<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION

                            Washington, D.C.  20549

                                   FORM 10-K

[X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
 -        EXCHANGE ACT OF 1934

                                      OR

[_]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
          EXCHANGE ACT OF 1934

For the Fiscal Year Ended January 2, 1998          Commission File No. 1-12188

                         MARRIOTT INTERNATIONAL, INC.

Delaware                                                              52-0936594
(State of Incorporation)                 (I.R.S. Employer Identification Number)


                              10400 Fernwood Road
                           Bethesda, Maryland  20817
                                (301) 380-3000


          Securities registered pursuant to Section 12(b) of the Act:

<TABLE>
<CAPTION>
                TITLE OF EACH CLASS                            NAME OF EACH EXCHANGE ON WHICH REGISTERED
---------------------------------------------------       --------------------------------------------------
<S>                                                       <C> 
 Common Stock, $1.00 par value (125,415,165 shares                 New York Stock Exchange
        outstanding as of January 28, 1998)                        Chicago Stock Exchange
                                                                   Pacific Stock Exchange
                                                                 Philadelphia Stock Exchange
</TABLE>

The aggregate market value of shares of common stock held by non-affiliates at
January 2, 1998 was $6,265,084,255.

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.

                         Yes  [X]   No   [_]

Indicate by check mark if disclosure by delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the 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]

                      Documents Incorporated by Reference

Portions of the Proxy Statement prepared for the 1998 Annual Meeting of
Shareholders are incorporated by reference into Part III of this report.

             Index to Exhibits is located on pages 56 through 58.
<PAGE>
 
                                    PART I

  Throughout this report, Marriott International, Inc., together with its
consolidated subsidiaries, is referred to as "the Company."

FORWARD-LOOKING STATEMENTS

  When used throughout this report, the words "believes," "anticipates,"
"expects," "intends," "hopes," "estimates," "projects" and other similar
expressions, which are predictions of or indicate future events and trends
identify forward-looking statements. Such statements are subject to a number of
risks and uncertainties which could cause actual results to differ materially
from those projected, including: dependence on arrangements with present and
future property owners; contract terms offered by competitors; competition
within each of the Company's business segments; business strategies and their
intended results; the balance between supply of and demand for hotel rooms,
timeshare units and senior living accommodations; the Company's continued
ability to renew existing operating contracts and franchise agreements and
obtain new operating contracts and franchise agreements (in each case on
favorable terms); the Company's ability to develop and maintain positive
relations with current and potential hotel and senior living community owners
and contract services clients; the effect of international, national and
regional economic conditions; the availability of capital to fund investments;
the Company's ability to achieve synergies and performance improvements
subsequent to closing on acquisitions; the Company's ability to successfully
complete its recently announced spinoff and merger transactions; and other risks
described from time to time in the Company's filings with the Securities and
Exchange Commission, including those set forth on Exhibit 99 filed herewith.
Given these uncertainties, readers are cautioned not to place undue reliance on
such statements. The Company also undertakes no obligation to publicly update or
revise any forward-looking statement to reflect current or future events or
circumstances.

ITEMS 1 AND 2.  BUSINESS AND PROPERTIES

  The Company is a worldwide operator and franchisor of hotels, and a leading
provider of food service and facilities management in the corporate, health care
and education markets. The Company's operations are grouped in two business
segments, Lodging and Contract Services, which represented 58 percent and 42
percent, respectively, of total sales in 1997.

  In its Lodging segment, the Company operates and franchises lodging facilities
under 10 separate brand names and develops and operates vacation timesharing
resorts.

  The Contract Services segment consists of three businesses. Marriott
Management Services provides food service and facilities management to 2,981
clients in business, education and health care, primarily in North America.
Marriott Senior Living Services develops and presently operates 89 senior living
communities offering independent living, assisted living and skilled nursing
care for seniors in the United States. Marriott Distribution Services supplies
food and related products to Company operations and to external customers
throughout the United States.

  Marriott International, Inc. was incorporated in Delaware in 1971. It was a
wholly-owned subsidiary of Marriott Corporation until October 8, 1993, when
Marriott Corporation separated the Company's businesses from its other
businesses through a special dividend (the Distribution) to the holders of
outstanding shares of Marriott Corporation common stock, on a share-for-share
basis, of all the outstanding shares of the Company's common stock. Upon the
consummation of the Distribution, Marriott Corporation changed its name to Host
Marriott Corporation (together with its subsidiaries, Host Marriott). See Notes
to Consolidated Financial Statements, "Summary of Significant Accounting
Policies" and "Relationship with Host Marriott and Host Marriott Services."

                                       2
<PAGE>
 
Proposed Spinoff and Merger
---------------------------

  On October 1, 1997, the Company announced a definitive agreement to combine
the operations of its Marriott Management Services Division (MMS) with the North
American operations of Sodexho Alliance, S.A. (Sodexho), a worldwide food and
management services organization. The combined company, to be renamed Sodexho
Marriott Services, Inc. (SMS), will be the largest provider of contracted food
services in North America, with over 4,800 accounts and annual sales in excess
of $4 billion. SMS common stock is expected to be listed on the New York Stock
Exchange.

  Prior to the merger, a new company comprised of the Company's lodging, senior
living and distribution services businesses will be spun off, on a tax-free
basis, to the Company's shareholders (the Spinoff).  The common stock of this
new company, New Marriott MI, Inc. (New Marriott), which will adopt the Marriott
International, Inc. name, is expected to be listed on the New York Stock
Exchange.

  Immediately following the Spinoff, Sodexho's North American operations will be
merged with the Company's food service and facilities management business, to
form SMS, and Sodexho will make a $304 million cash payment to SMS.  As
consideration for the merger and the cash payment to SMS, Sodexho will receive
newly issued common shares of SMS totaling approximately 49 percent of the
issued and outstanding common stock of SMS after giving effect to such issuance.
The Company's shareholders and Sodexho will own approximately 51 percent and 49
percent, respectively, of SMS.  The Spinoff and merger transactions are expected
to be completed near the end of the first fiscal quarter of 1998.

  In connection with these transactions, the Company expects that its public
debt and commercial paper borrowings will be refinanced by SMS. Prior to the
Spinoff, the Company intends to offer to repurchase its outstanding public
senior debt, currently totaling $720 million, through a tender offer and consent
solicitation. In addition, the Company intends to repay all outstanding
commercial paper prior to the Spinoff and merger transactions. The Company's
commercial paper ($721 million outstanding as of January 28, 1998) is supported
by a bank revolving credit facility of $1.5 billion. Each outstanding zero-
coupon convertible subordinated note (LYONs) of the Company will be convertible
into 2.19 shares of SMS common stock (after giving effect to a one-for-four
reverse stock split described below), 8.76 shares of New Marriott Common Stock
and 8.76 shares of New Marriott Class A Common Stock (described below). The
LYONs debt will be assumed by New Marriott and SMS will assume a pro rata share
of the debt obligation based on the respective equity values of the two
companies.

  New Marriott and SMS will enter into agreements under which New Marriott will
distribute food and supplies and provide administrative and data processing
services to SMS.  The rights to all Marriott trademarks and trade names will be
transferred to New Marriott, which will license to SMS, for a period of four
years, certain Marriott brand names used in the food service and facilities
management business.  In a related transaction, on October 31, 1997, Sodexho
acquired the Company's food service and facilities management operations in the
United Kingdom for approximately $50 million in cash.

  The Spinoff and the merger are subject to customary conditions, including
approval by the Company's shareholders. A special meeting of stockholders is
scheduled to be held on March 17, 1998 for purposes of considering and acting on
the foregoing transactions and related matters. A proxy statement and proxy card
relating to the special meeting were mailed beginning on February 16, 1998 to
shareholders of record on January 28, 1998. In February 1998, the Company
received a favorable ruling from the Internal Revenue Service confirming that
the Spinoff will be tax-free to the Company and its shareholders. The waiting
period for these transactions under the Hart-Scott-Rodino Antitrust Improvements
Act expired on December 17, 1997.

  Upon consummation of the Spinoff, SMS will combine every four shares of its
common stock into one share of SMS common stock pursuant to a reverse stock
split.  Additionally, New Marriott will have two classes of common stock.  One
class will have one vote per share (New Marriott Common Stock) and one class
will have ten votes per share (New Marriott Class A Common Stock).  Each holder
of Company common stock on the record date for the Spinoff will receive one
share of New Marriott Common Stock and one share of New Marriott Class A Common
Stock for each share of Company common stock owned on such date.  The rights,
powers and preferences of the two classes of stock will otherwise be identical,
except that the Board of Directors may declare and pay regular quarterly cash
dividends on the New Marriott Common Stock that may be up to 125% of the cash
dividend declared and paid on the New Marriott Class A Common

                                       3
<PAGE>
 
Stock, and the New Marriott Common Stock has certain customary minority rights
protection provisions that apply if a person or group of persons acquires over
15% of the outstanding shares of New Marriott Class A Common Stock after the
Spinoff, and does not at that time hold at least the same percentage of New
Marriott Common Stock.

  Financial information by industry segment and geographic area as of January 2,
1998 and for the three fiscal years then ended, appears in the Consolidated
Statement of Income, the Summary of Significant Accounting Policies -
International Operations and the Business Segments notes to the Consolidated
Financial Statements included in Part II, Item 8.

Employee Relations
------------------

  At January 2, 1998, the Company had approximately 195,000 employees, including
approximately 11,500 who are subject to collective bargaining agreements.  The
Company believes its relations with employees are positive.

Other Properties
----------------

  In addition to the operating properties discussed below, the Company leases an
870,000 square foot office building, located in Bethesda, Maryland, which serves
as the Company's headquarters.  This lease has an initial term which expires in
2004, and includes options for an additional 15 years.

  The Company believes its properties are in generally good physical condition
with need for only routine repair and maintenance.

LODGING

  The Company's Lodging businesses included 1,478 operated or franchised hotels
with 297,086 rooms at January 2, 1998, under 10 distinct brands, serving all
segments of the lodging industry:  Marriott Hotels, Resorts and Suites (full-
service); Ritz-Carlton (luxury); Renaissance (full-service); New World (full-
service); Ramada International (moderate-price, full-service); Residence Inn
(extended-stay); Courtyard hotels (moderate-price); Fairfield Inn and Suites
(economy); TownePlace Suites (moderate-price, extended-stay) and serviced
apartments including those operated under the Marriott Executive Residences
brand (extended-stay, international).  The Company is also a leading developer
and operator of vacation timesharing properties (Marriott Vacation Club
International).

Company-Operated Lodging Properties
-----------------------------------

  At January 2, 1998, the Company operated a total of 729 properties (191,214
rooms) across its 10 lodging brands under long-term management or lease
agreements with property owners (together, the Operating Agreements).

  Terms of the Company's management agreements vary, but typically include base
and incentive management fees and reimbursement of costs (both direct and
indirect) of lodging operations.  Such agreements are generally for initial
periods of 20 to 30 years, with options to renew for up to 50 additional years.
The Company's lease agreements also vary, but typically include fixed annual
rentals plus additional rentals based on a percentage of annual revenues in
excess of a fixed amount.  Many of the Operating Agreements are subordinated to
mortgages or other liens securing indebtedness of the owners.  Additionally, a
number of the Operating Agreements permit the owners to terminate the agreement
if financial returns fail to meet defined levels and the operator has not cured
such deficiencies.

  The Company's responsibilities for units it operates include hiring, training
and supervising the managers and employees required to operate the facilities.
The Company provides centralized reservation services, and national advertising,
marketing and promotional services, as well as various accounting and data
processing services.  The Company prepares and implements annual budgets for
lodging facilities that it operates.  Additionally, the Company is responsible
for allocating funds, generally a fixed percentage of revenue, for periodic
renovation of buildings and replacement of furnishings.  The Company believes
that its ongoing refurbishment program is adequate to preserve the competitive
position and earning power of the hotels.

                                       4
<PAGE>
 
Franchised Lodging Properties
-----------------------------

  The Company has franchising programs that permit the use of its brand names
and its lodging systems by other hotel owners and operators. Under these
programs, the Company receives an initial application fee and continuing royalty
fees, which typically range from 4 percent to 6 percent of room revenues for all
brands, plus 2 percent to 3 percent of food and beverage revenues for full-
service hotels. In addition, franchisees contribute to the national marketing
and advertising programs, and pay fees for use of the Company's centralized
reservation systems. At January 2, 1998, the Company had 749 franchised
properties (105,872 rooms).

Summary of Hotels by Brand
--------------------------

 The table below shows the distribution of hotels by brand as of January 2,
1998.

<TABLE>
<CAPTION>
                                                              Company-operated                          Franchised
                                                     --------------------------------      ----------------------------------
                      Brand                               Units             Rooms               Units               Rooms
-------------------------------------------------    -------------     --------------      --------------      --------------
<S>                                                  <C>               <C>                 <C>                 <C>
Marriott Hotels, Resorts and Suites                            204             87,423                 122              37,148
Ritz-Carlton                                                    33             11,416                   -                   -
Renaissance                                                     62             24,183                   8               2,587
New World                                                       14              6,889                   -                   -
Ramada International                                            33              7,032                  41               7,444
Residence Inn                                                  112             14,719                 146              15,957
Courtyard                                                      210             30,731                 139              17,015
Fairfield Inn and Suites                                        51              7,133                 293              25,721
TownePlace Suites                                                2                184                   -                   -
Marriott Executive Residences and Other                          8              1,504                   -                   -
                                                     -------------     --------------      --------------      --------------
Total                                                          729            191,214                 749             105,872
                                                     =============     ==============      ==============      ==============
</TABLE>

  A significant proportion of hotels operated or franchised by the Company at
January 2, 1998 were located outside the U.S., as follows:

<TABLE>
<CAPTION>
                                                                    U.S.                                 Non-U.S.
                                                     --------------------------------      ----------------------------------
                      Brand                               Units             Rooms               Units               Rooms
-------------------------------------------------    -------------     --------------      --------------      --------------
<S>                                                  <C>               <C>                 <C>                 <C>
Marriott Hotels, Resorts and Suites                            254            101,641                  72              22,930
Ritz-Carlton                                                    20              7,166                  13               4,250
Renaissance                                                     31             14,145                  39              12,625
New World                                                        -                  -                  14               6,889
Ramada International                                             -                  -                  74              14,476
Residence Inn                                                  254             30,125                   4                 551
Courtyard                                                      338             46,715                  11               1,031
Fairfield Inn and Suites                                       344             32,854                   -                   -
TownePlace Suites                                                2                184                   -                   -
Marriott Executive Residences and Other                          -                  -                   8               1,504
                                                     -------------     --------------      --------------      --------------
Total                                                        1,243            232,830                 235              64,256
                                                     =============     ==============      ==============      ==============
</TABLE>

  Marriott Hotels, Resorts and Suites primarily serve business and leisure
travelers and meeting groups at locations in downtown and suburban areas, near
airports and at resort locations.  Most Marriott full-service hotels contain
from 300 to 500 rooms. However, the 19 convention hotels (approximately 18,500
rooms) are larger and contain up to 1,900 rooms.  Marriott full-service hotel
facilities typically include swimming pools, gift shops, convention and banquet
facilities, a variety of restaurants and lounges and parking facilities.  The 35
Marriott resort hotels (approximately 15,000 rooms) have additional recreational
facilities, such as tennis courts and golf courses. The 10

                                       5
<PAGE>
 
Marriott Suites (approximately 2,600 rooms) are full-service suite hotels that
typically contain about 250 suites, each consisting of a living room, bedroom
and bathroom. These properties have only limited meeting space.

  The Company operates 25 conference centers, with approximately 4,400 guest
rooms, located throughout the United States. Some of the centers are used
exclusively by employees of the sponsoring organization, while others are
marketed to outside meeting groups and individuals. The centers typically
include meeting room space, dining facilities, guest rooms and recreational
facilities. The Company receives management fees for operating the conference
centers under contracts which typically range from one to five years. Management
fees are generally based on a fixed amount or a percentage of revenues, and some
of the management contracts provide for the Company to earn incentive fees if
certain financial targets are exceeded.

  Room revenues for Marriott full-service hotels contributed approximately 61
percent of the Company's full-service hotel sales for fiscal year 1997, with the
remainder coming from food and beverage operations, recreational facilities and
other services. Individual business and leisure travelers accounted for
approximately 62 percent of occupied room nights at the Company full-service
hotels for fiscal year 1997, with group meetings representing another 38
percent. Although business at many resort properties is seasonal depending on
location, overall hotel profits have been relatively stable and include only
moderate seasonal fluctuations.

  As of January 2, 1998, Marriott Hotels, Resorts and Suites were located in 41
states, the District of Columbia and 33 other countries.  The Company expects to
add 21 operated or franchised Marriott Hotels, Resorts and Suites (approximately
6,100 rooms) during 1998.  Of these hotel rooms, approximately 50 percent will
be located outside the United States.

  At January 2, 1998, Marriott Hotels, Resorts and Suites operated or franchised
were located outside the U.S. in the United Kingdom (23 hotels), Continental
Europe (14 hotels), Asia (eight hotels), the Americas (17 hotels), Africa and
the Middle East (eight hotels) and Australia (two hotels).

  Ritz-Carlton hotels and resorts are renowned for their distinctive
architecture and the quality of their facilities, dining and guest service.
Most Ritz-Carlton hotels have 200 to 500 guest rooms and typically include
meeting and banquet facilities, a variety of restaurants and lounges, gift
shops, swimming pools and parking facilities.  Resort guests usually have access
to additional recreational amenities, such as tennis courts and golf courses.

  As of January 2, 1998, Ritz-Carlton luxury hotels and resorts were located in
the United States and 12 other countries.  It is expected that three Ritz-
Carlton hotels (approximately 1,000 rooms) will be opened during 1998.

  Renaissance is a global quality-tier brand which targets business travelers,
group meetings and leisure travelers.  Renaissance hotels are generally located
in downtown locations of major cities, in suburban office parks, near major
gateway airports and in destination resorts.  Most hotels contain 300 to 500
rooms; however, a few of the convention hotels are larger in size, and some
hotels in non-gateway markets, particularly in Europe, are smaller.  Renaissance
hotels typically include an all-day dining restaurant, a specialty restaurant,
club floors and lounge, boardrooms, convention and banquet facilities.  There
are 15 Renaissance Resorts which have additional recreational facilities
including golf, tennis and water sports.  As of January 2, 1998,  Renaissance
hotels were located in 15 states, the District of Columbia and 22 other
countries.

  At January 2, 1998, Renaissance hotels operated or franchised by the Company
were located outside the U.S. in Continental Europe (16 hotels), Asia (12
hotels), the Americas (eight hotels), Africa and the Middle East (two hotels)
and Australia (one hotel).

  New World primarily targets international business travelers.  New World
hotels are located exclusively in the Asia-Pacific region and are concentrated
in the major business districts of gateway cities in China and Southeast Asia.
With hotels in the key gateway markets to China of Hong Kong, Beijing and
Shanghai, New World has expanded into China's secondary business centers.  New
World hotels typically range in size from 300 to 600 rooms and offer multiple
restaurants and lounges, executive floors and a variety of recreational, banquet
and meeting facilities.  As of January 2, 1998, New World hotels were located in
seven countries outside the U.S.

                                       6
<PAGE>
 
  Ramada International is a moderately priced, full-service brand targeted at
business and leisure travelers.  Each full-service Ramada International property
includes a restaurant, a cocktail lounge and full-service meeting and banquet
facilities.  Ramada International hotels are located primarily in Europe in
major and secondary cities, near major international airports and suburban
office park locations.  The Company also receives a royalty fee from Cendant
Corporation (successor to HFS, Inc.) and Ramada Franchise Canada Limited for the
use of the Ramada name in the United States and Canada, respectively.

