**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

| **x**                                            | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934**     |
|--------------------------------------------------|-----------------------------------------------------------------------------------------------|
| **For the  fiscal year ended December 31, 2006** |
| **OR**                                           |
| **o**                                            | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**Forthe transition period from                          to                           **

**Commission File Number 1-3427**

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**HILTON HOTELS CORPORATION**

(Exact Name of Registrant asSpecified in its Charter)

| Delaware                                 | ** ** | **36-2058176**         |
|------------------------------------------|------------|------------------------|
| (State  or other jurisdiction            |       | (I.R.S.  Employer      |
| of incorporation or organization)        |       | Identification Number) |
| **9336 Civic Center Drive**              | ** ** | ** **             |
| **Beverly Hills, California**            | ** ** | **90210**              |
| (Address of principal executive offices) |       | (Zip  Code)            |

 

Registrant’s telephonenumber, including area code:   **(310) 278-4321**

Securities registeredpursuant to Section 12(b) of the Act:

|                                          |                    | **Name of each exchange** |
|------------------------------------------|-------------------------|---------------------------|
|                                          | **Title of each class** | ** **                |   |  | **on which registered** | ** ** |
| Common  Stock, par value $2.50 per share |                    | New  York                 |
| 8%  Quarterly Interest Bonds due 2031    |                    | New  York                 |
|                                          |                         |                           |  |  |  |  |

 

Securities registeredpursuant to Section 12(g) of the Act:   None

Indicate by check mark ifthe Registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.   Yes x  No o

Indicate by check mark ifthe Registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.   Yes o  No x

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.   o

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|--------------------------------|--------|--------------------------|--------|------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Act).   Yes o  No x

Based upon the June 30,2006, New York Stock Exchange closing price of $28.28 per share, the aggregatemarket value of the Registrant’s outstanding Common Stock held bynon-affiliates of the Registrant was approximately $10.2 billion. There were385,556,381 and 388,953,623 shares of Common Stock outstanding as of June 30,2006 and January 31, 2007, respectively.

**DOCUMENTSINCORPORATED BY REFERENCE**

Certainportions of Registrant’s definitive proxy statement, to be filed with theSecurities and Exchange Commission pursuant to Regulation 14A not later than120 days after the close of the Registrant’s fiscal year, are incorporated byreference under Part III.

 

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**TABLEOF CONTENTS**

|                                                                                                       | ** ** | ** **                                                                                                             | ** ** | **Page No.** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| **PART I**                                                                                       |       | 1                                                                                                                      |
| **Item 1.**                                                                                           | ** ** | **Business**                                                                                                           |       | 1                 |
| General  Information                                                                                  |       | 1                                                                                                                      |
| Operations                                                                                            |       | 3                                                                                                                      |
| Additional  Information                                                                               |       | 15                                                                                                                     |
| **Item  1A.**                                                                                         | ** ** | **Risk  Factors**                                                                                                      |       | 21                |
| **Item 1B.**                                                                                          | ** ** | **Unresolved Staff Comments**                                                                                          |       | 25                |
| **Item 2.**                                                                                           | ** ** | **Properties**                                                                                                         |       | 25                |
| **Item  3.**                                                                                          | ** ** | **Legal  Proceedings**                                                                                                 |       | 25                |
| **Item 4.**                                                                                           | ** ** | **Submission of Matters to a Vote of Security Holders**                                                                |       | 25                |
| **PART II**                                                                                      |       | 26                                                                                                                     |
| **Item 5.**                                                                                           | ** ** | **Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities** |       | 26                |
| Rights  Agreement                                                                                     |       | 26                                                                                                                     |
| Performance  Graph                                                                                    |       | 28                                                                                                                     |
| **Item  6.**                                                                                          | ** ** | **Selected  Financial Data**                                                                                           |       | 29                |
| **Item 7.**                                                                                           | ** ** | **Management’s Discussion and Analysis of Financial  Condition and Results of Operations**                        |       | 30                |
| Overview                                                                                              |       | 30                                                                                                                     |
| Critical Accounting Policies and Estimates                                                            |       | 31                                                                                                                     |
| Development and Capital Spending                                                                      |       | 35                                                                                                                     |
| Liquidity and Capital Resources                                                                       |       | 38                                                                                                                     |
| Off-Balance  Sheet Arrangements                                                                       |       | 41                                                                                                                     |
| Results of Operations—Fiscal 2006 Compared with Fiscal  2005                                     |       | 42                                                                                                                     |
| Results of Operations—Fiscal 2005 Compared with Fiscal  2004                                     |       | 46                                                                                                                     |
| Other Matters                                                                                         |       | 49                                                                                                                     |
| **Item 7A.**                                                                                          | ** ** | **Quantitative and Qualitative Disclosures About Market  Risk**                                                        |       | 49                |
| **Item 8.**                                                                                           | ** ** | **Financial Statements and Supplementary Data**                                                                        |       | 52                |
| Consolidated Statements of Income                                                                     |       | 52                                                                                                                     |
| Consolidated Balance Sheets                                                                           |       | 53                                                                                                                     |
| Consolidated Statements of Cash Flow                                                                  |       | 54                                                                                                                     |
| Consolidated Statements of Stockholders’ Equity                                                  |       | 55                                                                                                                     |
| Notes to Consolidated Financial Statements                                                            |       | 56                                                                                                                     |
| Report of Independent Registered Public Accounting  Firm                                              |       | 98                                                                                                                     |
| Report of Independent Registered Public Accounting  Firm on Internal Control over Financial Reporting |       | 98                                                                                                                     |
| Supplementary Financial Information (Unaudited)                                                       |       | 100                                                                                                                    |
| Five Year  Summary                                                                                    |       | 101                                                                                                                    |
| **Item 9.**                                                                                           | ** ** | **Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure**                              |       | 102               |
| **Item 9A.**                                                                                          | ** ** | **Controls and Procedures**                                                                                            |       | 102               |
| Evaluation of Disclosure Controls and Procedures                                                      |       | 102                                                                                                                    |
| Management’s Report on Internal Control over Financial  Reporting                                |       | 102                                                                                                                    |

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| **Item 9B.**                            | ** ** | **Other  Information**                                                                              |   | 103 |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------|--------|-----|
| **PART III**                       |       | 103                                                                                                 |
| **Item 10.**                            | ** ** | **Directors, Executive Officers and Corporate Governance**                                          |   | 103 |
| **Item 11.**                            | ** ** | **Executive Compensation**                                                                          |   | 103 |
| **Item 12.**                            | ** ** | **Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters** |   | 103 |
| Equity Compensation Plan Information    |       | 104                                                                                                 |
| **Item 13.**                            | ** ** | **Certain Relationships and Related Transactions and  Director Independence**                       |   | 105 |
| **Item 14.**                            | ** ** | **Principal Accounting Fees and Services**                                                          |   | 105 |
| **PART IV**                        |       | 106                                                                                                 |
| **Item 15.**                            | ** ** | **Exhibits, Financial Statement Schedules**                                                         |   | 106 |
| (a) Index  to Financial Statements |       | 106                                                                                                 |
| (b) Exhibits                       |       | 106                                                                                                 |
| SIGNATURES                              |       | 107                                                                                                 |
| INDEX TO EXHIBITS                       |       | 108                                                                                                 |

 

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**PART I**

**Item 1.**                        Business

**GENERAL INFORMATION**

**Current Operations**

Hilton Hotels Corporationis engaged, together with its subsidiaries, in the ownership, management anddevelopment of hotels, resorts and timeshare properties and the franchising oflodging properties. As of December 31, 2006, our system contained 2,935properties with approximately 501,000 rooms in 78 countries andterritories. Of such properties, we owned and operated 60 hotels, leased andoperated 203 hotels, owned an interest in and operated 53 hotels, managed343 hotels owned by others and franchised 2,242 hotels owned and operated bythird parties. Also included in the number of properties in our system are 34timeshare properties which we managed.

Our hotel brands include Hilton, Hilton Garden Inn,Doubletree, Embassy Suites, Homewood Suites by Hilton, Hampton, Scandic, Conradand the Waldorf=Astoria Collection. We develop and operate domestic timeshareresorts through Hilton Grand Vacations Company and its related entities, whichwe wholly own. We are also engaged in various other activities related orincidental to the operation of hotels.

Hilton was organized inthe State of Delaware on May 29, 1946. Our principal executive offices arelocated at 9336 Civic Center Drive, Beverly Hills, California 90210, and ourtelephone number is (310) 278-4321.

**Acquisition ofHilton International**

On February 23, 2006,we consummated the acquisition of the lodging assets of Hilton Group plc (the “HIAcquisition”) including its operating subsidiary, Hilton International Co. (“HI”),for approximately £3.3 billion, equivalent to approximately $5.7 billionon the transaction date, excluding acquisition costs, in an all-cashtransaction. As a result of the HI Acquisition, we believe we are one of thelargest and most geographically diverse lodging companies in the world. The HIproperties that we acquired consisted of 392 hotels with approximately 102,000rooms, including 39 owned, 201 leased, four partially owned through jointventures, 118 managed and 30 franchised properties. The hotels we acquired inthe HI Acquisition consisted of 249 properties operated under the Hilton brand,131 properties operated under the mid-market Scandic brand, one property underthe Conrad brand and 11 other properties. We also acquired 80 LivingWell healthclubs, primarily in Europe, and six timeshare properties. As a result of the HIAcquisition, we now wholly own the Hilton HHonors Worldwide frequent guestprogram and the Hilton Reservations Worldwide reservation system, both of whichwere previously owned equally by us and HI. We also obtained worldwideownership of the luxury Conrad hotel brand, which had been operated as a jointventure between us and HI since 2002. As a result of the HI Acquisition, we nowown all the rights to the Hilton and Conrad brands, including the right todevelop these brands, along with all of our other proprietary brands, on aworldwide basis. See “Note 3: Purchase of Hilton International” to theconsolidated financial statements under Part II—Item 8.

**Recent Developments**

*Hotel Properties*

·       In2006, we commenced management of the Grand Wailea Resort Hotel & Spa inMaui, Hawaii, the Arizona Biltmore Resort & Spa in Phoenix, Arizona, the LaQuinta Resort & Club in La Quinta, California and the Qasr Al Sharq inJeddah, Saudi Arabia.  These properties,together with the Waldorf=Astoria in New York, New York, are included in ournew Waldorf=Astoria Collection of luxury hotels.

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·       Inthe fourth quarter of 2006, we announced plans to form a joint venture withreal estate developer DLF Limited to develop hotel properties and servicedapartments in India. The joint venture company plans to develop and own 50 to75 mid-scale and extended-stay hotels over the next seven years. We also announcedan alliance with Deutsche Asset Management and HQ Asia Pacific in which theywill develop an initial 25 Hilton Garden Inns in Beijing, Shanghai and Tianjin,China, which are expected to be franchised hotels.

·       In2006, we sold the following assets we acquired as part of the HI Acquisitionfor aggregate gross proceeds of approximately $1.281 billion as of thetransaction dates: the Hilton London Metropole, the Hilton Birmingham Metropoleand the Wembley hotel, all in the United Kingdom; the Hilton Toronto Airport, theHilton Toronto Downtown, the Hilton Quebec City, the Hilton Montreal Airportand the Hilton Saint John, all in Canada; the stand alone LivingWell healthclubs; and the leasehold for the Drake Hotel in Chicago, Illinois. We haveretained multi-year management agreements on all of these dispositions exceptfor LivingWell.

