cash equivalents -- beginning of period............      201        205      141
                                                              -------    -------    -----
Cash and cash equivalents -- end of period..................  $   290    $   201    $ 205
                                                              =======    =======    =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
 Interest...................................................  $   619    $    73    $ 105
                                                              =======    =======    =====
 Income taxes, net of refunds...............................  $    68    $   183    $ 108
                                                              =======    =======    =====
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
                                       F-7
<PAGE>   73
 
                           STARWOOD HOTELS & RESORTS
 
                           CONSOLIDATED BALANCE SHEET
                               DECEMBER 31, 1998
                        (IN MILLIONS, EXCEPT SHARE DATA)
 
<TABLE>
<S>                                                             <C>
                                ASSETS
Current assets:
  Cash and cash equivalents.................................    $   12
  Accounts receivable.......................................        24
  Receivable, Corporation...................................        42
  Prepaid expenses and other................................         3
                                                                ------
          Total current assets..............................        81
Investments, Corporation....................................     1,057
Investments.................................................        86
Plant, property and equipment, net..........................     4,411
Long-term receivables, net, Corporation.....................     2,583
Goodwill and intangible assets, net.........................       258
Other assets................................................       152
Net assets held for sale....................................        18
                                                                ------
                                                                $8,646
                                                                ======
                 LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................    $    6
  Accrued expenses..........................................        68
  Short-term borrowings and current maturities of long-term
     debt...................................................         1
                                                                ------
          Total current liabilities.........................        75
Long-term debt..............................................       737
Minority interest...........................................       435
                                                                ------
                                                                 1,247
                                                                ------
Equity put options and forward equity contracts.............        23
                                                                ------
Class B exchangeable preferred shares, at redemption
  value.....................................................       149
                                                                ------
Commitments and contingencies
Stockholders' equity:
  Class A exchangeable preferred shares.....................        --
  Trust common shares of beneficial interest; $0.01 par
     value; authorized 1,200,000,000 shares; outstanding
     175,574,135 shares.....................................         2
  Additional paid-in capital................................     7,178
  Retained earnings.........................................        47
                                                                ------
          Total stockholders' equity........................     7,227
                                                                ------
                                                                $8,646
                                                                ======
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                   statement.
 
                                       F-8
<PAGE>   74
 
                           STARWOOD HOTELS & RESORTS
 
                      CONSOLIDATED STATEMENT OF OPERATIONS
                      (IN MILLIONS, EXCEPT PER UNIT DATA)
 
<TABLE>
<CAPTION>
                                                                    PERIOD FROM
                                                                 FEBRUARY 23, 1998
                                                                TO DECEMBER 31, 1998
                                                                --------------------
<S>                                                             <C>
REVENUES
Hotels:
  Owned, leased and consolidated joint venture hotels.......           $   1
  Unconsolidated joint ventures and other...................               9
Rent and interest, Corporation..............................             590
                                                                       -----
                                                                         600
                                                                       -----
COSTS AND EXPENSES
Selling, general and administrative.........................              22
Depreciation and amortization...............................             131
                                                                       -----
                                                                         153
                                                                       -----
                                                                         447
Interest expense, net of interest income of $6..............             (24)
Income tax expense..........................................              (1)
Minority equity.............................................             (27)
                                                                       -----
  Net income................................................           $ 395
                                                                       =====
Basic net income per Unit...................................           $2.05
                                                                       =====
Diluted net income per Unit.................................           $2.04
                                                                       =====
Weighted average number of Units............................             185
                                                                       =====
Weighted average number of Units assuming dilution..........             194
                                                                       =====
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                   statement.
 
                                       F-9
<PAGE>   75
 
                           STARWOOD HOTELS & RESORTS
 
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                    PERIOD FROM
                                                                 FEBRUARY 23, 1998
                                                                TO DECEMBER 31, 1998
                                                                --------------------
<S>                                                             <C>
OPERATING ACTIVITIES
Net income..................................................           $ 395
Adjustments to net income:
  Depreciation and amortization.............................             131
  Minority equity in net income.............................              27
  Equity income, net of dividends received..................               2
Changes in working capital:
  Accounts receivable.......................................              (8)
  Accounts payable..........................................               1
  Accrued expenses..........................................             (17)
Other, net..................................................              72
                                                                       -----
  Cash from operating activities............................             603
                                                                       -----
INVESTING ACTIVITIES
Additions to plant, property and equipment..................            (177)
Proceeds from sale of real estate and investments...........             282
Acquisitions, net of acquired cash..........................             (13)
Notes receivable, Corporation...............................             488
Other, net..................................................            (325)
                                                                       -----
  Cash from investing activities............................             255
                                                                       -----
FINANCING ACTIVITIES
Short-term debt, net........................................               1
Long-term debt issued.......................................             319
Long-term debt repaid.......................................            (546)
Settlement of forward equity contracts......................             (88)
Cancellation of Class B EPS.................................             (13)
Stock option exercises......................................              11
Dividends paid..............................................            (278)
Unit repurchases............................................            (260)
Other, net..................................................               8
                                                                       -----
  Cash used for financing activities........................            (846)
                                                                       -----
Increase in cash and cash equivalents.......................              12
Cash and cash equivalents -- beginning of period............              --
                                                                       -----
Cash and cash equivalents -- end of period..................           $  12
                                                                       =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
  Interest..................................................           $  21
                                                                       =====
  Income taxes..............................................           $   1
                                                                       =====
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                   statement.
                                      F-10
<PAGE>   76
 
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                        (IN MILLIONS, EXCEPT SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
                                    ASSETS
Current assets:
  Cash and cash equivalents.................................  $   278    $  201
  Accounts receivable, net of allowance for doubtful
     accounts of $74 and $112...............................      583       424
  Inventories...............................................       73        63
  Prepaid expenses and other................................      104       105
                                                              -------    ------
          Total current assets..............................    1,038       793
Investments, Trust..........................................       77        --
Investments.................................................      298       368
Plant, property and equipment, net..........................    5,439     4,832
Goodwill and intangible assets, net.........................    3,440     1,257
Other assets................................................      495       731
Net assets held for sale....................................      391       471
Net assets of discontinued operations.......................       36        73
                                                              -------    ------
                                                              $11,214    $8,525
                                                              =======    ======
 
                LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
  Accounts payable..........................................  $   278    $  273
  Accrued expenses..........................................      821     1,078
  Short-term borrowings and current maturities of long-term
     debt...................................................      693       898
  Short-term borrowings and current maturities of long-term
     debt, Trust............................................       42        --
  Other current liabilities.................................      207       161
                                                              -------    ------
          Total current liabilities.........................    2,041     2,410
Long-term debt..............................................    7,374     1,070
Long-term debt, net, Trust..................................    2,583        --
Deferred income taxes.......................................      609        97
Other liabilities...........................................      415       423
Net liabilities of discontinued operations..................       --     1,600
Minority interest...........................................    1,208       181
                                                              -------    ------
                                                               14,230     5,781
                                                              -------    ------
Equity put options..........................................        9        --
                                                              -------    ------
Commitments and contingencies
Stockholders' equity (deficit):
  Corporation common stock; $0.01 par value; authorized
     1,050,000,000 shares; outstanding 175,574,135 shares...        2         1
  Additional paid-in capital................................   (2,815)    2,935
  Cumulative translation and marketable securities
     adjustments............................................     (120)     (135)
  Accumulated deficit.......................................      (92)      (57)
                                                              -------    ------
          Total stockholders' equity (deficit)..............   (3,025)    2,744
                                                              -------    ------
                                                              $11,214    $8,525
                                                              =======    ======
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
 
                                      F-11
<PAGE>   77
 
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN MILLIONS, EXCEPT PER UNIT DATA)
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                              --------------------------
                                                               1998      1997      1996
                                                              ------    ------    ------
<S>                                                           <C>       <C>       <C>
REVENUES
Hotels:
  Owned, leased and consolidated joint venture hotels.......  $2,982    $1,550    $1,440
  Management and franchise fees.............................     234       174       165
  Unconsolidated joint ventures and other...................     107        38        41
Gaming......................................................   1,377     1,212     1,285
                                                              ------    ------    ------
                                                               4,700     2,974     2,931
                                                              ------    ------    ------
COSTS AND EXPENSES
Hotels:
  Owned, leased and consolidated joint venture hotels.......   2,030     1,116     1,059
  Rent and interest, Trust..................................     590        --        --
  Other.....................................................     120        69        72
Gaming......................................................   1,103     1,019       994
Selling, general and administrative.........................      74        66        76
Restructuring and other special charges.....................     204       691        --
Depreciation and amortization...............................     425       281       261
                                                              ------    ------    ------
                                                               4,546     3,242     2,462
                                                              ------    ------    ------
                                                                 154      (268)      469
Interest expense, net of interest income of $20, $19 and
  $68.......................................................    (589)      (94)      (96)
Gain on sale of real estate and investments.................      55       432        42
Miscellaneous expense, net..................................      --      (172)       (9)
                                                              ------    ------    ------
                                                                (380)     (102)      406
Income tax benefit (expense)................................     109      (159)     (173)
Minority equity.............................................      17        (9)       (7)
                                                              ------    ------    ------
Income (loss) from continuing operations....................    (254)     (270)      226
Discontinued operations:
  Net income (loss) from operations, net of taxes and
     minority interest......................................      (8)       25        23
  Gain on sale of Educational Services, Inc. shares, net of
     taxes and minority interest of $103....................     150        --        --
  Gain on disposition of World Directories, net of taxes of
     $558...................................................     972        --        --
Extraordinary item, net of taxes............................      --       (42)       --
Cumulative effect of accounting change, net of taxes........      --       (11)       --
                                                              ------    ------    ------
  Net income (loss).........................................  $  860    $ (298)   $  249
                                                              ======    ======    ======
EARNINGS PER UNIT -- BASIC
Income (loss) from continuing operations....................  $(1.37)   $(2.14)   $ 1.81
Discontinued operations.....................................    6.02      0.20      0.18
Extraordinary item..........................................      --     (0.33)       --
Cumulative effect of accounting change......................      --     (0.09)       --
                                                              ------    ------    ------
  Net income (loss).........................................  $ 4.65    $(2.36)   $ 1.99
                                                              ======    ======    ======
EARNINGS PER UNIT -- DILUTED
Income (loss) from continuing operations....................  $(1.37)   $(2.14)   $ 1.78
Discontinued operations.....................................    6.02      0.20      0.18
Extraordinary item..........................................      --     (0.33)       --
Cumulative effect of accounting change......................      --     (0.09)       --
                                                              ------    ------    ------
  Net income (loss).........................................  $ 4.65    $(2.36)   $ 1.96
                                                              ======    ======    ======
Weighted average number of Units............................     185       126       125
                                                              ======    ======    ======
Weighted average number of Units assuming dilution..........     185       126       127
                                                              ======    ======    ======
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
 
                                      F-12
<PAGE>   78
 
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                              1998      1997     1996
                                                              -----    ------    -----
<S>                                                           <C>      <C>       <C>
Net income (loss)...........................................  $860     $(298)    $249
 
Other comprehensive income:
Foreign currency translation adjustments --
  Foreign currency translation arising during the period....   (18)     (133)      (2)
  Reclassification adjustment for losses included in net
     income (loss)..........................................    32        --       --
Unrealized gains (losses) on securities --
  Unrealized holding gains (losses) arising during the
     period.................................................     1       176      (62)
  Reclassification adjustment for gains included in net
     income (loss)..........................................    --      (114)      --
                                                              ----     -----     ----
                                                                15       (71)     (64)
                                                              ----     -----     ----
Comprehensive income (loss).................................  $875     $(369)    $185
                                                              ====     =====     ====
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
 
                                      F-13
<PAGE>   79
 
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                                              ---------------------------
                                                               1998       1997      1996
                                                              -------    -------    -----
<S>                                                           <C>        <C>        <C>
OPERATING ACTIVITIES
Net income (loss)...........................................  $   860    $  (298)   $ 249
Exclude:
Discontinued operations --
 Net (income) loss from operations..........................        8        (25)     (23)
 Gain on disposition of World Directories and Educational
   Services, Inc............................................   (1,122)        --       --
Extraordinary item..........................................       --         42       --
Cumulative effect of accounting change......................       --         11       --
                                                              -------    -------    -----
Income (loss) from continuing operations....................     (254)      (270)     226
Adjustments to income (loss) from continuing operations:
 Depreciation and amortization..............................      425        281      261
 Amortization of deferred loan costs........................       22         --       --
 Non-cash portion of restructuring and other special
   charges..................................................      140         --       --
 Provision for doubtful receivables.........................       52         65       39
 Minority equity in net income..............................      (17)         9        7
 Equity income, net of dividends received...................      (18)       (10)      (6)
 Gain on sale of real estate and investments -- pretax......      (55)      (432)     (42)
Changes in working capital:
 Accounts receivable........................................      (53)      (102)    (102)
 Inventories................................................       (4)        (8)     (11)
 Accounts payable...........................................       24         (5)     (33)
 Accrued expenses...........................................     (593)       630        6
Accrued and deferred income taxes...........................       25        (65)      41
Other, net..................................................      (73)       (20)      34
                                                              -------    -------    -----
 Cash from continuing operations............................     (379)        73      420
 Cash used for discontinued operations......................       --         (9)     (12)
                                                              -------    -------    -----
 Cash from (used for) operating activities..................     (379)        64      408
                                                              -------    -------    -----
INVESTING ACTIVITIES
Additions to plant, property and equipment..................     (655)    (1,003)    (528)
Proceeds from sale of real estate and investments...........    2,572      1,641      282
Collection of note receivable...............................      156        217       81
Acquisitions, net of acquired cash..........................      (47)      (287)    (364)
Employee benefit trust......................................      143       (166)      --
Notes payable, Trust........................................     (488)        --       --
Other, net..................................................      (21)       (41)     (66)
                                                              -------    -------    -----
 Cash from (used for) investing activities..................    1,660        361     (595)
                                                              -------    -------    -----
FINANCING ACTIVITIES
Short-term debt, net........................................      486       (153)      77
Long-term debt issued.......................................    3,835        145      454
Long-term debt issued by discontinued operations............       --        546       --
Long-term debt repaid.......................................   (2,244)      (995)    (303)
Settlement of forward equity contracts......................      (37)        --       --
Stock option exercises......................................        4         --       --
Dividends paid..............................................   (3,079)        --       --
Unit repurchases............................................     (111)        --       --
Other, net..................................................      (58)        31       22
                                                              -------    -------    -----
 Cash from (used for) financing activities..................   (1,204)      (426)     250
                                                              -------    -------    -----
Exchange rate effect on cash and cash equivalents...........       --         (3)       1
                                                              -------    -------    -----
Increase (decrease) in cash and cash equivalents............       77         (4)      64
Cash and cash equivalents -- beginning of period............      201        205      141
                                                              -------    -------    -----
Cash and cash equivalents -- end of period..................  $   278    $   201    $ 205
                                                              =======    =======    =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
 Interest...................................................  $   598    $    73    $ 105
                                                              =======    =======    =====
 Income taxes, net of refunds...............................  $    67    $   183    $ 108
                                                              =======    =======    =====
</TABLE>
 
The accompanying notes to financial statements are an integral part of the above
                                  statements.
                                      F-14
<PAGE>   80
 
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
NOTE 1.  BASIS OF PRESENTATION
 
     The accompanying balance sheets as of December 31, 1998 include the
accounts of Starwood Hotels & Resorts and its subsidiaries (the "Trust") and
Starwood Hotels & Resorts Worldwide, Inc. and its subsidiaries (the
"Corporation" and, together with the Trust, "Starwood Hotels" or the "Company"),
inclusive of ITT Corporation and its subsidiaries ("ITT") (see Note 3). Because
the Company's acquisition of ITT (the "ITT Merger") was treated as a reverse
purchase for financial accounting purposes, the statements of operations,
comprehensive income, equity and cash flows for the year ended December 31, 1998
include the accounts of the Trust and the Corporation for the period from the
closing of the ITT Merger on February 23, 1998 through December 31, 1998 and the
accounts of ITT for the year ended December 31, 1998. Additionally, the balance
sheet as of December 31, 1997 and the statements of operations, comprehensive
income, equity and cash flows for the years ended December 31, 1997 and 1996
represent the results of ITT.
 
     The Trust was formed in 1969 and elected to be taxed as a real estate
investment trust ("REIT") under the Internal Revenue Code (the "Code"). In 1980,
the Trust formed the Corporation and made a distribution to the Trust's
shareholders of one share of common stock, par value $0.01 per share, of the
Corporation (a "Corporation Share") for each common share of beneficial
interest, par value $0.01 per share, of the Trust (a "Trust Share"). Until
January 6, 1999, the Trust Shares and Corporation Shares were paired on a
one-for-one basis and, pursuant to an agreement between the Trust and the
Corporation, could be held or transferred only in units ("Paired Shares")
consisting of one Trust Share and one Corporation Share.
 
     At December 31, 1998, Starwood Hotels was a "paired share REIT" under the
grandfathering provisions of the Code. During 1998, Congress enacted tax
legislation that has the effect of eliminating this grandfathering for certain
interests in real property acquired after March 26, 1998. With respect to
certain interests in real property acquired after March 26, 1998, this new
legislation treats "grandfathered paired share REITs" as one entity for REIT
qualification purposes. In response to this legislation, the Company proposed a
restructuring of the Trust and the Corporation (the "Restructuring") which was
approved by the Company's shareholders on January 6, 1999. As a result of the
Restructuring, the Company is no longer a "grandfathered paired share REIT." In
addition, the Trust became a subsidiary of the Corporation, which holds all
outstanding shares of the new Class A shares of beneficial interest in the
Trust. Each outstanding Trust Share was converted into one share of the new
non-voting Class B Shares of beneficial interest in the Trust (a "Class B
Share"). The Class B Shares and the Corporation Shares are attached on a
one-for-one basis, and pursuant to an agreement between the Trust and the
Corporation, may be transferred only in units ("Units") consisting of one Class
B Share and one Corporation Share. The Restructuring will be accounted for as a
reorganization of two companies under common control. As such, there was no
revaluation of the assets and liabilities of the combining companies. The
Company expects to take a one-time charge during the first quarter of 1999,
primarily related to a deferred tax liability that will result from the
Restructuring.
 
     The Company is one of the largest hotel and gaming companies in the world
and the Trust is one of the largest REITs in the United States. The Company's
principal lines of business are hotels and gaming. The hotel segment is
comprised of a worldwide hospitality network of approximately 690 full-service
hotels primarily serving three markets: luxury, upscale and mid-price. The
Company's hotel operations are represented on every continent and in nearly
every major world market. The Company's gaming operations are located in several
key domestic jurisdictions. The Company also operates various hotel/casino
ventures outside the United States.
 
     Unless otherwise stated herein, all information with respect to Units
refers to Units since January 6, 1999 and to Paired Shares for periods before
January 6, 1999.
 
     The Corporation, through its subsidiaries, is the general partner of, and
holds an aggregate 81.2% partnership interest in, SLC Operating Limited
Partnership (the "Operating Partnership") as of Decem-
 
                                      F-15
<PAGE>   81
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
ber 31, 1998. The Trust, through its subsidiaries, is the general partner of,
and owns an aggregate 92.3% partnership interest in, SLT Realty Limited
Partnership (the "Realty Partnership" and, together with the Operating
Partnership, the "Partnerships") as of December 31, 1998. The Realty Partnership
principally owns, directly or indirectly, fee, ground lease and mortgage loan
interests in hotel properties. The Operating Partnership, directly or
indirectly, principally leases hotel properties from the Realty Partnership and
also owns fee interests in other hotel properties and manages hotels for third
parties.
 