  As of January 2, 1998, Ramada International hotels were located in 22
countries outside of the U.S., including the United Kingdom (four hotels),
Continental Europe (48 hotels), Asia (11 hotels), Central and South America
(three hotels), Africa and the Middle East (five hotels) and Australia (three
hotels).

  The Company expects to add 17 hotels (approximately 4,000 rooms) to the
Renaissance, New World and Ramada International brands during fiscal 1998.

  Courtyard hotels is the Company's moderate-price limited service hotel
product.  Aimed at individual business and leisure travelers as well as
families, Courtyard hotels maintain a residential atmosphere and typically have
80 to 150 rooms.  Well landscaped grounds include a courtyard with a pool and
social areas.  Most hotels feature meeting rooms, limited restaurant and lounge
facilities, and an exercise room.  The operating systems developed for these
hotels allow Courtyard to be price competitive while providing better value
through superior facilities and guest service.

  As of January 2, 1998, Courtyard hotels were located in 42 states, the
District of Columbia, Canada and the United Kingdom.  The Company expects to add
36 properties (approximately 5,000 rooms) to its Courtyard hotel system during
fiscal 1998, primarily through franchising.

  Residence Inn is the U.S. market leader in the extended-stay lodging segment,
which caters primarily to business, government and family travelers who stay
more than five consecutive nights.  Residence Inns generally have 80 to 130
studio and two-story penthouse suites.  Most inns feature a series of
residential style buildings with landscaped walkways, courtyards and
recreational areas.  The inns do not have restaurants but offer complimentary
continental breakfast.  Each suite contains a fully equipped kitchen, and many
suites have wood-burning fireplaces.

  As of January 2, 1998, Residence Inns were located in 43 states, Canada and
Mexico.  The Company expects to add 34 inns (approximately 4,000 rooms) to its
Residence Inn system during fiscal 1998, primarily through franchising.

  Fairfield Inn and Suites is the Company's economy lodging product which
competes directly with major national economy motel chains.  Aimed at cost-
conscious individual business and leisure travelers, a typical Fairfield Inn has
63 to 135 rooms and offers a swimming pool, complimentary continental breakfast
and free local phone calls.  Fairfield Suites are designed to meet the needs of
travelers who require more space and amenities.  They feature suites that are 25
percent larger than the typical Fairfield Inn room, and offer a broader range of
amenities.

  As of January 2, 1998, Fairfield Inn and Suites were located in 47 states.
The Company expects to add 44 franchised Fairfield Inn and Suites (approximately
3,900 rooms) to its system during fiscal 1998.

  TownePlace Suites is a moderately priced, extended-stay hotel that is designed
to appeal to business and leisure travelers.  The standard TownePlace Suites
hotel consists of two interior-corridor buildings containing 95 units consisting
of high-quality one- and two-bedroom studio suites.  Each suite has a fully
equipped kitchen and separate living area.  Each hotel provides housekeeping
services and has on-site exercise facilities, an outdoor pool, 24-hour staffing
and laundry facilities.  The Company plans to open 18 TownePlace Suites
(approximately 1,900 rooms) during fiscal 1998.

  Serviced apartments provide temporary housing for business executives and
others who need quality accommodations outside their home country for 30 or more
days. Some serviced apartments operate under the

                                       7
<PAGE>
 
Marriott Executive Residences brand, that was introduced in February 1997 and is
being developed specifically for the long-term international traveler.

  Marriott Vacation Club International develops, sells and operates vacation
timesharing resorts.  Profits are generated from three primary sources:  (1)
selling fee simple and other forms of timeshare interests, (2) operating the
resorts and (3) financing consumer purchases of timesharing intervals.

  Some timesharing resorts are located adjacent to Marriott hotels and timeshare
owners have access to certain hotel facilities during their vacation.  Owners
can trade their annual interval for intervals at another Marriott timesharing
resort or for intervals at certain timesharing resorts not otherwise sponsored
by the Company through an affiliated exchange company.  Owners also can trade
their unused interval for points in the Marriott Rewards program, enabling them
to stay at over 1,300 Marriott hotels worldwide.

  In 1997, the Company had 11 resorts in active sales, including the historic
Custom House in Boston, which is the Company's first urban timeshare project and
the Company's first European timeshare resort in Marbella, Spain.  Additionally,
the Company announced its second European timeshare and golf resort on the
island of Mallorca in Spain.  In 1997, the Company added 20,000 new owners
taking the Company's total timeshare owners to over 100,000.  In addition, the
Company purchased a minority ownership in Interval International, Inc., one of
the leading timeshare interval exchange companies.

  As of January 2, 1998, the Company operated 32 timeshare resorts located in
the Continental U.S. (28 resorts), Hawaii (one resort), the Caribbean (two
resorts) and Europe (one resort).

Other Activities
-----------------

 Marriott Golf manages 17 golf course facilities for the Company and other golf
course owners.

  The Company has provided event planning and management services since 1996
under the brand name of Marquis Events International by Marriott.  In 1996, the
Company was awarded a contract by the National Football League to be the
official provider of hospitality services such as catering, beverage services,
entertainment and decor to the NFL's corporate clientele for the 1997, 1998 and
1999 Super Bowls.

  The Company operates systemwide hotel reservation centers in Omaha, Nebraska;
Salt Lake City, Utah; Atlanta, Georgia; Los Angeles, California; and London,
England that handle reservation requests for Marriott lodging brands worldwide,
including franchised units.  A further eight regional administrative office
locations also serve as reservation centers.  The Company owns the Omaha
facility and leases the other facilities.

  The Company's Architecture and Construction Division assists in the design,
development, construction and refurbishment of lodging properties and senior
living communities.

Competition
-----------

  The Company encounters strong competition both as a hotel operator and a
franchisor.  There are over 500 hotel management companies in the United States,
including several that operate more than 100 properties.  These operators are
primarily private management firms, but also include several large national
chains that own and operate their own hotels and also franchise their brands.
Hotel management contracts are typically long-term in nature, but most allow the
hotel owner to replace the management firm if certain financial or performance
criteria are not met.

  Affiliation with a national or regional brand is prevalent in the U.S. lodging
industry.  In 1997, the majority of U.S. hotel rooms were brand-affiliated.
Most of the branded properties are franchises, under which the operator pays the
franchisor a fee for use of its hotel name and reservation system.  The
franchising business is fairly concentrated, with the three largest franchisors
operating multiple hotel brands accounting for a significant proportion of all
U.S. rooms.

                                       8
<PAGE>
 
  Outside the United States, branding is much less prevalent, and most markets
are served primarily by independent operators.  The Company believes that chain
affiliation will increase in overseas markets as local economies grow, trade
barriers are reduced, international travel accelerates and hotel owners seek the
economies of centralized reservation systems and marketing programs.

  The Company has approximately a six percent share of the U.S. lodging market
and less than a one percent share of the lodging market outside the United
States.  The Company's brands are attractive to hotel owners seeking a
management company or franchise affiliation, because its hotels typically
generate higher occupancies and revenue per available room (REVPAR) than direct
competitors in most market areas.  The Company attributes this performance
premium to its success in achieving and maintaining strong customer preference.
The Company believes its superior facilities, national marketing programs,
reservation systems and its emphasis on guest service and satisfaction are
contributing factors.

  The Company's properties are regularly upgraded to maintain their
competitiveness.  The vast majority of rooms in the Marriott lodging system
either opened or have been refurbished in the past five years.  The Company also
strives to continually update and improve the products and services offered.
The Company believes that by operating a number of hotels in each of its brands,
it stays in direct touch with customers and reacts to changes in the marketplace
more quickly than chains which rely exclusively on franchising.

  Repeat guest business is enhanced by the Marriott Rewards and Marriott Miles
programs, which reward frequent travelers with free stays at Marriott hotels or
free travel on participating airlines.  Marriott Rewards, introduced in the
spring of 1997, is a multi-brand frequent guest program and replaced the
Company's 14-year-old Honored Guest Awards program. In addition to the
participation of seven Marriott Brands and Marriott Vacation Club International,
Marriott Rewards has formed a partnership with select Ritz-Carlton hotels and
also allows members to exchange points for frequent flyer miles with nine
partner airlines. Management believes that the frequent stay programs generate
substantial repeat business that might otherwise go to competing hotels.

  The resort timesharing industry also is very competitive.  Formerly dominated
by real estate development companies and entrepreneurs, the industry has
recently begun to attract well capitalized corporations with significant
experience in the lodging and hospitality-related industries.  The Company
currently has about a six percent share of this rapidly growing industry's
annual worldwide sales of about $6 billion.  The Company competes by offering
premium quality products at attractive locations to prospective timeshare
buyers, many of whom are familiar with the Company's strong commitment to
customer satisfaction through its hotel properties.  Approximately 26 percent of
the Company's ownership resort sales come from additional purchases by or
referrals from existing owners.

CONTRACT  SERVICES

  The Contract Services segment includes three businesses:  Marriott Management
Services (food service and facilities management); Marriott Senior Living
Services (development and operation of senior living communities and related
senior care services); and Marriott Distribution Services (distribution of food
and supplies).

Marriott Management Services
----------------------------

  Marriott Management Services provides food service and facilities management
for 2,981 businesses, industrial operations, health care facilities, primary and
secondary school districts, and colleges and universities located throughout the
United States and Canada.  The services are provided at client facilities under
contracts typically cancelable by either party on 30 to 120 days notice.  Income
earned by MMS from these contracts is based upon a negotiated fee, the profit of
the account or both.

  MMS has grown significantly through a combination of acquisitions, new
accounts and new service offerings to become a leading provider of food service
and facilities management in the corporate, health care and education markets.
The Company is pursuing additional growth opportunities in these existing
businesses through cross-selling of services to existing clients and obtaining
food service and facilities management accounts at schools, hospitals and other
institutions which currently are self-operated. MMS provides multiple services
to many clients,

                                       9
<PAGE>
 
including: supplying food; housekeeping and janitorial services; operating,
maintaining and servicing building equipment and systems; and managing laundry
facilities.

 The following table provides information as of January 2, 1998, regarding MMS
accounts:

<TABLE>
<CAPTION>
                                                                                        Accounts
                                                                                   -----------------
     <S>                                                                           <C> 
     United States
        Corporate Services....................................................                   973
        Health Care...........................................................                   947
        Higher Education......................................................                   530
        School Services.......................................................                   362
        Laundries.............................................................                    33
 
     Canada...................................................................                   136
                                                                                   -----------------
 
        Total accounts........................................................                 2,981
                                                                                   =================
</TABLE>

Marriott Senior Living Services
-------------------------------

  Through its Senior Living Services business, the Company develops and operates
both "independent full-service" and "assisted living" senior living communities
and provides related senior care services.  Most are rental communities with
daily rates that depend on the amenities and services provided.  The Company is
the largest U.S. operator of senior living communities in the quality tier.

  As of January 2, 1998, the Senior Living Services business operated 44
independent full-service senior living communities, which offer both independent
living apartments and personal assistance units for seniors.  Most of these
communities also offer licensed nursing care.

  As of January 2, 1998, the Senior Living Services business also operated 45
assisted living senior living communities under the names "Brighton Gardens by
Marriott," "Village Oaks," "National Guest Homes" and "Hearthside."  Assisted
living senior living communities are for seniors who presently require personal
assistance with hygiene, administration of medication, mobility and other daily
activities which do not require skilled nurses.  The Brighton Gardens concept is
quality tier assisted living which generally has 100 single resident assisted
living suites and 30 to 40 nursing beds in a community.  Alzheimer care units
are also provided at 23 communities.  Village Oaks and National Guest Homes are
moderately priced assisted living concepts which emphasize non-family companion
living and generally have 70 two-person suites in a community.  These concepts
are geared for the cost-conscious senior who enjoys the companionship of another
unrelated individual. Hearthside assisted living communities consist of a
cluster of six or seven 14-room cottages which offer residents small scale and
family-like living at a moderate price.

  The assisted living concepts typically include three meals per day, linen and
housekeeping services, security, transportation, and social and recreational
activities. Additionally, skilled nursing and therapy services are generally
available to Brighton Gardens and Hearthside residents.

  Terms of the senior living services management agreements vary but typically
include base management fees, ranging from four to five percent of revenues,
central administrative services reimbursements and incentive management fees.
Such agreements are generally for initial periods of five to 30 years, with
options to renew for up to 25 additional years.  Under the terms of the lease
agreements covering certain of the communities, the Company  pays the owner
fixed annual rentals plus additional rentals equal to a percentage of annual
revenues in excess of a fixed amount.

                                       10
<PAGE>
 
  The senior living services market is one of the fastest-growing segments of
the U.S. economy and the Company is expanding its Senior Living Services
division to meet this growing demand. By the end of fiscal 1998, the Company
expects to operate approximately 120 senior living communities.

 As of January 2, 1998, the Company operated 89 senior living communities in 24
states.

<TABLE>
<CAPTION>
                                                                           Communities                     Units/1/
                                                                      -------------------            -------------------
<S>                                                                   <C>                            <C> 
Independent full-service
      - owned....................................................                       3                          1,189
      - operated under long-term agreements......................                      41                         11,074
                                                                      -------------------            -------------------
                                                                                       44                         12,263
                                                                      -------------------            -------------------
 
Assisted living
      - owned....................................................                      12                          1,242
      - operated under long-term agreements......................                      33                          4,188
                                                                       -------------------            -------------------
                                                                                       45                          5,430
                                                                      -------------------            -------------------
      Total senior living communities............................                      89                         17,693
                                                                      ===================            ===================
</TABLE>

________
/1/  Units represent independent and assisted living apartments plus beds in
     nursing centers.
 
Marriott Distribution Services (MDS)
------------------------------------

  MDS is a United States limited-line distributor of food and related supplies,
carrying an average of 3,000 product items per distribution center.  This
business unit originally focused on purchasing, warehousing and distributing
food and supplies to other Company businesses.  In recent years, however, MDS
has steadily increased its third-party business to about 65 percent of total
sales volume in fiscal year 1997, compared to less than 15 percent in fiscal
year 1988.

  MDS operated a nationwide network of 15 distribution centers as of January 2,
1998, including three centers opened during 1997.  Leased facilities are
generally built to the Company's specifications, and utilize a narrow aisle
concept and technology to enhance productivity.

  MDS plans to pursue new business by leveraging its purchasing economies,
quality assurance programs and operating systems.

Competition
-----------

  The Company encounters strong competition in each of its Contract Services
businesses. MMS competes with other large national and international companies
as well as local and regional competitors.  MMS has a proven track record at
winning new clients and retaining existing business.  Over the last three years,
MMS's company-wide success rate on contract bids was over 40 percent,
representing the number of contracts awarded to MMS as a percentage of the total
number of contracts for which it bid.  MMS has achieved an average annual
company-wide retention of clients representing over 95 percent of its profits
over the last three years.

  Marriott Senior Living Services competes mostly with local and regional
providers of long-term health care and senior living, although some national
providers are emerging in the assisted living market.  Marriott Senior Living
Services is able to compete by operating well maintained facilities and by
providing quality health care, food service and other services at reasonable
prices.  The reputation for service associated with the Marriott name is also
attractive to residents and their families.  Additionally, Marriott Senior
Living Services has focused on developing relationships with professionals who
often refer seniors to senior living communities, such as hospital discharge
planners and ministers.  By educating these groups on the assisted living
concept, and familiarizing them with the Marriott product and associates,
Marriott Senior Living Services generates a significant volume of referrals that
helps its senior living communities to quickly achieve high, stabilized
occupancy levels.

                                       11
<PAGE>
 
  MDS competes with numerous national, regional and local distribution companies
in the $134 billion U.S. food distribution industry.  MDS attracts clients by
adopting competitive pricing policies and by maintaining one of the highest
order fill rates in the industry.  In addition, MDS uses its purchasing leverage
and limited product lines to provide a favorable cost structure.

                                       12
<PAGE>
 
ITEM 3.  LEGAL PROCEEDINGS

 There are no material legal proceedings pending against the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 None.

                                       13
<PAGE>
 
                                    PART II

ITEM 5.  MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

  The range of the Company's common stock prices and dividends declared per
share for the past two fiscal years are as follows:

<TABLE>
<CAPTION>
                                                                                                               Dividends
                                                                                                               Declared
                                                               High                    Low                     Per Share
                                                         ---------------        ---------------          -------------------
<S>                                                      <C>                    <C>                      <C>  
1996    -  First Quarter                                   $      52 5/8          $      37 1/4            $       0.08     
        -  Second Quarter                                         50                     44 1/4                    0.08     
        -  Third Quarter                                          57 3/8                 48 3/8                    0.08     
        -  Fourth Quarter                                         59 7/8                 51 3/8                    0.08     
                                                                                                                            
1997    -  First Quarter                                          57 1/4                 49 5/8                    0.08     
        -  Second Quarter                                         64 1/8                 49 5/8                    0.09     
        -  Third Quarter                                          71 3/4                 60                        0.09     
        -  Fourth Quarter                                         76 3/4                 65 1/8                    0.09     
</TABLE>

  At January 28, 1998, there were 125,415,165 shares of common stock outstanding
held by 50,758 shareholders of record.  The Company's common stock is traded on
the New York Stock Exchange, Chicago Stock Exchange, Pacific Stock Exchange and
Philadelphia Stock Exchange.

                                       14
<PAGE>
 
ITEM 6.  SELECTED HISTORICAL FINANCIAL DATA

  The following table presents summary selected historical financial data for
the Company derived from its financial statements as of and for the five fiscal
years ended January 2, 1998.

  The Company was a wholly-owned subsidiary of Marriott Corporation (now named
Host Marriott Corporation) prior to October 8, 1993, on which date its common
stock was distributed to Marriott Corporation shareholders.  The historical
income statement of the Company for 1993 includes 40 weeks of operating results
as a subsidiary of Marriott Corporation and 12 weeks of operating results as an
independent entity. As a result, 1993 operating results are not directly
comparable to other years.  The historical information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto, each contained herein.

<TABLE>
<CAPTION>
                                                                           Fiscal Year
                                                  ------------------------------------------------------------
                                                     1997/1/      1996/2/       1995        1994        1993
                                                  ------------------------------------------------------------
                                                               (in millions, except per share data)
<S>                                               <C>             <C>           <C>         <C>         <C>  
INCOME STATEMENT DATA:
Sales............................................   $  12,034    $  10,172    $  8,961    $  8,415    $  7,430
Operating Profit Before
   Corporate Expenses and Interest...............         726          629         490         413         356
Income Before Cumulative Effect
   of a Change in Accounting Principle/4/........         335          306         247         200         159
Net Income.......................................         335          306         247         200         126
PER SHARE DATA:
Diluted Earnings Per Share Before Cumulative
 Effect of a Change in Accounting Principle/4/...        2.46         2.25        1.87        1.51        1.27
Diluted Earnings Per Share/3/....................        2.46         2.25        1.87        1.51        1.01
Cash Dividends Declared..........................        0.35         0.32        0.28        0.28        0.14
BALANCE SHEET DATA (AT END OF YEAR):
Total Assets.....................................       6,322        5,075       4,018       3,207       3,092
Long-Term and Convertible Subordinated Debt......       1,844        1,307         806         506         564
Shareholders' Equity.............................       1,463        1,260       1,054         767         696
</TABLE>

___________
/1/ Operating results in 1997 include a loss before tax of $22 million 
($14 million after tax, or $.10 per share) on the sale of the UK operations of
Marriott Management Services to a subsidiary of Sodexho in connection with the
Spinoff and pending merger with Sodexho's North American operations.
/2/ Fiscal year 1996 includes 53 weeks, all other years include 52 weeks.
/3/ Earnings per share data have been restated to reflect the adoption in 1997
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
/4/ Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," was adopted in the first fiscal quarter of 1993.