·       In 2006, we sold threewholly owned domestic properties and our minority interest in joint venturesowning three properties. We retained management or franchise agreements on eachof these properties, which included four Hiltons and two Embassy Suites.

*TimeshareProperties*

·       Weare continuing to develop a 1,582-unit timeshare resort in Las Vegas,Nevada, of which 45 percent of the planned four-tower project has beencompleted.

·       Weare developing or have developed three timeshare resorts in Orlando, Florida: a440-unit resort at Tuscany Village on International Drive, of which376 units are opened; a completed resort adjacent to Sea World, of which48 units were added in 2006; and a new resort at Ruby Lake, of which thefirst phase is expected to contain 141 units.

·       InWaikoloa, Hawaii, we have completed development of a 120-unit timeshare resortcalled Kohala Coast Vacation Suites, and commenced construction of a newtimeshare project called Kings Land, of which 198 units are scheduled forcompletion in 2010.

·       InHonolulu, Hawaii, we have commenced construction of the Waikikian Tower, a new331-unit timeshare project adjacent to the Hilton Hawaiian Village, scheduledfor completion in late 2008.

·       In 2006, we announced thedevelopment of the 57th Street Tower, a new 161-unit timeshareproject in New York City scheduled for completion in early 2009.

*AdditionalInformation*

For a description of ourplanned expansion activities, see “Operations—Development.” For additionalinformation, see “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Development and Capital Spending” under Part II—Item7.

**Industry Segments**

As of December 31, 2006, we operated in threereportable business segments which are based on similar products or services:Hotel Ownership; Managing and Franchising; and Timeshare. For additionalinformation, see “Note 16: Segment Information” to the consolidatedfinancial statements under Part II—Item 8.

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**OPERATIONS**

**Hotel Properties**

*Owned Hotels*

As of December 31,2006, we owned a majority or controlling financial interest in and operated60 hotels, representing 29,647 rooms. The owned hotels include some of ourlargest and most profitable hotels, including:

·       the1,416-room Waldorf=Astoria;

·       the1,980-room Hilton New York;

·       the2,860-room Hilton Hawaiian Village;

·       the1,240-room Hilton Waikoloa Village;

·       the1,908-room Hilton San Francisco;

·       the1,544-room Hilton Chicago;

·       the1,119-room Hilton Washington; and

·       the1,616-room Hilton New Orleans Riverside.

Our owned hotels includesix properties for which we lease the underlying land. The expiration dates ofthe leases range up to 2044, with certain leases containing renewal options for10 to 40 years. Under these leases, we own the buildings and leaseholdimprovements and all furniture and equipment; we are responsible for repairs,maintenance, operating expenses and lease rentals; and we retain completemanagerial discretion over operations. Lease terms generally require us to paya fixed monthly base rent and may require us to pay additional rent based on apercentage of revenue or income from the hotel. Upon the expiration of suchleases, the buildings and other leasehold improvements presently owned by us revertto the landlords. For additional information, see “Note 17: Leases” to theconsolidated financial statements under Part II—Item 8.

*Leased Hotels*

As of December 31,2006, we leased 203 hotels, representing 46,663 rooms. Under these leases, welease the hotel from its owner, manage the hotel and are generally responsiblefor all aspects of the hotel’s operations and recognize all revenue andsubstantially all expenses associated with the hotel’s operations. In general,replacement of furniture, fixtures and equipment is our responsibility. Ourhotel leases may require the payment of fixed rent payments, variable rentpayments based on a percentage of revenue or income, or the payment of rentequal to the greater of a minimum fixed rent or variable rent based on apercentage of revenue or income. The terms of our leases are for variousperiods expiring through 2097 and generally provide for certain renewaloptions, subject to certain termination rights. For additional information, see“Note 17: Leases” to the consolidated financial statements under Part II—Item8.

*Joint Ventures*

As of December 31,2006, we had a minority or non-controlling financial interest in and operated53 hotels, representing 17,232 rooms. We have a right of first refusal topurchase additional equity interests in certain of these joint ventures. Wemanage each of the partially owned hotels for the entity owning the hotel.

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*Managed Hotels*

As of December 31, 2006, we managed 343 hotels,representing 97,536 rooms, which are wholly owned by others. Under our standardmanagement agreement, we operate a hotel for the benefit of its owner, whicheither owns or leases the hotel and the associated personal property. Ourmanagement fee is generally based on a percentage of each hotel’s gross revenue,operating profits, cash flow or a combination thereof. For the majority ofproperties, we may also earn an incentive fee based on operating performance.The terms of our management agreements are for various periods and generallycontain renewal options, subject to certain termination rights.

In general, under ourmanagement agreements all operating and other expenses are paid by the ownerand we are reimbursed for our out-of-pocket expenses. In turn, our managerialdiscretion is subject to approval by the owner in certain major areas,including the approval of capital expenditure budgets.

*Franchise Hotels*

As of December 31,2006, we franchised 2,242 hotels, representing 306,660 rooms, which are ownedand operated by third parties. In general, franchisees pay us an initial feebased on the number of rooms in a franchise hotel and a continuing fee based ona percentage of the hotel’s rooms revenue, which may be up to five percent ofrooms revenue depending on the brand. Although we do not directly participatein the management or operation of franchise hotels, we conduct periodicinspections to ensure that our standards are maintained and render advice withrespect to certain aspects of hotel operations. We generally approve the plansfor, and the location of, franchise hotels and assist in their design.

**Hotel Brands**

We operate hotels throughthe brands described below, which target a wide variety of markets andgeographic areas. According to data from Smith Travel Research, in 2006, our domesticHilton, Hilton Garden Inn, Doubletree, Embassy Suites, Homewood Suites byHilton and Hampton brands all commanded market share premiums in thesystem-wide revenue per available room (“RevPAR”) index, which represents theshare of RevPAR these properties attain versus their respective competitivesets.

*Hilton*

Hilton hotels are ourupscale, full-service hotels that typically include swimming pools, gift shopsand retail facilities, meeting and banquet facilities, restaurants and lounges,room service, parking facilities and other services. The Hilton brand alsoincludes Hilton Suites hotels, which are upscale, all-suite hotels. As ofDecember 31, 2006, there were 498 Hilton hotels, representing 172,605rooms, located in 38 states, the District of Columbia and an additional 71countries and territories throughout the world. As of December 31, 2006,36 Hilton hotels were under construction, of which 20 are expected to bemanaged hotels and 16 are expected to be franchise hotels.

*Hilton Garden Inn*

Hilton Garden Inn hotels areour upper mid-market, focused service hotels that generally utilize a modulardesign constructed around a courtyard containing an indoor or outdoor swimmingpool. In 2006, the Hilton Garden Inn brand earned the first place J.D. PowerAward for “Highest Customer Satisfaction” in its category for a fifthconsecutive year. As of December 31, 2006, there were 302 Hilton GardenInn hotels, representing 41,669 rooms, located in 44 states, the District ofColumbia, Canada, Germany, Italy and Mexico. As of December 31, 2006, 57Hilton Garden Inn hotels were under construction, of which 55 are expected tobe franchise hotels and two are expected to be managed hotels.

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*Doubletree*

Doubletree hotels are ourfull-service hotels in the mid-market to upscale hotel category. The Doubletreebrand also includes the Doubletree Guest Suites all-suite hotels and themoderately priced Doubletree Club hotels. As of December 31, 2006, therewere 173 Doubletree hotels, representing 45,119 rooms, located in 39states, the District of Columbia, Canada and Latin America. As of December 31,2006, six Doubletree hotels were under construction, all of which are expectedto be franchise hotels.

*Embassy Suites*

Embassy Suites are ourupscale, all-suite hotels that feature two-room guest suites with a separateliving room and dining/work area and a complimentary cooked-to-order breakfast.Most Embassy Suites hotels are built around a landscaped atrium. As ofDecember 31, 2006, there were 185 Embassy Suites, representing 45,172rooms, located in 38 states, the District of Columbia, Canada, Latin Americaand the Caribbean. As of December 31, 2006, eight Embassy Suites hotelswere under construction, all of which are expected to be franchise hotels.

*Homewood Suites byHilton*

Homewood Suites by Hiltonare our upscale, extended-stay hotels that feature residential styleaccommodations including business centers, swimming pools, convenience storesand limited meeting facilities. As of December 31, 2006, there were 192Homewood Suites, representing 21,141 rooms, located in 41 states, the Districtof Columbia and Canada. As of December 31, 2006, 28 Homewood Suites hotelswere under construction, of which 26 are expected to be franchise hotels andtwo are expected to be managed hotels.

*Hampton*

Hampton Inn hotels are ourmoderately priced hotels with limited food and beverage facilities. The Hamptonbrand also includes Hampton Inn & Suites hotels which offer bothtraditional hotel room accommodations and apartment style suites within oneproperty. As of December 31, 2006, there were 1,392 Hampton hotels,representing 138,487 rooms, located in 49 states, the District ofColumbia, Canada, Latin America and the Caribbean. As of December 31,2006, 127 Hampton hotels were under construction, all of which are expectedto be franchise hotels.

*Scandic*

Scandichotels are our mid-market, full-service hotels located in Northern Europe. Asof December 31, 2006, there were 129 Scandic hotels, representing 22,808rooms, located in Belgium, Denmark, Estonia, Finland, Germany, Italy,Lithuania, the Netherlands, Norway and Sweden. As of December 31, 2006,one Scandic hotel was under construction, which is expected to be a leased hotel.

*Conrad*

Conrad hotels are our upscale, full-service hotelslocated primarily outside the United States. As of December 31, 2006 wemanaged, and in some cases partially owned, 15 Conrad hotels, representing5,152 rooms, located in Chicago, Illinois; Miami, Florida; Indianapolis,Indiana; and Belgium, China, Egypt, Indonesia, Ireland, Japan, Singapore,Thailand, Turkey and the United Kingdom. We have entered into agreements to manage new Conrad hotels in Shanghai,China and Koh Samui, Thailand.

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*Waldorf=AstoriaCollection*

Inearly 2006, we introduced a new brand line, the Waldorf=Astoria Collection.This elite brand designation debuted with New York’s legendary Waldorf=Astoria,which is wholly owned, along with three world-class luxury resorts managed byus under long-term agreements: the Grand Wailea Resort Hotel & Spa onthe island of Maui in Hawaii; the Arizona Biltmore Resort & Spa inPhoenix, Arizona; and the La Quinta Resort & Club in La Quinta,California. Also in 2006, we commenced management of the Qasr Al Sharq inJeddah, Saudi Arabia, the newest member of the Waldorf=Astoria Collection. Weanticipate that the Waldorf=Astoria Collection will grow primarily throughbranding of existing landmark or boutique hotels and opening newly builtWaldorf=Astoria hotels in select cities.