NOTE 2.  SIGNIFICANT ACCOUNTING POLICIES
 
     CASH AND CASH EQUIVALENTS.  The Company considers all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
 
     INVENTORIES.  Inventories, comprised principally of hotel and gaming
operating supplies, are generally valued at the lower of cost (first-in,
first-out) or market and potential losses from obsolete and slow-moving
inventories are provided for in the current period.
 
     INVESTMENTS.  Investments in partnerships and joint ventures are accounted
for using the equity method of accounting when the Company has a 20% to 50%
ownership interest or exercises control over the venture. If the Company's
interest exceeds 50% and the Company exercises control over the venture, the
results of the partnership or joint venture are consolidated herein. All other
investments are generally accounted for under the cost method.
 
     Under the equity method of accounting, profits and losses are allocated in
accordance with the partnership or joint venture agreements. The Company's share
of income or losses before interest expense, depreciation expense and
extraordinary items is included in other hotel revenues in the accompanying
combined consolidated statements of operations. The Company's proportionate
share of interest expense and depreciation and amortization expense of such
joint ventures is included in interest expense and depreciation and amortization
expense, respectively, in the accompanying combined consolidated statements of
operations.
 
     PLANT, PROPERTY AND EQUIPMENT.  Plant, property and equipment, including
capitalized interest of $26 million, $35 million and $13 million in 1998, 1997
and 1996, respectively, applicable to major project expenditures, are recorded
at cost. Depreciation is provided on a straight-line basis over the estimated
useful economic lives of 15 to 40 years for buildings and improvements, 5 to 10
years for furniture, fixtures and equipment, and the lesser of the leasehold
term or 40 years for leasehold improvements. Gains or losses on the sale or
retirement of assets are included in income when the assets are sold provided
there is reasonable assurance of the collectibility of the sales price and any
future activities to be performed by the Company relating to the hotel assets
sold are insignificant.
 
     The Company evaluates the carrying value of each of the Company's hotel and
gaming assets for impairment. For assets not held for sale, the expected
undiscounted future cash flows of the assets are compared to the net book value
of the assets. If the expected undiscounted future cash flows are less than the
net book value of the assets, the excess of the net book value over the
estimated fair value is charged to current earnings. When assets are identified
by management as held for sale, the Company discontinues depreciating the assets
and estimates the fair value of such assets. If, in management's opinion, the
fair value of the hotel or gaming assets which have been identified for sale is
less than the net book value of the assets, a loss reserve is established. Fair
value is determined based upon discounted cash flows of the hotel or gaming
assets at rates deemed reasonable for the type of property and prevailing market
conditions, appraisals and, if appropriate, current estimated net sales proceeds
from pending offers.
 
     LONG-TERM RECEIVABLES.  Long-term receivables consist primarily of secured
loans to owners of managed hotels and unconsolidated joint ventures and are
included in other assets in the accompanying combined consolidated balance
sheets. For adjustable rate loans, fair value approximates carrying value due to
the
                                      F-16
<PAGE>   82
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
variable nature of the interest rates. For fixed rate loans, fair value is
determined based upon discounted cash flows from the note at rates deemed
reasonable for the type of note and prevailing market conditions, appraisals,
and if appropriate, current estimated net sales proceeds from pending offers to
buy the underlying properties. The carrying value approximates fair value due to
the interest rates being in line with market rates.
 
     Management considers a loan to be impaired when it is probable that the
Company will be unable to collect all amounts due according to the contractual
terms of the loan. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows
discounted at the note's effective interest rate. Impairment losses are charged
to expense. Generally, cash receipts are first applied to reduce accrued and
unpaid interest and then to reduce principal.
 
     GOODWILL AND INTANGIBLE ASSETS.  Goodwill and intangible assets arose in
connection with acquisitions and management contracts, respectively, and are
amortized using the straight-line method over 8 to 40 years. Accumulated
amortization was $193 million and $100 million at December 31, 1998 and 1997,
respectively. The Company continually reviews the carrying value of goodwill and
intangible assets to assess recoverability from future operations using
undiscounted cash flows. Impairments would be recognized in operating results if
a permanent diminution in value is deemed to have occurred.
 
     DERIVATIVE FINANCIAL INSTRUMENTS.  The Company enters into interest rate
swap agreements to manage interest rate exposure. The differential to be paid or
received under these agreements is accrued consistent with the terms of the
agreements and is recognized in interest expense over the term of the related
debt using a method that approximates the effective interest method (the accrual
accounting method). The related amounts payable to or receivable from
counterparties are included in other liabilities or assets. The fair value of
the swap agreements and changes in the fair value as a result of changes in
market interest rates are not recognized in the financial statements.
 
     The Company enters into foreign currency forward contracts and foreign
currency swaps as a means of hedging exposure to foreign currency fluctuations.
Foreign currency forward contracts and foreign currency swaps are accounted for
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
Foreign Currency Translation. Changes in the value of the derivative instruments
designated as hedges of foreign currency denominated assets and liabilities are
classified in the same manner as the classification of the changes in the
underlying assets and liabilities.
 
     The Company does not enter into these derivative financial instruments for
speculative purposes and closely monitors the financial stability and credit
standing of its counterparties. When a derivative financial instrument is deemed
to no longer effectively correlate with its underlying assets or liabilities, it
is the Company's policy to mark to market these derivatives.
 
     FOREIGN CURRENCY TRANSLATION.  Balance sheet accounts are translated at the
exchange rates in effect at each year end and income and expense accounts are
translated at the average rates of exchange prevailing during the year. The
national currencies of foreign operations are generally the functional
currencies. Gains and losses from foreign currency translation and the effect of
exchange rate changes on intercompany transactions of a long-term investment
nature are generally included as a separate component of stockholders' equity in
accordance with SFAS No. 52. Gains and losses from foreign currency transactions
are reported currently in costs and expenses and were insignificant for all
periods presented.
 
     INCOME TAX.  The Trust has elected to be treated as a REIT under the
provisions of the Code beginning with the 1995 calendar year. As a result, the
Trust will not be subject to federal income tax on its taxable income at
corporate rates provided it distributes annually 100% of its taxable income to
its shareholders and complies with certain other requirements.
 
                                      F-17
<PAGE>   83
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     For the Corporation, under the asset and liability method of accounting for
income taxes, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets, including net operating
loss carryforwards, and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period when the new rate is enacted.
 
     EARNINGS PER UNIT.  The following is a reconciliation of basic earnings per
Unit to diluted earnings per Unit for income (loss) from continuing operations
(in millions, except per Unit data):
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                             -----------------------------------------------------------------------------------------
                                        1998                           1997                           1996
                             ---------------------------    ---------------------------    ---------------------------
                             EARNINGS   UNITS   PER UNIT    EARNINGS   UNITS   PER UNIT    EARNINGS   UNITS   PER UNIT
                             --------   -----   --------    --------   -----   --------    --------   -----   --------
<S>                          <C>        <C>     <C>         <C>        <C>     <C>         <C>        <C>     <C>
Income (loss) from
  continuing operations....    $141                          $(270)                          $226
Dividends on Class A and
  Class B EPS..............     (16)                            --                             --
                               ----                          -----                           ----
Basic earnings (loss)......    $125      185     $0.68       $(270)     126     $(2.14)      $226      125     $1.81
                               ====              =====       =====              ======       ====              =====
Effect of dilutive
  securities:
  Unit options.............                2                             --                              2
                                         ---                            ---                            ---
Diluted earnings (loss)....    $125      187     $0.67       $(270)     126     $(2.14)      $226      127     $1.78
                               ====      ===     =====       =====      ===     ======       ====      ===     =====
</TABLE>
 
     Earnings per Unit for the years ended December 31, 1997 and 1996, as
previously reported by ITT, has been restated to give effect to the reverse
purchase accounting for the ITT Merger and to conform to the presentation
required by SFAS No. 128, Earnings Per Share.
 
     Class A and Class B Exchangeable Preferred Shares ("EPS") of the Trust,
equity put options and forward equity contract security settlements were not
included in the computation of diluted earnings per Unit for the year ended
December 31, 1998 as the effects were anti-dilutive. There were no Class A EPS
and Class B EPS, equity put options or forward equity contract security
settlements outstanding in 1997.
 
     REVENUE RECOGNITION.  Generally, revenues are recognized when the services
have been rendered. The following is a description of the composition of
revenues for each of the Company's business segments:
 
     Hotels.  Owned hotel revenues represent revenue derived primarily from the
rental of rooms and food and beverage sales. Services are deemed to be rendered
at the date upon which a guest occupies a room and/or utilizes the hotel's
services. Ongoing credit evaluations are performed and potential credit losses
are expensed at the time the account receivable is estimated to be
uncollectible.
 
     Emerging Issues Task Force ("EITF") 97-2, Application of SFAS No. 94 and
Accounting Principles Board ("APB") Opinion No. 16 to Physician Practice
Management Entities and Certain Other Entities with Contractual Management
Arrangements, addresses the circumstances in which a management entity may
include the revenues and expenses of a managed entity in its financial
statements. As a result of EITF 97-2, the Company changed its accounting policy
for its managed hotels beginning in the fourth quarter of 1998. As such,
revenues and expenses of non-owned managed hotels are no longer included in the
Company's financial statements, and the results for all periods presented herein
reflect this change in accounting policy. Management fees earned by the Company
for the hotels are included in management and franchise fees in the accompanying
combined consolidated financial statements. Management and franchise fees are
generally based on a percentage of hotel room revenues. Application of EITF 97-2
for the years ended December 31, 1998, 1997 and 1996 reduced each of revenues
and operating expenses by approximately $4.2 billion, $2.8
 
                                      F-18
<PAGE>   84
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
billion and $2.8 billion, respectively. There was no impact on operating income,
net income, working capital, earnings per Unit or stockholders' equity as a
result of this change in accounting policy.
 
     Gaming.  Gaming revenues represent the net win from gaming wins and losses
as well as rooms, food, beverage and other revenues. Revenues exclude the retail
value of rooms, food, beverage, entertainment and other promotional allowances
provided on a complimentary basis to customers. The estimated retail value of
these promotional allowances was $197 million, $157 million and $161 million for
the years ended December 31, 1998, 1997 and 1996, respectively. The estimated
cost of such promotional allowances was $138 million, $100 million and $111
million for the years ended December 31, 1998, 1997 and 1996, respectively, and
has been included in costs and expenses in the accompanying combined
consolidated statements of operations.
 
     Revenues and costs and expenses of the gaming operations, excluding King 8
Hotel & Casino, which was sold in June 1998, are comprised of the following for
the years ended December 31, 1998, 1997 and 1996 (in millions):
 
<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                     ------------------------------------------------------------------
                                             1998                   1997                   1996
                                     --------------------   --------------------   --------------------
                                                COSTS AND              COSTS AND              COSTS AND
                                     REVENUES   EXPENSES    REVENUES   EXPENSES    REVENUES   EXPENSES
                                     --------   ---------   --------   ---------   --------   ---------
<S>                                  <C>        <C>         <C>        <C>         <C>        <C>
Casino.............................   $1,001     $  584      $  953     $  592      $1,032     $  592
Rooms..............................      127         43          71         25          70         25
Food and beverage..................      115        102          77         71          79         71
Other operations...................      130         61         111         61         104         57
Selling, general and
  administrative...................       --        229          --        183          --        213
Restructuring and other special
  charges..........................       --         --          --          6          --         --
Preopening costs...................       --         41          --         28          --          2
Depreciation and amortization......       --        158          --         83          --         80
Provision for doubtful accounts....       --         39          --         59          --         34
                                      ------     ------      ------     ------      ------     ------
          Total....................   $1,373     $1,257      $1,212     $1,108      $1,285     $1,074
                                      ======     ======      ======     ======      ======     ======
</TABLE>
 
     COMPREHENSIVE INCOME.  SFAS No. 130, Reporting Comprehensive Income,
requires a separate statement to report the components of comprehensive income
for each period reported. Items to be included in comprehensive income include
foreign currency translation adjustments, unrealized gains and losses on certain
investments in debt and equity securities and minimum pension liability
adjustments. The Company adopted SFAS No. 130 on January 1, 1998 and, as such,
has included the required statements of comprehensive income in the accompanying
financial statements for the Company and the Corporation.
 
     USE OF ESTIMATES.  The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
 
     RECLASSIFICATIONS.  Certain reclassifications have been made to the prior
year financial statements to conform to the current year presentation.
 
     IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS.  In June 1998, SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, was issued.
This statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
 
                                      F-19
<PAGE>   85
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
embedded in other contracts) be recorded in the balance sheet as either an asset
or liability measured at its fair value. The statement requires that changes in
the fair value of the derivative be recognized currently in earnings unless
specific hedge accounting criteria are met. If specific hedge accounting
criteria are met, changes in the fair value of derivatives will either be offset
against the change in the fair value of the hedged assets, liabilities, or firm
commitments through earnings, or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The
Company expects to adopt SFAS No. 133 effective January 1, 2000. Management has
not yet quantified the impact of adopting SFAS No. 133 on the Company's
financial statements.
 
NOTE 3.  ACQUISITIONS
 
     ACQUISITION OF ITT.  On February 23, 1998, pursuant to an Amended and
Restated Agreement and Plan of Merger, dated as of November 12, 1997 (the "ITT
Merger Agreement"), among the Corporation, Chess Acquisition Corp. ("Merger
Sub"), the Trust and ITT, the Company acquired ITT.
 
     Pursuant to the terms of the ITT Merger Agreement, Merger Sub, a newly
formed Nevada corporation, was merged with and into ITT, whereupon the separate
corporate existence of Merger Sub ceased and ITT continued as the surviving
corporation. As a result of the ITT Merger, ITT was owned jointly by the Trust
and the Corporation. Immediately after the effective time of the ITT Merger, the
Corporation purchased all of the common stock, no par value, of ITT ("ITT Common
Stock") owned by the Trust for a combination of cash and notes. After such
purchase, ITT became a wholly owned subsidiary of the Corporation.
 
     Under the terms of the ITT Merger Agreement, each outstanding share of ITT
Common Stock, together with the associated right to purchase shares of Series A
Participating Cumulative Preferred Stock of ITT (the rights and, together with
the ITT Common Stock, "ITT Shares"), other than those that were converted into
cash pursuant to a cash election by the holder (and other than ITT Shares owned
directly or indirectly by ITT or Starwood Hotels, which shares were canceled),
was converted into 1.543 Units. Pursuant to cash election procedures,
approximately 35 million ITT Shares, representing approximately 30% of the
outstanding ITT Shares, were converted into $85 in cash per share. In addition,
each ITT Share was converted into additional cash consideration in the amount of
$0.37493151, which amount represents the interest that would have accrued
(without compounding) on $85 at an annual rate of 7% during the period from and
including January 31, 1998 to but excluding the date of the closing of the ITT
Merger (February 23, 1998). The aggregate value of the ITT acquisition in cash,
Units and assumed debt was approximately $14.6 billion.
 
     The Company accounted for the ITT Merger as a reverse purchase in
accordance with APB Opinion No. 16. Purchase accounting for a combination is
similar to the accounting treatment used in the acquisition of any asset group.
Although the Trust and the Corporation issued Units to ITT stockholders and
survived the ITT Merger, the Trust and the Corporation are considered the
acquired companies for accounting purposes since the prior ITT stockholders held
a majority of the outstanding Units immediately after the ITT Merger was
consummated. The fair market value of the Units outstanding and available upon
conversion of the Partnership units held by Starwood Hotels' stockholders prior
to the ITT Merger and the Partnerships' unit holders, respectively (using the
stock price of $54.31 per Unit, based on the average of the high and low prices
per Unit of Starwood Hotels as reported on the New York Stock Exchange (the
"NYSE") on November 12, 1997), is used as the valuation basis for the
combination. The fair market value of the Units outstanding on February 23, 1998
(the ITT Merger closing date) immediately prior to giving effect to the ITT
Merger in excess of the net book value of the assets and liabilities of Starwood
Hotels has been allocated to plant, property and equipment and goodwill. The
goodwill is being amortized over a 40-year period. The Company has completed a
valuation of the assets acquired and liabilities assumed and has allocated the
excess of fair market value of the assets and liabilities based on that
valuation. The calculation of the excess of the fair
 
                                      F-20
<PAGE>   86
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
market value of the Units over the book value of the Company's assets and
liabilities at February 23, 1998 is as follows (in millions):
 
<TABLE>
<S>                                                           <C>
Total Units and Partnership units outstanding prior to the
  ITT Merger................................................       80
Fair market value of the Company's Units using the stock
  price of $54.31 (based on the average of the high and low
  prices per Unit of Starwood Hotels as reported on the NYSE
  on November 12, 1997).....................................  $ 4,361
Book value of the Company's combined consolidated equity....   (1,775)
Transaction-related fees and expenses.......................       37
Minority interest related to the Partnerships...............     (152)
                                                              -------
Excess of fair market value of Units over the book value of
  net assets................................................  $ 2,471
                                                              =======
</TABLE>
 
     Because the acquisition of ITT is treated as a reverse purchase for
financial accounting purposes, the statements of operations, comprehensive
income and cash flows for the year ended December 31, 1998 include the accounts
of the Trust and the Corporation for the period from the closing of the ITT
Merger on February 23, 1998 through December 31, 1998 and the accounts of ITT
for the entire year ending December 31, 1998. Historical stockholders' equity of
the Company prior to the ITT Merger has been retroactively restated for the
equivalent number of shares received in the ITT Merger after giving effect to
the difference in par value between Starwood Hotels' and ITT's stock. Unless
otherwise indicated, all references herein to the number of Units and per share
amounts have been restated to reflect the impact of the reverse acquisition at
the conversion factor of 1.543 Units for each ITT Share acquired.
 
     ACQUISITION OF WESTIN.  On January 2, 1998, pursuant to a Transaction
Agreement dated as of September 8, 1997 (the "Transaction Agreement"), among
WHWE L.L.C., Woodstar Investor Partnership, Nomura Asset Capital Corporation,
Juergen Bartels, Westin Hotels & Resorts Worldwide, Inc. ("Westin Worldwide"),
W&S Lauderdale Corp. ("Lauderdale"), W&S Seattle Corp. ("Seattle"), Westin St.
John Hotel Company, Inc. ("St. John"), W&S Denver Corp. ("Denver"), W&S Atlanta
Corp. ("Atlanta" and, together with Westin Worldwide, Lauderdale, Seattle, St.
John and Denver, "Westin"), W&S Hotel L.L.C., the Trust, the Corporation and the
Partnerships, Starwood Hotels acquired Westin.
 