                                       15
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

  The following discussion presents an analysis of results of operations of the
Company for fiscal years ended January 2, 1998 (52 weeks), January 3, 1997 (53
weeks) and December 29, 1995 (52 weeks). Comparable statistics are used
throughout this report and are based upon Company-operated U.S. properties. The
Ramada International and New World brands do not have any U.S. properties.

1997 Compared to 1996.

  Net income increased nine percent to $335 million in fiscal 1997, on a sales
increase of 18 percent to $12 billion, driven by contributions from new unit
expansion and strong profit growth for the Lodging segment, partially offset by
the loss on the sale of the UK operations of Marriott Management Services and
the impact of the Renaissance Hotel Group (RHG) acquisition.  Diluted earnings
per share increased nine percent to $2.46, reflecting higher net income. Before
the loss on sale of the UK operations of Marriott Management Services and the
impact of the RHG acquisition, net income and diluted earnings per share
increased 20 percent.

  LODGING operating profit was up 26 percent on 20 percent higher sales,
benefiting from favorable conditions in the U.S. lodging market, and
contributions from new properties.  The revenue increase resulted from average
REVPAR growth across all brands of eight percent and the net addition of 325
hotels (69,810 rooms), including the RHG acquisition. This revenue growth
resulted in higher base management and franchise fees.  Revenue growth also
contributed to higher house profits which resulted in higher incentive
management fees.

  Profits for Marriott Hotels, Resorts and Suites increased in excess of 20
percent in fiscal 1997 on sales growth of seven percent, which reflects the
addition of a net of two units (881 rooms) in the U.S. and a net of eight units
(2,903 rooms) internationally.  Comparable Company-operated U.S. hotels achieved
seven percent higher sales due to REVPAR increases of nine percent resulting
from room rate growth of nine percent to $129.  These sales gains, coupled with
profit margin improvements, generated substantially higher incentive management
fees at many properties.  Profits for international hotels also were higher,
primarily because of contributions from new properties in 1996 and 1997.

  Ritz-Carlton reported an increase in average room rates of five percent to
$185 and an increase in occupancy of four percentage points to 79 percent,
resulting in a 10 percent increase in REVPAR.

  RHG, which is comprised of the Renaissance, New World and Ramada International
brands, contributed $594 million in sales during fiscal 1997. The March 29, 1997
RHG acquisition reduced diluted earnings per share by $.13 in fiscal 1997.
REVPAR for Company-operated U.S. Renaissance hotels increased six percent due to
higher room rates and a slight decrease in occupancy. Integration of RHG into
the Company's payroll, procurement, marketing and sales, reservation and yield
management systems continues to progress on schedule and is expected to
contribute to revenue gains and margin improvements in 1998.

  The limited-service lodging brands reported eight percent higher sales and
more than 25 percent profit growth in fiscal 1997 benefiting from increased
incentive management fees on Company-operated properties and expansion of
franchising programs.  The limited-service brands added a net of 149 properties
(16,390 rooms), primarily franchises, during fiscal 1997.

 .    Courtyard, the Company's moderate-price brand, posted a five percent
     increase in sales for comparable Company-operated units, as average room
     rates and REVPAR were up eight percent while occupancy remained at 81
     percent.

                                       16
<PAGE>
 
 .    Residence Inn, the Company's extended-stay brand, generated five percent
     growth in sales for comparable Company-operated units as average room rates
     climbed eight percent to $95, while occupancy dipped slightly to 84 percent
     resulting in a six percent increase in REVPAR.


 .    Fairfield Inn and Suites, the Company's economy brand, reflected a decrease
     of two percent in sales for comparable Company-operated units. A two
     percent increase in average room rates to $51 was offset by a slight
     decline in occupancy to 75 percent, resulting in no change in REVPAR.

  Marriott Vacation Club International posted a 21 percent increase in the
number of timeshare intervals sold and 51 percent growth in financially reported
sales under the percentage of completion method. The sales increase resulted
from strong performance in several locations, including Marriott Vacation Club
International's first European resort in Marbella, Spain, as well as Fort
Lauderdale and Orlando, Florida and Hilton Head, South Carolina. Increased
profits from resort development were offset by reduced financing income, due to
lower sales of timeshare notes receivable during fiscal 1997.

  CONTRACT SERVICES reported a one percent increase in operating profit on 16
percent higher sales in fiscal 1997, before the $22 million loss on the sale of
the UK operations of Marriott Management Services. Profit comparisons between
years are affected by sales to investors during 1996 and 1997 of 43 senior
living communities which Marriott continues to operate under long-term
agreements. Before the impact of both of these transactions, Contract Services
profits increased 11 percent over fiscal 1996. Contract Services' operating
profit was also adversely affected by start-up losses for new distribution
centers and distribution accounts.

  Before the loss on the sale of the UK operations, Marriott Management Services
generated 14 percent higher profits on a sales increase of three percent in
fiscal 1997. Sales and profits increased due to new contracts, expanded service
to ongoing accounts and continued cost reductions in several areas. The
corporate services, healthcare, education and school services divisions were the
main contributors to the profit growth.

  Marriott Senior Living Services reported a sales increase of 28 percent in
fiscal 1997 over 1996, primarily due to the opening of 17 communities during
1997 and a two percentage point increase in occupancy, to 95 percent, for
comparable properties. The Company has sold 43 senior living properties to
investors since the beginning of 1996, retaining long-term operating agreements.
Operating profit declined as "ownership profits" from these properties were
replaced with "managed operating profits." This reduction in operating profit
was offset by a corresponding reduction in interest expense.

  Marriott Distribution Services' sales were up sharply in fiscal 1997 as a
result of the addition of several major restaurant customers and the net
addition of two new distribution centers. Profits, however, were lower in fiscal
1997 due to start-up costs associated with the new centers, as well as costs of
integrating the new business into existing distribution centers.

  Corporate expenses rose 19 percent in 1997, due to non-cash items associated
with investments generating significant income tax benefits as well as modest
staff increases to accommodate growth and new business development. Interest
expense increased 29 percent over fiscal 1996 despite lower effective interest
rates. The average debt balance increased due to the acquisition of RHG,
partially offset by proceeds from sales of hotels and senior living communities.
Interest income declined 14 percent, primarily due to collections and sales of
affiliate and other notes receivable.

  The Company's effective income tax rate increased to 39.5 percent in 1997,
compared to 39 percent in 1996, reflecting approximately a one percentage point
increase due to the RHG acquisition and the Company's ongoing participation in
jobs and affordable housing tax credit programs. The effective tax rate is
expected to decline about one-half percentage point in 1998.

                                       17
<PAGE>
 
1996 Compared to 1995.

  Net income increased 24 percent to $306 million in 1996, driven by
contributions from new unit expansion and strong profit growth for both the
Lodging and Contract Services segments, partially offset by higher interest and
corporate expenses. Diluted earnings per share advanced 20 percent to $2.25,
reflecting higher net income partially offset by higher average shares
outstanding.

  Sales were up 14 percent to $10.2 billion in 1996. The impact of the 53rd week
on 1996 results of operations was not significant.

  LODGING operating profit was up 26 percent on 10 percent higher sales,
benefiting from favorable conditions in the U.S. lodging market, and
contributions from new properties. The Company added a net of 146 hotels (18,204
rooms) and opened four new vacation club resorts during the year.

  Profits for Marriott Hotels, Resorts and Suites rose 24 percent in 1996 on
sales growth of nine percent reflecting the addition of a net of two units
(1,006 rooms) in the U.S. and a net of 17 units (3,768 rooms) internationally.
Comparable Company-operated U.S. hotels posted eight percent higher sales due to
room rate growth of seven percent to $118, and a one percentage point increase
in occupancy to 78 percent. These sales gains, coupled with profit margin
improvements, generated substantially higher incentive management fees at many
properties. Profits for international hotels also were higher, primarily because
of contributions from new properties.

  The limited-service lodging brands reported 10 percent higher sales and 29
percent profit growth in 1996, also benefiting from increased incentive
management fees on Company-operated properties, and expansion of franchising
programs. The three brands added a net of 125 properties (12,888 rooms),
primarily franchises, during 1996.

 .    Courtyard posted an eight percent increase in sales for comparable Company-
     operated units, as average room rates were up eight percent to $78 while
     occupancy remained at 81 percent.

 .    Residence Inn generated eight percent growth in sales for comparable
     Company-operated units as average room rates climbed seven percent to $89,
     while occupancy dipped slightly to 85 percent.

 .    Fairfield Inn and Suites achieved a six percent sales gain for comparable
     Company-operated units, as average room rates were boosted 10 percent to
     $50. Occupancy fell four percentage points to 77 percent, reflecting the
     planned shift to higher rated business. The Company introduced Fairfield
     Suites in 1996.

  Marriott Vacation Club International posted a 25 percent increase in the
number of timeshare intervals sold and 17 percent growth in financially reported
sales under the percentage of completion method. Income from owner financing
activities and resort management also increased. Profits were flat, reflecting
higher marketing and selling costs associated with new resort locations, off-
site sales centers and establishing a European operations group.

  Also contributing to 1996 lodging profit growth was higher income from the
Company's investment in The Ritz-Carlton Hotel Company LLC. For comparable U.S.
hotels, the luxury chain posted a 10 percent increase in sales as average room
rates increased four percent to $181 and occupancy increased to 75 percent. In
addition, house profit margins improved, benefiting from integration with
Marriott Lodging systems and programs.

  CONTRACT SERVICES reported a 36 percent increase in operating profit on 19
percent higher sales in fiscal 1996. Excluding the impact of the March 1996
acquisition of Forum Group, Contract Services' operating profits were up 11
percent for the year on 14 percent sales growth.

  Profits for Marriott Management Services rose 12 percent in 1996 while sales
were up nine percent. Performance was paced by the division's health care,
higher education and school services divisions, all of which benefited from the
impact of new accounts, and expansion of services to ongoing clients.
International profits were also higher, reflecting improved results in Canada.

                                       18
<PAGE>
 
  Sales for Marriott Senior Living Services increased 117 percent in 1996, while
profits were up more than five-fold from 1995 levels. Excluding the impact of
the Forum acquisition, sales increased 23 percent and profits increased 18
percent. Overall growth was generated by a gain in occupancy to 96 percent, and
a two percent increase in average per diem rates for comparable Marriott senior
living communities, strong move-in rates at 11 communities opened since the
beginning of 1995, and contributions from the acquired Forum Group communities.

  Sales for Marriott Distribution Services grew 35 percent in 1996, as the
division opened five new distribution centers and added several major external
restaurant accounts. Profits were flat in 1996, as sales gains were offset by
start-up costs associated with the new centers and new business.

  Corporate expenses rose 23 percent in 1996, reflecting higher outlays
associated with new business development and staff additions to facilitate the
Company's growth. Additionally, costs increased due to tax-related investments
which generated significant after-tax savings. Interest expense was up 60
percent as a result of incremental borrowings to support business growth,
partially offset by lower interest rates. Interest income declined five percent,
primarily due to collections and sales of affiliate and other notes receivable.

  The Company's effective income tax rate declined to 39 percent in 1996,
compared to 40 percent in 1995. This favorable trend reflects the Company's
ongoing participation in jobs and affordable housing tax credit programs.

LIQUIDITY AND CAPITAL RESOURCES

Impact of Spinoff and Merger Transactions
-----------------------------------------

  After the Spinoff, SMS will be a focused management services company
affiliated with Sodexho, one of the premier management services companies in the
world. SMS will be the largest provider of contracted food services in North
America. SMS intends to capitalize on this market presence to continue to add
new accounts and services to sustain double-digit annual growth. SMS will focus
on integration of the MMS and Sodexho North American operations, which is
expected to generate annual pretax cost savings of approximately $60 million in
the third year following the Spinoff, largely through greater purchasing
economies and elimination of duplicate functions and facilities. After the
Spinoff, SMS will be substantially more leveraged on a relative basis than the
Company was prior to the Spinoff. The Company expects that SMS's long-term
unsecured debt ratings, if obtained, would be below investment grade. The
replacement SMS debt will contain restrictive covenants and require grants of
security and guarantees by subsidiaries of SMS, that will limit SMS's ability to
incur additional debt and engage in other activities. Additionally, these debt
covenants will limit SMS's ability to pay dividends.

  After the Spinoff, New Marriott will have substantial investment capacity with
which to pursue growth opportunities. New Marriott's lodging management and
franchise operations and its contract services businesses generate substantial
operating cash flow, with only modest reinvestment requirements. New Marriott's
lodging division expects to add more than 140,000 rooms over the five years 
1998-2002, and to significantly expand its portfolio of vacation club resorts.
During the same period, New Marriott also expects to take advantage of
significant opportunities in the senior living services market by more than
tripling the number of senior living communities it operates.

  On the Spinoff date, SMS will combine every four shares of its common stock
into one share of SMS common stock through a reverse stock split. As a result of
the issuance of new shares of SMS common stock to Sodexho in connection with the
merger, the shareholders who owned 100 percent of the Company immediately prior
to the Spinoff will own approximately 51 percent immediately thereafter.
Additionally, Company shareholders will receive one share of New Marriott Common
Stock and one share of New Marriott Class A Common Stock for each share of
Company common stock owned. The issuance of one share of each class of New
Marriott common stock will maintain the relative voting power of the initial
shareholders of New Marriott. The New Marriott Common Stock will have one vote
per share, and the New Marriott Class A Common Stock will have 10 votes per
share. Both classes of New Marriott Common Stock and SMS common stock are
expected to be listed on the New York Stock Exchange.

                                       19
<PAGE>
 
  The planned capital structure of New Marriott, following the Spinoff, is part
of an integrated strategy for a focused hospitality company with substantially
increased borrowing and investment capacity, as well as increased flexibility to
use its equity, where prudent, to participate aggressively in the ongoing global
consolidation of the lodging industry as well as the accelerating rate of
consolidation of the senior living industry within the United States. The
Company has a history of pursuing, and New Marriott intends to continue to
pursue, strategic acquisition opportunities.

  The Company believes that both SMS and New Marriott will have access to
financial resources sufficient to finance their growth, as well as to support
ongoing operations and meet debt service and other cash requirements.

Cash From Operations
--------------------

  Cash from operations was $610 million in 1997, $602 million in 1996 and $369
million in 1995. The operating cash flow in 1997 primarily reflects higher
earnings than 1996, offset by lower sales of timeshare notes receivable. While
the Company's timesharing business generates strong operating cash flow, annual
amounts are affected by the timing of cash outlays for the acquisition and
development of new resorts and cash inflows related to purchaser financing.
Interval sales financed by the Company are not included in operating cash flow
until cash is collected or the notes are sold for cash.

  Earnings Before Interest Expense, Income Taxes, Depreciation and Amortization
(EBITDA) was $852 million, $743 million and $594 million for fiscal years 1997,
1996 and 1995, respectively, representing a 15 percent increase in 1997 and a 25
percent increase in 1996. The Company considers EBITDA to be an indicator of its
operating performance because EBITDA can be used to measure the Company's
ability to service debt, fund capital expenditures and expand its business.
Nevertheless, EBITDA should not be considered as an alternative to net income,
operating profit, cash flows from operations, or any other operating or
liquidity measure prescribed by generally accepted accounting principles. A
substantial portion of the Company's EBITDA is based on fixed dollar amounts or
percentages of sales. This includes lodging base management and franchise fees,
certain food service and facilities management fees and land rent. With more
than 1,450 hotel properties and approximately 3,000 management services
accounts, no single operation or customer is critical to the Company's financial
results.

  The Company's ratio of current assets to current liabilities was .88 at
January 2, 1998, compared to .81 at January 3, 1997. Each of the Company's
businesses minimizes working capital through strict credit-granting policies,
aggressive collection efforts and high inventory turnover. Working capital for
managed hotels is generally advanced to the Company by the hotel owners.

Investing Activities Cash Flows
-------------------------------

  Acquisitions.  The Company completed three major acquisitions during the last
three years: Renaissance Hotel Group N.V., a premier operator and franchisor of
approximately 150 hotels, under three brands, in 38 countries, Forum Group,
Inc. (Forum), a leading provider of senior living services; and, a 49 percent
interest in The Ritz-Carlton Hotel Company LLC, one of the world's premier
luxury hotel brands and management companies. The Company expects to exercise
its right to acquire the remaining 51 percent of The Ritz-Carlton Hotel Company
LLC over the next several years at prices based on Ritz-Carlton's cash flow.

  Dispositions.  On April 3, 1997, the Company agreed to sell and leaseback,
under long-term, limited-recourse leases, 14 limited service hotels for
approximately $149 million in cash. Concurrently, the Company agreed to pay
security deposits of $15 million, which will be refunded upon expiration of the
leases. As of January 2, 1998, sales of all of the properties had closed,
resulting in a $20 million excess of the sales price over the net book value,
which will be recognized as a reduction of rent expense over the 17-year initial
lease terms. On October 10, 1997, the Company agreed to sell, and leaseback,
under long-term limited-recourse leases, another nine limited service hotels for
approximately $129 million in cash. Concurrently, the Company agreed to pay
security deposits of $13 million, which will be refunded upon expiration of the
leases. At January 2, 1998, sales of three of these nine properties had closed,
resulting in a $7 million excess of the sales price over the net book value,
which will be recognized as a

                                       20
<PAGE>
 
reduction of rent expense over the 15-year initial lease terms. All of the
aforementioned leases are renewable at the option of the Company.

  On April 11, 1997, the Company sold five senior living communities for cash
consideration of approximately $79 million. On September 12, 1997, the Company
agreed to sell another seven senior living communities for cash consideration of
approximately $93 million. As of January 2, 1998, the sales of five of these
properties had closed. The Company will continue to operate all of these
communities under long-term management agreements.

  On June 21, 1997, the Company sold 29 senior living communities acquired as
part of the Forum acquisition, to Host Marriott for approximately $550 million,
resulting in no gain or loss. The consideration included approximately $50
million to be received subsequent to 1997 as expansions at certain communities
are completed. The $500 million of consideration received during 1997 consisted
of $222 million in cash, $187 million of outstanding debt, $50 million of notes
receivable due June 20, 1998, and $41 million of notes receivable due January 1,
2001. The notes receivable from Host Marriott bear interest at nine percent.
Under the terms of the sale, Host Marriott purchased all of the common stock of
Forum which, at the time of the sale, included the 29 communities, certain
working capital and associated debt. The Company will continue to operate these
communities under long-term management agreements.

  The Company sold four senior living communities during 1996 and three senior
living communities during 1995, retaining long-term operating agreements.

  Capital Expenditures and Other Investments.  Capital expenditures in 1997,
1996 and 1995 of $553 million, $326 million and $153 million, respectively,
included construction and development of new senior living communities and
Courtyard, Residence Inn and TownePlace Suites properties. Capital expenditures
are expected to increase in 1998. The Company expects that, over time, it will
sell certain lodging and senior living service properties under development, or
to be developed, while continuing to operate them under long-term agreements.

  The Company also will continue to make other investments to grow its
businesses, including development of new timeshare resorts and loans and
minority equity investments in connection with adding units to the Marriott
Lodging and Senior Living Services businesses.

  The Company has made loans to owners of hotel and senior living properties
which it operates or franchises. At January 2, 1998, and January 3, 1997 loans
outstanding pursuant to this program totaled $351 million and $186 million
respectively. Unfunded commitments aggregating $220 million were outstanding at
January 2, 1998. These loans are typically secured by mortgages on the projects.
During 1997, $18 million of proceeds were received from sales of such loans to
institutional investors. The Company participates in a program with an
unaffiliated lender in which the Company may provide credit enhancements for
loans made to facilitate third party ownership of Company-operated or franchised
hotels and senior living services communities.