**Hotels By Region**

The following table sets forth the number ofproperties and rooms in our hotel system, excluding timeshare properties, byregion and country as of December 31, 2006. The inclusion of hotels inregions in the table below is consistent with the reporting of regionalinformation throughout this annual report.

| **Region/Country**                    | ** ** | ** ** | ** ** | **Hotels** | ** ** | **Rooms** | ** ** |
|---------------------------------------|------------|------------|------------|------------|------------|-----------|------------|
| **North  America**                    |       |       |       |       |       |
| Canada                                |       | 56         |       | 11,648     |       |
| United States                         |       | 2,416      |       | 376,700    |       |
| Total                                 |       | 2,472      |       | 388,348    |       |
| **United Kingdom & Ireland** |       |       |       |       |       |
| Ireland                               |       | 5          |       | 750        |       |
| United Kingdom                        |       | 70         |       | 15,727     |       |
| Total                                 |       | 75         |       | 16,477     |       |
| **Continental Europe**                |       |       |       |       |       |
| Austria                               |       | 4          |       | 1,340      |       |
| Belgium                               |       | 8          |       | 1,684      |       |
| Bulgaria                              |       | 1          |       | 245        |       |
| Croatia                               |       | 1          |       | 147        |       |
| Cyprus                                |       | 2          |       | 492        |       |
| Czech Republic                        |       | 1          |       | 788        |       |
| France                                |       | 9          |       | 2,660      |       |
| Germany                               |       | 16         |       | 4,890      |       |
| Greece                                |       | 2          |       | 928        |       |
| Hungary                               |       | 2          |       | 552        |       |
| Israel                                |       | 2          |       | 1,064      |       |
| Italy                                 |       | 14         |       | 3,265      |       |
| Luxembourg                            |       | 1          |       | 337        |       |
| Malta                                 |       | 1          |       | 294        |       |
| Netherlands                           |       | 6          |       | 1,180      |       |
| Romania                               |       | 1          |       | 272        |       |
| Spain                                 |       | 3          |       | 1,043      |       |
| Switzerland                           |       | 2          |       | 537        |       |
| Turkey                                |       | 8          |       | 2,607      |       |
| Total                                 |       | 84         |       | 24,325     |       |

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| **Africa**                             |   |   |   |   |   |
|----------------------------------------|--------|--------|--------|--------|--------|
| Algeria                                |   | 1      |   | 410    |   |
| Cameroon                               |   | 1      |   | 257    |   |
| Ethiopia                               |   | 1      |   | 379    |   |
| Kenya                                  |   | 1      |   | 293    |   |
| Madagascar                             |   | 1      |   | 170    |   |
| Mauritius                              |   | 1      |   | 193    |   |
| Morocco                                |   | 1      |   | 269    |   |
| Nigeria                                |   | 1      |   | 670    |   |
| Republic of Seychelles                 |   | 1      |   | 40     |   |
| South Africa                           |   | 2      |   | 654    |   |
| Total                                  |   | 11     |   | 3,335  |   |
| **Middle East**                        |   |   |   |   |   |
| Egypt                                  |   | 19     |   | 7,038  |   |
| Kuwait                                 |   | 1      |   | 350    |   |
| Oman                                   |   | 1      |   | 147    |   |
| Saudi Arabia                           |   | 4      |   | 2,207  |   |
| United Arab Emirates                   |   | 8      |   | 1,673  |   |
| Total                                  |   | 33     |   | 11,415 |   |
| **Asia Pacific**                       |   |   |   |   |   |
| Australia                              |   | 7      |   | 2,507  |   |
| China                                  |   | 5      |   | 2,537  |   |
| Guam                                   |   | 1      |   | 682    |   |
| India                                  |   | 8      |   | 1,409  |   |
| Indonesia                              |   | 1      |   | 298    |   |
| Japan                                  |   | 8      |   | 3,876  |   |
| Korea                                  |   | 4      |   | 1,564  |   |
| Malaysia                               |   | 4      |   | 1,478  |   |
| Maldives                               |   | 1      |   | 150    |   |
| New Zealand                            |   | 2      |   | 197    |   |
| Philippines                            |   | 1      |   | 246    |   |
| Republic of Fiji                       |   | 1      |   | 218    |   |
| Singapore                              |   | 2      |   | 931    |   |
| Sri Lanka                              |   | 2      |   | 552    |   |
| Thailand                               |   | 4      |   | 1,909  |   |
| Vietnam                                |   | 1      |   | 269    |   |
| Total                                  |   | 52     |   | 18,823 |   |
| **Latin America & Caribbean** |   |   |   |   |   |
| Argentina                              |   | 1      |   | 418    |   |
| Bahamas                                |   | 1      |   | 291    |   |
| Barbados                               |   | 1      |   | 350    |   |
| Brazil                                 |   | 2      |   | 846    |   |
| Colombia                               |   | 2      |   | 384    |   |
| Costa Rica                             |   | 1      |   | 100    |   |
| Curacao                                |   | 1      |   | 196    |   |
| Dominican Republic                     |   | 2      |   | 351    |   |
| Ecuador                                |   | 3      |   | 689    |   |

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| El Salvador                                                |   | 1      |   | 204     |   |
|------------------------------------------------------------|--------|--------|--------|---------|--------|
| Honduras                                                   |   | 1      |   | 120     |   |
| Jamaica                                                    |   | 1      |   | 303     |   |
| Mexico                                                     |   | 17     |   | 3,516   |   |
| Nicaragua                                                  |   | 1      |   | 104     |   |
| Peru                                                       |   | 1      |   | 110     |   |
| Puerto Rico                                                |   | 5      |   | 1,739   |   |
| Trinidad & Tobago                                 |   | 2      |   | 578     |   |
| Venezuela                                                  |   | 4      |   | 1,439   |   |
| Total                                                      |   | 47     |   | 11,738  |   |
| **Nordic**                                                 |   |   |   |    |   |
| Denmark                                                    |   | 20     |   | 3,455   |   |
| Estonia                                                    |   | 3      |   | 206     |   |
| Finland                                                    |   | 21     |   | 4,056   |   |
| Lithuania                                                  |   | 1      |   | 60      |   |
| Norway                                                     |   | 15     |   | 2,487   |   |
| Sweden                                                     |   | 67     |   | 13,013  |   |
| Total                                                      |   | 127    |   | 23,277  |   |
| **Total  Hotel Properties (78 countries and territories)** |   | 2,901  |   | 497,738 |   |

 

*North America*

As of December 31,2006, there were 2,472 properties, representing 388,348 rooms, in our hotelsystem located in the United States and Canada. These properties consist of 239Hiltons, 296 Hilton Garden Inns, 172 Doubletrees, 179 Embassy Suites, 192Homewood Suites by Hilton, 1,381 Hamptons, three Conrads and ten other hotels. Ourproperties in North America consist of 27 owned, five leased, 46 joint venture,205 managed and 2,189 franchised hotels.

*United Kingdom andIreland*

As of December 31,2006, there were 75 properties, representing 16,477 rooms, in our hotel systemlocated in the U.K. and Ireland, consisting of 70 Hiltons, three Conrads andtwo other hotels. Our properties in the U.K. and Ireland consist of 14 owned,32 leased, one joint venture and 28 managed hotels.

*Continental Europe*

As of December 31,2006, there were 84 properties, representing 24,325 rooms, in our hotel systemlocated in 19 countries in Continental Europe (exclusive of the Nordic region).These properties consist of 70 Hiltons, three Hilton Garden Inns, sevenScandics, two Conrads and two other hotels. Our properties in ContinentalEurope consist of 12 owned, 33 leased, three joint venture, 26 managed and tenfranchised hotels.

*Af*r*ica*

As of December 31,2006, there were 11 properties, representing 3,335 rooms, in our hotel systemlocated in ten countries in Africa, each of which is a Hilton branded hotel. Ourproperties in Africa consist of one owned, three leased, six managed and onefranchised hotel.

8

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*Middle East*

As of December 31,2006, there were 33 properties, consisting of 11,415 rooms, in our hotel systemlocated in five countries in the Middle East, consisting of 30 Hiltons, twoConrads and one other hotel. Our properties in the Middle East consist of twoleased, one joint venture and 30 managed hotels.

***Asia Pacific***

As of December 31,2006, there were 52 properties, representing 18,823 rooms, in our hotel systemlocated in 16 countries and territories in the Asia Pacific region, consistingof 47 Hiltons and five Conrad hotels. Our properties in the Asia Pacific regionconsist of one owned, five leased, two joint venture, 31 managed and 13franchised hotels.

*Latin America &Caribbean*

As of December 31,2006, there were 47 properties, representing 11,738 rooms, in our hotel systemlocated in 18 countries and territories in Latin America and the Caribbean,consisting of 26 Hiltons, three Hilton Garden Inns, one Doubletree, six EmbassySuites, and 11 Hampton hotels. Our properties in Latin America and theCaribbean consist of two owned, four leased, 15 managed and 26 franchisedproperties.

*Nordic*

As of December 31,2006, there were 127 properties, representing 23,277 rooms, in our hotel systemlocated in 6 countries in the Nordic region, consisting of five Hiltons and 122Scandic hotels. Our properties in the Nordic region consist of three owned, 119leased, two managed and three franchised hotels.

**TimeshareOperations**

Weconduct our domestic timeshare operations through Hilton Grand VacationsCompany and its related entities (“HGVC”), which we wholly own. As of December 31,2006, HGVC operated 34 timeshare resorts, consisting of 3,740 rooms, including21 resorts in Florida, four in Hawaii, three in Nevada and one in each ofColorado and New York. We also operate three timeshare resorts in the UnitedKingdom and one in Egypt which we acquired in the HI Acquisition. HGVC operatesHGVClub and Hilton Club, points-based reservation and exchange systems with 34affiliated timeshare resorts.

**Development**

*Hotel Properties*

We intend to grow ourhotel system through franchising and the addition of management contracts. Wewill also continue to invest in capital improvements and select projects at ourowned hotels. In addition, we may seek to acquire ownership interests in hotelproperties on a strategic and selective basis, either directly or throughinvestments in joint ventures. See “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Developmentand Capital Spending” under Part II—Item 7.

During 2006, in additionto the properties added to our system in the HI Acquisition, we added a totalof 223 properties, primarily franchises, with approximately 36,000 roomsto our system. A total of 74 properties, primarily franchises, withapproximately 12,000 rooms were removed from our system in 2006.

Total hotel propertyadditions to our system in 2006 included 204 franchise properties, 17 managedproperties owned by third parties and two leased properties. These additionsincluded 32 properties which, due in part to the market share leadership of ourbrands, were converted to our family of brands in 2006. The 32 conversionsincluded 16 Doubletrees, eight Hiltons, five Hamptons and three Hilton Garden Inns.

9

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Included in the propertyadditions in 2006 are long-term management agreements we acquired for thefollowing properties:  the Grand WaileaResort Hotel & Spa on the island of Maui in Hawaii; the ArizonaBiltmore Resort & Spa in Phoenix, Arizona; and the La Quinta Resort &Club in La Quinta, California. Also in 2006, we commenced management of theQasr El Sharq in Jeddah, Saudi Arabia. These properties are included in ournew, elite brand designation, the Waldorf=Astoria Collection. See “Operations—HotelBrands—Waldorf=Astoria Collection” above. In 2006, we also acquired a long-termmanagement agreement for the Hilton Anatole in Dallas, Texas.