     Pursuant to the terms of the Transaction Agreement,
 
          (i) Westin Worldwide merged into the Trust (the "Westin Merger"). In
     connection with the Westin Merger, all the issued and outstanding shares of
     capital stock of Westin Worldwide (other than shares held by Westin
     Worldwide and its subsidiaries or by the Company) were converted into an
     aggregate of 6,285,783 Class A EPS and 5,294,783 Class B EPS and cash in
     the amount of $177.9 million;
 
          (ii) The stockholders of Lauderdale, Seattle and Denver contributed
     all the outstanding shares of such companies to the Realty Partnership. In
     exchange for such contribution and after giving effect to the deemed
     exchange of certain units, the Realty Partnership issued to such
     stockholders an aggregate of 470,309 limited partnership units of the
     Realty Partnership and the Trust issued to such stockholders an aggregate
     of 127,534 shares of Class B EPS. In addition, in connection with the
     foregoing share contribution, the Realty Partnership assumed, repaid or
     refinanced the indebtedness of Lauderdale, Seattle and Denver and assumed
     $84.2 million of indebtedness incurred by the members of W&S Hotel L.L.C.
     prior to such contributions; and
 
          (iii) The stockholders of Atlanta and St. John contributed all the
     outstanding shares of such companies to the Operating Partnership. In
     exchange for such contribution and after giving effect to the deemed
     exchange of certain units, the Operating Partnership issued to such
     stockholders an aggregate of 312,741 limited partnership units of the
     Operating Partnership and the Trust issued to such stockholders
 
                                      F-21
<PAGE>   87
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     an aggregate of 80,415 shares of Class B EPS. In addition, in connection
     with the foregoing share contributions, the Operating Partnership assumed,
     repaid or refinanced indebtedness of Atlanta and St. John and assumed $3.4
     million of indebtedness incurred by the members of W&S Hotel L.L.C. prior
     to such contributions.
 
     The aggregate principal amount of debt assumed or incurred by the Company
pursuant to the Westin Transaction Agreement was approximately $1.0 billion. The
Company accounted for the acquisition of Westin as a purchase in accordance with
APB No. 16. As such, the carrying values of the assets acquired and liabilities
assumed were recorded at fair market value resulting in goodwill and identified
intangibles of $1.1 billion.
 
     The shares of Class A and Class B EPS and the limited partnership interests
issued in connection with the Westin Merger and the contribution of Seattle,
Lauderdale, Denver, St. John and Atlanta to the Partnerships are directly or
indirectly exchangeable on a one-for-one basis (subject to certain adjustments)
for Units (subject to the right of the Company to elect to pay cash in lieu of
issuing such shares). The limited partnership interests also are exchangeable on
a one-for-one basis for shares of Class B EPS. The shares of Class B EPS have a
liquidation preference of $38.50 per share and provide the holders with the
right, from and after the fifth anniversary of the closing date of the Westin
Merger, to require the Trust to redeem such shares at a price of $38.50.
 
     OTHER HOTEL ACQUISITIONS.  In May 1998, the Company acquired the 242-room
Danbury Hilton Hotel in Danbury, Connecticut for approximately $20 million in
cash.
 
     In January 1998, the Company completed the acquisition of four
full-service, luxury properties located in Aspen, Colorado; New York, New York;
Washington, D.C.; and Houston, Texas for a total consideration of approximately
$348 million, consisting of $164 million in cash and 3.7 million Units, valued
for purposes of this transaction, at approximately $184 million.
 
     UNAUDITED PRO FORMA RESULTS.  The following unaudited pro forma information
reflects the ITT Merger, the acquisition of Westin and certain asset sales as if
they occurred on January 1, 1997 and does not purport to present what actual
results would have been had such transactions, in fact, occurred at January 1,
1997, or to project results for any future period (in millions, except per Unit
data):
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                              ----------------
                                                               1998      1997
                                                              ------    ------
<S>                                                           <C>       <C>
Revenues....................................................  $4,857    $4,303
Income (loss) from continuing operations....................  $  208    $ (283)
Net income (loss)...........................................  $1,322    $ (311)
Basic income (loss) from continuing operations per Unit.....  $ 1.04    $(1.52)
Diluted income (loss) from continuing operations per Unit...  $ 1.03    $(1.52)
</TABLE>
 
NOTE 4.  DISPOSITIONS
 
     In January 1999, the Company sold the International Golf Club in Bolton,
Massachusetts for $25 million in net proceeds and will recognize a gain of $6
million in first quarter 1999.
 
     The Company disposed of the following eight properties in May 1998 for a
total of approximately $245 million in cash: the 229-room Embassy Suites Phoenix
Airport in Phoenix, Arizona; the 224-room Tempe Embassy Suites in Tempe,
Arizona; the 198-room Palm Desert Embassy Suites in Palm Desert, California; the
233-room Embassy Suites Hotel in Atlanta, Georgia; the 297-room St. Louis
Embassy Suites in St. Louis, Missouri; the 308-room Doubletree Guest Suites in
Dallas-Ft. Worth International Airport, Texas; the 254-
 
                                      F-22
<PAGE>   88
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
room Doubletree Guest Suites Cypress Creek in Ft. Lauderdale, Florida; and the
155-room Doubletree Guest Suites in Lexington, Kentucky. There was no gain or
loss recognized in connection with these dispositions as the fair market value
of the assets approximated the net book value at the time of the disposition.
 
     In May 1998, the Company sold a Gulfstream V corporate aircraft for
approximately $39 million in cash. A gain of $2 million was recognized in
connection with this disposition.
 
     During 1998, the Company sold four additional properties, including one
gaming property. No gain or loss was recognized in connection with these
dispositions.
 
     In June 1997, ITT sold a 38.5% ownership interest in Madison Square Garden,
L.P. ("MSG") to Cablevision Systems Corporation ("Cablevision") for
approximately $500 million and recorded a pretax gain of approximately $200
million. ITT also had two "put" options each allowing ITT to require Cablevision
or MSG to purchase one-half of ITT's then continuing interest in MSG for $75
million. In addition, ITT contributed to MSG an ITT-owned aircraft which MSG had
used for the New York Knickerbockers basketball team and the New York Rangers
hockey team. In consideration of the aircraft contribution, Cablevision agreed
to increase the exercise price of each of ITT's "put" options by $19 million.
The Company exercised one "put" option in April 1998 for total consideration of
approximately $94 million, and the remaining "put" option is exercisable in June
1999.
 
     During 1997, ITT sold its interest in the capital stock of Alcatel Alsthom.
Total proceeds from these sales were approximately $830 million, resulting in a
pretax gain of $183 million.
 
NOTE 5.  DISCONTINUED OPERATIONS
 
     ITT EDUCATIONAL SERVICES, INC.  In June 1998, the Company sold
approximately 13.0 million shares of ITT Educational Services, Inc.
("Educational Services") in a public offering for net proceeds of approximately
$304 million. The Company recorded a gain of $253 million before income taxes
and minority interest of $103 million. Subsequent to this sale, the Company was
a minority holder in Educational Services and, as such, accounted for its
remaining interest under the equity method by recording its proportionate share
of net losses totaling $1 million for the period from June 1, 1998 to December
31, 1998. At December 31, 1998, the assets and liabilities of Educational
Services are included in net assets of discontinued operations in the
accompanying financial statements. Summary financial information of Educational
Services is as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              ------------
                                                              1998    1997
                                                              ----    ----
<S>                                                           <C>     <C>
BALANCE SHEET DATA
Total assets................................................  $36     $144
Total liabilities...........................................   --      (71)
                                                              ---     ----
Net assets of discontinued operations.......................  $36     $ 73
                                                              ===     ====
</TABLE>
 
                                      F-23
<PAGE>   89
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                    YEAR ENDED
                                                                 FIVE MONTHS       DECEMBER 31,
                                                                    ENDED          ------------
                                                                MAY 31, 1998       1997    1996
                                                              -----------------    ----    ----
<S>                                                           <C>                  <C>     <C>
INCOME STATEMENT DATA
Revenues....................................................        $114           $262    $232
Operating income............................................        $ 12           $ 27    $ 21
Interest income.............................................        $  2           $  5    $  4
Miscellaneous expense, net..................................        $ --           $ --    $  1
Income tax expense..........................................        $  6           $ 13    $ 10
Minority equity.............................................        $  1           $  3    $  2
Earnings from discontinued operations.......................        $  7           $ 16    $ 12
</TABLE>
 
     In February 1999, the Company completed the sale of its remaining interest
in Educational Services, selling 8.0 million shares of common stock of
Educational Services in an underwritten public offering at a price per share of
$34.00. Concurrently, Educational Services repurchased the Company's remaining
1.5 million shares of Educational Services common stock at $32.73 per share.
Starwood Hotels received aggregate net proceeds of approximately $310 million
from these transactions, which were used to repay a portion of the Company's
outstanding debt. The Company will recognize a gain of $268 million, before
taxes and minority interest, on the sale in the first quarter of 1999.
 
     ITT WORLD DIRECTORIES.  In February 1998, the Company disposed of ITT World
Directories ("WD"), the subsidiary through which ITT conducted its telephone
directories publishing business, to VNU International B.V., a leading
international publishing and information company based in the Netherlands, for
gross consideration of $2.1 billion. The Company recorded a gain of $1,530
million before income taxes of $558 million on the disposition. Interest expense
and debt related to the disposition of WD was allocated to discontinued
operations. The assets and liabilities of WD are included in net liabilities of
discontinued operations in the accompanying financial statements as of December
31, 1997. Summary financial information of WD is as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31, 1997
                                                              -----------------
<S>                                                           <C>
BALANCE SHEET DATA
Total assets................................................       $   562
Total liabilities...........................................          (829)
Allocated debt of ITT.......................................        (1,333)
                                                                   -------
Net liabilities of discontinued operations..................       $(1,600)
                                                                   =======
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                     YEAR ENDED
                                                                 PERIOD FROM        DECEMBER 31,
                                                              JANUARY 1, 1998 TO    ------------
                                                              FEBRUARY 19, 1998     1997    1996
                                                              ------------------    ----    ----
<S>                                                           <C>                   <C>     <C>
INCOME STATEMENT DATA
Revenues....................................................         $  8           $586    $647
Operating income (loss).....................................         $ (8)          $192    $208
Interest expense, net.......................................         $ 14           $130    $138
Miscellaneous expense, net..................................         $ --           $  7    $  1
Income tax (benefit) expense................................         $ (7)          $ 25    $ 27
Minority equity.............................................         $ (1)          $ 21    $ 31
Earnings (losses) from discontinued operations..............         $(14)          $  9    $ 11
</TABLE>
 
                                      F-24
<PAGE>   90
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 6.  CHANGE IN ACCOUNTING PRINCIPLE
 
     Effective January 1, 1997, ITT changed its method of accounting for
start-up costs on major hospitality and gaming projects to expense these costs
as incurred. Prior to 1997, the Company capitalized these costs and amortized
them over a three-year period. ITT's 1997 results include a charge of $17
million before income taxes of $6 million as the cumulative effect of this
accounting change. In connection with the ITT Merger, the Company elected to
follow ITT's accounting treatment for start-up costs and, as such, is expensing
start-up costs as incurred.
 
NOTE 7.  EXTRAORDINARY ITEM
 
     During 1997, ITT announced the tender offer for $546 million of debt
securities of a subsidiary company. The tender offer was financed through
short-term bank facilities. The tender offer resulted in ITT paying a tender
premium of $42 million after tax ($78 million pretax) which was recorded in 1997
as an extraordinary loss on the early retirement of debt.
 
NOTE 8.  RESTRUCTURING AND OTHER SPECIAL CHARGES
 
     During 1998, the Company recorded pretax charges totaling approximately
$204 million relating to restructuring and other special charges. The charges
represent a portion of the restructuring and other special charges announced by
the Company in August 1998.
 
     The 1998 restructuring and other special charges consist of the following
(in millions):
 
<TABLE>
<CAPTION>
                                                   NON-CASH        CASH        EXPENDITURES
                                                   CHARGES     EXPENDITURES      ACCRUED       TOTAL
                                                   --------    ------------    ------------    -----
<S>                                                <C>         <C>             <C>             <C>
Write-down of assets.............................    $115          $--             $ --        $115
ITT Merger-related costs.........................      10           59               43         112
Adjustment to ITT 1997 other special charges.....      --           --              (23)        (23)
                                                     ----          ---             ----        ----
          Total..................................    $125          $59             $ 20        $204
                                                     ====          ===             ====        ====
</TABLE>
 
     WRITE-DOWN OF ASSETS.  The restructuring and other special charges for the
write-down of assets include an investment in a hotel in Kuala Lampur, Malaysia;
a mortgage note receivable secured by a hotel in Paris, France; an investment in
a shared services center established by ITT in 1997 which was closed by the
Company following the ITT Merger; and certain receivable balances in the
Company's gaming division primarily related to Asian customers. Substantially
all of these assets were ITT assets and were written down primarily as a result
of certain worldwide economic conditions indicating a reduced value for these
assets.
 
     ITT MERGER-RELATED COSTS.  The restructuring and other special charges
include costs related to the ITT Merger consisting primarily of severance
payments and relocation costs for ITT employees and certain costs to integrate
the companies, including costs to integrate the Company's frequent guest
programs and to close down duplicate facilities. The Company expects to pay out
the remaining balance of $43 million during 1999.
 
     ADJUSTMENT TO ITT 1997 OTHER SPECIAL CHARGES.  During the fourth quarter of
1998, the Company reversed approximately $23 million in special charges related
to a liability set up during 1997 by ITT for tax reimbursements that will not be
paid due to modifications of contractual agreements with certain former
employees. The remaining balance of $62 million will be paid out in 1999 subject
to resolution of certain contract terms.
 
     1998 OTHER SPECIAL CHARGES.  In addition, during the third quarter of 1998,
the Company recorded a non-recurring charge to selling, general and
administrative expense of approximately $30 million primarily associated with
the vesting, during the quarter, of certain restricted stock granted earlier in
the year to the new
 
                                      F-25
<PAGE>   91
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
President and Chief Executive Officer of the Corporation. Also during 1998, the
Company recorded a $40 million non-recurring charge to interest expense
associated with the settlement of certain forward interest swap agreements (see
Note 22).
 
     ITT 1997 RESTRUCTURING AND OTHER SPECIAL CHARGES.  As a result of the ITT
Merger, ITT recorded the following special charges in 1997: (1) conversion of
the accounting for ITT's stock option plan to variable accounting due to limited
stock appreciation rights subject to exercise and related charges for tax
reimbursements to employees of $431 million, and (2) other costs including legal
fees, investment banking fees and asset write-offs totaling $169 million which
are included in miscellaneous expense, net. The employee-related costs and the
restructuring charges are included as a component of operating income in the
accompanying financial statements, while the other costs are included in
miscellaneous expense, net.
 
     Additionally, during 1997, ITT recorded pretax charges totaling $260
million ($169 million after tax) to restructure and rationalize operations at
its World Headquarters and the headquarters of its field operations. Of the
total pretax charge, approximately $196 million represented severance and other
related employee termination costs associated with the elimination of nearly 370
positions worldwide. The balance of the restructuring charge ($64 million
pretax) related primarily to asset write-offs, lease commitments and termination
penalties.
 
     At December 31, 1998, the Company has remaining accruals related to these
restructuring and other special charges of approximately $163 million primarily
related to remaining lease commitments which expire through 2006, the settlement
of certain employee benefits scheduled to be completed in the first quarter of
2000 and the tax reimbursements to certain former employees discussed
previously.
 
NOTE 9.  INVESTMENTS
 
     Investments consisted of the following (in millions):
 
<TABLE>
<CAPTION>
                                                              DECEMBER 31,
                                                              ------------
                                                              1998    1997
                                                              ----    ----
<S>                                                           <C>     <C>
Equity in WBIS+.............................................  $ --    $119
Equity in and advances to hotel partnerships and joint
  ventures..................................................   366     230
Other investments at cost...................................    18      19
                                                              ----    ----
                                                              $384    $368
                                                              ====    ====
</TABLE>
 
     Equity in earnings of unconsolidated subsidiaries accounted for on the
equity basis were $30 million, $14 million and $8 million in 1998, 1997 and
1996, respectively.
 
     In January 1999, Starwood Hotels purchased a 25% interest in the Moriah
Hotels ("Moriah") in Israel for approximately $20 million. This investment will
be accounted for under the equity method of accounting. Moriah currently owns
five hotels which will be managed by Starwood Hotels: the 292-room Moriah Plaza
Jerusalem, the 215-room Moriah Plaza Dead Sea, the 306-room Moriah Plaza Eilat,
the 265-room Moriah Plaza Tel Aviv and the 265-room Moriah Plaza Tiberias.
 
     In July 1998, the Company acquired a 95% non-controlling interest in the
760-room Westin Maui in Maui, Hawaii for approximately $132 million.
 
     In March 1998, the Company and Dow Jones & Company, Inc. sold WBIS+,
Channel 31 in New York City, to Paxson Communications Corporation for a total
cash purchase price of approximately $258 million; approximately $128 million
was received by the Company, resulting in a pretax gain of $6 million.
 
                                      F-26
<PAGE>   92
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The fair market value of investments is based on the market prices for the
last day of the period if the investment trades on quoted exchanges. For
non-traded investments, fair value is estimated based on the underlying value of
the investment. The carrying value of other investments approximates fair value
based on market prices and the value of the underlying collateral.
 
NOTE 10.  PLANT, PROPERTY AND EQUIPMENT
 
     Plant, property and equipment consisted of the following (in millions):
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998       1997
                                                              -------    ------
<S>                                                           <C>        <C>
Land and improvements.......................................  $ 1,682    $1,178
Buildings and improvements..................................    7,422     2,823
Furniture, fixtures and equipment...........................    1,640     1,009
Construction work in process................................      247       599
                                                              -------    ------
                                                               10,991     5,609
Less accumulated depreciation and amortization..............   (1,141)     (777)
                                                              -------    ------
                                                              $ 9,850    $4,832
                                                              =======    ======
</TABLE>
 
NOTE 11.  NET ASSETS HELD FOR SALE
 
     At December 31, 1998, the Company's hotel portfolio included two hotel
properties held for sale: the 155-room Tyee Hotel in Olympia, Washington and the
259-room Four Points Hotel in Wichita, Kansas. These properties were included in
net assets held for sale in the accompanying balance sheets.
 
     In 1997, ITT announced its intention to sell one of its gaming properties,
the Desert Inn Resort & Casino in Las Vegas, Nevada, and its investment in MSG.
For financial reporting purposes, the assets and liabilities attributable to
this property and investment have been included in net assets held for sale as
of December 31, 1998 and 1997. In March 1999, the Company entered into an
agreement to dispose of its remaining interest in MSG for net proceeds of $87
million.
 
     There can be no assurance that these sales will occur or, if they occur, as
to the timing of such sales. Management will evaluate its alternatives in the
event a decision is made to change its current intention to sell these
properties.
 
NOTE 12.  OTHER ASSETS
 
     Other assets include long-term receivables of $282 million and $281 million
at December 31, 1998 and 1997, respectively, which are net of allowance for
doubtful accounts of $33 million and $57 million, respectively. These long-term
receivables exclude current maturities of $42 million and $28 million,
respectively, which are included in accounts receivable. Total unsecured and
secured long-term receivables totaled $156 million and $201 million,
respectively, as of December 31, 1998 and $279 million and $87 million,
respectively, as of December 31, 1997.
 
NOTE 13.  ACCRUED EXPENSES
 
     Accrued expenses include accrued restructuring and other special charges of
$172 million and $674 million, salaries, wages and benefits of $160 million and
$83 million and accrued interest of $59 million and $36 million as of December
31, 1998 and 1997, respectively. The remaining balance of $498 million and $285
million as of December 31, 1998 and 1997, respectively, represents other accrued
expenses including, but not limited to, legal costs and insurance.
 