  The annual capital required by the Company to maintain its hotels and senior
living communities is modest. Most of the Company's operating agreements require
that specified percentages of sales be set aside for renovation and
refurbishment of the properties.

     The Company, like most computer users, will be required to modify
significant portions of its computer software so that it will function properly
prior to, in the year 2000 and beyond. The Company has assembled a dedicated
team to address the year 2000 issue. This team has completed an inventory of all
systems requiring modification, and has completed the remediation of some
significant systems. Many of the costs to be incurred will be reimbursed to the
Company or otherwise paid directly by owners and clients, pursuant to existing
contracts. Estimated pre-tax maintenance and modification costs to be borne by
the Company are approximately $25 to $30 million and will be expensed as
incurred. These amounts are subject to numerous estimation uncertainties
including extent of work to be done, availability and cost of consultants and
the extent of testing required.

                                       21
<PAGE>
 
Cash From Financing Activities
------------------------------

  Debt Financing.  The Company utilizes debt in its capital structure to lower
its overall cost of capital, and has implemented policies designed to diversify
financing sources and optimize the mix and maturity of its long-term
indebtedness.

  The Company entered into a $1.5 billion bank credit facility on March 27,
1997. This facility has a term of five years and bears interest at the London
Interbank Offered Rate (LIBOR) plus a spread, presently 21.5 basis points, based
on the Company's senior debt rating. Additionally, annual fees are paid on the
total facility at a rate, presently 11 basis points, also based on the Company's
senior debt rating.

  In 1996, the Company received proceeds of $288 million from the issuance of
zero coupon subordinated Liquid Yield Option Notes (LYONs) which have an
aggregate maturity value of $540 million in 2011. Each $1,000 LYON was issued at
a discount representing a yield to maturity of 4.25 percent.

  The Company's credit agreements require it to maintain certain financial
ratios and levels of shareholders' equity. The Company is currently in
compliance with all financial covenants.

  In connection with the Spinoff, the Company will tender for $720 million
principal amount of its outstanding publicly held debt, and the Company will
refinance its commercial paper and any indebtedness outstanding under its
revolving credit bank facility. SMS has entered into loan agreements providing
for $1.355 billion of bank financing, consisting of a six-year $735 million
senior secured credit facility and a seven year $620 million senior guaranteed
credit facility (guaranteed by Sodexho). The $735 million senior credit facility
will consist of a $235 million secured revolving credit facility and a $500
million senior secured amortizing term loan. These SMS credit facilities will
provide funds to refinance most of the debt of the Company, described above,
with the remainder coming from a $304 million cash payment from Sodexho.

  Upon consummation of the Spinoff, each LYON will be convertible into 2.19
shares of SMS common stock (after giving effect to a one-for-four reverse stock
split), 8.76 shares of New Marriott Common Stock and 8.76 shares of New Marriott
Class A Common Stock. The LYONs will be assumed by New Marriott, and SMS will
assume responsibility for a portion of the LYONs equal to its pro rata share of
the relative equity values of SMS and New Marriott as determined in good faith
by the Company prior to the Spinoff, although New Marriott will remain liable to
the holders of the LYONs for any payments that SMS fails to make on its
allocable portion.

  New Marriott has entered into a new $1.5 billion bank credit facility, on
similar terms to the Company's existing facility.

  Dividends.  The Company declared dividends of seven cents per share in each
quarter of 1995, eight cents per share in each quarter of 1996 and the first
quarter of 1997, and nine cents per share in each of the last three quarters of
1997. The Company expects to reinvest most of its earnings in its businesses.
SMS expects to pay quarterly dividends, subject to the judgement of its Board of
Directors and restrictive covenants in its debt agreements limiting the payment
of dividends. New Marriott expects to pay quarterly dividends comparable to
those historically paid by the Company.

  Share Repurchases.  The Company purchased 3.3 million shares of its common
stock in 1997, at a cost of $191 million, 3.0 million shares of its common stock
in 1996, at a cost of $158 million, and 400,000 shares in 1995, at a cost of $17
million.

INFLATION

  The rate of inflation has been moderate in recent years and, accordingly, has
not had a significant impact on the Company's businesses.

                                       22
<PAGE>
 
MARKET RISK DISCLOSURES

  The Company's earnings are affected by changes in interest rates as a result
of borrowing at floating interest rates and holding certain notes receivable
which earn a variable rate of interest. If interest rates increased by ten
percent, the Company's annual interest expense would have increased by $3
million, and interest income would have increased by $1 million, based on
balances during the fiscal year ended January 2, 1998. Changes in interest rates
also impact the fair value of the Company's fixed rate debt and fixed rate notes
receivable. If interest rates increased by ten percent, the fair value of the
Company's fixed debt would have decreased by approximately $38 million, and the
fair value of the Company's fixed rate notes receivable balances would have
decreased by approximately $4 million, based on balances at January 2, 1998.

  The Company uses a foreign exchange swap to hedge a loan receivable
denominated in UK pounds sterling, and interest rate swap agreements to hedge
interest rate exposures relating to the Company's timeshare mortgage financing
program. The fair value of these arrangements, and the exposures to loss in
earnings, fair value and cash flows arising from these arrangements are not
material to the Company.

                                       23
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 The following financial information is included on the pages indicated:

<TABLE>
<CAPTION>
                                                                                              Page
                                                                                           ----------
<S>                                                                                        <C>
Report of Independent Public Accountants...........................................            25
Consolidated Statement of Income...................................................            26
Consolidated Balance Sheet.........................................................            27
Consolidated Statement of Cash Flows...............................................            28
Consolidated Statement of Shareholders' Equity.....................................            29
Notes to Consolidated Financial Statements.........................................           30-47
</TABLE>

                                       24
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders of Marriott International, Inc.:


  We have audited the accompanying consolidated balance sheet of Marriott
International, Inc. as of January 2, 1998 and January 3, 1997, and the related
consolidated statements of income, cash flows, and shareholders' equity for each
of the three fiscal years in the period ended January 2, 1998. These financial
statements 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 an 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marriott
International, Inc. as of January 2, 1998 and January 3, 1997, and the results
of its operations and its cash flows for each of the three fiscal years in the
period ended January 2, 1998, in conformity with generally accepted accounting
principles.




/s/ ARTHUR ANDERSEN LLP



Washington, D.C.
February 3, 1998

                                       25
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
                       CONSOLIDATED STATEMENT OF INCOME
   FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
                   ($ IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                         1997           1996           1995
                                                                    -------------- -------------- ------------- 
                                                                      (52 weeks)     (53 weeks)     (52 weeks)
<S>                                                                 <C>            <C>            <C>
SALES
Lodging
     Rooms........................................................  $       4,288  $      3,619   $     3,273
     Food and beverage............................................          1,577         1,361         1,289
     Other........................................................          1,143           874           765
                                                                    -------------- -------------- -------------
                                                                            7,008         5,854         5,327
     Contract Services............................................          5,026         4,318         3,634
                                                                    -------------- -------------- -------------
                                                                           12,034        10,172         8,961
                                                                    -------------- -------------- -------------
OPERATING COSTS AND EXPENSES
     Lodging
     Departmental direct costs
     Rooms........................................................            964           843           772
     Food and beverage............................................          1,195         1,038           973
     Remittances to hotel owners (including $541, $438 and $300,
     respectively, to related parties)............................          1,493         1,256         1,120
     Other operating expenses.....................................          2,787         2,265         2,102
                                                                    -------------- -------------- -------------
                                                                            6,439         5,402         4,967
     Contract Services
     Operating expenses...........................................          4,847         4,141         3,504
     Loss on sale of UK operations of Marriott Management
     Services.....................................................             22             -             -
                                                                    -------------- -------------- -------------
                                                                            4,869         4,141         3,504
                                                                    -------------- -------------- -------------
                                                                           11,308         9,543         8,471
                                                                    -------------- -------------- -------------
OPERATING PROFIT
     Lodging......................................................            569           452           360
     Contract Services............................................            157           177           130
                                                                    -------------- -------------- -------------
OPERATING PROFIT BEFORE CORPORATE EXPENSES
     AND INTEREST.................................................            726           629           490
Corporate expenses................................................            (94)          (79)          (64)
Interest expense..................................................           (110)          (85)          (53)
Interest income...................................................             32            37            39
                                                                    -------------- -------------- -------------
INCOME BEFORE INCOME TAXES........................................            554           502           412
Provision for income taxes........................................            219           196           165
                                                                    -------------- -------------- -------------
NET INCOME........................................................  $         335  $        306   $       247
                                                                    ============== ============== =============

Basic Earnings Per Share..........................................  $        2.64  $       2.40   $      1.98
                                                                    ============== ============== =============
Diluted Earnings Per Share........................................  $        2.46  $       2.25   $      1.87
                                                                    ============== ============== ============= 
</TABLE>

                See Notes To Consolidated Financial Statements

                                       26
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
                          CONSOLIDATED BALANCE SHEET
                      JANUARY 2, 1998 AND JANUARY 3, 1997
                                ($ IN MILLIONS)

<TABLE>
<CAPTION>
                                                                          January 2,                  January 3,
                                                                             1998                        1997
                                                                   ----------------------      ----------------------
 
                            ASSETS
<S>                                                                <C>                         <C>    
Current assets
     Cash and equivalents.....................................       $                312        $                268
     Accounts and notes receivable............................                      1,027                         754
     Inventories, at lower of average cost or market..........                        170                         168
     Prepaid taxes............................................                        202                         187
     Other....................................................                         78                          55
                                                                   ----------------------      ----------------------
                                                                                    1,789                       1,432
                                                                   ----------------------      ----------------------

Property and equipment........................................                      1,597                       1,894
Intangible assets.............................................                      1,674                         648
Investments in affiliates.....................................                        543                         496
Notes and other receivable....................................                        414                         293
Other.........................................................                        305                         312
                                                                   ----------------------      ----------------------
                                                                     $              6,322        $              5,075
                                                                   ======================      ======================


LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
     Accounts payable.........................................       $              1,037        $                891
     Accrued payroll and benefits.............................                        436                         380
     Self-insurance...........................................                         79                          73
     Other payables and accruals..............................                        472                         415
                                                                   ----------------------      ----------------------
                                                                                    2,024                       1,759
                                                                   ----------------------      ----------------------

Long-term debt................................................                      1,534                       1,010
Self-insurance................................................                        264                         262
Other long-term liabilities...................................                        727                         487
Convertible subordinated debt.................................                        310                         297
Shareholders' equity
     Common stock, 128.6 million shares issued................                        129                         129
     Additional paid-in capital...............................                        696                         653
     Retained earnings........................................                        822                         628
     Treasury stock, at cost..................................                       (184)                       (150)
                                                                   ----------------------      ---------------------- 
                                                                                    1,463                       1,260
                                                                   ----------------------      ----------------------
                                                                     $              6,322        $              5,075
                                                                   ======================      ======================
</TABLE>

                See Notes To Consolidated Financial Statements

                                       27
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
                     CONSOLIDATED STATEMENT OF CASH FLOWS
  FISCAL YEARS ENDED JANUARY 2, 1998,  JANUARY 3, 1997 AND DECEMBER 29, 1995
                                ($ IN MILLIONS)

<TABLE>
<CAPTION>
                                                                        1997                     1996                  1995
                                                               -------------------      -------------------      ----------------
                                                                     (52 weeks)               (53 weeks)             (52 weeks)
<S>                                                            <C>                      <C>                      <C>          
OPERATING ACTIVITIES
     Net income...............................................   $             335        $             306        $          247   

     Adjustments to reconcile to cash provided by operations:                                                                      
     Depreciation and amortization............................                 188                      156                   129   

     Income taxes.............................................                  56                       65                    42   

     Timeshare activity, net..................................                (118)                     (95)                 (192)
     Other....................................................                 107                       62                    57   

     Working capital changes:                                                                                                      
     Accounts receivable......................................                 (92)                     (52)                  (36)
     Inventories..............................................                   2                       14                    (7)
     Other current assets.....................................                 (13)                       3                   (10)
     Accounts payable and accruals............................                 145                      143                   139   

                                                               -------------------      -------------------      ----------------
     Cash provided by operations..............................                 610                      602                   369   
                                                               -------------------      -------------------      ----------------
                                                                                                                                   
INVESTING ACTIVITIES                                                                                                               
     Capital expenditures.....................................                (553)                    (326)                 (153)
     Acquisitions.............................................                (859)                    (331)                 (254)
     Dispositions.............................................                 609                       65                    42   

     Loans to Host Marriott Corporation.......................                  (5)                     (16)                 (210)
     Loan repayments from Host Marriott Corporation...........                   6                      141                   250   

     Other loan advances......................................                 (90)                     (73)                 (143)
     Other loan collections and sales.........................                  41                      155                    37   

     Other....................................................                (190)                    (164)                 (126)
                                                               -------------------      -------------------      ----------------
     Cash used in investing activities........................              (1,041)                    (549)                 (557)
                                                               -------------------      -------------------      ----------------
                                                                                                                                   
FINANCING ACTIVITIES                                                                                                               
     Issuances of long-term debt..............................                 687                        -                   556   

     Repayments of long-term debt.............................                 (18)                    (137)                 (341)
     Issuance of convertible subordinated debt................                   -                      288                     -   

     Issuances of common stock................................                  40                       43                    40   

     Dividends paid...........................................                 (43)                     (40)                  (35)
     Purchases of treasury stock..............................                (191)                    (158)                  (17)
                                                               -------------------      -------------------      ----------------
     Cash provided by (used in) financing activities..........                 475                       (4)                  203   
                                                               -------------------      -------------------      ----------------
INCREASE IN CASH AND EQUIVALENTS..............................                  44                       49                    15   

CASH AND EQUIVALENTS, beginning of year.......................                 268                      219                   204   

                                                               -------------------      -------------------      ----------------
CASH AND EQUIVALENTS, end of year............................    $             312        $             268        $          219   
                                                               ===================      ===================      ================
</TABLE>

                 See Notes To Consolidated Financial Statements

                                       28
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
   FISCAL YEARS ENDED JANUARY 2, 1998, JANUARY 3, 1997 AND DECEMBER 29, 1995
                    (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
    Common                                                                  Additional                                             
    shares                                               Common          paid-in capital          Retained         Treasury stock, 
  outstanding                                             stock                                   earnings             at cost     
-----------------------------------------------------------------------------------------------------------------------------------
<S>              <C>                                 <C>  <C>            <C>  <C>             <C>  <C>             <C>  <C>        
     122.5       Balance, December 30, 1994          $           129     $           623      $           183      $          (168)
       -         Net income                                        -                   -                  247                    - 
                 Employee stock plan                                                                                               
       3.4       issuance and other                                -                  (6)                   -                   97 
       -         Dividends ($.28 per share)                        -                   -                  (35)                   - 
       (.4)      Purchases of treasury stock                       -                   -                    -                  (16)
-----------------------------------------------------------------------------------------------------------------------------------
     125.5       Balance, December 29, 1995                      129                 617                  395                  (87)
       -         Net income                                        -                   -                  306                    - 
                 Employee stock plan                                                                                               
       3.4       issuance and other                                -                  36                  (32)                 100 
       -         Dividends ($.32 per share)                        -                   -                  (41)                   - 
      (3.0)      Purchases of treasury stock                       -                   -                    -                 (163)
-----------------------------------------------------------------------------------------------------------------------------------
     125.9       Balance, January 3, 1997                        129                 653                  628                 (150)
       -         Net income                                        -                   -                  335                    - 
                 Employee stock plan                                                                                               
       3.2       issuance and other                                -                  43                  (97)                 173 
       -         Dividends ($.35 per share)                        -                   -                  (44)                   - 
      (3.3)      Purchases of treasury stock                       -                   -                    -                 (207)
-----------------------------------------------------------------------------------------------------------------------------------
     125.8       Balance, January 2, 1998            $           129     $           696      $           822      $          (184)
================================================================================================================================== 
</TABLE>

                See Notes To Consolidated Financial Statements

                                       29
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

  On October 8, 1993, Marriott International, Inc. (together with its
consolidated subsidiaries, the Company) became a publicly traded company that
succeeded to Marriott Corporation's lodging management, franchising and vacation
timesharing operations; senior living service operations; food service and
facilities management and distribution service businesses. Marriott Corporation
changed its name to Host Marriott Corporation (together with its consolidated
subsidiaries, Host Marriott) and retained ownership of Marriott Corporation's
real estate.

  All material intercompany transactions and balances between Marriott
International, Inc., and its consolidated subsidiaries have been eliminated.
Certain amounts previously presented have been reclassified to conform to the
1997 presentation.

  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 as of the date of the
financial statements, and the reported amounts of sales and expenses during the
reporting period. Accordingly, ultimate results could differ from those
estimates.

Spinoff

  Subject to shareholder approval at a Special Meeting to be held on March 17,
1998 and other customary conditions, the Company intends to spin off to its
shareholders, on a pro rata basis, all outstanding shares of New Marriott MI,
Inc. (New Marriott), a wholly owned subsidiary of the Company in a tax-free
distribution (the Spinoff). After the Spinoff, New Marriott will conduct the
lodging (including timeshare resort development and operation), the senior
living services and the distribution service businesses previously conducted by
the Company. The food service and facilities management business will continue
to be conducted by the Company. Immediately after the Spinoff, the Company will
merge with the North American food service and facilities management operations
of Sodexho Alliance, S.A. (Sodexho) in exchange for stock of the Company, and
the Company will operate the combined food service and facilities management
businesses under a new corporate name - Sodexho Marriott Services, Inc. (SMS).
As a result of the issuance of new shares of SMS common stock to Sodexho in
connection with the merger, the shareholders who owned 100 percent of the
Company immediately prior to the Spinoff will own approximately 51 percent
immediately thereafter. At the same time, SMS will incur replacement
indebtedness that is being arranged by Sodexho, the proceeds of which will be
used to refinance certain existing indebtedness of the Company.

   SMS will combine every four shares of its common stock into one share of SMS
common stock pursuant to a reverse stock split (the SMS Reverse Stock Split).
Additionally, New Marriott will have two classes of common stock. One class will
have one vote per share (New Marriott Common Stock) and one class will have ten
votes per share (New Marriott Class A Common Stock).

  For the purposes of governing certain of the ongoing relationships between New
Marriott and SMS after the Spinoff and to provide for an orderly transition, New
Marriott and SMS will enter into various agreements including the Employee
Benefits and Other Employment Matters Allocation Agreement, Liquid Yield Option
Notes (LYONs) Allocation Agreement, Tax Sharing Agreement, Trademark and Trade
Name License Agreement, Noncompetition Agreement, Employee Benefit Services
Agreement, Procurement Services Agreement, Distribution Services Agreement and
other transitional services agreements. Effective as of the Spinoff date, these
agreements will provide, among other things, that New Marriott will assume
sponsorship of certain of the Company's employee benefit plans and insurance
programs as well as succeed to the Company's liability to LYONs holders under
the LYONs Indenture, a portion of which will be assumed by SMS. In connection
with the Spinoff, on October 31, 1997, the Company sold the UK operations of
Marriott Management Services to a subsidiary of Sodexho for $50 million in cash.
The sale resulted in a loss before tax of $22 million ($14 million after tax or
$.10 per share).

                                       30
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

Fiscal Year

  The Company's fiscal year ends on the Friday nearest to December 31. The 1996
fiscal year includes 53 weeks, while 1997 and 1995 fiscal years include 52
weeks.