In the fourth quarter of2006, we announced plans to form a joint venture with DLF Limited to develophotel properties and serviced apartments in India. The joint venture companyplans to develop and own 50 to 75 mid-scale and extended-stay hotels over thenext seven years. We also announced an alliance with Deutsche Asset Managementand HQ Asia Pacific in which they will develop an initial 25 Hilton GardenInns in Beijing, Shanghai and Tianjin, China, which are expected to befranchised hotels.

In 2007, we expect to addapproximately 255 hotels and 35,000 rooms to our hotel system. We expectvirtually all of this growth to be through franchise and management agreements.

Our current developmentpipeline is our largest to date, with more than 775 hotels, primarilyfranchises, with 110,000 rooms at December 31, 2006. Approximately 90 percentof the hotels in the current development pipeline are in the Americas (U.S.,Canada, Mexico and South America), though international development is expectedto comprise an increasingly larger percentage of our development pipelinewithin the next few years. The consummation of transactions in our developmentpipeline is subject to various conditions and uncertainties.

Ourability to grow the number of managed and franchised hotels is affected by thefactors set forth under Item 1A “Risk Factors,” including but not limited tointernational, national and regional economic conditions; the effects of actualand threatened terrorist attacks and international conflicts; acts of God, suchas natural disasters; credit availability; relationships with franchisees andproperty owners; and competition from other hotel brands.

*TimeshareProperties*

We haverecently opened or are currently developing the following timeshare projects:

·       Weare continuing to develop a 1,582-unit timeshare resort located at thenorth end of the Las Vegas Strip in Las Vegas, Nevada. Phase two of thisproject, consisting of 431 units, opened in 2006. Approximately 45 percentof the planned four-tower project has been completed.

·       Weare continuing to develop a timeshare resort at Tuscany Village onInternational Drive in Orlando, Florida, with seven phases and a total of 440units. We have opened the first six phases of this project, consisting of 376units, including 70 units opened in January 2007. The final phase of thisproject, consisting of 64 units, is scheduled for completion in spring 2008. Alsoin Orlando, we have added 48 units to our existing property adjacent to SeaWorld. In 2007, we began construction of our new timeshare project at Ruby Lakein Orlando. Phase I of the Ruby Lake project is expected to contain 141 unitsand is scheduled for completion in 2009.

·       In2006, we completed the remaining 98 units of a 120-unit timeshare resortcalled Kohala Coast Vacation Suites in Waikoloa, Hawaii, near the HiltonWaikoloa Village. We are also developing a new timeshare project in Waikoloacalled Kings Land, the first phase of which is expected to consist of 198 unitsand is scheduled for completion in 2010.

·       In2006, we began construction of the Waikikian Tower, a new timeshare project inHonolulu, Hawaii, adjacent to the Hilton Hawaiian Village. The Waikikian Toweris expected to contain 331 units upon completion which is scheduled for late2008.

10

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·       In 2006, we announced thedevelopment of a new timeshare project in New York City on West 57th Street. The 57th Street Tower is expected to contain 161 unitsand is scheduled for completion in early 2009.

**PropertyDispositions**

In 2006, we sold thefollowing assets we acquired as part of the HI Acquisition: the Hilton LondonMetropole, the Hilton Birmingham Metropole and the Wembley hotel, all in theUnited Kingdom; the Hilton Toronto Airport, the Hilton Toronto Downtown, theHilton Quebec City, the Hilton Montreal Airport and the Hilton Saint John, allin Canada; the stand alone LivingWell health clubs; and the leasehold for theDrake Hotel in Chicago, Illinois. We have retained multi-year managementagreements on all of these dispositions except for LivingWell.

In 2006, we sold thefollowing wholly owned domestic hotel properties: the Pointe Hilton TapatioCliffs in Arizona; the Hilton Minneapolis in Minnesota; and the HiltonPittsburgh in Pennsylvania. Also during 2006, we sold our minority interest inthe joint ventures owning the following hotels: the Hilton Times Square in New York; the Embassy Suites San Diego-LaJolla in California; and the Embassy Suites Battery Park in New York. Weretained long-term management agreements for the Pointe Hilton Tapatio Cliffs,the Hilton Minneapolis and the Embassy Suites San Diego-La Jolla, and long-termfranchise agreements for the Hilton Pittsburgh, the Hilton Times Square and theEmbassy Suites Battery Park.

Foradditional information, see “Note 5: Acquisitions and Dispositions” to theconsolidated financial statements under Part II—Item 8.

**DevelopmentFinancing**

We haveestablished franchise financing programs with third party lenders to supportthe growth of our brands. As of December 31, 2006, we have providedguarantees of $16 million on loans outstanding under these programs. Inaddition, we have guaranteed $27 million of debt and other obligations ofunconsolidated affiliates and third parties, bringing our total guarantees to approximately$43 million. Our outstanding guarantees have terms ranging from one to 14years. We also have commitments under letters of credit totaling$110 million as of December 31, 2006. We believe it is unlikely thatmaterial payments will be required under these guarantees or letters of credit.See “Note 18: Commitments and Contingencies” to the consolidated financialstatements under Part II—Item 8.

**TerritorialRestrictions**

Prior to the HIAcquisition, we were subject to certain restrictions on our rightto operate hotels outside the U.S. identified as “Hilton” hotels. As aresult of the HI Acquisition, we now own the right to develop each of ourbrands on a worldwide basis. See “General Information—Acquisition of HiltonInternational” above.

We havealso entered into certain management and franchise agreements that containprovisions which may restrict our right to own, manage or franchise additionalhotels in specified geographic areas.

**PotentialAcquisitions**

Wecontinue to evaluate acquisition opportunities and may, from time to time,negotiate to engage in a business combination transaction or other acquisition.However, there is no assurance that we will engage in any such transactions.

11

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**PropertyTransactions**

We willcontinue to review our owned hotel portfolio for potential repositioning orrebranding opportunities and we may seek to sell certain assets, includingassets acquired in the HI Acquisition. It is our intention to be opportunisticwhen evaluating potential asset sales and we will look to sell particular hotelproperties to the extent we can obtain premium prices. We are currentlymarketing for sale certain of our owned and leased hotels, including ten hotelsin continental Europe, the Hilton Caledonian in Scotland and six properties inthe U.S. We are also marketing for sale the Scandic brand of hotels.

**Seasonality**

The hospitality industryis seasonal in nature. However, the periods during which our propertiesexperience higher or lower levels of demand vary from property to property anddepend principally upon location. Based upon historical results, we generallyexpect our revenue to be lower in the first fiscal quarter of each year than ineach of the three subsequent quarters.

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**StatisticalInformation**

Thefollowing table sets forth certain system-wide information for our propertieswith respect to the number of properties and rooms as of December 31, 2005and 2006:

| ** **                    | ** ** | **2005 Number of** | ** ** | **2006 Number of** | ** ** | **Change in Number of** | ** ** |
|-------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| ** **                    | ** ** | **Properties**               | ** ** | **Rooms**                    | ** ** | **Properties**                         | ** ** | **Rooms** | ** ** | **Properties** | ** ** | **Rooms** | ** ** |
| **Hilton**                    | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 57                           |       | 32,369                       |       | 47                                     |       | 26,347 |   | (10 | ) | (6,022 | ) |
| Leased                        |       | 79                           |       | 23,460                       |       | 80                                     |       | 23,798 |   | 1 |   | 338 |   |
| Joint Venture                 |       | 16                           |       | 6,844                        |       | 14                                     |       | 6,156 |   | (2 | ) | (688 | ) |
| Managed                       |       | 137                          |       | 47,709                       |       | 152                                    |       | 56,633 |   | 15 |   | 8,924 |   |
| Franchised                    |       | 193                          |       | 54,784                       |       | 205                                    |       | 59,671 |   | 12 |   | 4,887 |   |
|                          |       | 482                          |       | 165,166                      |       | 498                                    |       | 172,605 |   | 16 |   | 7,439 |   |
| **Hilton Garden Inn**         | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 1                            |       | 162                          |       | 1                                      |       | 162 |   | — |   | — |   |
| Joint Venture                 |       | 1                            |       | 128                          |       | 1                                      |       | 128 |   | — |   | — |   |
| Managed                       |       | 7                            |       | 886                          |       | 7                                      |       | 886 |   | — |   | — |   |
| Franchised                    |       | 250                          |       | 34,347                       |       | 293                                    |       | 40,493 |   | 43 |   | 6,146 |   |
|                          |       | 259                          |       | 35,523                       |       | 302                                    |       | 41,669 |   | 43 |   | 6,146 |   |
| **Doubletree**                | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 3                            |       | 1,349                        |       | 3                                      |       | 1,349 |   | — |   | — |   |
| Leased                        |       | 5                            |       | 1,746                        |       | 4                                      |       | 1,554 |   | (1 | ) | (192 | ) |
| Joint Venture                 |       | 14                           |       | 4,306                        |       | 12                                     |       | 3,761 |   | (2 | ) | (545 | ) |
| Managed                       |       | 30                           |       | 8,060                        |       | 27                                     |       | 7,487 |   | (3 | ) | (573 | ) |
| Franchised                    |       | 108                          |       | 26,707                       |       | 127                                    |       | 30,968 |   | 19 |   | 4,261 |   |
|                          |       | 160                          |       | 42,168                       |       | 173                                    |       | 45,119 |   | 13 |   | 2,951 |   |
| **Embassy Suites**            | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 3                            |       | 663                          |       | 3                                      |       | 664 |   | — |   | 1 |   |
| Joint Venture                 |       | 25                           |       | 6,586                        |       | 23                                     |       | 5,788 |   | (2 | ) | (798 | ) |
| Managed                       |       | 56                           |       | 14,832                       |       | 56                                     |       | 14,918 |   | — |   | 86 |   |
| Franchised                    |       | 98                           |       | 22,348                       |       | 103                                    |       | 23,802 |   | 5 |   | 1,454 |   |
|                          |       | 182                          |       | 44,429                       |       | 185                                    |       | 45,172 |   | 3 |   | 743 |   |
| **Homewood Suites by Hilton** | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 1                            |       | 140                          |       | 1                                      |       | 140 |   | — |   | — |   |
| Managed                       |       | 41                           |       | 4,706                        |       | 41                                     |       | 4,706 |   | — |   | — |   |
| Franchised                    |       | 122                          |       | 13,287                       |       | 150                                    |       | 16,295 |   | 28 |   | 3,008 |   |
|                          |       | 164                          |       | 18,133                       |       | 192                                    |       | 21,141 |   | 28 |   | 3,008 |   |
| **Hampton**                   | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 1                            |       | 133                          |       | 1                                      |       | 133 |   | — |   | — |   |
| Managed                       |       | 34                           |       | 4,453                        |       | 34                                     |       | 4,447 |   | — |   | (6 | ) |
| Franchised                    |       | 1,301                        |       | 129,535                      |       | 1,357                                  |       | 133,907 |   | 56 |   | 4,372 |   |
|                          |       | 1,336                        |       | 134,121                      |       | 1,392                                  |       | 138,487 |   | 56 |   | 4,366 |   |
| **Scandic**                   | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 1                            |       | 325                          |       | 3                                      |       | 528 |   | 2 |   | 203 |   |
| Leased                        |       | 121                          |       | 21,405                       |       | 118                                    |       | 21,182 |   | (3 | ) | (223 | ) |
| Managed                       |       | 3                            |       | 429                          |       | 3                                      |       | 429 |   | — |   | — |   |
| Franchised                    |       | 5                            |       | 715                          |       | 5                                      |       | 669 |   | — |   | (46 | ) |
|                          |       | 130                          |       | 22,874                       |       | 129                                    |       | 22,808 |   | (1 | ) | (66 | ) |
| **Conrad**                    | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Joint Venture                 |       | 3                            |       | 1,395                        |       | 3                                      |       | 1,399 |   | — |   | 4 |   |
| Managed                       |       | 12                           |       | 3,660                        |       | 12                                     |       | 3,753 |   | — |   | 93 |   |
|                          |       | 15                           |       | 5,055                        |       | 15                                     |       | 5,152 |   | — |   | 97 |   |
| **Other**                     | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 2                            |       | 630                          |       | 1                                      |       | 324 |   | (1 | ) | (306 | ) |
| Leased                        |       | 2                            |       | 666                          |       | 1                                      |       | 129 |   | (1 | ) | (537 | ) |
| Managed                       |       | 6                            |       | 1,311                        |       | 11                                     |       | 4,277 |   | 5 |   | 2,966 |   |
| Franchised                    |       | 6                            |       | 2,434                        |       | 2                                      |       | 855 |   | (4 | ) | (1,579 | ) |
|                          |       | 16                           |       | 5,041                        |       | 15                                     |       | 5,585 |   | (1 | ) | 544 |   |
| **Timeshare**                 |       | 40                           |       | 4,272                        |       | 34                                     |       | 3,740 |   | (6 | ) | (532 | ) |
| **Total**                     | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned                         |       | 69                           |       | 35,771                       |       | 60                                     |       | 29,647 |   | (9 | ) | (6,124 | ) |
| Leased                        |       | 207                          |       | 47,277                       |       | 203                                    |       | 46,663 |   | (4 | ) | (614 | ) |
| Joint Venture                 |       | 59                           |       | 19,259                       |       | 53                                     |       | 17,232 |   | (6 | ) | (2,027 | ) |
| Managed                       |       | 326                          |       | 86,046                       |       | 343                                    |       | 97,536 |   | 17 |   | 11,490 |   |
| Franchised                    |       | 2,083                        |       | 284,157                      |       | 2,242                                  |       | 306,660 |   | 159 |   | 22,503 |   |
| Timeshare                     |       | 40                           |       | 4,272                        |       | 34                                     |       | 3,740 |   | (6 | ) | (532 | ) |
| **TOTAL  PROPERTIES**         | ** ** | **2,784**                    | ** ** | **476,782**                  | ** ** | **2,935**                              | ** ** | **501,478** |   | **151** | ** ** | **24,696** | ** ** |