                                      F-27
<PAGE>   93
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 14.  INCOME TAXES
 
     As discussed in Note 2, the trust is not currently subject to income taxes.
Accordingly, the following income tax data from continuing operations of the
Corporation is as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              1998     1997     1996
                                                              -----    -----    ----
<S>                                                           <C>      <C>      <C>
Pretax income (loss)
  U.S. .....................................................  $(517)   $(255)   $310
  Foreign...................................................    137      153      96
                                                              -----    -----    ----
                                                              $(380)   $(102)   $406
                                                              =====    =====    ====
Provision (benefit) for income tax
Current:
  U.S. federal..............................................  $  27    $ 201    $ 96
  State and local...........................................      4       15      11
  Foreign...................................................     54       57      29
                                                              -----    -----    ----
                                                                 85      273     136
                                                              -----    -----    ----
Deferred:
  U.S. federal..............................................   (211)    (143)     22
  Foreign and other.........................................     17       29      15
                                                              -----    -----    ----
                                                               (194)    (114)     37
                                                              -----    -----    ----
                                                              $(109)   $ 159    $173
                                                              =====    =====    ====
</TABLE>
 
     No provision was made for U.S. taxes payable on undistributed foreign
earnings amounting to approximately $194 million since these amounts are
permanently reinvested.
 
     Deferred income taxes represent the tax effect of the differences between
the book and tax bases of assets and liabilities. Deferred tax assets
(liabilities) include the following (in millions):
 
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                          ----------------------------------------
                                                                 1998                  1997
                                                          ------------------    ------------------
                                                           U.S.      FOREIGN     U.S.      FOREIGN
                                                          FEDERAL    & OTHER    FEDERAL    & OTHER
                                                          -------    -------    -------    -------
<S>                                                       <C>        <C>        <C>        <C>
Plant, property and equipment...........................   $(224)     $(111)     $(183)     $(91)
Allowances for doubtful accounts and other reserves.....      57         --         58        --
Employee benefits.......................................      66         --         38        --
Deferred gain...........................................    (517)        --         --        --
Net operating loss carryforwards........................     211         --         --        --
Transaction costs.......................................      18         --        159        --
Other...................................................       2         (2)        (9)       (5)
                                                           -----      -----      -----      ----
                                                            (387)      (113)        63       (96)
Less valuation allowance................................    (109)        --        (64)       --
                                                           -----      -----      -----      ----
Deferred income taxes...................................   $(496)     $(113)     $  (1)     $(96)
                                                           =====      =====      =====      ====
</TABLE>
 
     At December 31, 1998, the Corporation has net operating loss carryforwards
of approximately $534 million for federal income tax purposes. Such
carryforwards, which may provide future tax benefits, expire in 2018.
 
                                      F-28
<PAGE>   94
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     A reconciliation of the tax provision of the Corporation at the U.S.
statutory rate to the provision for income tax as reported is as follows (in
millions):
 
<TABLE>
<CAPTION>
                                                              1998     1997    1996
                                                              -----    ----    ----
<S>                                                           <C>      <C>     <C>
Tax provision (benefit) at U.S. statutory rate..............  $(133)   $(36)   $142
Tax on repatriation of foreign earnings.....................     (5)     21       1
Non-deductible goodwill.....................................     29      10      10
Foreign tax rate differential...............................      9      (1)      6
U.S. state and local income taxes...........................      5      24       8
Transaction costs...........................................    (21)     89      --
Deferred asset valuation allowance..........................     --      64      --
Other.......................................................      7     (12)      6
                                                              -----    ----    ----
Provision (benefit) for income tax..........................  $(109)   $159    $173
                                                              =====    ====    ====
</TABLE>
 
NOTE 15.  DEBT
 
     Short-term borrowings and long-term debt consisted of the following (in
millions):
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998      1997
                                                              ------    -------
<S>                                                           <C>       <C>
Short-term borrowings, including $1 billion asset sale
  bridge....................................................  $  657    $   258
Long-term debt..............................................   8,148      3,043
                                                              ------    -------
                                                               8,805      3,301
Less net debt allocated to discontinued operations..........      --     (1,333)
                                                              ------    -------
                                                              $8,805    $ 1,968
                                                              ======    =======
</TABLE>
 
     The weighted average interest rate for short-term borrowings was 5.87% and
6.71% at December 31, 1998 and 1997, respectively, and their fair values
approximated carrying value given their short-term nature. This average is
composed of interest rates on both U.S. dollar and non-U.S. dollar denominated
indebtedness.
 
     Long-term debt including capital leases consisted of the following (in
millions):
 
<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                              -----------------
                                                               1998      1997
                                                              ------    -------
<S>                                                           <C>       <C>
$3.1 Billion Facility:
  $1 billion five-year term loan............................  $1,000    $    --
  $1.1 billion five-year revolver...........................     814         --
IRN Facility I..............................................   2,500         --
IRN Facility II.............................................   1,000         --
Revolving credit agreement (6.16% weighted average).........      --        600
6.25% notes due 2000........................................     699        699
6.75% notes due 2003........................................     250        250
6.75% notes due 2005........................................     449        449
7.375% debentures due 2015..................................     448        448
7.75% debentures due 2025...................................     148        148
8.875% senior subordinated notes due 2002...................     150        150
6.3%-10.0% domestic loans due 1999-2013.....................     481         44
4.75%-18.45% foreign loans due 1999-2009....................     209        255
                                                              ------    -------
                                                               8,148      3,043
Less indebtedness classified in net liabilities of
  discontinued operations...................................      --     (1,333)
Less current maturities.....................................     (37)      (640)
                                                              ------    -------
                                                              $8,111    $ 1,070
                                                              ======    =======
</TABLE>
 
                                      F-29
<PAGE>   95
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Aggregate long-term debt maturities for each of the years ending December
31 are as follows (in millions):
 
<TABLE>
<CAPTION>
                                                              LONG-TERM    CAPITAL
                                                                DEBT       LEASES     TOTAL
                                                              ---------    -------    ------
<S>                                                           <C>          <C>        <C>
1999........................................................   $   24        $14      $   38
2000........................................................      899         12         911
2001........................................................      243          9         252
2002........................................................      777          3         780
2003........................................................    4,833          1       4,834
Thereafter..................................................    1,336         --       1,336
                                                               ------        ---      ------
                                                                8,112         39       8,151
Less amounts representing interest..........................       --         (3)         (3)
                                                               ------        ---      ------
                                                               $8,112        $36      $8,148
                                                               ======        ===      ======
</TABLE>
 
     On February 23, 1998, the Company obtained two credit facilities ($5.6
billion in total) with Lehman Commercial Paper Inc., Bankers Trust Company and
The Chase Manhattan Bank to fund the cash portion of the ITT Merger
consideration, to refinance a portion of the Company's existing indebtedness
(including indebtedness outstanding under the $2.2 billion credit facility
entered into in connection with the Westin Merger) and to provide funds for
general corporate purposes. These facilities are comprised of a $3.1 billion
senior secured credit facility (the "$3.1 Billion Facility") and a $2.5 billion,
five-year secured increasing rate notes facility (the "IRN Facility I").
 
     The $3.1 Billion Facility has three tranches: a $1.0 billion, one-year term
loan; a $1.0 billion, five-year term loan; and a $1.1 billion, five-year
revolving credit facility. The Corporation, the Trust and certain of their
respective direct and indirect subsidiaries may be designated as borrowers or
co-borrowers under all or a portion of the $3.1 Billion Facility. The interest
rate for the $3.1 Billion Facility was one-, two- or three-month LIBOR, at the
Company's option, plus a margin of 125 basis points at December 31, 1998. The
margin is determined pursuant to a pricing "grid" with rates based on the
Company's leverage and/or senior unsecured debt rating. Quarterly amortization
of the five-year term loan begins in the third year, with total amortization of
10%, 20% and 70% of the principal amount over the third, fourth and fifth year,
respectively. Repayment of amounts borrowed under the $3.1 Billion Facility is
guaranteed by the Trust, the Corporation and substantially all their respective
significant subsidiaries (including the Partnerships) other than gaming and
foreign subsidiaries and joint venture entities (the "Guarantor Subsidiaries"),
to the extent such entities are not borrowers or co-borrowers, and is secured by
a pledge of all the capital stock, partnership interests and other equity
interests of the Guarantor Subsidiaries.
 
     The IRN Facility I consists of a single drawdown, increasing rate,
non-amortizing five-year term loan for $2.5 billion. The Corporation is the
borrower under the IRN Facility I; the Trust and all Guarantor Subsidiaries are
guarantors of the IRN Facility I. The IRN Facility I is secured equally and
ratably by all the collateral securing the $3.1 Billion Facility and is pari
passu in right of payment with all other senior indebtedness of the borrower and
the Guarantor Subsidiaries, including the $3.1 Billion Facility. Amounts
borrowed under the IRN Facility I bore interest at one-, two- or three-month
LIBOR plus 325 basis points at December 31, 1998, with the interest rate
increasing by 50 basis points every three months thereafter, up to a maximum
rate of one-, two- or three-month LIBOR plus 375 basis points.
 
     In September 1998, the Company entered into a new $1 billion, five-year
term borrowing facility ("IRN Facility II" and, together with IRN Facility I,
the "IRN Facilities"). IRN Facility II bears interest at one-, two- or
three-month LIBOR plus 275 basis points at December 31, 1998. The Corporation is
the borrower under the IRN Facility II; the Trust and all Guarantor Subsidiaries
are guarantors of the IRN Facility II. The
                                      F-30
<PAGE>   96
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
IRN Facility II is secured equally and ratably by all the collateral securing
the $3.1 Billion Facility and is pari passu in right of payment with all other
senior indebtedness of the borrower and the Guarantor Subsidiaries, including
the $3.1 Billion Facility.
 
     The Company maintains lines of credit under which bank loans and other
short-term debt are drawn. In addition, smaller credit lines are maintained by
the Company's foreign subsidiaries. The Company had approximately $390 million
of available borrowing capacity under the revolving credit agreements as of
December 31, 1998.
 
     The Company is subject to certain restrictive debt covenants under its
short-term borrowing and long-term debt obligations including defined financial
covenants, escrow account funding requirements for capital purchases and tax
payments, limitations on capital expenditures and on the Company's right to
incur further debt, and restrictions on transactions with affiliates and related
persons. The Company was in compliance with all of the short-term borrowing and
long-term debt obligation covenants at December 31, 1998.
 
     In January 1999, the Company completed a $542 million long-term financing
(the "Mortgage Loan"), secured by mortgages on a portfolio of 11 hotels. The
Mortgage Loan bears interest at a blended rate of 6.98%. The Mortgage Loan is
due in February 2009 and the proceeds from the Mortgage Loan were used to pay
down the one-year term loan under the $3.1 Billion Facility.
 
     For adjustable rate debt, fair value approximates carrying value due to the
variable nature of the interest rates. For fixed rate debt, fair value is
determined based upon discounted cash flows for the debt at rates deemed
reasonable for the type of debt and prevailing market conditions and, if
appropriate, the length to maturity for the debt. The estimated fair value of
long-term debt at December 31, 1998 and 1997 was $8.7 billion and $3.0 billion,
respectively, and was determined based on quoted market prices and/or discounted
cash flows using the Company's incremental borrowing rates for similar
arrangements.
 
NOTE 16.  EMPLOYEE BENEFIT PLANS
 
     PENSION AND POSTRETIREMENT BENEFIT PLANS.  The Company and its subsidiaries
sponsor numerous pension plans. The ITT plans are funded with trustees, except
in some countries outside the U.S. where funding is not required. The ITT plan's
assets are comprised of a broad range of domestic and foreign equity securities,
fixed income investments, and real estate. The Westin Supplemental Executive
Retirement Plan is a non-contributory, non-qualified plan that provides benefits
for certain executives. The plan is unfunded apart from general assets of the
Company.
 
     The Company also sponsors multiple non-pension postretirement benefit
plans. The ITT plans provide health care and life insurance benefits for certain
eligible retired employees. The Company has prefunded a portion of the health
care and life insurance obligations through trust funds where such prefunding
can be accomplished on a tax effective basis. The Westin plan covers certain
eligible retired employees. The plan provides medical and dental benefits, and
is a contributory plan, with retiree contributions adjusted annually. The plan
also contains other cost-sharing features such as deductibles and coinsurance.
The Company funds the health plan on a pay-as-you-go basis.
 
     The following table sets forth the benefit obligation, fair value of plan
assets, and the funded status of the Company's pension and other benefit plans,
amounts recognized in the Company's combined consolidated balance sheets at
December 31, 1998 and 1997, and the principal weighted average assumptions
inherent in their determination (amounts are in millions).
 
                                      F-31
<PAGE>   97
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                   FOREIGN PENSION
                                               PENSION BENEFITS       BENEFITS        OTHER BENEFITS
                                               ----------------    ---------------    --------------
                                                1998      1997      1998     1997     1998     1997
                                               ------    ------    ------    -----    -----    -----
<S>                                            <C>       <C>       <C>       <C>      <C>      <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year......   $278      $232     $ 152     $150     $ 27     $ 30
  Service cost...............................     17        16         6       11        1        1
  Interest cost..............................     19        19         5        9        2        2
  Actuarial loss.............................     47        19         4       89        8        1
  Divestitures...............................     (1)       --       (72)      --       --       --
  Curtailments...............................    (68)       --        (1)      --       --       (4)
  Settlements................................     --        --        (2)      (3)      --       (2)
  Effect of foreign exchange rates...........     --        --         1      (12)      --       --
  Special termination benefits...............      6        --        --       --       --       --
  Benefits paid..............................     (9)       (8)      (13)     (92)      (2)      (1)
                                                ----      ----     -----     ----     ----     ----
Benefit obligation at end of year............   $289      $278     $  80     $152     $ 36     $ 27
                                                ====      ====     =====     ====     ====     ====
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of       $227      $183     $ 152     $143     $ 19     $ 23
  year.......................................
  Actual return on plan assets...............     12        45         4       18        1        4
  Employer contribution......................     13         7        11       97        2       (4)
  Divestitures...............................     (3)       --      (107)      --       --       --
  401(h) transfer............................     --        --        --       --       --        1
  Settlements................................     --        --        (2)      --       --       (4)
  Effect of foreign exchange rates...........     --        --         2      (14)      --       --
  Benefits paid..............................     (9)       (8)      (13)     (92)      (2)      (1)
                                                ----      ----     -----     ----     ----     ----
Fair value of plan assets at end of year.....   $240      $227     $  47     $152     $ 20     $ 19
                                                ====      ====     =====     ====     ====     ====
Funded status................................   $(49)     $(51)    $ (33)    $ --     $(16)    $ (8)
  Unrecognized net actuarial (gain)loss......    (12)      (18)        8      (26)      (1)     (12)
  Unrecognized prior service cost............     --        17         2        2       (2)      (3)
  Unrecognized net transition obligation.....     --        (1)       (1)      (1)      --       --
                                                ----      ----     -----     ----     ----     ----
Accrued benefit cost.........................   $(61)     $(53)    $ (24)    $(25)    $(19)    $(23)
                                                ====      ====     =====     ====     ====     ====
Amounts recognized in the combined
  consolidated balance sheet consist of:
  Prepaid benefit cost.......................   $  3      $  3     $   6     $ 11     $ --     $ --
  Accrued benefit cost.......................    (64)      (56)      (30)     (36)     (19)     (23)
  Additional minimum liability...............     (2)       --        --       --       --       --
  Adjustment for purchase accounting.........     --        --        --       --       --        3
  Accumulated other comprehensive income.....      2        --        --       --       --       --
                                                ----      ----     -----     ----     ----     ----
Net amount recognized at end of year.........   $(61)     $(53)    $ (24)    $(25)    $(19)    $(20)
                                                ====      ====     =====     ====     ====     ====
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER
  31
Discount rate................................   6.50%     7.25%     5.88%    6.67%    6.50%    7.25%
Expected return on plan assets...............   9.75%     9.75%     7.00%    7.82%    9.75%    9.75%
Rate of compensation increase................   5.00%     5.00%     3.20%    4.12%    4.50%    4.50%
</TABLE>
 
                                      F-32
<PAGE>   98
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     For measurement purposes, a 6.80% to 7.00% annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1998. The rate
was assumed to decrease gradually to 5.00% for 2001 for the ITT plans, and 2007
for the Westin plan, and remain at that level thereafter.
 
<TABLE>
<CAPTION>
                                                                       FOREIGN PENSION
                                                 PENSION BENEFITS          BENEFITS           OTHER BENEFITS
                                                ------------------    ------------------    ------------------
                                                1998   1997   1996    1998   1997   1996    1998   1997   1996
                                                ----   ----   ----    ----   ----   ----    ----   ----   ----
<S>                                             <C>    <C>    <C>     <C>    <C>    <C>     <C>    <C>    <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost..................................  $ 17   $ 16   $ 15    $ 6    $ 11   $ 11    $ 1    $ 1    $ 1
Interest cost.................................    19     19     16      5       9      9      2      2      2
Expected return on plan assets................   (18)   (16)   (15)    (5)    (11)   (10)    (2)    (2)    (2)
Amortization of:
  Prior service cost..........................     1      2      2     --      --     --     --     --     --
  Actuarial (gain) loss.......................     1     --     --     --      --     --     --     (1)    (1)
                                                ----   ----   ----    ---    ----   ----    ---    ---    ---
SFAS 87 cost/SFAS 106 cost....................    20     21     18      6       9     10      1     --     --
                                                ----   ----   ----    ---    ----   ----    ---    ---    ---
SFAS 88 charges:
  Special termination benefit charge
    (credit)..................................    (1)    --     --     --      --     --     --     --     --
  Curtailment charge (credit).................     2     --     --     (1)     --     --     --     (3)    --
  Settlement charge (credit)..................    --     --     --      5      (3)     2     --      1     --
                                                ----   ----   ----    ---    ----   ----    ---    ---    ---
Net periodic benefit cost.....................  $ 21   $ 21   $ 18    $10    $  6   $ 12    $ 1    $(2)   $--
                                                ====   ====   ====    ===    ====   ====    ===    ===    ===
</TABLE>
 
<TABLE>
<CAPTION>
                                                                                 FOREIGN PENSION
                                                             PENSION BENEFITS        BENEFITS
                                                             ----------------    ----------------
                                                             1998       1997     1998        1997
                                                             -----      -----    ----        ----
<S>                                                          <C>        <C>      <C>         <C>
Plans with ABO exceeding assets at end of year:
  ABO......................................................   $33        $26     $29         $34
  PBO......................................................   $--        $--     $32         $37
  Fair value of plan assets................................   $--        $--     $--         $ 2
</TABLE>
 
     Educational Services was spun off from the ITT Corporation Salaried
Retirement Plan in June 1998 resulting in a release of future pension
obligations. WD was spun off from the Salaried Plan in February 1998 resulting
in a release of all pension obligations along with approximately $110 million of
plan assets. The curtailment and special termination benefit amounts resulting
from these two spin-offs, as well as the charges triggered by the change in
control provisions, are presented in accordance with SFAS No. 88, Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Terminated Benefits.
 