Managed Operations

  The Company operates 509 hotels and 55 senior living communities under long-
term management agreements whereby remittances to owners, of $1,350 million,
$1,056 million and $960 million in 1997, 1996 and 1995, respectively, are based
primarily on profits.

  Working capital and operating results of managed hotels and senior living
communities operated by the Company's employees are consolidated because the
operating responsibilities associated with such entities are substantially the
same as if they were owned. The consolidated financial statements include the
following related to managed hotels and senior living communities operated by
the Company's employees: current assets and current liabilities of $512 million
at January 2, 1998 and $320 million at January 3, 1997; sales of $5,515 million
in 1997, $4,595 million in 1996 and $4,071 million in 1995; and operating
expenses, including remittances to owners, of $5,181 million in 1997, $4,322
million in 1996 and $3,830 million in 1995.

International Operations

  The consolidated statement of income includes the following related to
international operations: sales of $594 million in 1997, $472 million in 1996
and $303 million in 1995; and operating profit before corporate expenses and
interest of $46 million in 1997, $21 million in 1996 and $19 million in 1995.

Profit Sharing Plans

  The Company contributes to a profit sharing plan for the benefit of employees
meeting certain eligibility requirements and electing participation in the plan.
Company contributions determined by the Board of Directors totaled $51 million
in 1997, $43 million in 1996 and $34 million in 1995.

Self-Insurance Programs

  The Company is self-insured for certain levels of general liability, workers'
compensation, employment practices and employee medical coverage. Estimated
costs of these self-insurance programs are accrued at the present value of
projected settlements for known and anticipated claims.

Cash and Equivalents

  The Company considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents. The Company uses
drafts in its cash management system. At January 2, 1998 and January 3, 1997,
outstanding drafts included in accounts payable totaled $193 million and $180
million, respectively. At January 2, 1998 and January 3, 1997, cash included
$140 million and $133 million, respectively, related to managed properties.

New Accounting Standards

  The Company will adopt Statement of Financial Accounting Standards (FAS) No.
130, "Reporting Comprehensive Income" and FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" during 1998. The Company is
evaluating the impact of these statements on its consolidated financial
statements. FAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was adopted during the first quarter
of 1997, and FAS No. 129, "Disclosure of Information about Capital Structure"
was adopted in the fourth quarter of 1997, with no material effect on the
Company's consolidated financial statements.

                                       31
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

  The Company adopted FAS No. 128, "Earnings Per Share" in the fourth quarter of
1997. A comparison to earnings per share as previously calculated follows:

<TABLE>
<CAPTION>
                                                                         1997                  1996                  1995
                                                                  -----------------     -----------------     -----------------
<S>                                                               <C>                   <C>                   <C>  
Primary Earnings Per Share as previously calculated............     $          2.49       $          2.26       $          1.87
                                                                  =================     =================     =================
Fully Diluted Earnings Per Share as previously calculated......     $          2.46       $          2.24       $          1.87
                                                                  =================     =================     =================
 
Basic Earnings Per Share.......................................     $          2.64       $          2.40       $          1.98
                                                                  =================     =================     =================
Diluted Earnings Per Share.....................................     $          2.46       $          2.25       $          1.87
                                                                  =================     =================     =================
</TABLE>

  On November 20, 1997, the Emerging Issues Task Force of the Financial
Accounting Standards Board reached a consensus on EITF 97-2 "Application of FASB
Statement No. 94 and APB Opinion No. 16 to Physician Practice Management
Entities and Certain Other Entities with Contractual Management Arrangements."
EITF 97-2 addresses the circumstances in which a management entity may include
the revenues and expenses of a managed entity in its financial statements.

  The Company is assessing the impact of EITF 97-2 on its long-standing policy
of including in its financial statements the working capital, revenues and
operating expenses of managed hotels and retirement communities operated with
the Company's employees. If the Company concludes that EITF 97-2 should be
applied to its management agreements, it would no longer include in its
financial statements the working capital and operating results of those managed
operations. Application of EITF 97-2 to the Company's financial statements as of
and for the 52 weeks ended January 2, 1998, would have reduced each of revenues
and operating expenses by approximately $5.2 billion, and each of current assets
and current liabilities by $512 million, and have no impact on operating profit,
net income, earnings per share or shareholders' equity.

RELATIONSHIP WITH HOST MARRIOTT AND HOST MARRIOTT SERVICES

  The Company and Host Marriott have entered into agreements which provide,
among other things, for (i) the Company to manage and franchise lodging
properties owned or leased by Host Marriott (the Host Marriott Lodging
Management Agreements), (ii) the Company to manage senior living communities
owned by Host Marriott (the Host Marriott Senior Living Management Agreements),
(iii) the Company to guarantee Host Marriott's performance in connection with
certain loans or other obligations (the Company Guarantees), and (iv) the
Company to provide Host Marriott with various administrative services (the
Service Agreements). Upon consummation of the Spinoff, New Marriott will replace
the Company under these agreements and guarantees. The Company has the right to
purchase up to 20 percent of the voting stock of Host Marriott if certain events
involving a change of control occur. This right will be assigned to New Marriott
upon consummation of the Spinoff.

  The Host Marriott Lodging Management Agreements provide for the Company to
manage Marriott hotels, Courtyard hotels and Residence Inns owned or leased by
Host Marriott. Each Host Marriott Lodging Management Agreement, when entered
into, reflects market terms and conditions and is substantially similar to the
terms of management agreements with third-party owners regarding lodging
facilities of a similar type. The Company recognized sales of $2,302 million,
$1,787 million and $1,274 million and operating profit (before corporate
expenses and interest) of $140 million, $95 million and $59 million during 1997,
1996 and 1995, respectively, from the lodging properties owned or leased by Host
Marriott. Additionally, Host Marriott is a general partner in several
unconsolidated partnerships that own lodging properties operated by the Company
under long-term agreements. The Company recognized sales of $1,513 million,
$1,769 million and $1,878 million and operating profit (before corporate
expenses and interest) of $122 million, $121 million and $115 million in 1997,
1996 and 1995, respectively, from

                                       32
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

the lodging properties owned by these unconsolidated partnerships. The Company
also leases land to certain of these partnerships and recognized land rent
income of $23 million, $22 million and $21 million in 1997, 1996 and 1995,
respectively.

  The Host Marriott Senior Living Management Agreements provide for the Company
to manage independent full-service senior living communities owned or leased by
Host Marriott. These agreements, entered into on June 21, 1997, reflect market
terms and conditions and are substantially similar to management agreements with
third-party owners. The Company recognized sales of $126 million and operating
profit (before corporate expenses and interest) of $1 million under these
agreements during 1997.

  The Company has provided, and may provide in the future, financing to Host
Marriott for a portion of the cost of acquiring properties to be operated or
franchised by the Company, including partial consideration for Host Marriott's
purchase of 29 senior living communities from the Company. The outstanding
principal balance of these loans was $135 million and $37 million at January 2,
1998 and January 3, 1997, respectively, and the Company recognized $9 million,
$17 million and $23 million in 1997, 1996 and 1995, respectively, in interest
and fee income under these credit agreements with Host Marriott.

  Under the Company Guarantees, the Company has guaranteed the performance of
Host Marriott and certain of its affiliates to lenders and other third parties.
These guarantees were limited to $107 million at January 2, 1998. No payments
have been made by the Company pursuant to these guarantees.

  On December 29, 1995, Host Marriott distributed to its shareholders through a
special dividend all of the outstanding shares of common stock of Host Marriott
Services Corporation (Host Marriott Services), which operates food, beverage and
merchandise concessions at airports, on toll roads and at arenas and other
tourist attractions. The Company provides certain administrative and data
processing services to Host Marriott Services for which the Company charged $10
million and $11 million in 1997 and 1996, respectively. In addition, the Company
provides and distributes food and supplies to Host Marriott Services, for which
the Company charged $80 million in 1997, $77 million in 1996 and (prior to the
special dividend) $65 million in 1995.

  The Company also provides certain administrative services to Host Marriott
(including the services provided to Host Marriott Services prior to the special
dividend) for which the Company charged $17 million in 1997, $19 million in 1996
and $25 million in 1995, including reimbursements.

PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                                     1997                      1996
                                                                            --------------------      --------------------
                                                                                             (in millions)
<S>                                                                         <C>                       <C>     
Land................................................................          $            426          $            434   
Buildings and leasehold improvements................................                       499                       860   
Furniture and equipment.............................................                       501                       497   
Timeshare properties................................................                       379                       335   
Construction in progress............................................                       230                       183   
                                                                            --------------------      -------------------- 
                                                                                         2,035                     2,309   
Accumulated depreciation and amortization...........................                      (438)                     (415)  
                                                                            --------------------      -------------------- 
                                                                              $          1,597          $          1,894   
                                                                            ====================      ====================
</TABLE>

  Property and equipment is recorded at cost, including interest, rent and real
estate taxes incurred during development and construction. Interest capitalized
as a cost of property and equipment totaled $16 million in 1997, $9 million in
1996 and $8 million in 1995. Replacements and improvements that extend the
useful life of property and equipment are capitalized. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the asset life or lease
term. Land with

                                       33
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

an aggregate book value of $264 million at January 2, 1998 is leased to certain
partnerships affiliated with Host Marriott. Most of this land has been pledged
to secure debt of these lessees. The Company has agreed to defer receipt of
rentals on this land, if necessary, to permit the lessees to meet their debt
service requirements.

ACQUISITIONS AND DISPOSITIONS

Renaissance Hotel Group N.V.

  On March 29, 1997, the Company acquired substantially all of the outstanding
common stock of Renaissance Hotel Group N.V. (RHG), an operator and franchisor
of approximately 150 hotels in 38 countries under the Renaissance, New World and
Ramada International brands. The purchase cost, of approximately $937 million,
was funded with proceeds from commercial paper borrowings supported by the
Company's long-term revolving credit facility. The acquisition has been
accounted for using the purchase method of accounting. The purchase cost has
been allocated to the assets acquired and liabilities assumed based on estimated
fair values as follows:

<TABLE>
<CAPTION>
                                                                                       (in millions)
          <S>                                                                        <C>
          Current assets.....................................................        $       141
          Hotel management, franchise and license agreements.................                380
          Other assets.......................................................                  7
          Current liabilities................................................               (119)
          Long-term debt.....................................................               (140)
          Other long-term liabilities........................................               (106)
          Goodwill...........................................................                774
                                                                                   -------------------
          Purchase cost......................................................        $       937
                                                                                   ===================
</TABLE>

  Goodwill is being amortized on a straight-line basis over 40 years. Amounts
allocated to management, franchise and license agreements are being amortized on
a straight-line basis over the lives of the agreements.

  The Company included RHG's operating results from the date of acquisition.
Summarized below are the unaudited pro forma consolidated results of operations
of the Company for 1997 and 1996, as if RHG had been acquired at the beginning
of the respective fiscal years (in millions, except per share amounts).

<TABLE>
<CAPTION>
                                                                         1997                          1996
                                                               ----------------------        ----------------------
<S>                                                            <C>                           <C>
Sales....................................................        $             12,232          $             11,028
                                                               ======================        ======================
Net income...............................................        $                331          $                283
                                                               ======================        ======================
Diluted earnings per share...............................        $               2.43          $               2.08
                                                               ======================        ======================
</TABLE>

  Unaudited pro forma net income includes interest expense on borrowings
relating to the Company's acquisition of RHG's common stock as well as the
impact on historical interest expense of the revaluation of RHG's debt based on
the Company's borrowing cost. Amortization expense deducted in determining net
income reflects the impact of the excess of the purchase price over the net
tangible assets acquired. The unaudited pro forma consolidated results of
operations do not reflect the Company's expected future results of operations.

  Dr. Henry Cheng Kar-Shun is the Managing Director of New World Development
Company Limited (New World Development) and, together with his family and
affiliated corporations, owns or otherwise controls approximately 35 percent of
New World Development's common stock. Effective June 1, 1997, Dr. Cheng was
appointed to the Company's Board of Directors. Dr. Cheng, New World Development
and their affiliates own all or a portion of 87 hotels that are operated by the
Company and, prior to the Company's acquisition of RHG, owned a majority of RHG
common stock. New World Development and other affiliates of Dr. Cheng have
indemnified the Company for 

                                       34
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

certain lease, debt, guarantee and other obligations resulting from the
formation of RHG as a hotel management company in 1995.

                                       35
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

The Ritz-Carlton Hotel Company LLC

  On April 24, 1995, the Company acquired a 49 percent beneficial ownership
interest in The Ritz-Carlton Hotel Company LLC, which owns the management
agreements on the Ritz-Carlton hotels and resorts, the licenses for the Ritz-
Carlton trademarks and trade name as well as miscellaneous assets. The
investment was acquired for a total consideration of approximately $200 million.
The Company expects to acquire the remaining 51 percent over the next several
years beginning in 1998. The investment in the Ritz-Carlton Hotel Company LLC is
accounted for using the equity method of accounting.

  The excess of the Company's investment in The Ritz-Carlton Hotel Company LLC
over its share of the net tangible assets is being amortized over 25 years. The
Company's income from The Ritz-Carlton Hotel Company LLC is included in lodging
operating profit in the accompanying consolidated statement of income. The
Company received distributions of $17 million, $20 million and $6 million in
1997, 1996 and 1995, respectively, from its investment in The Ritz-Carlton Hotel
Company LLC. Such amounts were based upon an annual, cumulative preferred return
on invested capital.

Forum Group, Inc.

  On March 25, 1996, a wholly owned subsidiary of the Company acquired all of
the outstanding shares of common stock of Forum Group, Inc. (Forum), an operator
of 43 senior living communities, 34 of which were owned or partially owned by
Forum, for total cash consideration of approximately $303 million. The
acquisition was accounted for using the purchase method of accounting. The
purchase cost was allocated to the assets acquired and liabilities assumed based
on estimated fair values as follows:

<TABLE>
<CAPTION>
                                                                                       (in millions)
          <S>                                                                        <C>
          Current assets.......................................................      $        40
          Property and equipment...............................................              531
          Other assets.........................................................               29
          Current liabilities..................................................              (45)
          Long-term debt.......................................................             (363)
          Other long-term liabilities..........................................              (58)
          Goodwill.............................................................              169
                                                                                   ===================
          Purchase cost........................................................      $       303
                                                                                   ===================
</TABLE>

Goodwill is being amortized on a straight-line basis over 35 years.

  On June 21, 1997, the Company sold 29 senior living communities acquired as
part of the Forum acquisition, to Host Marriott for approximately $550 million,
resulting in no gain or loss. The consideration included approximately $50
million to be received subsequent to 1997, as expansions at certain communities
are completed. The $500 million of consideration received during 1997 consisted
of $222 million in cash, $187 million of outstanding debt, $50 million of notes
receivable due on June 20, 1998, and $41 million of notes receivable due on
January 1, 2001. The notes receivable from Host Marriott bear interest at nine
percent. Under the terms of sale, Host Marriott purchased all of the common
stock of Forum which at the time of the sale included the 29 communities,
certain working capital and associated debt. The Company will continue to
operate these communities under long-term management agreements.

Other Property Sales

  On April 3, 1997, the Company agreed to sell and leaseback, under long-term,
limited-recourse leases, 14 limited service hotels for approximately $149
million in cash. Concurrently, the Company agreed to pay security deposits of
$15 million, which will be refunded upon expiration of the leases. As of January
2, 1998, sales of all of the properties had closed, resulting in a $20 million
excess of the sales price over the net book value, which will be

                                       36
<PAGE>
 
                          MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

recognized as a reduction of rent expense over the 17-year initial lease terms.
On October 10, 1997, the Company agreed to sell and leaseback, under long-term,
limited-recourse leases, another nine limited service hotels for approximately
$129 million in cash. Concurrently, the Company agreed to pay security deposits
of $13 million, which will be refunded upon expiration of the leases. As of
January 2, 1998, sales of three of these nine properties had closed, resulting
in a $7 million excess of the sales price over the net book value, which will be
recognized as a reduction of rent expense over the 15-year initial lease terms.
All of the aforementioned leases are renewable at the option of the Company.

  On April 11, 1997, the Company sold five senior living communities for cash 
consideration of approximately $79 million. On September 12, 1997, the Company 
agreed to sell another seven senior living communities for cash consideration of
approximately $93 million. As of January 2, 1998, the sales of five of these 
properties had closed. The Company will continue to operate all of these 
communities under long-term management agreements.

  During 1996, the Company sold and leased back four senior living communities 
for cash consideration of approximately $53 million. The excess of the sales 
price over the net book value of $9 million will be recognized as a reduction of
rent expense over the 20-year initial lease terms.

Note Sales

  The Company periodically sells, with limited recourse, notes receivable
originated by Marriott Vacation Club International in connection with the sales
of timesharing intervals. Net proceeds from these transactions totaled 
$68 million in 1997 and $148 million in 1996. At January 2, 1998, the Company
had a repurchase obligation of $70 million with respect to these mortgage note
sales. Additionally, the Company sold, without recourse, first mortgage loans on
Marriott lodging and senior living properties of $18 million in 1997 and 
$113 million in 1996.

INTANGIBLE ASSETS

<TABLE>
<CAPTION>
                                                       1997           1996
                                                    ----------     ----------
                                                         (in millions)
<S>                                                 <C>            <C>
Contract Services agreements.......................  $  390         $  417
Hotel management, franchise and license agreements.     587            178
Goodwill...........................................   1,062            357
Other..............................................       8              8
                                                    ----------     ----------

                                                      2,047            960
Accumulated amortization...........................    (373)          (312)
                                                    ----------     ----------
                                                     $1,674         $  648
                                                    ==========     ==========
</TABLE> 

  Intangible assets are amortized on a straight-line basis over periods of three
to 40 years. Amortization expense totaled $67 million in 1997, $34 million in 
1996 and $29 million in 1995.

INCOME TAXES

  Total deferred tax assets and liabilities as of January 2, 1998 and January 3,
1997, were as follows:

<TABLE> 
<CAPTION> 
                                                       1997           1996
                                                    ----------     ----------
                                                         (in millions)
<S>                                                 <C>            <C>     
Deferred tax assets...............................  $   469         $  449
Deferred tax liabilities..........................     (411)          (318)
                                                    ----------     ----------
Net deferred taxes................................  $    58         $  131
                                                    ==========     ==========
</TABLE> 

                                       37
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

  The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as of
January 2, 1998 and January 3, 1997 follows:

<TABLE>
<CAPTION>
                                                                                     1997                        1996
                                                                              -------------------         -------------------
                                                                                                (in millions)
 <S>                                                                          <C>                         <C>     
Self-insurance...........................................................       $             139           $             139
Employee benefits........................................................                     123                         126
Deferred income..........................................................                      15                          15
Other reserves...........................................................                      41                          41
Frequent stay programs...................................................                      99                          78
Partnership interests....................................................                     (31)                        (31)
Property, equipment and intangible assets................................                    (204)                       (138)
Finance leases...........................................................                     (44)                        (25)
Other, net...............................................................                     (80)                        (74)
                                                                              -------------------         -------------------
Net deferred taxes                                                              $              58           $             131
                                                                              ===================         ===================
</TABLE>

  No provision for U.S. income taxes, or additional foreign taxes, has been made
on the cumulative unremitted earnings of non-U.S. subsidiaries ($60 million as
of January 2, 1998) because management considers these earnings to be
permanently invested.  These earnings could become subject to additional taxes
if remitted as dividends, loaned to the Company or a U.S. affiliate, or if the
Company sells its interests in the affiliates.  It is not practicable to
estimate the amount of additional taxes which might be payable on the unremitted
earnings.