 

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For purposes of the table above, “owned” properties includethose in which we have a majority or controlling financial interest and “jointventure” properties are those in which we have a minority or non-controllingfinancial interest. Statistics are presented pro forma as if the HI Acquisitionhad occurred January 1, 2005. For additional information, see “HotelProperties” above.

Thefollowing table sets forth certain system-wide information for our hotels withrespect to occupancy rates, average room rates and RevPAR for the fiscal yearsended December 31, 2005 and 2006:

| ** **                     | ** ** | **2005(1)** | ** ** | **2006(1)** | ** ** | **Change** | ** ** |
|--------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Hilton**                     |       |        |       |        |       |       |       |
| Occupancy                      |       | 71.8        | %          | 72.8        | %          | 1.0        | pts        |
| Average Rate                   |       | $           | 138.55     |        | $          | 149.86     |       | 8.2 | % |
| RevPAR                         |       | $           | 99.50      |        | $          | 109.11     |       | 9.7 | % |
| **Hilton  Garden Inn**         |       |        |       |        |       |       |       |
| Occupancy                      |       | 70.0        | %          | 71.4        | %          | 1.4        | pts        |
| Average Rate                   |       | $           | 103.89     |        | $          | 111.34     |       | 7.2 | % |
| RevPAR                         |       | $           | 72.70      |        | $          | 79.55      |       | 9.4 | % |
| **Doubletree**                 |       |        |       |        |       |       |       |
| Occupancy                      |       | 70.4        | %          | 71.6        | %          | 1.2        | pts        |
| Average Rate                   |       | $           | 112.58     |        | $          | 122.32     |       | 8.7 | % |
| RevPAR                         |       | $           | 79.30      |        | $          | 87.60      |       | 10.5 | % |
| **Embassy  Suites**            |       |        |       |        |       |       |       |
| Occupancy                      |       | 73.8        | %          | 74.9        | %          | 1.1        | pts        |
| Average Rate                   |       | $           | 129.93     |        | $          | 140.18     |       | 7.9 | % |
| RevPAR                         |       | $           | 95.85      |        | $          | 105.05     |       | 9.6 | % |
| **Homewood  Suites by Hilton** |       |        |       |        |       |       |       |
| Occupancy                      |       | 75.2        | %          | 75.8        | %          | 0.6        | pts        |
| Average Rate                   |       | $           | 101.31     |        | $          | 108.31     |       | 6.9 | % |
| RevPAR                         |       | $           | 76.19      |        | $          | 82.14      |       | 7.8 | % |
| **Hampton**                    |       |        |       |        |       |       |       |
| Occupancy                      |       | 71.6        | %          | 72.5        | %          | 0.9        | pts        |
| Average Rate                   |       | $           | 87.80      |        | $          | 94.69      |       | 7.8 | % |
| RevPAR                         |       | $           | 62.87      |        | $          | 68.66      |       | 9.2 | % |
| **Scandic**                    |       |        |       |        |       |       |       |
| Occupancy                      |       | 64.0        | %          | 65.1        | %          | 1.1        | pts        |
| Average Rate                   |       | $           | 104.86     |        | $          | 109.92     |       | 4.8 | % |
| RevPAR                         |       | $           | 67.11      |        | $          | 71.58      |       | 6.7 | % |
| **Conrad**                     |       |        |       |        |       |       |       |
| Occupancy                      |       | 70.4        | %          | 69.6        | %          | (0.8       | )pts       |
| Average Rate                   |       | $           | 153.35     |        | $          | 173.75     |       | 13.3 | % |
| RevPAR                         |       | $           | 107.90     |        | $          | 120.94     |       | 12.1 | % |
| **Other**                      |       |        |       |        |       |       |       |
| Occupancy                      |       | 75.2        | %          | 79.5        | %          | 4.3        | pts        |
| Average Rate                   |       | $           | 132.99     |        | $          | 145.13     |       | 9.1 | % |
| RevPAR                         |       | $           | 99.98      |        | $          | 115.36     |       | 15.4 | % |
| **Total**                      |       |        |       |        |       |       |       |
| Occupancy                      |       | 71.4        | %          | 72.5        | %          | 1.1        | pts        |
| Average Rate                   |       | $           | 115.43     |        | $          | 124.58     |       | 7.9 | % |
| RevPAR                         |       | $           | 82.46      |        | $          | 90.27      |       | 9.5 | % |

----

(1)          Statistics are presentedpro forma as if the HI Acquisition had occurred January 1, 2005. Includeshotels in our system as of December 31, 2006 which were in our hotelsystem or the hotel system of HI since January 1, 2005. Comparable hotelsexclude data for HI franchise hotels and our owned hotels in New Orleans due tothe interruption in operations as a result of Hurricane Katrina.

For additional information regarding our hotel brands,see “Hotel Brands” above.

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Thefollowing table sets forth certain system-wide statistical information for ourhotels by geographic region as of and for the year ended December 31,2006:

| **Regions**                         | ** ** | ** ** | ** ** | **Occupancy** | ** ** | **Average Rate** | ** ** | **RevPAR** | ** ** |
|-------------------------------------|------------|------------|------------|---------------|------------|-----------------------|------------|------------|------------|
| North America                       |       |       | 72.8       | %             |       |                  | $          | 120.56     |       |   | $ | 87.77 |   |
| United  Kingdom & Ireland  |       |       | 77.1       |          |       |                  | 169.92     |       |       | 130.98 |   |
| Continental  Europe                 |       |       | 69.0       |          |       |                  | 161.27     |       |       | 111.29 |   |
| Africa                              |       |       | 71.3       |          |       |                  | 133.52     |       |       | 95.16 |   |
| Middle East                         |       |       | 72.7       |          |       |                  | 115.84     |       |       | 84.24 |   |
| Asia Pacific                        |       |       | 77.3       |          |       |                  | 132.65     |       |       | 102.57 |   |
| Latin  America & Caribbean |       |       | 71.4       |          |       |                  | 128.03     |       |       | 91.47 |   |
| Nordic                              |       |       | 65.3       |          |       |                  | 114.17     |       |       | 74.57 |   |
| Total                               |       |       | 72.5       |          |       |                  | 124.58     |       |       | 90.27 |   |
|                                     |            |            |            |               |            |                       |            |            |            |  |  |  |  |  |  |

 

In the table above,statistics are presented pro forma as if the HI Acquisition occurred January 1,2005. This table includes hotels in our system as of December 31, 2006which were in our hotel system or in the hotel system of HI since January 1,2005. Comparable hotels exclude data for HI franchise hotels and our ownedhotels in New Orleans due to the interruption in operations as a result ofHurricane Katrina. For additional information regarding our number ofproperties, number of available rooms and statistical information, see “FiveYear Summary” under Part II—Item 8.

**ADDITIONALINFORMATION**

**Casino Windsor**

We own a 50% equityinterest in Windsor Casino Limited, which operates the 400-room CasinoWindsor in Windsor, Ontario, Canada for the Ontario provincial government undera management contract that expires in 2012. This hotel casino features a 75,000square foot casino and entertainment and meeting facilities. See “AdditionalInformation—Regulation and Licensing—Ontario Gaming Laws” below.

**Design andFurnishing Services**

Hilton Supply Management, Inc.,our wholly owned subsidiary, provides design and furnishing services to ourhotels and to hotels owned and operated by others. These services include thepurchase and distribution of furniture, furnishings, equipment, food, beverageand operating supplies. The volume of this operation depends primarily on thenumber of new hotels we operate or franchise and on refurbishing and remodelingof our existing hotels.

**Reservation System**

Hilton ReservationsWorldwide, LLC (“HRW”) oversees and operates a computerized, worldwidereservation system for hotels owned, operated or franchised by us, ouraffiliates and others. Prior to the HI Acquisition, Hilton and HiltonGroup plc each owned a 50% interest in HRW. As a result of theHI Acquisition, HRW is now wholly owned by us. The domestic HRWreservation agents utilize an automated system that enables them toautomatically cross-sell among all of our hotel brands which has benefited, andwhich we expect will continue to benefit, our hotel brands.

