I would second Bali and the Westin Nusa Dua. This used to be a Cat 1 and the LC Nusa Dua Resort was a Cat 2 a few years ago when I stayed there. Malaysia has incredible Cat 1 and 2 porperites. I personally find the best value for the Cat 1 and 2 hotels is weekday airports like SFO, LAX, and EWR. The 2007 recatagorization moved many of the great Cat 2 properties to Cat 3 hotels.

Germany had incredible Cat 2 hotels. I don't know if any of the Luxury Collection hotels are still Cat 2 or if they all went up to Cat 3 this year. I stayed at the Dresden Westin in February 2007 on a Cat 2 award I made before the rate change.