 The provision for income taxes consists of:

<TABLE>
<CAPTION>
                                                                        1997                    1996                     1995
                                                               -------------------      -------------------     -------------------
                                                                                            (in millions)
<S>                                                            <C>                      <C>                     <C>     
Current  -  Federal.......................................       $             180        $             127       $              72
         -  State.........................................                      37                       25                      23
         -  Foreign.......................................                      43                       19                      16
                                                               -------------------      -------------------     -------------------
                                                                               260                      171                     111
                                                               -------------------      -------------------     -------------------
Deferred -  Federal......................................                      (37)                      20                      48
         -  State........................................                       (3)                       4                       8
         -  Foreign......................................                       (1)                       1                      (2)

                                                               -------------------      -------------------     -------------------
                                                                               (41)                      25                      54
                                                               -------------------      -------------------     -------------------
                                                                 $             219        $             196       $             165
                                                               ===================      ===================     ===================
</TABLE>

  The tax provision does not reflect the benefit attributable to the exercise of
employee stock options of $43 million in 1997, $34 million in 1996 and $22
million in 1995.

  A reconciliation of the U.S. statutory tax rate to the Company's effective
income tax rate follows:

<TABLE>
<CAPTION>
                                                                        1997                     1996                  1995
                                                               --------------------     --------------------     --------------
 
<S>                                                            <C>                      <C>                      <C>
U.S. statutory tax rate...................................               35.0%                    35.0%                    35.0%
State income taxes, net of U.S. tax benefit...............                4.1                      4.0                      5.0
Corporate-owned life insurance............................               (0.7)                    (0.5)                    (1.2)
Tax credits...............................................               (3.3)                    (1.9)                    (1.4)
Goodwill amortization.....................................                2.0                      1.0                      0.6
Other, net................................................                2.4                      1.4                      2.0
                                                               --------------------     --------------------     --------------
 Effective rate...........................................               39.5%                    39.0%                    40.0%
                                                               ====================     ====================     ==============
</TABLE>

                                       38
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 
  Cash paid for income taxes, net of refunds, was $162 million in 1997, $131
million in 1996 and $123 million in 1995.

  As part of the Spinoff, SMS and New Marriott will enter into a tax sharing
agreement which reflects each party's rights and obligations with respect to
deficiencies and refunds, if any, of federal, state or other taxes relating to
the business of the Company and New Marriott prior to the Spinoff.

LEASES

 Summarized below are the Company's future obligations under leases at January
2, 1998:

<TABLE>
<CAPTION>
                                                                          Capital                      Operating
                                                                          Leases                        Leases
                                                                  ---------------------         ---------------------
                                                                                      (in millions)
     <S>                                                          <C>                           <C>      
     Fiscal Year                           
                                           
     1998..............................................             $                 5           $               142
     1999..............................................                               2                           136
     2000..............................................                               1                           129
     2001..............................................                               1                           125
     2002..............................................                               1                           124
     Thereafter........................................                               2                         1,149
                                                                  ---------------------         ---------------------
     Total minimum lease payments......................                              12           $             1,805
                                                                                                =====================
     Less amount representing interest.................                               2
                                                                  ---------------------
     Present value of minimum lease payments...........             $                10
                                                                  =====================
</TABLE>

  Most leases have initial terms of one to 20 years, and contain one or more
renewal options, generally for five or 10 year periods.  The leases provide for
minimum rentals, and additional rentals which are based on the operations of the
leased property.
 
 Rent expense consists of:

<TABLE>
<CAPTION>
                                                                     1997                   1996                   1995
                                                               ---------------        ---------------        ---------------
                                                                                        (in millions)
  <S>                                                          <C>                    <C>                    <C>     
  Minimum rentals.........................................       $         140          $         127          $         119
  Additional rentals......................................                 127                    133                    102
                                                               ---------------        ---------------        ---------------
                                                                 $         267          $         260          $         221
                                                               ===============        ===============        ===============
</TABLE>

                                       39
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

LONG-TERM DEBT

 Long-term debt at January 2, 1998 and January 3, 1997, consisted of the
following:

<TABLE>
<CAPTION>
                                                                                   1997                    1996
                                                                           -------------------     -------------------
                                                                                           (in millions)
<S>                                                                        <C>                     <C>     
Secured debt, average interest rate of 7.34% at January 2, 1998,
 maturing through 2020...............................................       $               -       $             286
Unsecured debt:
 Senior notes, average interest rate of 7.43% at January 2, 1998,
  maturing through 2009...............................................                     725                     597
 Commercial paper, interest rate of 5.82% at January 2, 1998..........                     692                      20
 Endowment deposits (non-interest bearing)............................                     108                     107
 Other................................................................                      24                       1
Capital lease obligations.............................................                      10                      22
                                                                           -------------------     -------------------
                                                                                         1,559                   1,033
Less current portion..................................................                      25                      23
                                                                           -------------------     -------------------
                                                                             $           1,534       $           1,010
                                                                           ===================     ===================
</TABLE>
 
  The Company entered into a $1.5 billion bank credit facility (the Facility) on
March 27, 1997. The Facility has a term of five years and bears interest at
LIBOR plus a spread, 21.5 basis points, based on the Company's senior debt
rating as of January 2, 1998. Additionally, annual fees are paid on the Facility
at a rate, 11 basis points, also based on the Company's senior debt rating as of
January 2, 1998. Commercial paper is classified as long-term debt based on the
Company's ability and intent to refinance it on a long-term basis.

  The Company's loan agreements require the maintenance of certain financial
ratios and minimum shareholders' equity, and also include, among other things,
limitations on additional indebtedness and the pledging of assets. At January 2,
1998, shareholders' equity exceeded the minimum requirement by $731 million.

  The 1997 consolidated statement of cash flows excludes $226 million of debt
assumed by Host Marriott and $91 million of notes receivable related to the sale
of 29 senior living communities to Host Marriott, and $141 million of debt
assumed in the RHG acquisition. The 1996 consolidated statement of cash flows
excludes $363 million of Forum debt (including capital leases) assumed at the
date of acquisition by the Company. Non-recourse debt of $62 million and $29
million extinguished without cash payments in 1997 and 1996, respectively, and
$77 million assumed in 1995 is not reflected in the statement of cash flows.

  Aggregate debt maturities, excluding capital lease obligations, are:  1998 -
$21 million; 1999 - $10 million; 2000 - $7 million; 2001 - $9 million; 2002 -
$700 million and $802 million thereafter.

 Cash paid for interest was $96 million in 1997, $57 million in 1996, and $32
million in 1995.

CONVERTIBLE SUBORDINATED DEBT

  On March 25, 1996, the Company issued $540 million (principal amount at
maturity) of zero coupon convertible subordinated debt in the form of Liquid
Yield Option Notes due 2011.  Each $1,000 LYON is convertible at any time, at
the option of the holder, into 8.76 shares of the Company's common stock.  The
LYONs were issued at a discount representing a yield to maturity of 4.25
percent.  The Company recorded the LYONs at the discounted amount at issuance.
Accretion is recorded as interest expense and an increase to the carrying value.
Gross proceeds from the LYONs issuance were $288 million.

                                       40
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

 At the option of the holder, the Company may be required to redeem each LYON on
March 25, 1999, or March 25, 2006, for $603.71 or $810.36 per LYON,
respectively. In such event, the Company may elect to redeem the LYONs for cash,
common stock, or any combination thereof.

  The LYONs are redeemable by the Company at any time on or after March 25,
1999, for cash equal to the issue price plus accrued original issue discount.
The LYONs are expressly subordinated to the Company's $1.8 billion of Senior
Indebtedness at January 2, 1998, including guarantees, as defined in the
indenture governing the LYONs.

  Upon consummation of the Spinoff, each LYON will be convertible into 2.19
shares of SMS common stock (after giving effect to a one-for-four reverse stock
split), 8.76 shares of New Marriott Common Stock and 8.76 shares of New Marriott
Class A Common Stock. The LYONS will be assumed by New Marriot, and SMS will
assume responsibility for a portion of the LYONs equal to its pro rata share of
the relative equity values of SMS and New Marriott as determined in good faith
by the Company prior to the Spinoff, although New Marriott will be liable to the
holders of the LYONs for any payments that SMS fails to make on its allocable
portion.

SHAREHOLDERS' EQUITY

  Three hundred million shares of the Company's common stock, with a par value
of $1 per share, are authorized.  One million shares of preferred stock, without
par value, are authorized, with none issued.  Upon the Spinoff, New Marriott
will have 500 million shares of New Marriott Common Stock, 300 million shares of
New Marriott Class A Common Stock, and 10 million shares of preferred stock
authorized.

  On July 23, 1993, the Company's Board of Directors adopted a shareholder
rights plan under which one preferred stock purchase right was distributed for
each share of Company common stock. Each right entitles the holder to buy
1/1000/th/ of a share of a newly issued series of junior participating preferred
stock of the Company at an exercise price of $150. The rights will be
exercisable ten days after a person or group acquires beneficial ownership of 20
percent or more of the Company's common stock, or begins a tender or exchange
offer for 30 percent or more of the Company's common stock. Shares owned by a
person or group on September 30, 1993 and held continuously thereafter are
exempt for purposes of determining beneficial ownership under the rights plan.
The rights are nonvoting and will expire on the tenth anniversary of the
adoption of the Company's shareholder rights plan, unless exercised or
previously redeemed by the Company for $.01 each. If the Company is involved in
a merger or certain other business combinations not approved by the Board of
Directors, each right entitles its holder, other than the acquiring person or
group, to purchase common stock of either the Company or the acquirer having a
value of twice the exercise price of the right.

  In connection with the Spinoff, the shareholder rights plan will be amended to
exempt shares acquired by Sodexho and its affiliates.

  The Company has been authorized by its Board of Directors to purchase up to an
additional 5.1 million shares of the Company's common stock including 5.0
million shares authorized in January 1998.

                                       41
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

EARNINGS PER SHARE

  The following table illustrates the reconciliation of the earnings and number
of shares used in the basic and diluted earnings per share calculations (in
millions, except per share amounts).

<TABLE>
<CAPTION>
                                                                     1997                    1996                    1995
                                                             -------------------     -------------------     -------------------
<S>                                                          <C>                     <C>                     <C>     
Computation of Basic Earnings Per Share

 Net income.............................................       $             335       $             306       $             247
 Weighted average shares outstanding....................                   127.0                   127.4                   124.7
                                                             -------------------     -------------------     -------------------
 
  Basic Earnings Per Share..............................       $            2.64       $            2.40       $            1.98
                                                             ===================     ===================     ===================
 
Computation of Diluted Earnings Per Share
 
 Net income.............................................       $             335       $             306       $             247
  After-tax interest expense on convertible
  subordinated debt.....................................                       8                       6                       -
                                                             -------------------     -------------------     -------------------
 
  Net income for diluted earnings per share.............       $             343       $             312       $             247
                                                             -------------------     -------------------     -------------------
 
 Weighted average shares outstanding....................                   127.0                   127.4                   124.7
 
 Effect of Dilutive Securities
    Employee stock purchase plan........................                     0.1                     0.2                     0.2
    Employee stock option plan..........................                     4.4                     4.5                     3.6
    Deferred stock incentive plan.......................                     3.0                     3.1                     3.4
    Convertible subordinated debt.......................                     4.7                     3.7                       -
                                                             -------------------     -------------------     -------------------
 
    Shares for diluted earnings per share...............                   139.2                   138.9                   131.9
                                                             -------------------     -------------------     -------------------
 
    Diluted Earnings Per Share..........................       $            2.46       $            2.25       $            1.87
                                                             ===================     ===================     ===================
</TABLE>

  The effect of dilutive securities is computed using the treasury stock method
and average market prices during the period. The if-converted method is used for
convertible subordinated debt.

  Certain options to purchase shares of common stock were outstanding but were
not included in the computation of diluted earnings per share because the
exercise prices of the options were greater than the average market price of the
common shares as follows:

<TABLE>
<CAPTION>
                                                                     1997                   1996                   1995
                                                             ------------------     -------------------     -----------------
<S>                                                          <C>                    <C>                     <C>     
Number of shares (in millions)............................              2.4                    1.9                    2.0    
Weighted average exercise price...........................     $         68           $         55            $        37    
Weighted average remaining life (in years)................               15                     15                     15    
</TABLE>

                                       42
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

EMPLOYEE STOCK PLANS

  Under the Company's 1996 Comprehensive Stock Incentive Plan (Comprehensive
Plan), the Company may award to participating employees (i) options to purchase
the Company's common stock (Stock Option Program and Supplemental Executive
Stock Option awards), (ii) deferred shares of the Company's common stock and
(iii) restricted shares of the Company's common stock. In addition, the Company
has an employee stock purchase plan (Stock Purchase Plan). In accordance with
the provisions of Opinion No. 25 of the Accounting Principles Board, no
compensation cost is recognized for the Stock Option Program, the Supplemental
Executive Stock Option awards or the Stock Purchase Plan.

  Deferred shares granted to officers and key employees under the Comprehensive
Plan generally vest over 10 years in annual installments commencing one year
after the date of grant. Certain employees may elect to defer receipt of shares
until termination or retirement. The Company accrues compensation expense for
the fair market value of the shares on the date of grant, less estimated
forfeitures. The Company awarded 0.2 million and 0.4 million deferred shares
under this plan during 1997 and 1996, respectively. Compensation cost recognized
during 1997 and 1996 was $11 million and $9 million, respectively.

  Restricted shares under the Comprehensive Plan are issued to officers and key
employees and distributed over a number of years in annual installments, subject
to certain prescribed conditions including continued employment. The Company
recognizes compensation expense for the restricted shares over the restriction
period equal to the fair market value of the shares on the date of issuance. The
Company awarded 0.1 million and 0.2 million restricted shares under this plan
during 1997 and 1996, respectively.  Compensation cost recognized was $2 million
in 1997 and 1996.

  Under the Stock Purchase Plan, eligible employees may purchase common stock
through payroll deductions at the lower of market value at the beginning or end
of each plan year.

  Employee stock options may be granted to officers and key employees at
exercise prices not less than the market price of the Company's stock on the
date of grant.  Nonqualified options expire up to 15 years after the date of
grant.  Most options under the Stock Option Program are exercisable in
cumulative installments of one-fourth at the end of each of the first four years
following the date of grant. In February 1997, the Company issued one million
Supplemental Executive Stock Option awards, which vest after eight years.
However, if the Company's stock price meets certain performance criteria the
options may vest sooner. These options have an exercise price of $54 and none of
them were exercised or forfeited during 1997.

  For purposes of the following disclosures required by FAS No. 123, "Accounting
for Stock-Based Compensation," the fair value of each option granted has been
estimated on the date of grant using the Black-Scholes option-pricing model,
with the following assumptions:

<TABLE>
<CAPTION>
                                                                 1997                       1996                   1995
                                                       ----------------------     ----------------------     -------------
<S>                                                    <C>                        <C>                        <C>     
Annual dividends..................................       $       .35                $       .32                $    .28    
Expected volatility...............................                24%                        25%                     26%   
Risk free interest rate...........................               6.2%                       6.1%                    5.9%   
Expected life (in years)..........................                 7                          7                       7    
</TABLE>

                                       43
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

  Pro forma compensation cost for the Stock Option Program, the Supplemental
Executive Stock Option awards and employee purchases pursuant to the Stock
Purchase Plan subsequent to December 30, 1994, recognized in accordance with FAS
No. 123, would reduce the Company's net income as follows (in millions, except
per share amounts):

<TABLE>
<CAPTION>
                                                                1997                     1996                     1995
                                                       --------------------     --------------------     --------------------
<S>                                                      <C>                    <C>                      <C>     
Net income as reported.........................          $          335           $          306           $         247     
Pro forma net income...........................          $          317           $          295           $         243     
                                                                                                                             
Diluted earnings per share as reported.........          $         2.46           $         2.25           $        1.87     
Pro forma diluted earnings per share...........          $         2.35           $         2.18           $        1.85     
</TABLE>

  The weighted-average fair value of each option granted during 1997, 1996 and
1995 was $22, $19 and $12, respectively.  Since the pro forma compensation cost
for the Stock Option Program is recognized over the vesting period, the
foregoing pro forma reductions in the Company's net income are not
representative of anticipated amounts in future years.

  A summary of the Company's Stock Option Program activity during 1997 and 1996
is presented below:

<TABLE>
<CAPTION>
                                                             1997                                           1996
                                          ----------------------------------------     --------------------------------------------
                                                                     Weighted                                         Weighted
                                              Number of               average                Number of                 average
                                               options               exercise                 options                 exercise
                                            (in millions)              price               (in millions)                price
                                           ---------------      -------------------     -------------------      -------------------

<S>                                        <C>                  <C>                     <C>                      <C>     
Outstanding at beginning of year.....              14.1          $         28                      14.4           $          23    
Granted during the year..............               2.5                    67                       1.9                      55    
Exercised during the year............              (1.9)                   21                      (2.1)                     20    
Forfeited during the year............              (0.2)                   35                      (0.1)                     40
                                            ------------                                     -----------
Outstanding at end of year...........              14.5                    35                      14.1                      28    
                                            ============             =========               ===========              ==========   
                                                                                                                                   
Options exercisable at end of year...               9.3          $         24                       9.2           $          20    
                                            ============             =========               ===========              ==========   
</TABLE>

 At January 2, 1998, 22.3 million shares were reserved under the Comprehensive
Plan (including 14.5 million shares under the Stock Option Program and one
million shares under the Supplemental Executive Stock Option Program) and 1.3
million shares were reserved under the Stock Purchase Plan.

  Stock options issued under the Stock Option Program outstanding at January 2,
1998 were as follows:

<TABLE>
<CAPTION>
                                                     Outstanding                                              Exercisable
                           ------------------------------------------------------------        -------------------------------------

                                                                
                                                     Weighted               Weighted                                      Weighted
       Range of                Number of             average                average               Number of               average
       exercise                 options           remaining life            exercise               options                exercise
        prices               (in millions)          (in years)               price              (in millions)              price
 ----------------------     ---------------      ---------------      --------------------     ---------------      ----------------
<S>                         <C>                  <C>                  <C>                      <C>                  <C>     
$    7 to 10                           1.2                    8        $                7                 1.2        $      7
     11 to 14                          1.2                    9                        13                 1.2              13
     15 to 22                          1.5                   10                        16                 1.5              16
     23 to 36                          4.5                    9                        28                 4.1              28
     37 to 56                          3.8                   14                        46                 1.3              43
     57 to 70                          2.3                   15                        68                   -
----------------------     ---------------                                                    ---------------
  $   7 to 70                         14.5                   11                        35                 9.3              24
======================     ===============      ===============      ====================     ===============      =================

</TABLE>

                                       44
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

  In connection with the Spinoff, stock options, deferred shares and restricted
shares which have been granted to persons other than those who remain employees
of SMS will be canceled and new awards with the same value will be issued to
them by New Marriott under a new comprehensive stock incentive plan.  Stock
options, deferred shares and restricted shares which have been granted to
persons who remain employees of SMS will be adjusted to reflect the Spinoff such
that the value of such awards before the Spinoff equals the value of the
adjusted SMS awards after the Spinoff.

FAIR VALUE OF FINANCIAL INSTRUMENTS

  The fair values of current assets and current liabilities are assumed to be
equal to their reported carrying amounts. The fair values of noncurrent
financial assets and liabilities are shown below.

<TABLE>
<CAPTION>
                                                                        1997                                    1996
                                                        -----------------------------------     -----------------------------------
                                                            Carrying              Fair              Carrying              Fair
                                                             amount               value              amount               value
                                                        ---------------     ---------------     ---------------     ---------------
                                                                                        (in millions)
<S>                                                     <C>                 <C>                 <C>                 <C>      
Notes and other receivable..........................      $         672       $         685       $         480       $         480
Long-term debt, convertible subordinated debt and
   other long-term liabilities......................              1,908               1,944               1,359               1,316
</TABLE>

  Notes and other receivable are valued based on the expected future cash flows
discounted at risk adjusted rates.  Valuations for long-term debt, convertible
subordinated debt and other long-term liabilities are determined based on quoted
market prices or expected future payments discounted at risk adjusted rates.
The fair value of commercial paper borrowings is the carrying value.