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**HHonors**

Hilton HHonors Worldwide,LLC (“HHW”) operates our guest loyalty program (“HHonors”). Prior to the HIAcquisition, Hilton and Hilton Group plc each owned a 50% interest in HHW. As aresult of the HI Acquisition, HHW is now wholly owned by us. The HHonorsprogram is operated for the benefit of our family of brands worldwide. Membersof the HHonors program earn points based on their spending at most of the hotelproperties operated and franchised by us. HHonors accumulates and tracks pointson the member’s behalf and fulfills awards upon request. Points can be redeemedfor hotel stays at participating properties and for a variety of other awardssuch as airline tickets, cruises and car rentals. We expect HHonors to continueto have a positive impact on our brands. See “Note 2: Summary ofSignificant Accounting Policies—Hilton HHonors” to the consolidated financialstatements under Part II—Item 8.

**Technology and Distribution**

We operate the Hiltonworldwide internet website (www.hiltonworldwide.com) and our various hotelbrand websites which provide cost effective customer service, including onlinehotel reservations and HHonors enrollment. We also provide various business,technology and information services for our hotel guests, including high speedinternet access at many of our hotels system-wide and self-service check-inkiosks at certain of our owned or managed hotels.

We operate our proprietary OnQ system, which is asingle technology platform that links our brands and hotels to enhance customerservice and loyalty, as well as to maximize operational efficiencies. The OnQsystem has been installed at virtually all of the hotels in our domestic hotelsystem. We have commenced the installation of the OnQ system in the hotels weacquired in the HI Acquisition. We also utilize an integrated strategy relatedto electronic and online distribution of rooms in our systems. The strategyprovides for brand standards that permit each hotel to establish its own roomrates, but requires the hotel to offer such rates consistently across alldesignated distribution channels, including our proprietary websites, HRW callcenters, the Global Distribution System used by travel agents, and throughhotels directly. In addition, we have implemented enhancements to our majorbrand websites as part of the strategy.

“Our Best Rates.Guaranteed.” is our program which offers a price-matching guarantee that isdesigned to encourage customers to book their reservations through the abovereferenced distribution channels. We believe that this program, along withenhancements to our branded websites, has contributed to significantlyincreased numbers of transactions on our proprietary websites.

**Trademarks**

The following trademarksused herein are owned by us and are either registered or have been filed forregistration as trademarks in the United States and/or in certain foreigncountries: Conrad®, Double Dip®, Doubletree®, Doubletree Club Hotel®, DoubletreeGuest Suites®, Doubletree by HiltonTM, Embassy Suites Hotels®, Embassy Suites byHiltonTM, Finn & Porter®, Garden Inn®, Hampton®, Hampton Inn®, HamptonInn & Suites®, Hampton by HiltonTM, Hawaiian Village®, HGVClub®,HHonors®, Hilton®, Hilton Garden Inn®, Hilton Grand Vacations Club®,Hilton Hawaiian Village®, Hilton Suites®, Homewood Suites by Hilton®,LivingWell®, OnQTM, Points & Miles®, Scandic®, Senior HHonors®,Waldorf=Astoria® and Waldorf=Astoria Collection®. We consider all of these trademarks,and the associated name recognition, to be valuable to our business. See “Note 2:Summary of Significant Accounting Policies—Brands” to the consolidatedfinancial statements under Part II—Item 8.

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**Marketing**

Our hotel properties offer multiple product lines to abroad range of customers in many geographic markets worldwide. Our propertiesinclude full-service and limited service hotels in urban, airport, resort andsuburban locations, as well as timeshare resorts.

Our metropolitan and airport properties primarilyserve the convention and meeting market and the business traveler market(business persons traveling as individuals or in small groups). Our resortproperties primarily serve the tour and leisure market (tourists travelingeither as individuals or in groups) and the convention and meeting market. Oursuburban properties primarily serve the leisure and business traveler markets.As indicated in “Risk Factors” under Item 1A, these sources of business aresensitive to general economic and other conditions.

We are a sponsor of theU.S. Olympic Team through 2008, which entitles our family of brands to use theofficial hotel sponsor designation and Olympic logo in advertising andmarketing materials.

**Competition**

We seek to maintain the quality of our lodgingbusiness while expanding both domestically and internationally, primarilythrough franchising and the addition of management contracts. We intend toimprove our business by leveraging our strong brand names, maximizing operatingefficiencies, utilizing cost containment programs and technology, and expandingand enhancing properties. We may also acquire or develop properties asappropriate, either directly or through investments in joint ventures.

We believe that ourposition as a multi-branded owner, operator, manager and franchisor of hotelsmakes us one of the largest and most geographically diverse lodging companiesin the world. Competition in the industry is based primarily on the level ofservice, quality of accommodations, convenience of locations and room rates.Competition from other hotels, motels and inns, including facilities owned bylocal interests and facilities owned by national and international chains, isvigorous in all areas in which we operate or franchise our facilities. Ourhotels also generally compete with facilities offering similar services incities and other locations where our hotels are not present. If hotel capacityis expanded by others in a city where our branded hotels are located,competition will increase. Our management agreements are generally forlong-term periods, but most allow the hotel owner to terminate the arrangementif certain financial or performance standards are not met. Competition in thetimeshare business is based primarily on the quality and location of timeshareresorts, the pricing of timeshare intervals and the availability of programbenefits, such as exchange programs. We believe that our focus on core businessstrategies, combined with our financial strength, diverse market presence,strong brands and strategically located properties, will enable us to remaincompetitive. For additional information, see “Risk Factors” under Item 1A.

**EnvironmentalMatters**

We are subject tovarious Federal, state, local and foreign laws, ordinances and regulationsthat:

(i)            govern activities oroperations that may have adverse environmental effects, such as discharges toair and water, as well as handling and disposal practices for solid andhazardous or toxic wastes; or

(ii)        may impose liability forthe costs of cleaning up, and certain damages resulting from, sites of pastspills, disposals or other releases of hazardous or toxic substances or wastes(together, “Environmental Laws”).

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Environmental Lawscould make us liable for costs of removing or cleaning up hazardous or toxicsubstances on, under or in property we currently own or operate or that wepreviously owned or operated. Those laws could impose liability without regardto whether we knew of, or were responsible for, the presence of hazardous ortoxic substances or waste. We endeavor to maintain compliance withEnvironmental Laws but, from time to time, our operations may have resulted ormay result in noncompliance or liability for cleanup pursuant to EnvironmentalLaws. In that regard, as of December 31, 2006, we had been notified ofcontamination resulting from past disposals of waste at eight sites to whichhazardous or non-hazardous waste may have been sent from our facilitiesin the past. Based on information reviewed by and available to us, including:

(i)            uncertainty whetherour facilities in fact shipped any waste to such sites;

(ii)        the number of potentiallyresponsible parties at such sites; and

(iii)    where available, the volumeand type of waste sent to such sites;

we believe that anyliability arising from such disposals under Environmental Laws would not have amaterial adverse effect on our financial position or results of operations.However, there can be no assurance that this will be the case.

**Regulation andLicensing**

*OntarioGaming Laws.*   Ontario, Canada haslaws and regulations governing the conduct of casino gaming. Ontario lawrequires that the operator of a casino must be found suitable and beregistered. A registration once issued remains in force until revoked. Ontariolaw defines the grounds for registration, as well as revocation or suspensionof such registration. The Ontario authorities have conducted an investigation andhave found us and the other shareholder of Windsor Casino Limited suitable inconnection with the Ontario registration of Windsor Casino Limited. See “AdditionalInformation—Casino Windsor” above.

*Other Laws andRegulations.*   We are subject to the laws andregulations of 78 countries and territories. The hotels and timeshareresorts we operate are subject to extensive state, local and nationalregulations and, on a periodic basis, must obtain various licenses and permits,including those required to sell alcoholic beverages. National and state lawsand regulations also require certain registration, disclosure statements andother practices with respect to the franchising of hotels. We believe that we haveobtained all required licenses and permits and our businesses are conducted insubstantial compliance with applicable laws.

**Employees**

At December 31, 2006,we had approximately 105,000 employees, of whom approximately 28,000 werecovered by various collective bargaining agreements providing, generally, forbasic pay rates, working hours, other conditions of employment and orderlysettlement of labor disputes. We believe that the aggregate compensationbenefits and working conditions afforded our employees compare favorably withthose received by employees in the hotel industry generally. See “Risk Factors”under Item 1A.

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**Forward-LookingStatements**

Forward-looking statementsin this report, including without limitation, those set forth under thecaptions Item 1 “—Business—Hotel Brands,” “—Operations—Development,” “—DevelopmentFinancing,” “—Territorial Restrictions,” “—Potential Acquisitions,” ”—PropertyTransactions” and “—Seasonality” and “Additional Information—ReservationSystem,” “—HHonors,” “—Competition,” “—Environmental Matters” and “—Regulationand Licensing,” Item 2 “—Properties,” Item 3 “—Legal Proceedings” and Item 7 “—Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” andother statements relating to our plans, strategies, objectives, expectations,intentions and adequacy of resources, are made pursuant to the safe harborprovisions of the Private Securities Litigation Reform Act of 1995. The words “believes,”“anticipates,” “expects,” “intends,” “plans,” “estimates,” “projects,” “will,” “should,”“continues” and similar expressions are intended to identify forward-lookingstatements. These forward-looking statements reflect our current views withrespect to future events and financial performance and are subject to risks anduncertainties, including those identified under Item 1A “—Risk Factors” belowand under “Operations—Territorial Restrictions” and “Management’s Discussionand Analysis of Financial Condition and Results of Operations.”  Any of these risks and uncertainties couldcause actual results to differ materially from historical results or thoseanticipated. We undertake no obligation to publicly update or revise anyforward-looking statements to reflect current or future events or circumstancesexcept as required by law.

**AvailableInformation**

Our internet website is located atwww.hiltonworldwide.com. We make available free of charge through this websiteour annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports filedor furnished pursuant to Section 13(a) or 15(d) of theSecurities Exchange Act of 1934, as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the Securities andExchange Commission. Our internet website also contains our Code of BusinessConduct and Ethics for officers, employees and directors, including our ChiefExecutive Officer and senior finance officers (the “Code of Ethics”), ourCorporate Governance Guidelines, Charters for our Audit, Compensation andCorporate Governance and Nominating Committees and information regardingcommunications with our Board of Directors. See “hiltonworldwide.com,” click on“Investor Relations,” then “Corporate Governance.” See also “Directors,Executive Officers and Corporate Governance” under Part III—Item 10.The information made available through our website is not incorporated byreference in this Form 10-K.

We will provide withoutcharge to any person, on the written or oral request of such person, a copy ofour annual report on Form 10-K, Code of Ethics, Corporate GovernanceGuidelines and Charters for our Audit, Compensation and Corporate Governanceand Nominating Committees. Requests should be directed to our Corporate Secretary,Hilton Hotels Corporation, 9336 Civic Center Drive, Beverly Hills, California90210 (telephone number (310) 278-4321).