     Effective February 23, 1999 all future accruals of defined benefits will be
eliminated under the ITT Corporation Salaried Retirement Plan and the ITT
Sheraton Corporation Pension Plan for Hourly Employees. The Westin Hotel Company
Supplemental Executive Retirement Plan was closed to future participation on
October 1, 1998, and all future accruals of defined benefits will be eliminated
effective February 23, 1999. The Caesars World Inc. Executive Security Plan
future accruals for all but a few employees will be eliminated effective
February 23, 1999. Curtailment accounting was done at September 30, 1998, based
on beginning of year estimates for all plans except the ITT Corporation Salaried
Retirement Plan, which was remeasured as of September 30, 1998.
 
     The postretirement medical and life plans will also be frozen February 23,
1999, with certain protections for "grandfathered" groups. Gains and losses
associated with these changes are expected to be relatively small.
 
                                      F-33
<PAGE>   99
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects (in
millions):
 
<TABLE>
<CAPTION>
                                                                 1%          1%
                                                              INCREASE    DECREASE
                                                              --------    --------
<S>                                                           <C>         <C>
Effect on total of service and interest cost components.....     $--        $--
Effect on the postretirement benefit obligation.............     $1         $(1)
</TABLE>
 
     DEFINED CONTRIBUTION PLANS.  The Company sponsors numerous 401(k) plans,
which are voluntary defined contribution plans allowing participation by
domestic employees that meet certain age and service requirements. Each
participant may contribute on a pretax basis between 1% and 16% of his or her
compensation to the plans. The plans also contain additional provisions for
matching and/or profit sharing contributions, both of which are based on a
portion of a participant's eligible compensation. The amount of expense for
matching and profit sharing contributions totaled $15.3 million in 1998, $10
million in 1997 and $10 million in 1996.
 
NOTE 17.  LEASES AND RENTALS
 
     At December 31, 1998, the Trust owned equity interests in 102 hotels, of
which 90 properties were owned and 12 were held pursuant to long-term leases.
 
     All of the Trust's hotels are leased to the Corporation as of December 31,
1998. The leases between the Trust and the Corporation are generally long-term
and provide for annual base, or minimum rents, plus contingent, or percentage
rents based on the gross revenues of the properties and are accounted for as
operating leases. The leases are "triple-net" in that the lessee is generally
responsible for paying all operating expenses of the properties, including
maintenance, insurance and real property taxes. The lessee is also generally
responsible for any payments required pursuant to underlying ground leases. The
Corporation is committed under its leases with the Trust to pay the rents
payable with respect to ground leases. Total rental expense incurred by the
Corporation under such leases was approximately $386 million for the year ended
December 31, 1998, of which approximately $100 million related to percentage
rent.
 
     The Corporation's minimum future rents at December 31, 1998 payable under
non-cancelable operating leases with the Trust and with others for the years
ended December 31 are as follows (in millions):
 
<TABLE>
<CAPTION>
                                              1999    2000    2001    2002    2003    THEREAFTER
                                              ----    ----    ----    ----    ----    ----------
<S>                                           <C>     <C>     <C>     <C>     <C>     <C>
Trust.......................................  $340    $248    $ 71    $15     $10        $ 60
Other.......................................    42      40      36     32      31         276
                                              ----    ----    ----    ---     ---        ----
Total.......................................  $382    $288    $107    $47     $41        $336
                                              ====    ====    ====    ===     ===        ====
</TABLE>
 
     The Corporation leases certain equipment for the hotels' operations under
various lease agreements. The leases extend for varying periods through 2023 and
generally are for a fixed amount each month. Future minimum lease payments under
the non-cancelable operating leases are included in the other minimum future
rents above.
 
     Rent expense under other non-cancelable operating leases was $45 million,
$39 million and $47 million in 1998, 1997 and 1996, respectively.
 
     The Trust's rents receivable from the Corporation relating to leased hotel
properties at December 31, 1998 was $20 million.
 
                                      F-34
<PAGE>   100
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The Corporation is committed under its leases with the Trust to pay rents
payable with respect to ground leases, which expire in 1999 through 2069,
including renewal options. The ground leases generally provide for a minimum
rent plus a percentage of gross revenues of the properties in excess of the
minimum rent. Future minimum lease payments under the ground leases for the
years ending December 31, 1999 through December 31, 2003 are $9 million each
year and $235 million thereafter. Rent expense, inclusive of percentage rents,
incurred by the Corporation, as the operator under the ground leases, was
approximately $15 million in 1998.
 
NOTE 18.  MINORITY INTEREST
 
     At December 31, 1998, minority interest includes 7.7% and 18.8%
respectively, of limited partnership interest of the Realty Partnership and the
Operating Partnership, and certain other interests in consolidated joint
ventures. The total number of limited partnership units outstanding in the
Realty Partnership and the Operating Partnership at December 31, 1998 was 10.5
million and 10.3 million, respectively. The limited partnership units are
exchangeable on a one-for-one basis for Units. During 1998, approximately 1.5
million limited partnership interests were converted into an equal number of
Units.
 
NOTE 19.  EQUITY PUT OPTIONS
 
     As a part of its share repurchase program, defined below, the Company sold
equity put options during 1998 that entitle the holder, at the expiration date,
to sell Units to the Company at contractually specified prices. The Company
issued put options for the purchase of one million Units for $1.8 million in
premiums. As of December 31, 1998, none of the equity put options had been
exercised and equity put options with an aggregate exercise price of
approximately $32 million for one million Units remained outstanding at strike
prices ranging from $30.24 to $32.95 with expiration dates through March 1999.
The exercise price is included in temporary equity in the accompanying financial
statements. In the event the options are exercised, the Company is required to
deliver the full stated amount of cash to the put holder for the full stated
number of Units. The Company may elect, under certain circumstances, to pay the
put holder in cash or shares equal to fair market value of the difference
between the strike price and the market price of the Units.
 
     In the first quarter of 1999, the Company settled certain outstanding
equity put options by purchasing 500,000 outstanding Units at an average strike
price of $32.04.
 
NOTE 20.  STOCKHOLDERS' EQUITY
 
     SHARE REPURCHASES.  In 1998, the Board of Directors of the Company approved
the repurchase of up to $1 billion of Units (the "Share Repurchase Program").
Pursuant to the Share Repurchase Program, the Company repurchased approximately
10.1 million Units in the open market at an average purchase price of $36.70
during 1998.
 
     FORWARD EQUITY TRANSACTIONS.  Pursuant to a Purchase Agreement dated
October 10, 1997, the Company sold to UBS Limited ("UBS Ltd.") 2.185 million
Units ("UBS Shares") at a cash price of $57.25 per share, and paid to Warburg
Dillon Read LLC (formerly UBS Securities LLC), an affiliate of UBS Ltd., a
placement fee equal to 2.5% of the gross proceeds to the Company from such sale
of shares. Concurrently therewith, the Company entered into an agreement that
provided for a settlement payment to be made, in the form of Units or cash, by
the Company to an affiliate of Union Bank of Switzerland, London Branch, or by
that affiliate to the Company, based on the market price of the Units over a
specified "unwind period," as compared to a "forward price." The Company settled
its obligations under this agreement in September 1998 by repurchasing the UBS
Shares for approximately $130.3 million in cash. As a result of this settlement,
the Company has no further obligations under this agreement and Units were
reduced by approximately 2.185 million.
                                      F-35
<PAGE>   101
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     On February 24, 1998, the Trust and the Corporation sold an aggregate of
4.641 million Units to Merrill Lynch International, NMS Services, Inc., Lehman
Brothers Inc. and certain affiliates for a cash purchase price per Unit of
$52.798, which price reflected a 2% discount from the last reported sale price
of the Units on the date of the purchase. Concurrently with these sales, the
Trust and the Corporation entered into three separate agreements with these
purchasers and/or certain of their affiliates pursuant to which each of these
purchasers or their respective affiliates agreed to sell, as directed by the
Trust and the Corporation in an underwritten fixed price offering or other
specified methods, a sufficient number of the Units to achieve net sales
proceeds equal to the aggregate market value of the Units purchased in February
1998, plus a forward accretion component, minus an adjustment for dividends paid
on the purchased Units. Additional Units were required to be delivered by the
Company as security in the event the market prices of the Units dropped below
certain specified levels. In October 1998, the Company settled its obligations
under these agreements by repurchasing all of the Units issued to these
purchasers for an aggregate of approximately $255 million in cash. As a result
of this settlement, the Company has no further obligations under these
agreements and Units outstanding were reduced by approximately 7.379 million
(4.641 million original Units issued and 2.738 million Units previously issued
as security).
 
     EXCHANGEABLE PREFERRED SHARES.  During 1998, 6.3 million shares of Class A
EPS and 5.5 million shares of Class B EPS were issued by the Trust in connection
with the Westin Merger. Class A EPS have a par value of $0.01 per share and are
convertible on a one-for-one basis (subject to certain adjustments) to Units.
Class B EPS have a liquidation preference of $38.50 per share and provide the
holders with the right, from and after the fifth anniversary of the closing date
of the Westin Merger, to require the Trust to redeem such shares at a price of
$38.50. Shares of Class B EPS are convertible on a one-for-one basis (subject to
certain adjustments) to Class A EPS. During 1998, the Trust consented to the
conversion of approximately 1.3 million shares of Class B EPS by certain
stockholders into an equal number of shares of Class A EPS; stockholders
thereafter converted approximately 3.2 million shares of Class A EPS into an
equal number of Units. Additionally, approximately 0.3 million Class B EPS were
canceled in satisfaction of certain employee tax withholding liabilities which
were paid by the Company. At December 31, 1998, the Trust had 150 million
preferred shares authorized and 4.4 million and 3.9 million of Class A EPS and B
EPS outstanding, respectively.
 
NOTE 21.  STOCK INCENTIVE PLANS
 
     The Trust and the Corporation each adopted Incentive and Non-Qualified
Share Option Plans in 1986 which provided for the purchase of up to an aggregate
of 175,000 Units by Trustees, Directors, officers and employees pursuant to
option grants. At December 31, 1998, the Company had options outstanding to
purchase approximately 4,000 Units at exercise prices ranging from $11.00 to
$14.50 per Unit under these plans. Such options, which have exercise prices
equal to the Units' fair market value on the date of grant, vest over three
years.
 
     During 1995, the Trust and the Corporation each adopted a 1995 Share Option
Plan (together, as amended, the "LTIP"), which provides for the purchase of
Units by Trustees, Directors, officers, employees, consultants and advisors,
pursuant to option grants. The aggregate number of Units subject to
non-qualified or incentive stock options, performance shares, restricted stock
or any combination of the foregoing which are available to be granted under the
LTIP at December 31, 1998 was approximately 9.7 million.
 
     The LTIP provides for the grant of Units that are subject to performance
measures or restriction periods and performance awards in tandem with certain
Paired Options to be paid in cash subject to performance measures. The LTIP also
provides for the automatic annual grant of Paired Options, as defined, to
Trustees and Directors for options to purchase 4,500 Units and provides for the
annual fee of Trustees and Directors to
 
                                      F-36
<PAGE>   102
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
be paid in Units, subject to each Trustee's and Director's option to receive up
to half in cash and to defer receipt of such annual fee until after terminating
service with the Company.
 
     As of the date of the ITT Merger (February 23, 1998), each ITT stock option
("ITT Stock Option") and related stock appreciation right that was outstanding
immediately prior to February 23, 1998, pursuant to ITT's stock option plans in
effect on the date of the original merger agreement (November 1997), was assumed
by the Corporation and became and represent a fully exercisable option to
purchase the number of Units ("Substitute Option") determined by applying the
conversion factor of 1.543 to the ITT Stock Options outstanding immediately
prior to February 23, 1998 and to the exercise price immediately prior to
February 23, 1998. As of February 23, 1998, each Substitute Option became
subject to the same terms and conditions as were applicable immediately prior to
that date under the related ITT Stock Option under which it was granted,
including those providing for the accelerated exercisability and other special
rights arising under certain circumstances. The ITT Merger triggered an
accelerated exercisability event and, as such, entitled each holder to receive
an amount equal to the excess of $85 over the adjusted exercise price of the
related ITT Stock Option.
 
     The Company applied APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations; accordingly, compensation cost was not
recognized for grants of stock options at market price. In November 1997, due to
the election of the holder of each ITT Stock Option to receive either cash,
Units or a combination, variable accounting required an expense to be recognized
for the difference between the option price and the formula market price
totaling $342 million.
 
     Had compensation cost for grants been determined based on the fair value at
the grant dates consistent with SFAS No. 123, Accounting for Stock-Based
Compensation, the Company's net income would have been reduced by $86 million
($0.46 per Unit) and $20 million ($0.16 per Unit) in 1998 and 1996,
respectively. Net income would not have been affected in 1997 as a result of the
application of the variable accounting, as noted above. The fair value of each
option grant used in the 1998 and 1996 pro forma amounts was estimated on the
date of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1996, respectively:
dividend yield of 2.6% and 0.0%; expected volatility of 47.6% and 33.0%;
risk-free interest rates of 4.5% and 5.3%; and an expected life of three and
four years for all options.
 
                                      F-37
<PAGE>   103
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The following table summarizes stock option activity as of and for the
years ended December 31:
 
<TABLE>
<CAPTION>
                                                                             WEIGHTED-AVERAGE
                                                                              EXERCISE PRICE
                                                                OPTIONS          PER UNIT
                                                              -----------    ----------------
<S>                                                           <C>            <C>
Outstanding at December 31, 1995............................    9,684,788         $24.13
Granted.....................................................    2,687,205          36.16
Exercised...................................................     (444,549)         21.93
Cancelled...................................................     (179,383)         32.18
                                                              -----------         ------
Outstanding at December 31, 1996............................   11,748,061          26.85
Granted.....................................................    3,248,478          37.50
Exercised...................................................   (1,347,453)         26.71
Forfeited...................................................     (380,109)         33.01
                                                              -----------         ------
Outstanding at December 31, 1997............................   13,268,977          29.29
Granted(1)..................................................   19,783,847          43.18
Exercised(2)................................................  (12,536,071)         28.45
Forfeited...................................................   (2,393,977)         44.61
                                                              -----------         ------
Outstanding at December 31, 1998............................   18,122,776         $43.80
                                                              ===========         ======
Exercisable at December 31, 1997............................   10,234,509         $27.20
                                                              ===========         ======
Exercisable at December 31, 1998............................    6,963,014         $32.51
                                                              ===========         ======
</TABLE>
 
---------------
(1) Represents Corporation and Trust options of 17,055,147 outstanding at
    February 23, 1998 (the ITT Merger date) and shares granted by the Company
    during 1998.
 
(2) Represents options exercised during 1998, including the ITT Stock Options
    which were exercised upon the occurrence of the accelerated exercisability
    event (the ITT Merger).
 
     The following table summarizes information about outstanding stock options
at December 31, 1998:
 
<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                  -------------------------------------------------   ------------------------------
                                WEIGHTED-AVERAGE
                                   REMAINING       WEIGHTED-AVERAGE                 WEIGHTED-AVERAGE
   RANGE OF         NUMBER        CONTRACTUAL          EXERCISE         NUMBER          EXERCISE
EXERCISE PRICES   OUTSTANDING    LIFE IN YEARS        PRICE/UNIT      EXERCISABLE      PRICE/UNIT
---------------   -----------   ----------------   ----------------   -----------   ----------------
<S>               <C>           <C>                <C>                <C>           <C>
$ 0.00 - $20.31    1,984,637          7.98              $14.42         1,346,137         $11.95
$21.33 - $23.92    2,178,724          7.43               23.43         2,178,724          23.43
$24.25 - $42.31    2,722,342          8.38               38.20         1,394,286          34.28
$42.69 - $49.19    2,967,428          9.31               48.91           184,000          44.69
$50.23 - $53.94    2,085,774          8.48               52.93           682,943          52.96
$54.63 - $54.63    2,500,000          9.13               54.63           833,334          54.63
$54.85 - $55.83    2,673,613          9.13               55.21           166,666          55.83
$57.88 - $76.13    1,010,258          9.28               69.67           176,924          69.12
                  ----------          ----              ------         ---------         ------
                  18,122,776          8.65              $43.80         6,963,014         $32.51
                  ==========          ====              ======         =========         ======
</TABLE>
 
     During 1998, the Company granted restricted stock awards for 327,000 Units.
As of December 31, 1998, approximately 300,000 of these awards had vested. The
remaining restricted stock awards vest at varying rates over four years from the
award grant date. Compensation expense of approximately $16 million and $1
million was recorded during 1998 and 1997, respectively, related to restricted
stock awards.
 
                                      F-38
<PAGE>   104
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 22.  DERIVATIVE FINANCIAL INSTRUMENTS
 
     The Company enters into interest rate swap agreements to manage interest
rate fluctuations on its variable rate debt. The Company currently has five
outstanding forward interest rate swap agreements under which the Company pays a
fixed rate and receives variable rates of interest. The aggregate notional
amount of these forward interest rate swaps was approximately $1.031 billion and
the estimated unrealized loss on these interest rate swaps was approximately $36
million at December 31, 1998. Four of these five forward interest rate swap
agreements, representing $1.0 billion of the total notional amount, are required
by the terms of the Company's existing credit facilities. The unrealized loss
represents the amount the Company would pay to terminate the swap agreements
based on current interest rates.
 
     The Company enters into forward foreign exchange contracts to hedge the
foreign currency exposure associated with the Company's foreign currency
denominated assets and liabilities. The Company currently has two forward
foreign exchange contracts outstanding with a dollar equivalent of the
contractual amounts of these hedges at December 31, 1998 of approximately $54.9
million. These contracts mature on April 12, 1999.
 
     A long-term debt offering that the Company was contemplating was delayed
due to market conditions and the Restructuring. As a result, certain of the
Company's forward interest rate swaps with a notional amount of $500 million no
longer correlated with this anticipated indebtedness. In accordance with the
Company's accounting policies, these forward interest rate swaps were marked to
market by the Company and, as such, the Company recognized a loss of $40 million
during 1998, which is included in interest expense. These contracts were
terminated by the Company in 1998.
 
NOTE 23.  RELATED PARTY TRANSACTIONS
 
     STARWOOD CAPITAL.  Starwood Capital Group, L.L.C. ("Starwood Capital") has
granted to Starwood Hotels an exclusive, non-transferable, royalty-free license
to use the "Starwood" name and trademarks in connection with the hotel and
hospitality services business worldwide, and to use the "Starwood" name in its
corporate name worldwide, in perpetuity.
 
     Starwood Capital and Starwood Hotels agreed that, subject to approval by
the independent Trustees or Directors, as appropriate, until December 31, 1998,
Starwood Hotels would reimburse Starwood Capital for its out-of-pocket expenses
and internal costs (including allocation of overhead) for services provided to
Starwood Hotels, other than internal costs of Starwood Capital for services of
senior management of Starwood Capital. During 1998, Starwood Hotels reimbursed
Starwood Capital approximately $391,000 for out-of-product expenses and
approximately $253,000 for internal costs in accordance with this agreement.
This agreement was terminated in 1998.
 
     Starwood Capital's engagement to act as financial advisor to Starwood
Hotels in connection with the ITT Merger was not subject to the above
reimbursement limitation. For its services as a financial advisor, Starwood
Capital was paid $15.5 million in cash and 131,388 Units were issued.
 