CONTINGENT LIABILITIES

  The Company issues guarantees to lenders and other third parties in connection
with financing transactions and other obligations.  These guarantees are
limited, in the aggregate, to $231 million at January 2, 1998, including the
Company Guarantees,  with expected funding of zero.   New World Development and
another affiliate of Dr. Cheng have severally indemnified the Company for loan
guarantees with a maximum funding of $18 million (which are included in the $231
million above) and guarantees by RHG of leases with minimum annual payments of
approximately $59 million.  As of January 2, 1998, the Company had extended
approximately $220 million of loan commitments to owners of lodging and senior
living properties.  Letters of credit outstanding on the Company's behalf at
January 2, 1998 totaled $120 million, of which $38 million related to the
Company's repurchase obligation for notes receivable originated by Marriott
Vacation Club International and the majority of the remainder related to the
Company's self-insurance program.   Upon consummation of the Spinoff, New
Marriott will replace SMS as guarantor or obligor under the guarantees and
commitments, or will indemnify SMS in respect of them.

                                       45
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

BUSINESS SEGMENTS

<TABLE>
<CAPTION>
                                                                        1997                  1996                   1995
                                                                 -----------------     -----------------     -------------------
                                                                                           (in millions)
<S>                                                              <C>                   <C>                   <C>     
Identifiable assets
  Lodging...................................................          $      3,995          $      2,414          $        2,329
  Contract Services.........................................                 1,669                 2,108                   1,169
  Corporate.................................................                   658                   553                     520
                                                                 -----------------     -----------------     -------------------
                                                                      $      6,322          $      5,075          $        4,018
                                                                  =================     =================     ===================
 
Capital expenditures
  Lodging...................................................          $        271          $        158          $           76
  Contract Services.........................................                   264                   154                      70
  Corporate.................................................                    18                    14                       7
                                                                 -----------------     -----------------     -------------------
                                                                      $        553          $        326          $          153
                                                                 =================     =================     ===================
 
Depreciation and amortization
  Lodging...................................................          $         89          $         55          $           45
  Contract Services.........................................                    87                    91                      73
  Corporate.................................................                    12                    10                      11
                                                                 -----------------     -----------------     -------------------
                                                                      $        188          $        156          $          129
                                                                 =================     =================     ===================
</TABLE>

  The Company is a diversified hospitality company with operations in two
business segments:  Lodging, which includes development, ownership, operation
and franchising of lodging properties under 10 brand names and development and
operation of vacation timesharing resorts; and Contract Services, consisting of
food service and facilities management for clients in business, education and
health care; development, ownership and operation of senior living communities;
and wholesale food distribution.
 
  The results of operations of the Company's business segments are reported in
the consolidated statement of income.  Segment operating expenses include
selling, general and administrative expenses directly related to the operations
of the businesses, aggregating $595 million in 1997, $534 million in 1996 and
$457 million in 1995.

                                       46
<PAGE>
 
                         MARRIOTT INTERNATIONAL, INC.
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

QUARTERLY FINANCIAL DATA - UNAUDITED

($ in millions, except per share amounts)

<TABLE>
<CAPTION>
                                                                                       1997/1/
                                              -------------------------------------------------------------------------------------
                                                    First            Second             Third            Fourth            Fiscal
                                                   Quarter           Quarter           Quarter         Quarter/3/           Year
                                               ---------------   ---------------   ---------------   ---------------   -------------

<S>                                            <C>               <C>               <C>               <C>               <C>     
Systemwide revenues/2/                          $       3,280     $       3,855     $       3,730     $       5,317     $    16,182
Sales..........................................         2,604             2,878             2,676             3,876          12,034
Operating profit before corporate expenses and
   interest....................................           162               187               149               228             726
Net income.....................................            77                83                67               108             335
Diluted earnings per share/4/..................           .57               .61               .49               .79            2.46
</TABLE>

--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                       1996/1/
                                              -------------------------------------------------------------------------------------
                                                  First              Second           Third              Fourth            Fiscal
                                                 Quarter             Quarter         Quarter             Quarter            Year
                                              ---------------   ---------------   ---------------   ---------------   -------------
<S>                                           <C>               <C>               <C>               <C>               <C>     
Systemwide revenues/2/........................  $       2,655     $       2,979     $       2,842     $       4,329     $    12,805
Sales.........................................          2,163             2,352             2,210             3,447          10,172
Operating profit before corporate expenses and
   interest...................................            123               153               128               225             629
Net income....................................             63                75                58               110             306
Diluted earnings per share/4/.................            .47               .55               .43               .80            2.25
</TABLE>

--------------------------------------------------------------------------------
/1/ The quarters consist of 12 weeks, except the fourth quarter, which includes
16 weeks in 1997 and 17 weeks in 1996.
/2/ Systemwide revenues represent sales of the Company plus revenues of
franchised lodging properties and other properties not operated with the
Company's employees, less fees generated by such properties (that are already
included in sales of the Company).
/3/ Fourth quarter 1997 includes a non-recurring loss before tax of $22 million
($14 million after tax, or $.10 per share) arising from the sale of the UK
operations of Marriott Management Services.
/4/ Earnings per share data have been restated to reflect the adoption, in the
fourth quarter of 1997, of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share."

                                       47
<PAGE>
 
ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

 None.

                                       48
<PAGE>
 
                                   PART III

ITEMS 10, 11, 12 AND 13.

  As described below, certain information appearing in the Company's Proxy
Statement to be furnished to shareholders in connection with the 1998 Annual
Meeting, is incorporated by reference in this Form 10-K Annual Report.

          ITEM 10.                 This information is incorporated by
                                   reference to the "Directors" and
                                   "Section 16(a) Beneficial Ownership
                                   Reporting Compliance" sections of
                                   the Company's Proxy Statement to be
                                   furnished to shareholders in
                                   connection with the 1998 Annual
                                   Meeting. Information regarding
                                   executive officers is included
                                   below.

          ITEM 11.                 This information is incorporated by
                                   reference to the "Executive
                                   Compensation" section of the
                                   Company's Proxy Statement to be
                                   furnished to shareholders in
                                   connection with the 1998 Annual
                                   Meeting .

          ITEM 12.                 This information is incorporated by
                                   reference to the "Security
                                   Ownership of Certain Beneficial
                                   Owners and Management" section of
                                   the Company's Proxy Statement to be
                                   furnished to shareholders in
                                   connection with the 1998 Annual
                                   Meeting.

          ITEM 13.                 This information is incorporated by
                                   reference to the "Certain
                                   Transactions" section of the
                                   Company's Proxy Statement to be
                                   furnished to shareholders in
                                   connection with the 1998 Annual
                                   Meeting. 

                                       49
<PAGE>
 
EXECUTIVE OFFICERS

 The 13 persons identified below are the executive officers of the Company.

<TABLE>
<CAPTION>
            Name and Title                     Age                             Business Experience
--------------------------------------     ----------      -----------------------------------------------------------
<S>                                        <C>             <C>
J. W. Marriott, Jr.                             65          Mr. Marriott is Chairman of the Company Board and Chief
Chairman of the Board and Chief                             Executive Officer of the Company.  He joined Marriott
Executive Officer                                           Corporation in 1956 and has been a member of the Board of
                                                            Directors of Marriott Corporation / Host Marriott /
                                                            Marriott International since 1964.  He became President
                                                            of Marriott Corporation in 1964, Chief Executive Officer
                                                            of Marriott Corporation in 1972 and Chairman of the Board
                                                            of Marriott Corporation in 1985.  Mr. Marriott remains a
                                                            director of Host Marriott and is a director of Host
                                                            Marriott Services.  He is also a director of General
                                                            Motors Corporation and the U.S.-Russia Business Council.
                                                            He serves on the Board of Trustees of the Mayo
                                                            Foundation, National Geographic Society and Georgetown
                                                            University.  He is on the President's Advisory Committee
                                                            of the American Red Cross and the Executive Committee of
                                                            the World Travel & Tourism Council, and is a member of
                                                            the Business Council and the Business Roundtable.  Mr.
                                                            Marriott has served as Chairman of the Board and Chief
                                                            Executive Officer of the Company since October 1993.
                                                     
Todd Clist                                      56          Todd Clist joined Marriott Corporation in 1968.  Mr.
Vice President;                                             Clist served as general manager of several hotels before
President - Marriott Lodging,                               being named Regional Vice President, Midwest Region for
United States and Canada                                    Marriott Hotels, Resorts & Suites in 1980.  Mr. Clist
                                                            became Executive Vice President of Marketing for Marriott
                                                            Hotels, Resorts & Suites in 1985, and Senior Vice
                                                            President, Lodging Products and Markets in 1989.  Mr.
                                                            Clist was named Executive Vice President and General
                                                            Manager for Fairfield Inn in 1990, for both Fairfield Inn
                                                            and Courtyard in 1991, and for Fairfield Inn, Courtyard
                                                            and Residence Inn in 1993. Mr. Clist was appointed to his
                                                            current position in January 1994.
                                                     
Edwin D. Fuller                                 52          Edwin D. Fuller joined Marriott Corporation in 1972 and
Vice President;                                             held several sales positions before being appointed Vice
President and Managing Director -                           President - Marketing in 1979.  After serving as general
Marriott Lodging International                              manager at several Marriott hotels, Mr. Fuller became a
                                                            Regional Vice President in 1985 and was promoted to
                                                            Senior Vice President and Managing Director of Marriott
                                                            Lodging International in 1990.  Mr. Fuller was appointed
                                                            to his current position in January 1994.
</TABLE>

                                       50
<PAGE>
 
<TABLE>
<CAPTION>
            Name and Title                     Age                             Business Experience
--------------------------------------     ----------      -----------------------------------------------------------
<S>                                        <C>             <C>
Paul E. Johnson, Jr.                            50          Paul E. Johnson, Jr. joined Marriott Corporation in 1983
Vice President;                                             in Corporate Financial Planning & Analysis.  In 1987, he
President - Marriott                                        was promoted to Group Vice President of Finance and
Senior Living Services                                      Development for the Marriott Service Group and later
                                                            assumed responsibility for real estate development for
                                                            Marriott Senior Living Services.  During 1989, he served
                                                            as Vice President and General Manager of Marriott
                                                            Corporation's Travel Plazas division.  Mr. Johnson
                                                            subsequently served as Vice President and General Manager
                                                            of Marriott Family Restaurants from December 1989 through
                                                            1991.  In October 1991, he was appointed as Executive
                                                            Vice President and General Manager of Marriott Senior
                                                            Living Services, and in June 1996 he was appointed to his
                                                            current position.
                                                     
Brendan M. Keegan                               54          Brendan M. Keegan joined Marriott Corporation in 1971, in
Senior Vice President -                                     the Corporate Organization Development Department and
Human Resources                                             subsequently held several human resources positions,
                                                            including Vice President of Organization Development and
                                                            Executive Succession Planning.  In 1986, Mr. Keegan was
                                                            named Senior Vice President, Human Resources, Marriott
                                                            Service Group, which now comprises the  Company's
                                                            Contract Services Group.  In April 1997, Mr. Keegan was
                                                            appointed Senior Vice president of Human Resources for
                                                            the Company's worldwide human resources functions,
                                                            including compensation, benefits, labor and employee
                                                            relations, employment, human resources planning and
                                                            development and employee communications.
                                                     
Charles D. O'Dell                               46          Charles D. O'Dell joined Marriott Corporation in 1979 and
Vice President;                                             became a Regional Manager in Marriott Corporation's Roy
President - Marriott                                        Rogers Division in 1981.  Mr. O'Dell held several
Management Services                                         management positions in that Division until 1985, when he
                                                            was named Division Vice President - Education in the Food
                                                            and Services Management Division.  In 1986, Mr. O'Dell
                                                            became Senior Vice President of Business Food and
                                                            Auxiliary Services, and in November 1990 he was appointed
                                                            to his current position.
                                                     
Robert T. Pras                                  56          Robert T. Pras joined Marriott Corporation in 1979 as
Vice President;                                             Executive Vice President of Fairfield Farm Kitchens, the
President - Marriott                                        predecessor of Marriott Distribution Services. In 1981,
Distribution Services                                       Mr. Pras became Executive Vice President of Procurement
                                                            and Distribution.  In May 1986, Mr. Pras was appointed to
                                                            the additional position of General Manager of Marriott
                                                            Corporation's Continuing Care Retirement Communities.  He
                                                            was named Executive Vice President and General Manager of
                                                            Marriott Distribution Services in 1990.  Mr. Pras was
                                                            appointed to his current position in January 1997.
</TABLE> 

                                       51
<PAGE>
 
<TABLE> 
<CAPTION> 
Name and Title                                 Age                             Business Experience
--------------------------------------     ----------      -----------------------------------------------------------
<S>                                        <C>              <C> 
Joseph  Ryan                                    56          Joseph Ryan joined the Company in December 1994 as
Executive Vice President and General                        Executive Vice President and General Counsel.  Prior to
Counsel                                                     that time, he was a partner in the law firm of O'Melveny
                                                            & Myers, serving as the Managing Partner from 1993 until
                                                            his departure.  He joined O'Melveny & Myers in 1967 and
                                                            was admitted as a partner in 1976.

William J. Shaw                                 52          On March 31, 1997, William J. Shaw became President and
President and Chief                                         Chief Operating Officer of the Company.  Mr. Shaw joined
Operating Officer                                           Marriott Corporation in 1974, was elected Corporate
                                                            Controller in 1979 and a Vice President in 1982. In 1986,
                                                            Mr. Shaw was elected Senior Vice President-Finance and
                                                            Treasurer of Marriott Corporation.  He was elected
                                                            Executive Vice President of Marriott Corporation and
                                                            promoted to Chief Financial Officer in April 1988.  In
                                                            February 1992, he was elected President of the Marriott
                                                            Service Group, which now comprises the Company's Contract
                                                            Services Group.  Mr. Shaw was elected Executive Vice
                                                            President and President - Marriott Service Group in
                                                            October 1993.  Mr. Shaw is also Chairman of the Board of
                                                            Directors of Host Marriott Services.  He also serves on
                                                            the Board of Trustees of the University of Notre Dame,
                                                            Loyola College in Maryland and the Suburban Hospital
                                                            Foundation.  Mr. Shaw has been a director of the Company
                                                            since May 1997.
 
Michael A. Stein                                48          Michael A. Stein joined Marriott Corporation in 1989 as
Executive Vice President and Chief                          Vice President, Finance and Chief Accounting Officer. In
Financial Officer                                           1990, he assumed responsibility for Marriott
                                                            Corporation's financial planning and analysis functions.
                                                            In 1991, he was elected Senior Vice President, Finance
                                                            and Corporate Controller of Marriott Corporation and also
                                                            assumed responsibility for Marriott Corporation's
                                                            internal audit function.  In October 1993, effective as
                                                            of the Distribution Date, he was appointed Executive Vice
                                                            President and Chief Financial Officer of the Company.
                                                            Prior to joining Marriott Corporation, Mr. Stein spent 18
                                                            years with Arthur Andersen LLP (formerly Arthur Andersen
                                                            & Co.) where, since 1982, he was a partner.
 
James M. Sullivan                               54          James M. Sullivan joined Marriott Corporation in 1980,
Vice President;                                             departed in 1983 to acquire, manage, expand and
Executive Vice President -                                  subsequently sell a successful restaurant chain, and
Lodging Development                                         returned to Marriott Corporation in 1986 as Vice
                                                            President of Mergers and Acquisitions.  Mr. Sullivan
                                                            became Senior Vice President, Finance - Lodging in 1989,
                                                            Senior Vice President - Lodging Development in 1990 and
                                                            was appointed to his current position in December 1995.
</TABLE> 

                                       52
<PAGE>
 
<TABLE>
<CAPTION>
            Name and Title                     Age                             Business Experience
--------------------------------------     ----------       ----------------------------------------------------------
<S>                                        <C>              <C>
William R. Tiefel                               63          William R. Tiefel joined Marriott Corporation in 1961 and
Executive Vice President and                                was named President of Marriott Hotels, Resorts and
President - Marriott Lodging Group                          Suites in 1988.  He had previously served as resident
                                                            manager and general manager at several Marriott hotels
                                                            prior to being appointed Regional Vice President and
                                                            later Executive Vice President of Marriott Hotels,
                                                            Resorts and Suites and Marriott Ownership Resorts.  Mr.
                                                            Tiefel was elected Executive Vice President of Marriott
                                                            Corporation in November 1989.  In March 1992, he was
                                                            elected President - Marriott Lodging Group and assumed
                                                            responsibility for all of the Company's lodging brands.
                                                            In October 1993, effective as of the Distribution Date,
                                                            he was appointed to his current position.
 
Stephen P. Weisz                                47          Stephen P. Weisz joined Marriott Corporation in 1972 and
Vice President;                                             was named Regional Vice President of the Mid-Atlantic
Executive Vice President - Marriott                         Region in 1991.  Mr. Weisz had previously served as
Lodging and                                                 Senior Vice President of Rooms Operations before being
President - Marriott Vacation Club                          appointed as Vice President of the Revenue Management
International                                               Group.  Mr. Weisz became Senior Vice President of Sales
                                                            and Marketing for Marriott Hotels, Resorts and Suites in
                                                            August 1992 and Executive Vice President - Lodging Brands
                                                            in August 1994.  In December 1996, Mr. Weisz was
                                                            appointed President - Marriott Vacation Club
                                                            International.
</TABLE>

  Upon the Spinoff, the foregoing officers will resign from the Company and
assume the same titles and responsibilities with New Marriott, with the
exception of Charles D. O'Dell, who will become President and Chief Executive
Officer and serve on the Board of Directors of the Company. In addition, William
J. Shaw will serve as Chairman of the Board of Directors of the Company.

  In addition to Mr. O'Dell, the following persons have been chosen to become
executive officers of the Company, effective upon the Spinoff:

<TABLE>
<CAPTION>
            Name and Title                     Age                            Business Experience
--------------------------------------     ----------     ------------------------------------------------------------
<S>                                        <C>            <C>
Charles D. O'Dell                               46        See above.
President and Chief
Executive Officer
 
Michel Landel                                   46        Michel Landel was appointed President and Chief Executive
Executive Vice President                                  Officer of Sodexho North America in 1994.  Mr. Landel
                                                          joined Sodexho in 1984 as a Regional Manager of Sodexho
                                                          Africa. In 1986, he was named President of Sodexho Africa, a
                                                          position he held until 1989, when he became President and
                                                          Chief Executive Officer of Sodexho's United States
                                                          operations. Prior to joining Sodexho, Mr. Landel held
                                                          positions with Groupe Poliet (Plan General Manager, 1980-
                                                          1984) and The Chase Manhattan Bank (Financial Analyst and
                                                          Assistant Treasurer, 1976 - 1980).
</TABLE> 

                                       53
<PAGE>
 
<TABLE> 
<CAPTION> 
Name and Title                                Age                             Business Experience
--------------------------------------     --------       -------------------------------------------------------------
<S>                                        <C>            <C>     
Anthony F. Alibrio                              53        Anthony F. Alibrio's has served as President of Health Care
President, Health Care Services                           Services for Marriott Management Services since 1990.  His
                                                          career has been focused on serving the health care industry
                                                          for the past 27 years of his 32 year tenure with Marriott. In
                                                          the past he has held various operations, sales, and marketing
                                                          responsibilities including Division Vice President and
                                                          National Vice President of Sales and Marketing. A member of
                                                          the Healthcare Research and Development Institute and the
                                                          American Academy of Medical Administrators. Mr. Alibrio also
                                                          serves as a member of the Board of Directors for the National
                                                          Committee for Quality Health Care and Health Insights
                                                          Foundation.
 