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**Executive Officersof the Registrant**

The following table sets forth certain informationwith respect to our executive officers.
| Name                  | ** ** | **Positions with the Company**                                                                                                                                                                                                                                                                                                                                                                 | ** ** | **Age** |
|-----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------|
| Stephen F. Bollenbach |       | Co-Chairman of the Board  and Chief Executive Officer since May 2004, and prior thereto, President  and Chief Executive Officer                                                                                                                                                                                                                                                                          |       | 64      |
| Matthew J. Hart       |       | President and Chief Operating  Officer since May 2004, and prior thereto, Executive Vice President and  Chief Financial Officer                                                                                                                                                                                                                                                                          |       | 54      |
| Ian R. Carter         |       | Executive Vice President  and Chief Executive Officer—Hilton International Co. (a subsidiary of Hilton  Hotels Corporation) since March 2006, Chief Executive Officer—Hilton  International Co. (a subsidiary of Hilton Group plc) from January 2005  until March 2006, and prior thereto, President—Europe, Middle East and  Asia Pacific, Black & Decker Corporation |       | 45      |
| Tim Harvey            |       | Executive Vice President—Global  Distribution Services and Chief Information Officer since January 2007,  Executive Vice President and Chief Information Officer from January 2006  until January 2007, and prior thereto, Senior Vice President and Chief  Information Officer                                                                                                           |       | 48      |
| Thomas L. Keltner     |       | Executive Vice President  and Chief Executive Officer—Americas and Global Brands, since  January 2007, and prior thereto, Executive Vice President and President—Brand  Performance and Development Group                                                                                                                                                                                      |       | 60      |
| Madeleine A. Kleiner  |       | Executive Vice  President, General Counsel and Corporate Secretary                                                                                                                                                                                                                                                                                                                                            |       | 55      |
| Robert M. La Forgia   |       | Executive Vice President and Chief Financial Officer  since January 2006, Senior Vice President and Chief Financial Officer  from May 2004 until January 2006, and prior thereto, Senior Vice  President and Controller                                                                                                                                                                        |       | 48      |

 

Unless otherwise noted in the table, all positions andoffices indicated have been continuously held since January 2002. Theexecutive officers are responsible for all major policy making functions andall other corporate and divisional officers are responsible to, and are underthe supervision of, the executive officers. None of the executive officerslisted above are related.

Messrs. Bollenbachand Hart also serve as directors of Hilton. Additional information for ourdirectors will be included under “Election of Directors” in our definitiveproxy statement to be used in connection with our annual meeting ofstockholders scheduled to be held on May 24, 2007 (the “Proxy Statement”),and this information is incorporated by reference in this Form 10-K.See Cover Page—“Documents Incorporated by Reference.”

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**Item 1A.**   **Risk Factors**

***We are subject to all of the operating risks common inthe lodging and timeshare industries and our results may be adversely impactedif any of these risks materialize.***   Ourresults are significantly affected by occupancy and room rates achieved by ourhotels, our ability to manage costs, foreign currency exchange rate movementsrelated to our international operations, our relative mix of owned, leased,managed and franchised hotels, supply and demand changes for hotel rooms andtimeshare intervals in our markets, the quantity and pricing of timeshareinterval sales and changes in the number of available hotel rooms and timeshareintervals through acquisition, development and disposition. Unfavorable changesin these factors, as well as the occurrence of other events described below,could negatively impact hotel room demand and pricing which, in turn, couldlimit our ability to pass through operating cost increases in the form ofhigher room rates. Our ability to manage costs could be adversely impacted bysignificant increases in operating expenses, such as wages and other laborcosts, healthcare, insurance, property taxes and energy, as well as increasesin construction costs, resulting in lower operating margins. In addition,economic factors beyond our control in the U.S. and internationally may createchallenges for the lodging industry and us in 2007 and beyond. A downturn ineconomic conditions could impact the demand for hotel rooms and put pressure onroom rates. Increases in transportation and fuel costs, the financial conditionof the airline industry and its impact on air travel and sustained recessionaryperiods in the U.S. and internationally could also unfavorably impact futureresults.

***Certain of our employees are covered by collectivebargaining agreements and labor disputes may disrupt our operations.*****  **Employees at certain of our owned and managed hotelsare covered by collective bargaining agreements. In July 2006, weannounced a five-year agreement with UNITE HERE, the union representing amajority of our unionized employees, termed a “partnership for future growth”which includes agreement by the parties to work together toward labor peace incities with collective bargaining. Since the announcement, collectivebargaining agreements have been reached and ratified in key markets includingNew York, Chicago, Puerto Rico, San Francisco, Toronto and Honolulu. At thistime, we cannot predict when or whether new agreements will be reached in othermarkets in which we have employees covered by collective bargaining agreements,and what the impact of prolonged negotiations could be. Labor disputes inmarkets in which we have employees covered by collective bargaining agreementscould disrupt our operations by causing the diversion of business to otherhotels, thereby impacting our financial results negatively.

***We derive a significant portion of our revenue fromoperations of our owned hotels and events in the markets where these propertiesare located could adversely affect our overall financial results.***   We derived approximately 31% of our revenue in2006 from the operations of our owned hotels. A significant portion of thisrevenue was derived from our large convention hotels located in major U.S.cities. See “Operations—Hotel Properties—Owned Hotels” under Item 1.In addition, we acquired 39 owned properties in the HI Acquisition.Although we sold a number of owned properties since the HI Acquisition and arecontinuing to market certain properties for sale, soft economic conditions andreduced business travel in any of the markets where we currently own propertiescould adversely affect our results from these properties and, therefore, ouroverall financial results. Our owned properties are also subject to risks thatgenerally relate to investments in commercial real estate, includinggovernmental regulations; real estate, insurance, zoning, tax and eminentdomain laws; the ongoing need for capital improvements to maintain or upgradeproperties; fluctuations in real estate values; and the relative illiquidity ofreal estate compared to other investments. If our owned properties do notgenerate sufficient revenue to meet operating expenses, including debt serviceand capital requirements, our financial results will be adversely affected.

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***We face challenges in integrating the operations ofHI, as well as risks related to owning and operating real estate andhotels in international locations.***   We mayexperience difficulties in completing the integration of HI’s operations,including combining technology and distribution activities, consolidatingregional infrastructure, integrating personnel with disparate businessbackgrounds and corporate cultures and managing relationships with hotelowners, lessors and other business partners on a worldwide basis. As a resultof the HI Acquisition, we are subject to varying degrees of risk relating tointernational real estate generally, including risks related to changes inlocal, political, economic and market conditions, interest rates, zoning laws,currency exchange rate fluctuations, compliance with environmental laws, costsand terms of financing and the potential for uninsured casualty and otherlosses. A number of the leased properties we acquired in the HI Acquisition aresubject to long-term contracts requiring fixed payments to the lessor. If theseproperties do not generate sufficient revenue, we may be required to fundshortfalls to the lessors which could adversely impact our financial results.We have assumed certain obligations and liabilities related to the businessacquired in the HI Acquisition and have limited rights of indemnification withrespect to such matters. As a result of the HI Acquisition, we are subject tothe laws and regulations of 78 countries and territories, which exposes us torisks relating to changes in franchise, tax, environmental, zoning, employment,repatriation of money, liquor license and other laws in the countries in whichwe operate. As a U.S. company operating globally, we may be subject toinconsistent requirements resulting from conflicts between U.S. laws and thelaws of the countries in which we operate. If taxation authorities in thecountries in which we operate interpret our tax position in a manner that ismaterially different than our assumptions, our tax liabilities could increasewhich could materially adversely impact our financial results. Someinternational jurisdictions restrict the repatriation of non-U.S.earnings. Various international jurisdictions also have laws limiting theability of non-U.S. entities to pay dividends and remit earnings to affiliatedcompanies unless specified conditions have been met. Sales in internationaljurisdictions typically are made in local currencies, which subject us to risksassociated with currency fluctuations. Currency devaluations and unfavorablechanges in international monetary and tax policies could have a materialadverse effect on our profitability and financing plans, as could other changesin the international regulatory climate and international economic conditions.In addition, the U.S. government prohibits U.S. companies from operating incertain countries that are subject to economic sanctions or are on theterrorist countries list. We will not do business in such countries, unless wedevelop or acquire a non-U.S. affiliate that is capable of managing hotels orwe obtain authorization from the U.S. Treasury Department’s Office of ForeignAssets Control to do so. Some investors would be prohibited by state law orself-imposed policies from investing in our securities if we were to dobusiness in such countries.

***We are more highly leveraged as a result of the HIAcquisition. If we are unable to complete planned dispositions of certain ofour owned hotels acquired in the HI Acquisition, our ability to reduce ourindebtedness could be impacted.***   We have soldcertain hotel properties we acquired in the HI Acquisition and are continuingto market additional properties for sale. See “Note 5: Acquisitions andDispositions” to the consolidated financial statements under Part II—Item8. We are required to use the net proceeds from such dispositions to repayamounts outstanding under our credit facilities which were incurred to financethe HI Acquisition. If we are unable to complete such dispositions oncommercially reasonable terms within anticipated timeframes, our ability toreduce our outstanding borrowings may be adversely affected, which couldnegatively impact our cost of borrowings, our financial results and our abilityto raise new capital to finance future growth. Our senior debt is currently ratedBa1 by Moody’s Investor Services and BB by Standard & Poor’s RatingsGroup. A downgrade by any rating agency of our credit rating could adverselyimpact the cost and availability of capital to us. Our higher level of debt andresulting interest expense may place us at a competitive disadvantage tocompetitors with lower amounts of indebtedness and/or higher credit ratings.

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***If we have disputes with the owners of hotels wemanage, we could be subject to litigation.******  ***For our managed hotels, we have theresponsibility to manage each hotel at a level consistent with the standardrequired for its brand in the relevant management agreement. Such provisionsvary in scope and may be subject to differing interpretations. In the ordinarycourse of business, we encounter disagreements with the owners of our managedhotels as to whether the duties in our management agreements have beensatisfied. To the extent that such conflicts arise, we seek to resolve them bynegotiation with the relevant parties. In the event that such resolution cannotbe achieved, litigation may result in damages or other remedies against us.Such remedies could include termination of the right to manage the relevantproperty. We may not be able to negotiate successfully or otherwise resolvesuch conflicts in each instance.

***In competing for management, franchise and timeshareagreements and leases, we may make loans or provide guarantees to third partiesand could experience losses under these loans or guarantee arrangements.***   The terms of our management,franchise and timeshare agreements and leases are influenced by contract termsoffered by our competitors at the time such agreements are entered into.Accordingly, we may not enter into contracts or renew contracts in the futureon terms that are as favorable to us as those under existing agreements. Inconnection with entering into these contracts, we may become obligated to makeloans to or guarantee the obligations of third parties or guarantee minimumincome to third parties. Most of our guarantees allow us to terminate theagreement rather than fund shortfalls if specified performance levels are notachieved. However, under certain agreements we are required to fund performanceshortfalls. Weak performance, particularly as a result of a soft economy, aswell as the financial condition of third party owners and franchisees, couldgive rise to losses under our loans and guarantees. Changes in legislation orregulatory changes may be implemented that have the effect of favoringfranchisees relative to brand owners.

***The growth of internet reservation channels could harmour profitability.*****  **Someof our hotel rooms are booked through internet travel intermediaries. If thesebookings increase, these intermediaries may be able to obtain highercommissions or other significant contract concessions from us. We believe thatthe aim of such intermediaries is to have consumers develop loyalties to theirreservation systems rather than to our lodging brands. Although we expect mostof our business to continue to be derived from traditional channels and ourproprietary branded internet websites, if the amount of sales made throughinternet intermediaries increases significantly, our ability to control thesupply, presentation and price of our room inventory and our profitability maybe harmed.