     Starwood Capital and its affiliates hold a 37% interest in a golf course
management company that currently manages one golf course that is associated
with a Westin hotel and hold a 20% non-controlling equity interest in a company
which operates the timeshare component of The Regina Resorts in Los Cabos,
Cancun and Puerto Vallarta, Mexico. Individuals affiliated with Starwood
Capital, including individuals who are Trustees of the Trust and Directors of
the Corporation, and certain other affiliates of Starwood Capital hold a 100%
interest in the company that owns the Westin Innisbrook Resort and the Tamarron
Hilton.
 
     In February 1999, the Company purchased in the open market from
unaffiliated third parties debt securities of an affiliated party for $23
million.
 
                                      F-39
<PAGE>   105
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     In February 1998, a subsidiary of the Corporation leased a Gulfstream III
Aircraft from an affiliate of Starwood Capital. The term of the lease is one
year and automatically renews for one-year terms thereafter unless either party
terminates the lease upon 90 days' written notice. The rent for the aircraft,
which was set at approximately 90% of fair market value (based on two
competitive bids from unrelated third parties) is (i) a monthly payment of 1.25%
of the lessor's total costs relating to the aircraft (approximately $123,000 at
the beginning of the lease) which shall be increased accordingly for additional
costs incurred by the lessor plus (ii) $300 for each hour that the aircraft is
in use.
 
     REALTY PARTNERSHIP AND OPERATING PARTNERSHIP.  In November 1998, the
Operating Partnership and other affiliates distributed certain partnership
interests in Moorland Hotel LP ("Moorland") to the Corporation in exchange for
the redemption of 576,995 units in the Operating Partnership held by the
Corporation. Subsequently, the Corporation owned 100% of the net assets of
Moorland and paid off the mortgage note payable in the amount of $37 million
from Moorland to the Realty Partnership with proceeds from an intercompany loan
from the Trust. The real and personal property of Moorland was then contributed
to the Realty Partnership by the Corporation in exchange for 1,810,951 units in
the Realty Partnership to conform to the ownership structure of the Company's
other domestically owned hotels, excluding properties acquired in the ITT
Merger. A three-year lease for the Moorland property, which provides for a
monthly base rent of $333,000 and annual percentage rent payments, was entered
into by the Trust and the Corporation.
 
     In December 1998, the Operating Partnership distributed its 100% interest
in Midland Holding ("Midland") to the Corporation in redemption of 3,733,630
units in the Operating Partnership held by the Corporation. Subsequently, the
Corporation owned 100% of the net assets of Midland and paid off the mortgage
note payable in the amount of $22 million from Midland to the Realty Partnership
with proceeds from an intercompany loan from the Trust. The real and personal
property of Midland was then contributed to the Realty Partnership by the
Corporation in exchange for 2,479,214 units in the Realty Partnership to conform
to the ownership structure of the Company's other domestically owned hotels,
excluding properties acquired in the ITT Merger. A three-year lease for the
Midland hotel, which provides for a monthly base rent of $400,000 and annual
percentage rent payments, was entered into by the Realty Partnership and the
Corporation.
 
     EMPLOYEE AND OFFICER LOANS.  In connection with specific employees' and
officers' relocation to Starwood Hotels headquarters in 1998, Starwood Hotels
made non-interest bearing loans to certain individuals. The original loan
amounts totaled approximately $7.8 million and the amount outstanding at
December 31, 1998 was approximately $6.9 million. These loans are due five years
from the date of issuance or upon the individual's termination.
 
NOTE 24.  COMMITMENTS AND CONTINGENCIES
 
     LITIGATION.  The Company is involved in various legal matters that have
arisen in the normal course of business, some of which include claims for
substantial sums. Reserves have been established when the outcome is probable
and can be reasonably estimated. While the ultimate results of claims and
litigation cannot be determined, the Company does not expect that the resolution
of all legal matters will have a material adverse effect on its consolidated
combined results of operations, financial position or cash flow.
 
     ENVIRONMENTAL MATTERS.  The Company is subject to certain requirements and
potential liabilities under various federal, state and local environmental laws,
ordinances and regulations. Such laws often impose liability without regard to
whether the current or previous owner or operator knew of, or was responsible
for, the presence of such hazardous or toxic substances. Although the Company
has incurred and expects to incur remediation and other environmental costs
during the ordinary course of operations, management anticipates that such costs
will not have a material adverse effect on the operations or financial condition
of the Company.
 
                                      F-40
<PAGE>   106
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     CAPTIVE INSURANCE COMPANY.  Through its captive insurance company, which
was acquired in connection with the Westin Merger, the Company provides
insurance coverage for workers' compensation and general liability claims
arising at hotel properties owned or managed by the Company through policies
written directly and through assumed reinsurance arrangements. Estimated
insurance claims payable represent outstanding claims and those estimated to
have been incurred but not reported based upon historical loss experience.
Actual costs may vary from estimates based on trends of losses for filed claims
and claims estimated to be incurred but not yet filed.
 
     Estimated insurance claims payable at December 31, 1998 was $26 million. At
December 31, 1998, standby letters of credit amounting to $18.4 million had been
issued to provide collateral for the estimated claims. The letters of credit are
guaranteed by the predecessor owner of Westin and Bankers Trust Company.
 
     GUARANTEED LOANS AND COMMITMENTS.  The Company has guaranteed certain loans
and commitments of various ventures to which it is a party. These commitments,
which in the aggregate were approximately $7.2 billion and $91 million at
December 31, 1998 and 1997, respectively, are not expected to have a material
adverse effect on the Company's consolidated financial position or results of
operations.
 
     ITT INDUSTRIES.  In 1995, the former ITT Corporation, renamed ITT
Industries, Inc. ("ITT Industries"), distributed to its stockholders all of the
outstanding shares of common stock of ITT, then a wholly owned subsidiary of ITT
Industries (the "Distribution"). In connection with this Distribution, ITT,
which was then named ITT Destinations, Inc., changed its name to ITT
Corporation.
 
     For purposes of governing certain of the ongoing relationships between the
Company and ITT Industries after the Distribution and spin-off of ITT and to
provide for an orderly transition, the Company and ITT Industries have entered
into various agreements including a spin-off agreement, Employee Benefits
Services and Liability Agreement, Tax Allocation Agreement and Intellectual
Property Transfer and License Agreements. The Company may be liable to or due
reimbursement from ITT Industries relating to the resolution of certain
pre-spin-off matters under these agreements.
 
NOTE 25.  BUSINESS SEGMENT INFORMATION
 
     The Company operates in four business segments within the hotel and gaming
industries as follows:
 
  HOTELS
 
     Owned -- Represents a worldwide network of owned, leased or consolidated
joint venture hotels and resorts operated under the Sheraton, Westin, St. Regis,
The Luxury Collection, Ciga, Four Points and "W" brand names.
 
     Management and Franchise -- Represents fees earned on hotels managed
worldwide, usually under long-term contracts with the hotel owner and franchise
fees received in connection with the franchise of the Company's Sheraton, Westin
and Four Points brand names.
 
     Other -- Represents the Company's interest in unconsolidated joint
ventures.
 
  GAMING
 
     Gaming -- Represents the operations of casinos or other gaming facilities
in the United States, Canada, the Philippines and South Africa, generally under
the Caesars brand name.
 
     The Company evaluates the performance of its segments based primarily on
operating income before interest expense, depreciation and amortization and
income taxes. The Company's income taxes are included in the consolidated
federal income tax return of the Company. Interest expense, interest income,
depreciation
 
                                      F-41
<PAGE>   107
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
and amortization and income taxes are not allocated to segments as management
does not evaluate this information at a segment level.
 
     The following table presents revenues and other financial information by
segment (in millions):
 
<TABLE>
<CAPTION>
                                      HOTELS                                                   SIGNIFICANT ITEMS
                           ----------------------------                                  -----------------------------
                                     MANAGEMENT                                                   CONSOLIDATED
                                        AND                         TOTAL                DESERT      JOINT
                            OWNED    FRANCHISE    OTHER   GAMING   SEGMENT   CORPORATE   INN(B)   VENTURES(A)    OTHER      TOTAL
                           -------   ----------   -----   ------   -------   ---------   ------   ------------   -----     -------
<S>                        <C>       <C>          <C>     <C>      <C>       <C>         <C>      <C>            <C>       <C>
1998
Revenues.................  $ 2,852      $239      $162    $1,263   $ 4,516     $  --      $116    $        104   $ (26)(f) $ 4,710
Operating profit
  (loss).................  $   908      $239      $ 42    $  318   $ 1,507     $ (72)     $(18)   $         15   $ (26)(f) $   601
                                                                                                                 $ (41)(c)
                                                                                                                 $(234)(d)
                                                                                                                 $(530)(g)
Interest expense.........                                                      $ 596      $ --    $          3   $  40(e)  $   639
Interest income..........                                                      $  --      $ --    $         --   $  26(f)  $    26
Depreciation and
  amortization...........                                                      $  --      $ 14    $         12   $ 530(g)  $   556
Income tax (expense)
  benefit................                                                      $ 116      $ --    $         (8)  $  --     $   108
Capital expenditures.....  $   427      $ --      $ --    $  405   $   832     $  --      $ --    $         --   $  --     $   832
Total assets.............  $12,199      $ --      $ --    $3,902   $16,101     $  --      $ --    $         --   $  --     $16,101
                                          --------------------------------------------------------------------
 
1997
Revenues.................  $ 1,465      $174      $ 57    $1,123   $ 2,819     $  --      $ 89    $         85   $ (19)(f) $ 2,974
Operating profit
  (loss).................  $   420      $174      $(34)   $  255   $   815     $ (66)     $(34)   $         18   $ (19)(f) $  (268)
                                                                                                                 $ (28)(c)
                                                                                                                 $(263)(g)
                                                                                                                 $(691)(h)
Interest expense.........                                                      $ 110      $  3    $         --   $  --     $   113
Interest income..........                                                      $  --      $ --    $         --   $  19(f)  $    19
Depreciation and
  amortization...........                                                      $  --      $  7    $         11   $ 263(g)  $   281
Income tax (expense)
  benefit................                                                      $(138)     $(15)   $         (6)  $  --     $  (159)
Capital expenditures.....  $   262      $ --      $ --    $  741   $ 1,003     $  --      $ --    $         --   $  --     $ 1,003
Total assets.............  $ 4,931      $ --      $ --    $3,594   $ 8,525     $  --      $ --    $         --   $  --     $ 8,525
                                          --------------------------------------------------------------------
 
1996
Revenues.................  $ 1,427      $165      $ 41    $1,159   $ 2,792     $  --      $126    $         81   $ (68)(f) $ 2,931
Operating profit
  (loss).................  $   431      $165      $(31)   $  291   $   856     $ (74)     $(10)   $         11   $ (68)(f) $   469
                                                                                                                 $(246)(g)
Interest expense.........                                                      $(158)     $ --    $         (6)  $  --     $  (164)
Interest income..........                                                      $  --      $ --    $         --   $  68(f)  $    68
Depreciation and
  amortization...........                                                      $  --      $  8    $          7   $ 246(g)  $   261
Income tax (expense)
  benefit................                                                      $(160)     $ (7)   $         (6)  $  --     $  (173)
Capital expenditures.....  $   298      $ --      $ --    $  230   $   528     $  --      $ --    $         --   $  --     $   528
Total assets.............  $ 6,029      $ --      $ --    $2,893   $ 8,922     $  --      $ --    $         --   $  --     $ 8,922
</TABLE>
 
---------------
 (a) Represents minority interest in consolidated joint venture results. These
     results are not included by management in evaluating the segment results.
 
(b) Includes the operations of Desert Inn Resort and Casino in Las Vegas,
    Nevada, which is held for sale.
 
 (c) Represents preopening costs which were not allocated or evaluated at a
     segment level by management due to the change in accounting for start-up
     costs.
 
(d) Represents other non-recurring items including restructuring and other
    special charges of $204 million and selling, general and administrative
    expense of $30 million associated with vesting of restricted stock grants.
 
 (e) Represents interest expense of $40 million associated with the settlement
     of certain forward interest rate swaps.
 
 (f) Represents interest income earned by the Company, primarily from mortgage
     notes receivable secured by hotel properties, which management includes in
     other hotel operations in evaluating this segment.
 
 (g) Represents depreciation and amortization expense which management does not
     evaluate in segment operating profit.
 
(h) Represents restructuring and other special charges recorded by ITT in 1997.
 
                                      F-42
<PAGE>   108
                         STARWOOD HOTELS & RESORTS AND
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
NOTE 26.  GEOGRAPHICAL INFORMATION -- TOTAL SEGMENTS
 
<TABLE>
<CAPTION>
                                                               REVENUES                  LONG-LIVED ASSETS
                                                      --------------------------    ---------------------------
                                                       1998      1997      1996      1998       1997      1996
                                                      ------    ------    ------    -------    ------    ------
                                                                            (IN MILLIONS)
<S>                                                   <C>       <C>       <C>       <C>        <C>       <C>
United States.......................................  $3,514    $1,944    $2,008    $ 8,138    $3,293    $3,065
Italy...............................................     325       302       300        655       610       701
All other international.............................     871       728       623      1,441     1,297     1,320
                                                      ------    ------    ------    -------    ------    ------
        Total.......................................  $4,710    $2,974    $2,931    $10,234    $5,200    $5,086
                                                      ======    ======    ======    =======    ======    ======
</TABLE>
 
     There were no other individual international countries, except for Italy,
which comprised over 10% of the total revenues and long-lived assets of the
Company as of December 31, 1998, 1997 or 1996.
 
NOTE 27.  QUARTERLY RESULTS (UNAUDITED)
 
     The following unaudited quarterly results have been restated from amounts
previously reported by the Company for the change in accounting policy related
to non-owned managed hotel revenues (see Note 1).
 
<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                   --------------------------------------------------
                                                   MARCH 31    JUNE 30    SEPTEMBER 30    DECEMBER 31     YEAR
                                                   --------    -------    ------------    -----------    ------
                                                               (IN MILLIONS, EXCEPT PER UNIT DATA)
<S>                                                <C>         <C>        <C>             <C>            <C>
1998
Revenues.........................................   $  884     $1,282        $1,277         $1,267       $4,710
Costs and expenses...............................   $  767     $1,069        $1,292         $  981       $4,109
Income (loss) from continuing operations.........   $   28     $   70        $ (101)        $  144       $  141
Discontinued operations..........................   $  940     $  152        $   24         $   (2)      $1,114
Net income (loss)................................   $  968     $  222        $  (77)        $  142       $1,255
Earnings per Unit:
Basic --
  Income (loss) from continuing operations.......   $ 0.14     $ 0.35        $(0.56)        $ 0.80       $ 0.68
  Discontinued operations........................   $ 6.19     $ 0.80        $ 0.13         $(0.01)      $ 6.02
  Net income (loss)..............................   $ 6.33     $ 1.15        $(0.43)        $ 0.79       $ 6.70
Diluted --
  Income (loss) from continuing operations.......   $ 0.14     $ 0.35        $(0.56)        $ 0.76       $ 0.67
  Discontinued operations........................   $ 6.08     $ 0.75        $ 0.13         $(0.01)      $ 5.96
  Net income (loss)..............................   $ 6.22     $ 1.10        $(0.43)        $ 0.75       $ 6.63
 
1997
Revenues.........................................   $  666     $  768        $  741         $  799       $2,974
Costs and expenses...............................   $  667     $  628        $  608         $1,339       $3,242
Income (loss) from continuing operations.........   $   95     $  183        $   43         $ (591)      $ (270)
Discontinued operations..........................   $  (15)    $   14        $   15         $   11       $   25
Extraordinary item...............................   $   --     $   --        $   --         $  (42)      $  (42)
Cumulative effect of accounting change...........   $  (11)    $   --        $   --         $   --       $  (11)
Net income (loss)................................   $   69     $  197        $   58         $ (622)      $ (298)
Earnings per Unit:
Basic --
  Income (loss) from continuing operations.......   $ 0.76     $ 1.46        $ 0.34         $(4.69)      $(2.14)
  Discontinued operations........................   $(0.12)    $ 0.11        $ 0.12         $ 0.08       $ 0.20
  Extraordinary item.............................   $   --     $   --        $   --         $(0.33)      $(0.33)
  Cumulative effect of accounting change.........   $(0.09)    $   --        $   --         $   --       $(0.09)
  Net income.....................................   $ 0.55     $ 1.57        $ 0.46         $(4.94)      $(2.36)
Diluted --
  Income (loss) from continuing operations.......   $ 0.75     $ 1.44        $ 0.34         $(4.69)      $(2.14)
  Discontinued operations........................   $(0.12)    $ 0.11        $ 0.11         $ 0.08       $ 0.20
  Extraordinary item.............................   $   --     $   --        $   --         $(0.33)      $(0.33)
  Cumulative effect of accounting change.........   $(0.09)    $   --        $   --         $   --       $(0.09)
  Net income (loss)..............................   $ 0.54     $ 1.55        $ 0.45         $(4.94)      $(2.36)
</TABLE>
 
                                      F-43
<PAGE>   109
 
                                  SCHEDULE II
 
                           STARWOOD HOTELS & RESORTS
                   STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                          ADDITIONS (DEDUCTIONS)
                                                                  ---------------------------------------
                                                                                   CHARGED
                                                                    CHARGED        TO/FROM
                                                       BALANCE        TO            OTHER       PAYMENTS/     BALANCE
                                                      JANUARY 1    EXPENSES      ACCOUNTS(A)      OTHER     DECEMBER 31,
                                                      ---------   -----------   -------------   ---------   ------------
<S>                                                   <C>         <C>           <C>             <C>         <C>
YEAR ENDED DECEMBER 31, 1998
Trade receivables -- allowance for doubtful
  accounts..........................................    $112         $ 52           $  28         $(118)        $ 74
Notes receivable -- allowance for doubtful
  accounts..........................................    $ 57         $ --           $  --         $ (24)        $ 33
Reserves included in accrued expenses and other
  liabilities:
  Restructuring and other special charges...........    $736         $204           $(134)        $(600)        $206
YEAR ENDED DECEMBER 31, 1997
Trade receivables -- allowance for doubtful
  accounts..........................................    $121         $ 65           $ (32)        $ (42)        $112
Notes receivable -- allowance for doubtful
  accounts..........................................    $ 50         $ --           $  --         $   7         $ 57
Reserves included in accrued expenses and other
  liabilities:
  Restructuring and other special charges...........    $ 39         $860(b)        $ (39)        $(124)        $736
YEAR ENDED DECEMBER 31, 1996
Trade receivables -- allowance for doubtful
  accounts..........................................    $ 81         $ 39           $  --         $   1         $121
Notes receivable -- allowance for doubtful
  accounts..........................................    $ 98         $ --           $  --         $ (48)        $ 50
Reserves included in accrued and other liabilities:
  Restructuring and other special charges...........    $ 65         $ --           $  --         $ (26)        $ 39
</TABLE>
 
---------------
 
(a) Charged to/from other accounts:
 
<TABLE>
<CAPTION>
                                                              TRADE RECEIVABLES -     RESTRUCTURING
                                                                 ALLOWANCE FOR          AND OTHER
                                                               DOUBTFUL ACCOUNTS     SPECIAL CHARGES
                                                              -------------------    ---------------
<S>                                                           <C>                    <C>
1998
Trade receivables...........................................         $ --                 $ (30)
Notes receivable............................................           --                   (20)
Other Investments...........................................           --                   (27)
Other assets................................................           --                   (40)
Other long-term liabilities.................................           --                   (17)
Acquired assets.............................................            7                    --
Assets held for sale........................................           21                    --
                                                                     ----                 -----
    Total charged to/from other accounts....................         $ 28                 $(134)
                                                                     ====                 =====
1997
Plant, property and equipment...............................         $ --                 $  (7)
Other assets................................................           --                   (32)
Assets held for sale........................................          (32)                   --
                                                                     ----                 -----
    Total charged to/from other accounts....................         $(32)                $ (39)
                                                                     ====                 =====
 