 
Stephen J. Brady                                 53       Stephen J. Brady joined Sodexho USA in 1989 after a 15-year
Senior Vice President,                                    career in the retail industry.  His positions with Sodexho
Corporate Communications                                  USA were Vice President of Strategic Developments, Vice
                                                          President of Health Care Operations and Regional Vice
                                                          President of Education Operations. Most recently he has
                                                          served as Vice President of Marketing and Communications for
                                                          Sodexho USA. Mr. Brady serves on the board of FoodChain, the
                                                          national food rescue network.
 
Robert Drury                                    51        Robert Drury has served as Senior Vice President of Finance
Corporate Treasurer                                       and Chief Financial Officer for Sodexho USA since 1995.
                                                          Prior to joining Sodexho USA, Mr. Drury held positions with
                                                          ARAMARK, including Chief Financial Officer of the
                                                          Leisure/International Sector, and had profit responsibility
                                                          of the Encore Service Division. Previously, he worked for
                                                          PepsiCo in a strategic planning role and for its Wilson
                                                          Sporting Goods Division in a variety of operating and
                                                          financial roles.
 
William W. Hamman                               56        William W. Hamman has served as President of Marriott
President, Higher Education Services                      Education Services since 1990.  He has supported the higher
                                                          education community for 35 years, holding positions in
                                                          Marriott Education Services that include Regional Vice
                                                          President, Area Vice President and Division Vice President.
                                                          Mr. Hamman is active in the National Association of College
                                                          and University Business Officers (NACUBO) and Council of
                                                          Independent Colleges (CIC). He also serves on the Western
                                                          Illinois University Foundation Board of Trustees.
 
Randall C. Harris                               46        Randall C. Harris joined Marriott Management Services in
Senior Vice President and                                 1997.  Before joining the Company, Mr. Harris was with
Chief Human Resources Officer                             Cognizant Corporation, which was formed as a result of the
                                                          restructuring of Dunn & Bradstreet Corporation. His previous
                                                          experience includes senior human resource and general
                                                          management positions with American Express (and the
                                                          subsequent initial public offering of First Data Corporation)
                                                          and Sprint Corporation.
</TABLE> 

                                       54
<PAGE>
 
<TABLE> 
<CAPTION> 
Name and Title                                Age                             Business Experience
--------------------------------------     ---------      ------------------------------------------------------------
<S>                                        <C>            <C>     
Lawrence E. Hyatt                               43        Lawrence E. Hyatt has served as Senior Vice President,
Senior Vice President and                                 Finance and Planning for Marriott Management Services since
Chief Financial Officer                                   1988.  He joined Marriott Corporation in 1981 and has been
                                                          Staff Auditor for Corporate Internal Audit, Manager of
                                                          Financial Analysis for Roy Rogers Restaurants, Director of
                                                          Finance for Marriott Services Group and Vice President,
                                                          Operations Planning and Control for the Company.
                                                          Previously, Mr. Hyatt was an associate in ICF Incorporated
                                                          and a financial analyst for the US Department of Energy.
 
 
 
Robert J. Jantzen                               49        Robert J. Jantzen has served as President, Marriott
President, Corporate Services                             Corporation Services since 1995.  He joined Marriott
                                                          Corporation in 1984 and has served as Senior Vice President
                                                          of Marriott Corporate Services for Marriott Management
                                                          Services.  Prior to joining Marriott Corporation, Mr.
                                                          Jantzen served in operations, sales and marketing with
                                                          PepsiCo and Procter & Gamble.
 
 
David R. Smail                                  58        David R. Smail has most currently served as Senior Vice
Senior Vice President and                                 President and Chief Information Officer for Marriott
Chief Information Officer                                 Management Services.  He joined Marriott Corporation in
                                                          1981 as Vice President in the Marriott Information Systems
                                                          Department.  From 1985 to 1992, he served as Vice
                                                          President, Corporate Systems Services, Marriott
                                                          Corporation.  Prior to joining Marriott Corporation, Mr.
                                                          Smail worked as an Assistant Vice President in the
                                                          Operations Group, AMTRAK, and spent 14 years at Andersen
                                                          Consulting.
 
Robert A. Stern                                 39        Robert A. Stern has most recently served as Associate
Senior Vice President and                                 General Counsel for the Company providing legal support to
General Counsel                                           Marriott Management Services.  Previously, he provided
                                                          legal support to Marriott Corporation's Restaurant and Travel
                                                          Plaza businesses. Mr. Stern joined Marriott Corporation in
                                                          1985 from the Washington, D.C., office of Skadden Arps Slate
                                                          Meagher & Flom.
 
Anthony J. Wilson                               45        Anthony J. Wilson has served as Senior Vice President,
Senior Vice President                                     Marketing and Product Development for MMS since joining the
Marketing and Procurement                                 Company in November 1996.  Previously, Mr. Wilson was Vice
                                                          President and General Manager in the Global Food Service
                                                          division of Campbell Soup Company. He also spent 13 years at
                                                          ARAMARK, where he served as Senior Vice President ARASERVE
                                                          and President of ARAMARK's Marketing Services Group.
</TABLE>

                                       55
<PAGE>
 
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

     (1)  FINANCIAL STATEMENTS

             The response to this portion of Item 14 is submitted under Item 8
          of this Report on Form 10-K.

     (2)  FINANCIAL STATEMENT SCHEDULES

             All schedules for which provision is made in the applicable
          accounting regulations of the Securities and Exchange Commission are
          not required under the related instructions or are inapplicable and
          therefore have been omitted.

     (3)  EXHIBITS

             Any shareholder who desires a copy of the following Exhibits may
          obtain a copy upon request from the Company at a charge that reflects
          the reproduction cost of such Exhibits. Requests should be made to the
          Secretary, Marriott International, Inc., Marriott Drive, Department
          52/862, Washington, D.C. 20058.

<TABLE>
<CAPTION> 
                                                                 Incorporation by Reference
                                                                 (where a report or registration statement is
Exhibit No.      Description                                     indicated below, that document has been previously
                                                                 filed by the Company and the applicable exhibit is
                                                                 incorporated by reference thereto)
--------------------------------------------------------------------------------------------------------------------
<S>              <C>                                             <C>     
3.1              Restated Certificate of Incorporation.          Exhibit No. 3.1 to Form 8-K dated October 25, 1993.
 
3.2              Restated Bylaws.                                Exhibit No. 4 to Form 10-Q for the fiscal quarter
                                                                 ended September 12, 1997.
 
4.1              Certificate of Designation, Preferences and     Exhibit No. 4.1 to Form 8-K dated October 25, 1993.
                 Rights of Series A Junior Participating
                 Preferred Stock.
 
4.2              Rights Agreement with The Bank of New York,     (a) Exhibit No. 4.2 to Form 8-K dated October 25,
                 as Rights Agent, as amended.                    1993 and (b) Exhibit 1 to Form 8-A/A filed on
                                                                 October 15, 1997 (Amendment No. 1).
 
4.3              Indenture with Chemical Bank, as Trustee, as    (a) Exhibit Nos. 4(i) and 4(ii) to Form 8-K dated
                 supplemented.                                   December 9, 1993 (original Indenture and First
                                                                 Supplemental Indenture); (b) Exhibit No. 4(ii) to
                                                                 Form 8-K dated April 19, 1995 (Second Supplemental
                                                                 Indenture); (c) Exhibit No. 4.2 to Form 8-K dated
                                                                 June 7, 1995 (Third Supplemental Indenture); and
                                                                 (d) Exhibit No. 4.2 to Form 8-K dated December 11,
                                                                 1995 (Fourth Supplemental Indenture).
 
4.4              Indenture with The Bank of New York, as         (a) Exhibit No. 4.1 to Form 8-K dated March 25,
                 Trustee, relating to Liquid Yield Option        1996; (b) Exhibit No. 4.2 to Form 8-K dated March
                 Notes, as supplemented.                         25, 1996 (First Supplemental Indenture).
</TABLE>

                                       56
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                       Incorporation by Reference
                                                       (where a report or registration statement
                                                       is indicated below, that document has been
                                                       previously filed by the Company and the
                                                       applicable exhibit is incorporated by
Exhibit No.    Description                             reference thereto)
------------------------------------------------------------------------------------------------------------ 
<S>            <C>                                     <C>   
4.5            Indenture among RHG Finance             (a) Exhibit No. 2.02 to Renaissance Hotel
               Corporation, as issuer, Renaissance     Group N.V. Annual Report on Form 20-F for
               Hotel Group N.V. and the Company, as    the fiscal year ended June 30, 1996; and
               guarantors, and The First National      (b) Exhibit 4 to Form 10-Q for the fiscal
               Bank of Chicago as Trustee, as          quarter ended June 20, 1997 (First and
               supplemented.                           Second Supplemental Indenture).
 
10.1           $1.5 billion Credit Agreement with      (a) Exhibit No. 10 to Form 10-Q for the
               Citibank, N.A., as Administrative       fiscal quarter ended March 28, 1997
               Agent, and certain banks, as Banks,     (original agreement), and (b) filed
               as amended.                             herewith (First Amendment.
 
10.2           Distribution Agreement with Host        (a) Exhibit No. 10.3 to Form 8-K dated
               Marriott, as amended.                   October 25, 1993; (b) Exhibit No. 10.2 to
                                                       Form 10-K for the fiscal year ended
                                                       December 29, 1995 (First Amendment); and
                                                       (c) Exhibit No. 10.1 to Form 10-Q for the
                                                       fiscal quarter ended September 12, 1997
                                                       (Second Amendment).
 
10.3           Non Competition Agreement with Host     (a) Exhibit No. 10.7 to Form 8-K dated
               Marriott and Host Marriott Services     October 25, 1993; (b) Exhibit No. 10.4 to
               Corporation, as amended.                Form 10-K for the fiscal year ended
                                                       December 29, 1995 (Amendment No. 1).
 
10.4           Employee Benefits and Other             Exhibit No. 10.6 to Form 8-K dated October
               Employment Matters Allocation           25, 1993.
               Agreement with Host Marriott.
 
10.5           1993 Comprehensive Stock Incentive      Exhibit No. 10.7 to Form 10-K for the
               Plan, as amended.                       fiscal year ended December 30, 1994.
 
10.6           1996 Comprehensive Stock Incentive      Appendix A to Proxy Statement for the
               Plan.                                   Annual Meeting of Shareholders held on May
                                                       10, 1996.
 
10.7           1994 Executive Officer Incentive Plan.  Exhibit No. 10.1 to Form 10-Q for the
                                                       fiscal quarter ended March 25, 1994.
 
10.8           1995 Non-Employee Directors' Deferred   Appendix A to Proxy Statement for the
               Stock Compensation Plan.                Annual Meeting of Shareholders held on May
                                                       9, 1997.
 
10.9           Agreement and Plan of Merger by and     Exhibit No. (c)(1) to Schedule 14d-1 dated
               among Marriott International, Inc.,     February 23, 1996.
               FGI Acquisition Corp. and Forum
               Group, Inc.
 
10.10          Acquisition Agreement, dated as of      Exhibit No. 10.1 to Form 8-K dated
               February 17, 1997, by and between the   February 19, 1997.
               Company and Renaissance Hotel Group
               N.V.
</TABLE> 

                                       57
<PAGE>
 
<TABLE> 
<CAPTION> 
                                                                 Incorporation by Reference
                                                                 (where a report or registration statement
                                                                 is indicated below, that document has been
                                                                 previously filed by the Company and the
                                                                 applicable exhibit is incorporated by
Exhibit No.    Description                                       reference thereto)
----------------------------------------------------------------------------------------------------------------
<S>            <C>                                               <C>    
10.11            Shareholder Agreement, dated as of February     Exhibit No. 10.2 to Form 8-K dated February 19,
                 17, 1997, by and between Marriott               1997.
                 International, Inc. and Diamant Hotel
                 Investments N.V.
 
10.12            Stock Purchase Agreement, dated as of June      Exhibit No. 10.2 to Form 10-Q for the fiscal
                 21, 1997, by and between Host Marriott          quarter ended September 12, 1997.
                 Corporation and Marriott Senior Living
                 Services, Inc.
 
10.13            Distribution Agreement dated as of September    Appendix A to Definitive Proxy Statement for a
                 30, 1997 between the Company and New Marriott   Special Meeting of Shareholders to be held on
                 MI, Inc.                                        March 17, 1998.
 
10.14            Agreement and Plan of Merger dated as of        Appendix B to Definitive Proxy Statement for a
                 September 30, 1997 by and among the Company,    Special Meeting of Shareholders to be held on
                 Marriott-ICC Merger Corp., New Marriott MI,     March 17, 1998.
                 Inc., Sodexho Alliance, S.A., and
                 International Catering Corporation.
 
10.15            Omnibus Restructuring Agreement dated as of     Appendix C to  Definitive Proxy Statement for a
                 September 30, 1997 by and among the Company,    Special Meeting of Shareholders to be held on
                 Marriott-ICC Merger Corp., New Marriott MI,     March 17, 1998.
                 Inc., Sodexho Alliance, S.A., and
                 International Catering Corporation.
 
10.16            Amendment Agreement, dated as of January 28,    Appendix D to Definitive Proxy Statement for a
                 1998, by and among the Company, Marriott-ICC    Special Meeting of Shareholders to be held on
                 Merger Corp., New Marriott MI, Inc., Sodexho    March 17, 1998.
                 Alliance, S.A., and International Catering
                 Corporation.
 
10.17            Employee Benefits and Other Employment          Exhibit No. 10.1 to Form 10 of New Marriott MI,
                 Matters Allocation Agreement, dated as of       Inc. filed on February 13, 1998.
                 September 30, 1997, by and between the
                 Company and New Marriott MI, Inc.
 
12               Computation of Ratio of Earnings to Fixed       Filed herewith.
                 Charges.
 
21               Subsidiaries of Marriott International, Inc.    Filed herewith.
 
23               Consent of Arthur Andersen LLP.                 Filed herewith.
 
99               Forward-Looking Statements.                     Filed herewith.
</TABLE> 

                                       58
<PAGE>
 
(b)  REPORTS ON FORM 8-K


     (1)  On September 26, 1997, the Company filed a report confirming that the
          registrant and Sodexho were engaged in discussions regarding a
          potential combination of their respective North American food service
          and facilities management businesses.


     (2)  On October 8, 1997, the Company filed a report announcing its plans to
          spin off, on a tax-free basis, its lodging, senior living and
          distribution services businesses to its shareholders; and that it had
          entered into a definitive agreement with Sodexho to combine its food
          service and facilities management business with Sodexho's North
          American operations.

OTHER INFORMATION

Beneficial Ownership of Certain Liquid Yield Option Notes

  Two holders of the Company's zero coupon subordinated Liquid Yield Option
Notes due 2011 (the "LYONs"), PHL Convertible Fund and Alcan Aluminum, have
recently notified the Company that they beneficially own the principal amount at
maturity of LYONs shown below, which they may from time to time offer and sell
pursuant to the Company's Registration Statement No. 333-03795 under the
Securities Act of 1933, as amended, relating to the LYONs and the Prospectus
dated October 9, 1996 included therein. For convenience of the reader, the
following table also sets forth all beneficial ownership of LYONs which the
Company has previously shown in reports filed under the Securities and Exchange
Act of 1934 (the "Exchange Act") since October 9, 1996:

<TABLE>
<CAPTION>
                                                                                                 Principal Amount
                                                                                                   at Maturity
                                                                                                     of LYONs
                                                                                           --------------------------
<S>                                                                                        <C>  
 Alcan Almuminum /(3)/............................................................          $             130,000
 BZW Securities Limited /(1)(2)/ .................................................                     50,000,000    
 Care America Life Insurance Company /(1)(3)/.....................................                         70,000    
 Delta Air Lines Master Trust /(1)(2)/............................................                      5,600,000    
 Donaldson Lufkin & Jenrette Securities Corp. /(1)(3)/............................                      5,000,000    
 Hughes Aircraft Company Master Retirement Trust /(1)(3)/.........................                      1,600,000    
 Lazard Freres & Co. LLC /(1)(3)/.................................................                        500,000    
 McMahan Securities Co. L.P. /(1)(3)/.............................................                      5,000,000    
 OCM Convertible Trust /(1)(2)/...................................................                      8,140,000    
 PHL Convertible Fund /(3)/.......................................................                      1,500,000    
 SBC Warburg, Inc. /(1)(2)/.......................................................                     20,136,000    
 State Employees' Retirement Fund of the State of Delaware /(1)(2)/...............                      2,020,000    
 State of Connecticut Combined Investment Funds /(1)(2)/..........................                      6,480,000    
 TCW Convertible Securities Fund, Inc. /(1)(2)/...................................                      5,105,000    
 Transguard Insurance of America, Inc. /(1)(3)/...................................                        100,000    
 United Teacher Associates Insurance Company /(1)(3)/.............................                        200,000    
</TABLE>

___________

/(1)/ Previously shown in the Company's Exchange Act reports.
/(2)/ Represents a change from the amount of LYONs disclosed to the Company
prior to October 9, 1996.
/(3)/ These holders did not disclose their LYONs holdings to the Company prior
to October 9, 1996.
 

                                       59
<PAGE>
 
SIGNATURES

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this Form 10-K to be signed on its
behalf by the undersigned, thereunto duly authorized, on this 23rd day of
February, 1998.

MARRIOTT INTERNATIONAL, INC.

 By             /s/J.W. MARRIOTT, JR.
    ---------------------------------
                   J.W. Marriott, Jr.
     Chairman of the Board, Chief Executive Officer and Director

  Pursuant to the requirements of the Securities Exchange Act of 1934, this Form
10-K has been signed by the following persons on behalf of the Company in their
capacities and on the date indicated above.

PRINCIPAL EXECUTIVE OFFICER:
 
    /s/J.W. MARRIOTT, JR.
----------------------------------------
       J.W. Marriott, Jr.                  Chairman of the Board, Chief 
                                           Executive Officer and Director
PRINCIPAL FINANCIAL OFFICER:
 
    /s/MICHAEL A. STEIN
----------------------------------------
       Michael A. Stein                    Executive Vice President and
                                           Chief Financial Officer
PRINCIPAL ACCOUNTING OFFICER:
 
    /s/STEPHEN E. RIFFEE
----------------------------------------
       Stephen E. Riffee                   Vice President, Finance and
                                           Chief Accounting Officer
 
 
DIRECTORS:
 
    /s/HENRY CHENG KAR-SHUN                       /s/W. MITT ROMNEY
----------------------------------------   ------------------------------------
       Henry Cheng Kar-Shun, Director                W. Mitt Romney, Director
 
    /s/GILBERT M. GROSVENOR                       /s/ROGER W. SANT
----------------------------------------   ------------------------------------
       Gilbert M. Grosvenor, Director                Roger W. Sant, Director
 
    /s/RICHARD E. MARRIOTT                        /s/WILLIAM J. SHAW
----------------------------------------   ------------------------------------
       Richard E. Marriott, Director                 William J. Shaw, Director
 
    /s/FLORETTA DUKES MCKENZIE                    /s/LAWRENCE M. SMALL
----------------------------------------   ------------------------------------
       Floretta Dukes McKenzie, Director             Lawrence M. Small, Director
 
    /s/HARRY J. PEARCE
----------------------------------------
       Harry J. Pearce, Director

                                       60