(b) Restructuring and other special charges:
Provision charged to costs and expenses.....................         $691
Provision charged to miscellaneous expense..................          169
                                                                     ----
                                                                     $860
                                                                     ====
</TABLE>
 
                                       S-1
<PAGE>   110
 
                                  SCHEDULE III
 
                           STARWOOD HOTELS & RESORTS
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
 
                               DECEMBER 31, 1998
                                 (IN MILLIONS)
<TABLE>
<CAPTION>
                                                                                                              GROSS AMOUNT BOOK
                                                                 INITIAL COST TO       COSTS SUBSEQUENT           VALUE AT
                                                                     COMPANY            TO ACQUISITION        DECEMBER 31, 1998
                                                              ---------------------   -------------------   ---------------------
                                                                                                             (1)
                                                                                                                        (1)(2)
                                                                       BUILDING AND          BUILDING AND            BUILDING AND
DESCRIPTION                                CITY        STATE   LAND    IMPROVEMENTS   LAND   IMPROVEMENTS    LAND    IMPROVEMENTS
-----------                          ----------------  -----  ------   ------------   ----   ------------   ------   ------------
<S>                                  <C>               <C>    <C>      <C>            <C>    <C>            <C>      <C>
HOTEL ASSETS:
Plaza Hotel & Conference Center....  Tucson            AZ     $   --     $    5.0     $--       $ 1.1       $   --     $    6.1
Chicago Midland....................  Chicago           IL       23.8         17.6      --          --         23.8         17.6
St. Regis Aspen....................  Aspen             CO       20.4        139.5      --         0.1         20.4        139.6
Luxury Collection Hotel............  Houston           TX        6.1         41.5      --         0.1          6.1         41.6
Westin Central Park South..........  New York          NY         --         77.9      --         0.4           --         78.3
Westin Fairfax Hotel...............  Washington        DC        5.7         38.8      --         0.1          5.7         38.9
Four Points Hotel Denver Cherry
 Creek.............................  Denver            CO        3.7         22.4      --         0.2          3.7         22.6
Westin South Coast Plaza...........  Costa Mesa        CA         --         28.7      --         0.1           --         28.8
Westin Indianapolis................  Indianapolis      IN       12.9         73.3      --          --         12.9         73.3
Westin San Francisco Airport.......  Millbrae          CA       11.4         69.5      --          --         11.4         69.5
Westin Ft. Lauderdale..............  Ft. Lauderdale    FL        3.3         20.1      --          --          3.3         20.1
Westin Seattle.....................  Seattle           WA       21.6        149.2      --         0.1         21.6        149.4
Westin Cincinnati..................  Cincinnati        OH         --         62.8      --          --           --         62.8
Westin Tabor Center................  Denver            CO        9.8         66.8      --         0.4          9.8         67.1
Westin Galleria Houston............  Houston           TX         --         10.7      --          --           --         10.7
Westin Oaks........................  Houston           TX         --         13.2      --          --           --         13.2
The St. Regis......................  New York          NY       65.0        149.8      --          --         65.0        149.8
Danbury Hilton and Towers..........  Danbury           CT        2.0         15.8      --          --          2.0         15.8
BWI Airport Marriott...............  Baltimore         MD        3.6         51.6      --          --          3.6         51.6
Charleston Hilton North............  North Charleston  SC        2.6         24.1      --         0.2          2.6         24.3
Sheraton Edison Hotel Raritan
 Center............................  Edison            NJ        1.7         20.2      --         0.3          1.7         20.4
Courtyard by Marriott Crystal
 City..............................  Arlington         VA        3.7         31.0      --          --          3.7         31.1
Novi Hilton........................  Novi              MI        1.8         36.7      --         0.1          1.8         36.8
Sheraton Norfolk Waterside Hotel...  Norfolk           VA        5.2         44.9      --         0.2          5.2         45.1
Park Ridge Hotel...................  King of Prussia   PA        3.1         39.4      --         0.3          3.1         39.7
Westin Long Beach..................  Long Beach        CA        4.3         48.0      --          --          4.3         48.0
Sonoma County Hilton...............  Santa Rosa        CA        1.8         15.4      --         1.5          1.8         16.9
Tremont Hotel......................  Chicago           IL        3.2         17.2      --         0.6          3.2         17.8
Westin Stamford Hotel..............  Stamford          CT        6.2         27.2      --         0.3          6.2         27.5
Sheraton Tara Lexington Inn........  Lexington         MA        1.5         17.5      --          --          1.5         17.5
 
<CAPTION>
 
                                      ACCUMULATED
                                     DEPRECIATION &     YEAR OF        DATE
DESCRIPTION                           AMORTIZATION    CONSTRUCTION   ACQUIRED   LIFE
-----------                          --------------   ------------   --------   ----
<S>                                  <C>              <C>            <C>        <C>
HOTEL ASSETS:
Plaza Hotel & Conference Center....      $  0.2           1971        02/98      21
Chicago Midland....................          --           1934        12/98      40
St. Regis Aspen....................         3.7           1992        01/98      40
Luxury Collection Hotel............         1.1           1982        01/98      40
Westin Central Park South..........         3.0           1929        01/98      25
Westin Fairfax Hotel...............         1.2           1927        01/98      40
Four Points Hotel Denver Cherry
 Creek.............................         0.6           1979        01/98      40
Westin South Coast Plaza...........         1.1           1975        01/98      40
Westin Indianapolis................         2.1           1989        01/98      40
Westin San Francisco Airport.......         2.0           1987        01/98      40
Westin Ft. Lauderdale..............         0.6           1986        01/98      40
Westin Seattle.....................         3.9           1969        01/98      40
Westin Cincinnati..................         1.8           1981        01/98      40
Westin Tabor Center................         1.9           1984        01/98      40
Westin Galleria Houston............         1.2           1977        01/98       9
Westin Oaks........................         1.5           1971        01/98       9
The St. Regis......................         1.7           1904        06/98      40
Danbury Hilton and Towers..........         0.2           1981        05/98      40
BWI Airport Marriott...............         1.0           1988        02/98      40
Charleston Hilton North............         0.5           1983        02/98      40
Sheraton Edison Hotel Raritan
 Center............................         0.4           1987        02/98      40
Courtyard by Marriott Crystal
 City..............................         0.7           1990        02/98      40
Novi Hilton........................         0.8           1985        02/98      40
Sheraton Norfolk Waterside Hotel...         0.9           1976        02/98      40
Park Ridge Hotel...................         0.8           1973        02/98      40
Westin Long Beach..................         1.0           1988        02/98      40
Sonoma County Hilton...............         0.3           1984        02/98      40
Tremont Hotel......................         0.4           1974        02/98      40
Westin Stamford Hotel..............         0.6           1985        02/98      40
Sheraton Tara Lexington Inn........         0.4           1958        02/98      40
</TABLE>
 
                                       S-2
<PAGE>   111
<TABLE>
<CAPTION>
                                        SCHEDULE III (CONTINUED)
                                        STARWOOD HOTELS & RESORTS
                                REAL ESTATE AND ACCUMULATED DEPRECIATION
                                            DECEMBER 31, 1998
                                              (IN MILLIONS)
 
                                                                 INITIAL COST TO       COSTS SUBSEQUENT
                                                                     COMPANY            TO ACQUISITION
                                                              ---------------------   -------------------
 
                                                                       BUILDING AND          BUILDING AND
DESCRIPTION                                CITY        STATE   LAND    IMPROVEMENTS   LAND   IMPROVEMENTS
-----------                          ----------------  -----  ------   ------------   ----   ------------
<S>                                  <C>               <C>    <C>      <C>            <C>    <C>
Sheraton Tara Hotel, Newton........  Newton            MA         --         37.7      --          --
Sheraton Tara Hotel, South
 Portland..........................  South Portland    ME        2.9         20.6      --          --
Wayfarer Inn.......................  Bedford           NH        2.5         10.1      --         0.1
Merrimack Hotel & Conference
 Center............................  Merrimack         NH        0.7          0.3      --          --
Sheraton Tara Airport Hotel........  Warwick           RI        2.7         18.2      --         0.1
Sheraton Stamford Hotel............  Stamford          CT        5.8         43.4      --         0.1
Sheraton Tara Hotel, Braintree.....  Braintree         MA        4.9         59.0      --         0.1
Sheraton Ferncroft Resort
 Danvers...........................  Danvers           MA        4.8         55.6      --         0.1
Sheraton Tara Hotel, Framingham....  Framingham        MA        4.8         46.6      --         0.2
Four Points Hotel Hyannis Cape
 Cod...............................  Hyannis           MA        3.4         13.1      --         0.2
Sheraton Hyannis Resort............  Hyannis           MA        2.9         23.1      --         0.3
Sheraton Colonial Hotel & Golf Club
 Boston North......................  Lynnfield         MA        3.6         53.6      --         0.2
Sheraton Tara Hotel, Nashua........  Nashua            NH        4.4         23.3      --         0.1
Sheraton Tara Hotel, Parsippany....  Parsippany        NJ        5.1         89.2      --         0.1
Crowne Plaza New Orleans...........  New Orleans       LA        5.7         62.7      --          --
Best Western Airport Inn (NM)......  Albuquerque       NM         --         10.3      --         0.2
One Washington Circle..............  Washington        DC        2.0         23.6      --          --
Westin Aquila......................  Omaha             NE        1.9         10.9      --         0.1
Westin Mission Hills Resort........  Rancho Mirage     CA        6.6        105.7      --        (0.1)
Riverside Inn......................  Portland          OR        1.8         21.7      --         0.1
Days Inn City Center...............  Portland          OR        2.2         18.0      --         0.6
Days Inn  -- Town Center...........  Seattle           WA         --          1.7      --         0.3
Sixth Avenue Inn...................  Seattle           WA         --          2.7      --         0.2
Edmond Meany Hotel.................  Seattle           WA        2.0         16.3      --          --
San Diego Marriott Suites..........  San Diego         CA        2.2         42.5      --          --
Raphael Hotel......................  Chicago           IL        3.0         18.2      --         0.2
Westin Southfield -- Detroit.......  Southfield        MI        1.7         52.0      --         0.2
Sheraton Indianapolis North
 Hotel.............................  Indianapolis      IN        7.2         43.7      --         0.7
Sheraton Gainesville Hotel.........  Gainesville       FL        2.5          8.1      --         1.0
Marriott Forrestal Village Hotel...  Princeton         NJ        3.2         31.6      --         0.1
Westwood Marquis Hotel & Gardens...  Los Angeles       CA        5.2         22.1      --         0.8
 
<CAPTION>
                                                   SCHEDULE III (CONTINUED)
                                                   STARWOOD HOTELS & RESORTS
                                REA        REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                       DECEMBER 31, 1998
                                                         (IN MILLIONS)
                                       GROSS AMOUNT BOOK
                                           VALUE AT
                                       DECEMBER 31, 1998
                                     ---------------------
                                      (1)
                                                 (1)(2)       ACCUMULATED
                                              BUILDING AND   DEPRECIATION &     YEAR OF        DATE
DESCRIPTION                           LAND    IMPROVEMENTS    AMORTIZATION    CONSTRUCTION   ACQUIRED   LIFE
-----------                          ------   ------------   --------------   ------------   --------   ----
<S>                                  <C>      <C>            <C>              <C>            <C>        <C>
Sheraton Tara Hotel, Newton........      --         37.8            2.9           1968        02/98      10
Sheraton Tara Hotel, South
 Portland..........................     2.9         20.6            0.4           1973        02/98      40
Wayfarer Inn.......................     2.5         10.1            0.2           1966        02/98      40
Merrimack Hotel & Conference
 Center............................     0.7          0.3             --           1979        02/98      40
Sheraton Tara Airport Hotel........     2.7         18.3            0.4           1979        02/98      40
Sheraton Stamford Hotel............     5.8         43.6            0.9           1984        02/98      40
Sheraton Tara Hotel, Braintree.....     4.9         59.1            1.2           1971        02/98      40
Sheraton Ferncroft Resort
 Danvers...........................     4.8         55.7            1.2           1978        02/98      40
Sheraton Tara Hotel, Framingham....     4.8         46.8            1.0           1973        02/98      40
Four Points Hotel Hyannis Cape
 Cod...............................     3.4         13.3            0.3           1975        02/98      40
Sheraton Hyannis Resort............     2.9         23.4            0.5           1967        02/98      40
Sheraton Colonial Hotel & Golf Club
 Boston North......................     3.6         53.8            1.1           1966        02/98      40
Sheraton Tara Hotel, Nashua........     4.4         23.4            0.5           1980        02/98      40
Sheraton Tara Hotel, Parsippany....     5.1         89.2            1.9           1987        02/98      40
Crowne Plaza New Orleans...........     5.7         62.8            1.3           1984        02/98      40
Best Western Airport Inn (NM)......      --         10.5            0.3           1980        02/98      30
One Washington Circle..............     2.0         23.6            0.5           1964        02/98      40
Westin Aquila......................     1.9         11.0            0.3           1924        02/98      40
Westin Mission Hills Resort........     6.6        105.7            2.2           1987        02/98      40
Riverside Inn......................     1.8         21.8            0.5           1964        02/98      40
Days Inn City Center...............     2.2         18.6            0.4           1962        02/98      40
Days Inn  -- Town Center...........      --          2.0            1.9           1957        09/86      10
Sixth Avenue Inn...................      --          2.9            2.7           1959        09/86      12
Edmond Meany Hotel.................     2.0         16.4            0.3           1932        02/98      40
San Diego Marriott Suites..........     2.2         42.5            0.9           1989        02/98      40
Raphael Hotel......................     3.0         18.4            0.4           1929        02/98      40
Westin Southfield -- Detroit.......     1.7         52.1            1.1           1987        02/98      40
Sheraton Indianapolis North
 Hotel.............................     7.2         44.4            0.9           1983        02/98      40
Sheraton Gainesville Hotel.........     2.5          9.1            0.2           1974        02/98      40
Marriott Forrestal Village Hotel...     3.2         31.7            0.7           1987        02/98      40
Westwood Marquis Hotel & Gardens...     5.2         22.9            0.5           1969        02/98      40
</TABLE>
 
                                       S-3
<PAGE>   112
<TABLE>
<CAPTION>
                                        SCHEDULE III (CONTINUED)
                                        STARWOOD HOTELS & RESORTS
                                REAL ESTATE AND ACCUMULATED DEPRECIATION
                                            DECEMBER 31, 1998
                                              (IN MILLIONS)
 
                                                                 INITIAL COST TO       COSTS SUBSEQUENT
                                                                     COMPANY            TO ACQUISITION
                                                              ---------------------   -------------------
 
                                                                       BUILDING AND          BUILDING AND
DESCRIPTION                                CITY        STATE   LAND    IMPROVEMENTS   LAND   IMPROVEMENTS
-----------                          ----------------  -----  ------   ------------   ----   ------------
<S>                                  <C>               <C>    <C>      <C>            <C>    <C>
Deerfield Beach Hilton.............  Deerfield         FL        1.5         17.8      --         0.3
Sheraton Denver Tech Center
 Hotel.............................  Denver            CO        2.3         26.7      --         0.1
Days Inn Lake Shore Drive..........  Chicago           IL       11.3         41.6      --         0.1
Sheraton Milwaukee.................  Milwaukee         WI        4.9         27.8      --          --
W -- Tuscany.......................  New York          NY        1.7         11.8      --         6.0
W -- The Court.....................  New York          NY        6.1         21.0      --         7.2
Residence Inn Tyson's Corner.......  Vienna            VA        1.2         17.0      --         0.5
Westin Hermitage...................  Nashville         TN        2.4         15.4      --         0.3
Hotel De La Poste..................  New Orleans       LA        1.7         18.0      --         0.2
Tyee Hotel.........................  Olympia           WA        2.0          6.3      --         0.2
Capital Hill Suites................  Washington        DC        2.0         15.4      --         0.2
Holiday Inn -- Albany..............  Albany            GA        2.0          5.1      --          --
Doubletree Club Hotel Rancho
 Bernardo..........................  Rancho Bernardo   CA        2.7         20.4      --         0.1
Four Points Hotel Wichita..........  Wichita           KS        3.4          6.4      --         0.2
Sheraton Chapel Hill Hotel.........  Chapel Hill       NC        2.2         15.4      --          --
Sheraton Colony Square.............  Atlanta           GA        3.4         64.4      --         0.4
W -- Doral Inn.....................  New York          NY        8.5           --      --          --
Sheraton Buckhead Hotel Atlanta....  Atlanta           GA        4.7         34.6      --         2.0
Four Points Hotel Atlanta
 Buckhead..........................  Atlanta           GA        2.3         15.4      --         0.1
Holiday Inn -- Calverton...........  Beltsville        MD        2.7         17.4      --          --
Westin Washington, DC..............  Washington        DC        8.5         38.5      --          --
Park Plaza Hotel...................  Boston            MA       12.5        124.0      --         3.4
Westin Philadelphia Int'l
 Airport...........................  Philadelphia      PA        2.9         29.9      --         0.2
Sheraton Philadelphia Airport......  Philadelphia      PA        1.9          7.1      --         1.2
Sheraton Suites Tampa Airport......  Tampa             FL        2.3         30.5      --         0.7
Clarion at San Francisco Airport...  Milbrae           CA        7.2         46.6      --         1.2
Sheraton Tucson Hotel & Suites.....  Tucson            AZ        1.8         14.3      --         0.2
W -- Atlanta.......................  Atlanta           GA        3.8         11.4      --         0.6
Sheraton Minneapolis Metrodome.....  Minneapolis       MN        1.8         26.7      --         0.3
Westin Atlanta N. at Perimeter.....  Atlanta           GA        5.4         45.4      --          --
Westin Los Angeles Airport.........  Los Angeles       CA        8.8         40.4      --         0.2
 
<CAPTION>
                                                   SCHEDULE III (CONTINUED)
                                                   STARWOOD HOTELS & RESORTS
                                REA        REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                       DECEMBER 31, 1998
                                                         (IN MILLIONS)
                                       GROSS AMOUNT BOOK
                                           VALUE AT
                                       DECEMBER 31, 1998
                                     ---------------------
                                      (1)
                                                 (1)(2)       ACCUMULATED
                                              BUILDING AND   DEPRECIATION &     YEAR OF        DATE
DESCRIPTION                           LAND    IMPROVEMENTS    AMORTIZATION    CONSTRUCTION   ACQUIRED   LIFE
-----------                          ------   ------------   --------------   ------------   --------   ----
<S>                                  <C>      <C>            <C>              <C>            <C>        <C>
Deerfield Beach Hilton.............     1.5         18.0            0.4           1985        02/98      40
Sheraton Denver Tech Center
 Hotel.............................     2.3         26.7            0.6           1986        02/98      40
Days Inn Lake Shore Drive..........    11.3         41.7            0.9           1965        02/98      40
Sheraton Milwaukee.................     4.9         27.8            0.1           1972        02/98      40
W -- Tuscany.......................     1.7         17.9            0.3           1935        02/98      40
W -- The Court.....................     6.1         28.3            0.5           1927        02/98      40
Residence Inn Tyson's Corner.......     1.2         17.6            0.4           1984        02/98      40
Westin Hermitage...................     2.4         15.7            0.3           1910        02/98      40
Hotel De La Poste..................     1.7         18.2            0.4           1973        02/98      40
Tyee Hotel.........................     2.0          6.4            0.1           1961        02/98      40
Capital Hill Suites................     2.0         15.6            0.3           1955        02/98      40
Holiday Inn -- Albany..............     2.0          5.1            0.1           1989        02/98      40
Doubletree Club Hotel Rancho
 Bernardo..........................     2.7         20.5            0.4           1988        02/98      40
Four Points Hotel Wichita..........     3.4          6.6             --           1974        02/98      40
Sheraton Chapel Hill Hotel.........     2.2         15.4            0.3           1981        02/98      40
Sheraton Colony Square.............     3.4         64.7            1.4           1973        02/98      40
W -- Doral Inn.....................     8.5           --             --           1927        02/98      40
Sheraton Buckhead Hotel Atlanta....     4.7         36.6            0.8           1975        02/98      40
Four Points Hotel Atlanta
 Buckhead..........................     2.3         15.5            0.3           1965        02/98      40
Holiday Inn -- Calverton...........     2.7         17.5            0.4           1987        02/98      40
Westin Washington, DC..............     8.5         38.5            0.8           1984        02/98      40
Park Plaza Hotel...................    12.5        127.2            9.4           1927        02/98      40
Westin Philadelphia Int'l
 Airport...........................     2.9         30.0            0.6           1985        02/98      40
Sheraton Philadelphia Airport......     1.9          8.3            0.2           1984        02/98      40
Sheraton Suites Tampa Airport......     2.3         31.3            0.6           1987        02/98      40
Clarion at San Francisco Airport...     7.2         47.7            0.9           1962        02/98      40
Sheraton Tucson Hotel & Suites.....     1.8         14.5            0.3           1986        02/98      40
W -- Atlanta.......................     3.8         12.1            0.2           1980        02/98      40
Sheraton Minneapolis Metrodome.....     1.8         27.0            0.6           1980        02/98      40
Westin Atlanta N. at Perimeter.....     5.4         45.4            1.0           1986        02/98      40
Westin Los Angeles Airport.........     8.8         40.6            0.8           1986        02/98      40
</TABLE>
 
                                       S-4
<PAGE>   113
<TABLE>
<CAPTION>
                                        SCHEDULE III (CONTINUED)
                                        STARWOOD HOTELS & RESORTS
                                REAL ESTATE AND ACCUMULATED DEPRECIATION
                                            DECEMBER 31, 1998
                                              (IN MILLIONS)
 
                                                                 INITIAL COST TO       COSTS SUBSEQUENT
                                                                     COMPANY            TO ACQUISITION
                                                              ---------------------   -------------------
 
                                                                       BUILDING AND          BUILDING AND
DESCRIPTION                                CITY        STATE   LAND    IMPROVEMENTS   LAND   IMPROVEMENTS
-----------                          ----------------  -----  ------   ------------   ----   ------------
<S>                                  <C>               <C>    <C>      <C>            <C>    <C>
Doubletree Hotel Minneapolis
 Airport at the Mall...............  Bloomington       MN        2.9         47.6      --         0.3
Westin Horton Plaza San Diego......  San Diego         CA        6.5         88.4      --         1.0
Ritz-Carlton Kansas City...........  Kansas City       MO        9.4         52.6      --         1.7
Ritz-Carlton Philadelphia..........  Philadelphia      PA        5.2         56.5      --         0.1
Sheraton Ft. Lauderdale Airport
 Hotel.............................  Dania             FL        2.9         27.1      --         0.1
Westin Waltham Hotel...............  Waltham           MA        5.0         63.9      --         0.1
Sheraton Needham Hotel.............  Needham           MA        3.0         40.6      --          --
Allentown Hilton...................  Allentown         PA        1.2         17.3      --         0.2
Arlington Park Hilton..............  Arlington         IL        5.5         42.3      --         0.4
                                     Heights
                                                              ------     --------     ----      -----
                                                              $487.6     $3,610.4     $--       $41.9
                                                              ======     ========     ====      =====
Land...............................
Furniture, fixtures and
 equipment.........................
Construction in progress...........
 
<CAPTION>
                                                   SCHEDULE III (CONTINUED)
                                                   STARWOOD HOTELS & RESORTS
                                REA        REAL ESTATE AND ACCUMULATED DEPRECIATION
                                                       DECEMBER 31, 1998
                                                         (IN MILLIONS)
                                       GROSS AMOUNT BOOK
                                           VALUE AT
                                       DECEMBER 31, 1998
                                     ---------------------
                                      (1)
                                                 (1)(2)       ACCUMULATED
                                              BUILDING AND   DEPRECIATION &     YEAR OF        DATE
DESCRIPTION                           LAND    IMPROVEMENTS    AMORTIZATION    CONSTRUCTION   ACQUIRED   LIFE
-----------                          ------   ------------   --------------   ------------   --------   ----
<S>                                  <C>      <C>            <C>              <C>            <C>        <C>
Doubletree Hotel Minneapolis
 Airport at the Mall...............     2.9         48.0            1.0           1975        02/98      40
Westin Horton Plaza San Diego......     6.5         89.3            1.9           1987        02/98      40
Ritz-Carlton Kansas City...........     9.4         54.3            1.1           1973        02/98      40
Ritz-Carlton Philadelphia..........     5.2         56.7            1.2           1990        02/98      40
Sheraton Ft. Lauderdale Airport
 Hotel.............................     2.9         27.2            0.5           1985        02/98      40
Westin Waltham Hotel...............     5.0         63.9            1.3           1990        02/98      40
Sheraton Needham Hotel.............     3.0         40.6            0.9           1986        02/98      40
Allentown Hilton...................     1.2         17.5            0.4           1981        02/98      40
Arlington Park Hilton..............     5.5         42.7            0.9           1968        02/98      40
                                     ------     --------         ------
                                     $487.6      3,652.3           95.8
                                     ======
Land...............................                487.6             --
Furniture, fixtures and
 equipment.........................                280.2           50.1
Construction in progress...........                154.9             --
                                                --------         ------
                                                $4,575.0         $145.9
                                                ========         ======
</TABLE>
 
---------------
 
(1) As of December 31, 1998, land, building, furniture, fixtures and equipment
    and construction in progress have a cost basis of $415.7 million, $2,315.1
    million, $353.1 million and $154.9 million, respectively, for federal income
    tax purposes.
 
(2) Building and improvements include amounts allocated for leasehold interest
    in land and net assets held for sale.
 
                                       S-5
<PAGE>   114
 
                            SCHEDULE III (CONTINUED)
 
                           STARWOOD HOTELS & RESORTS
                    REAL ESTATE AND ACCUMULATED DEPRECIATION
 
                                 (IN MILLIONS)
 
     A reconciliation of the Trust's investment in real estate, furniture and
fixtures and related accumulated depreciation is as follows:
 
<TABLE>
<CAPTION>
                                                                   YEAR ENDED
                                                                DECEMBER 31, 1998
                                                                -----------------
<S>                                                             <C>
REAL ESTATE AND FURNITURE AND FIXTURES:
Balance at beginning of period..............................         $4,255
Additions during period:
  Acquisitions..............................................            314
  Improvements..............................................            206
Deductions during period:
  Sale of properties........................................           (200)
                                                                     ------
Balance at end of period....................................         $4,575
                                                                     ======
ACCUMULATED DEPRECIATION:
Balance at beginning of period..............................         $  (49)
Additions during period:
  Depreciation expense......................................           (123)
Deductions during period:
  Sale of properties........................................             26
                                                                     ------
Balance at end of period....................................         $ (146)
                                                                     ======
</TABLE>
 
                                       S-6
<PAGE>   115
 
                                  SCHEDULE IV
 
                           STARWOOD HOTELS & RESORTS
                         MORTGAGE LOANS ON REAL ESTATE
 
                               DECEMBER 31, 1998
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                                                                                 PRINCIPAL AMOUNT
                                                                                    ORIGINAL                     OF LOANS SUBJECT
                                                                                      FACE         CARRYING       TO DELINQUENT
                              INTEREST      FINAL                          PRIOR    AMOUNT OF     AMOUNT OF        PRINCIPAL OR
DESCRIPTION                     RATE       MATURITY    PERIODIC PAYMENT    LIENS    MORTGAGES    MORTGAGES(1)        INTEREST
-----------                  ----------    --------    ----------------    -----    ---------    ------------    ----------------
<S>                          <C>           <C>         <C>                 <C>      <C>          <C>             <C>
First Mortgages:
    Ramada Inn -- Tucker,
      GA...................    9.00%         1998                 17(3)     No       $    2         $    2
    Ramada
      Suites -- Secaucus,
      NJ...................     (2)          1999         Adjustable(4)     No           14             12
    Westin Maui -- Maui,
      HI...................    10.00%        2000                   (5)     No          105            105
    Harvey Hotel
      Addison -- Dallas,
      TX...................    8.00%         2002                324(6)     No           11              8
    Harvey Bristol
      Suites -- Dallas,
      TX...................    8.00%         2002                518(7)     No           18             13
    Harvey DFW Airport
      Hotel -- Dallas,
      TX...................    8.00%         2002                806(8)     No           28             21
    Vagabond
      Inns -- Modesto,
      CA...................    10.00%        2006                   (9)     No            2              1
    Ramada
      Inn -- Fayetteville,
      NC...................    9.00%         2006                  9(10)    No            1             --
Second Mortgages:
    Harvey Hotel
      Addison -- Dallas,
      TX...................  Prin. Only      2002                  2(11)   Yes           --             --
    Harvey Bristol
      Suites -- Dallas,
      TX...................  Prin. Only      2002                  5(12)   Yes           --             --
    Harvey DFW Airport
      Hotel -- Dallas,
      TX...................  Prin. Only      2002                  2(13)   Yes           --             --
    Westin
      Portland -- Portland,
      OR...................    11.50%        2003                   (14)   Yes            2              2
                                                                                     ------         ------
                                                                                     $  183         $  164
                                                                                     ======         ======
Intercompany Mortgage Loans
First Mortgages:
    W New York, NY.........    9.50%         2006                   (15)    No       $   40         $   40
    Westin
      Regina -- Cancun,
      Mexico...............    8.00%         1999                   (16)    No           41             39
    Westin Regina -- Los
      Cabos, Mexico........    8.00%         1999                   (16)    No           53             44
    Westin Regina -- Puerto
      Vallarta, Mexico.....    8.00%         1999                   (16)    No           25             23
    Westin
      Hotel -- Turnberry,
      Scotland.............    10.00%        2000                   (17)    No           27             30
    ITT Corporation
      Mortgage Note........    8.50%         2005                   (18)    No        2,699          2,699
    Starwood Hotels &
      Resorts Worldwide,
      Inc..................    8.50%         2005                   (18)    No          100            100
    Starwood Hotels &
      Resorts Worldwide,
      Inc..................    8.50%         2005                   (18)    No           50             50
                                                                                     ------         ------
                                                                                     $3,035         $3,025
                                                                                     ======         ======
</TABLE>
 
                                                                     (Continued)
 
                                       S-7
<PAGE>   116
 
---------------
 (1) As of December 31, 1998, the aggregate cost (before allowance for loan
     losses) for federal income tax purposes is not significantly different from
     that used for book purposes.
 
 (2) The interest rate is the ninety-day LIBOR plus 1.25% or prime rate, at
     borrower's option. At December 31, 1998, the interest rate was 6.5625%.
 
 (3) Forbearance agreement extended due date to 1999. Payments of $20,000 due
     monthly towards interest and principal.
 
 (4) Principal and interest due monthly. Principal amount adjusts annually based
     on note schedule.
 
 (5) Interest only payable monthly. Interest based on current principal balance
     and 10% interest rate. Principal balance comprised of initial advance of
     $105 million with additional advances up to $121 million available.
     Principal and all accrued and unpaid interest are due January 29, 2000.
 
 (6) Principal and interest due quarterly based on note schedule. A 25%
     participation on both the first and second mortgages was sold to a third
     party in 1995.
 
 (7) Principal and interest due quarterly based on note schedule.
 
 (8) Principal and interest due quarterly based on note schedule.
 
 (9) Note provides for monthly payments of interest plus additional annual
     payments based on a percentage of the hotel's sales, a portion of which is
     applied to principal. On April 29, 1996, the borrower exercised its right
     under the terms of the note to extend the maturity of the note to June
     2006.
 
(10) Principal and interest due monthly based on a 12-year amortization schedule
     with unpaid principal of $9,000 due in December 2006.
 
(11) Forty equal principal payments of $125,125 each of which the Realty
     Partnership has a 2.0% interest. The note carrying amount is net of $39,000
     allowance. The face amount represents the Realty Partnership's 2.0%
     interest in the mortgage loan. The remaining payment amounts are passed
     through to the participants.
 
(12) Forty equal principal payments of $237,500 each of which the Realty
     Partnership has a 2.0% interest. The note carrying amount is net of $76,000
     allowance. The face amount represents the Realty Partnership's 2.0%
     interest in the mortgage loan. The remaining payment amounts are passed
     through to the participants.
 
(13) Forty equal principal payments of $90,000 each of which the Realty
     Partnership has a 2.0% interest. The note carrying amount is net of $29,000
     allowance. The face amount represents the Realty Partnership's 2.0%
     interest in the mortgage loan. The remaining payment amounts are passed
     through to the participants.
 
(14) Interest only payable monthly. Interest calculated based upon 11.5%
     interest rate, $1.8 million principal balance and actual/365-day basis.
     Principal and all accrued and unpaid interest are due June 4, 2003.
 
(15) One hundred thirty-two equal installments of interest only. Principal and
     all accrued and unpaid interest due October 1, 2006.
 
(16) Principal and all accrued and unpaid interest are due May 1999.
 
(17) Interest only payable monthly. Principal and all accrued and unpaid
     interest are due December 2000.
 
(18) Interest only payable monthly. Principal and all accrued and unpaid
     interest are due February 2005.
 
                                                                     (Continued)
                                       S-8
<PAGE>   117
 
                            SCHEDULE IV (CONTINUED)
 
                           STARWOOD HOTELS & RESORTS
                        RECONCILIATION OF MORTGAGE LOANS
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1998     1997     1996
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Balance at beginning of period..............................  $ 51     $ 91     $ 80
Additions:
  New mortgage loans........................................   107       --       31
  Purchase accounting revaluation...........................    12        5        3
Deductions:
  Principal repayments......................................    (6)     (45)     (23)
                                                              ----     ----     ----
Balance at end of period....................................  $164     $ 51     $ 91
                                                              ====     ====     ====
</TABLE>
 
                       INTERCOMPANY MORTGAGE ROLLFORWARD
                               DECEMBER 31, 1998
                                 (IN MILLIONS)
 
<TABLE>
<CAPTION>
                                                           BEGINNING               ACCRUED    PRINCIPAL   ENDING
DESCRIPTION                                                 BALANCE    ADDITIONS   INTEREST   PAYMENTS    BALANCE
-----------                                                ---------   ---------   --------   ---------   -------
<S>                                                        <C>         <C>         <C>        <C>         <C>
W New York...............................................   $   40        $--        $--        $ --      $   40
Westin Regina -- Cancun(1)...............................       43        --           2          (6)         39
Westin Regina -- Los Cabos(1)............................       55        --           3         (14)         44
Westin Regina -- Puerto Vallarta(1)......................       26        --           2          (5)         23
Westin Hotel -- Turnberry(1).............................       28        --           2          --          30
ITT Corporation..........................................    2,699        --          --          --       2,699
Starwood Hotels & Resorts Worldwide, Inc.................      100        --          --          --         100
Starwood Hotels & Resorts Worldwide, Inc.................       50        --          --          --          50
                                                            ------        --         ---        ----      ------
                                                            $3,041        $--        $ 9        $(25)     $3,025
                                                            ======        ==         ===        ====      ======
</TABLE>
 
---------------
(1) Per mortgage loan agreements, the borrowers are not required to pay monthly
    interest if the cash flows are insufficient. Thus, the Trust has accrued
    interest on the notes.
 
                                       S-9
<PAGE>   118
 
                        INDEX OF EXHIBITS FILED HEREWITH
 
<TABLE>
<C>      <S>
 3.2     Charter of the Corporation, amended and restated as of
         February 1, 1995, as amended through March 26, 1999.
10.1     Third Amended and Restated Limited Partnership Agreement for
         Realty Partnership, dated January 6, 1999, among the Trust
         and the limited partners of Realty Partnership.
10.2     Third Amended and Restated Limited Partnership Agreement for
         Operating Partnership, dated January 6, 1999, among the
         Corporation and the limited partners of Operating
         Partnership.
10.9     Employment Agreement, dated October 1, 1998, between the
         Corporation and Thomas C. Janson, Jr.(1)(2)
10.50    Sixth Amendment to the Credit Agreement, dated as of
         December 15, 1998, among the Trust, Realty Partnership, the
         Corporation, ITT, the lenders party to the Credit Agreement,
         BTC and Chase Bank, as Administrative Agents, and Lehman
         Paper and Bank of Montreal, as Syndication Agents.
10.51    Seventh Amendment to the Credit Agreement, dated as of
         February 1999, among the Trust, Realty Partnership, the
         Corporation, ITT, the lenders party to the Credit Agreement,
         BTC and Chase Bank, as Administrative Agents, and Lehman
         Paper and Bank of Montreal, as Syndication Agents.
10.58    Loan Agreement, dated as of January 27, 1999, among the
         Borrowers named therein, as Borrowers, Starwood Operator I
         LLC, as Operator, and Lehman Capital.
12.1     Calculation of Ratio of Earnings to Total Fixed Charges.
21.1     Subsidiaries of the Registrants.
23.1     Consent of Arthur Andersen LLP.
27.1     Financial Data Schedule for the Corporation for the twelve
         months ended December 31, 1998.
27.2     Financial Data Schedule for the Trust for the twelve months
         ended December 31, 1998.
27.3     Restated Financial Data Schedule for the Corporation for the
         nine months ended September 30, 1998.
27.4     Restated Financial Data Schedule for the Trust for the nine
         months ended September 30, 1998.
27.5     Restated Financial Data Schedule for the Corporation for the
         six months ended June 30, 1998.
27.6     Restated Financial Data Schedule for the Trust for the six
         months ended June 30, 1998.
27.7     Restated Financial Data Schedule for the Corporation for the
         three months ended March 31, 1998.
27.8     Restated Financial Data Schedule for the Trust for the three
         months ended March 31, 1998.
27.9     Restated Financial Data Schedule for the Corporation for the
         twelve months ended December 31, 1997.
27.10    Restated Financial Data Schedule for the Corporation for the
         nine months ended September 30, 1997.
27.11    Restated Financial Data Schedule for the Corporation for the
         six months ended June 30, 1997.
27.12    Restated Financial Data Schedule for the Corporation for the
         three months ended March 31, 1997.
27.13    Restated Financial Data Schedule for the Corporation for the
         twelve months ended December 31, 1996.
</TABLE>