***We are a party to joint venture arrangements andinvesting through joint ventures decreases our ability to manage risk.******  ***We havefrom time to time invested, and expect to continue to invest, as a co-venturer.Joint venturers often have shared control over the operation of the jointventure assets. Therefore, joint venture investments may involve risks such asthe possibility that the co-venturer in an investment might become bankrupt, orhave economic or business interests or goals that are inconsistent with ourbusiness interests or goals, or be in a position to take action contrary to ourinstructions or requests or contrary to our policies or objectives.Consequently, actions by a co-venturer might subject hotels owned by the jointventure to additional risk. Additionally, we may be unable to take actionwithout the approval of our joint venture partners, or our joint venturepartners could take actions binding on the joint venture without our consent.

***Our***hotel and timeshare businesses are subjectto risks related to the availability of capital.***  ***Ownersof our hotel and timeshare properties, including us, are required to spendmoney to construct, refurbish and maintain properties. This creates an ongoingneed for cash which, if not generated by ongoing operations or otherwiseobtained, is subject to the availability of credit in capital markets. Theability of our owners to spend money necessary to maintain the brand standardsof our properties is significantly impacted by the cost and availability ofcapital, over which we have little control.

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***Our timeshare business is subject to extensiveregulation and if we fail to comply with such regulation our timeshare businesscould suffer.***   We develop, manage, market and sell timeshare intervals,which generally entitle the buyer to occupy a fully-furnished unit for aone-week period on either an annual or an alternative-year basis. We alsoprovide financing to purchasers of timeshare intervals. Certain of theseactivities are subject to extensive state regulation in both the state in whichthe property is located and the states in which the property is marketed andsold, as well as Federal regulation of certain marketing practices. Inaddition, the laws of most states in which we sell timeshare intervals grantthe purchaser a unilateral right to rescind the purchase contract within astatutory rescission period. If we fail to be in compliance with applicableFederal, state, and local laws and regulations to which timeshare properties,marketing, sales and operations are subject, including Federal telemarketingregulations, or a determination by a regulatory authority that we were not incompliance, our timeshare business could suffer.

***Reported profits from our timeshare business may benegatively impacted by deferrals required under percentage-of-completionaccounting.  ******During periods of construction,profits from timeshare sales are recognized under the percentage-of-completion accountingmethod.*********Aswe are currently constructing several new timeshare projects, we anticipatethat this required accounting will negatively impact the reported profits fromour timeshare business in 2007. We expect the impact of percentage-of-completionaccounting on 2007 results to reverse in 2008. See “Note 2:  Summary of Significant Accounting Policies—NewAccounting Standards” to the consolidated financial statements under Part II—Item8.

***Our properties are subject to risks relating to actsof God, terrorist activity and war and any such event could materiallyadversely affect our operating results.***   Our financial and operatingperformance may be adversely affected by acts of God, such as naturaldisasters, particularly in locations where we own and/or operate significantproperties. Some types of losses, such as those from earthquake, hurricane,terrorism and environmental hazards, may be either uninsurable or too expensiveto justify insuring against. Should an uninsured loss or a loss in excess ofinsured limits occur, we could lose all or a portion of the capital we haveinvested in a property, as well as the anticipated future revenue from theproperty. In that event, we might nevertheless remain obligated for anymortgage debt or other financial obligations related to the property.Similarly, war (including the potential for war) and terrorist activity(including threats of terrorist activity), epidemics (such as SARS and birdflu), travel-related accidents, as well as geopolitical uncertainty andinternational conflict, which impact domestic and international travel, havecaused in the past, and may cause in the future, our results to differmaterially from anticipated results. Terrorism incidents such as the events of September 11,2001 and wars such as the Iraq war significantly impact international traveland, consequently, global demand for hotel rooms. In addition, inadequatepreparedness, contingency planning or recovery capability in relation to amajor incident or crisis may prevent operational continuity and consequentlyimpact the value of the brand or the reputation of our business.

***We may incur losses as a ***result*** of class actions orother lawsuits which have recently targeted hospitality companies.  ***Ourfinancial results may be adversely impacted by legal or governmentalproceedings brought by or on behalf of our employees or customers. In recentyears, a number of hospitality companies have been subject to lawsuits,including class action lawsuits, alleging violations of federal and state lawregarding workplace and employment matters, discrimination and similar matters.A number of these lawsuits have resulted in the payment of substantial damagesby the defendants. Similar lawsuits have been and may be instituted against usfrom time to time, and we may incur substantial damages and expenses resultingfrom lawsuits of this type, which could have a material adverse effect on ourbusiness.

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***If we fail to comply with privacy regulations, wecould be subject to fines or other restrictions on our business.*****  **We collect and maintain information relating to ourguests for various business purposes, including maintaining guest preferencesto enhance our customer service and for marketing and promotion purposes. Thecollection and use of personal data are governed by privacy laws andregulations enacted in the U.S. and other international jurisdictions in whichwe operate. Privacy regulation is an evolving area in which differentjurisdictions may subject us to inconsistent compliance requirements.Compliance with applicable privacy regulations may increase our operating costsand/or adversely impact our ability to service our guests and market ourproducts, properties and services to our guests. In addition, non-compliancewith applicable privacy regulations by us (or in some circumstancesnon-compliance by third parties engaged by us) could result in fines orrestrictions on our use or transfer of data.

***We rely on our proprietary systems and any failures insuch systems could negatively affect our business.******  ***We invest in sophisticatedtechnology and systems for property management, procurement, reservations andthe operation of our HHonors customer loyalty program. If our systems fail tooperate as anticipated, or we fail to replace our systems with new systemsintroduced by our competitors, our business could suffer. In addition, we arecombining the systems used by the hotels acquired in the HI Acquisition withours, and if we experience difficulties in merging these systems, it coulddisrupt our operations.

In addition, see thecautionary factors set forth under Item 1 “Business—Additional Information—Competition”and “—Environmental Matters.”

**Item 1B.**   UnresolvedStaff Comments

None.

**Item 2.**   Properties

We consider our hotels to be leading establishmentswith respect to desirability of location, size, facilities, physical condition,quality and the variety of services offered in most of the areas in which theyare located. Obsolescence arising from age and condition of facilities is afactor in the hotel industry. Accordingly, we spend, and intend to continue tospend, substantial funds to maintain the condition of our owned facilities inorder to remain competitive.

Hotels and timeshareproperties owned, leased, managed and franchised by us are briefly describedunder Item 1 and, in particular, under the caption “Operations,” and areincorporated by reference herein. In addition, new properties presently underconstruction that we will operate are briefly described under “Operations—Development”under Item 1.

**Item 3.**   LegalProceedings

The description of legalproceedings in “Note 18: Commitments andContingencies” to the consolidated financial statements included under Part II—Item8 is incorporated by reference herein.

**Item 4.**   Submissionof Matters to a Vote of Security Holders

Not applicable.

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**PART II**

**Item 5.**                        Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities

OurCommon Stock is listed on the New York Stock Exchange and is traded under thesymbol “HLT.” As of December 31, 2006, we had approximately 11,500stockholders of record, although we believe that there are a significantlylarger number of beneficial holders of our Common Stock. The high and lowreported sales prices per share of our Common Stock and dividends declared pershare of Common Stock are set forth in the following table for the periodsindicated:

| ** **                                    | ** ** | **High** | ** ** | **Low** | ** ** | **Dividend  Per Share** | ** ** |   |
|-----------------------------------------------|------------|----------|------------|---------|------------|------------------------------|------------|--------|
| 2005                                          |       |     |       |    |       |                         |       |   |   |   |   |   |   |
| 1st Quarter                                   |       |     | 23.36      |    |       |                         | 20.93      |   |   |   | .02 |   |   |
| 2nd Quarter                                   |       |     | 25.06      |    |       |                         | 21.37      |   |   |   | .02 |   |   |
| 3rd Quarter                                   |       |     | 25.81      |    |       |                         | 21.10      |   |   |   | .04 |   |   |
| 4th Quarter                                   |       |     | 24.35      |    |       |                         | 18.78      |   |   |   | .04 |   |   |
| 2006                                          |       |     |       |    |       |                         |       |   |   |   |   |   |   |
| 1st Quarter                                   |       |     | 26.05      |    |       |                         | 22.76      |   |   |   | .04 |   |   |
| 2nd Quarter                                   |       |     | 29.22      |    |       |                         | 25.06      |   |   |   | .04 |   |   |
| 3rd Quarter                                   |       |     | 28.53      |    |       |                         | 23.19      |   |   |   | .04 |   |   |
| 4th Quarter                                   |       |     | 35.79      |    |       |                         | 27.16      |   |   |   | .04 |   |   |
| 2007                                          |       |     |       |    |       |                         |       |   |   |   |   |   |   |
| 1st Quarter (through  February 23, 2007) |       |     | 37.82      |    |       |                         | 33.27      |   |   |   | .04 |   |   |

 

**Rights Agreement**

On November 29, 1999, we adopted a preferredshare purchase rights plan (the “Rights Plan”) and declared a dividenddistribution of one preferred share purchase right (a “Right”) on each outstandingshare of our Common Stock. We have entered into a rights agreement, dated as ofNovember 29, 1999, which was amended as of February 15, 2001 toprovide for the substitution of The Bank of New York as Rights Agent (asamended, the “Rights Agreement”). The Rights are transferred only with theCommon Stock, unless and until they become exercisable. The Rights will expireon November 29, 2009, subject to our right to extend, unless earlierredeemed or exchanged by us or terminated.

Generally, theRights become exercisable only if a person or group (other than HiltonInterests, as defined below):

(i)            acquires beneficialownership of 20 percent or more of the Common Stock (such person or group,an “Acquiring Person”); or

(ii)        announcesa tender offer, the consummation of which would result in ownership by a personor group of 20 percent or more of the Common Stock.

When exercisable, each Right entitles a shareholder topurchase from us one one-hundredth of a share of Series A JuniorParticipating Preferred Stock at an exercise price of $80, subject toadjustment (the “Purchase Price”).

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After a person becomes an Acquiring Person, eachholder of a Right (other than Rights owned by the Acquiring Person) will havethe right to receive, upon exercise of such Right, a number of shares of CommonStock having a market value equal to two times the then current Purchase Priceof the Right. After a person becomes an Acquiring Person, if we engage incertain mergers or transfers of assets, each holder of a Right (other thanRights owned by the Acquiring Person) will have the right to receive uponexercise, at the Right’s exercise price, a number of the acquiring company’scommon shares having a market value of twice the Right’s Purchase Price.

Once a person becomes an Acquiring Person, but priorto their acquisition of 50 percent or more of the outstanding Common Stock, ourBoard of Directors may cause us to exchange the Rights (other than Rights ownedby an Acquiring Person), in whole or in part, for shares of Common Stock at anexchange ratio based on the value of the Common Stock at that time, subject toadjustment.

Prior to a person or group becoming an AcquiringPerson, the Rights are redeemable for $.001 per Right at the option of ourBoard of Directors.

“Hilton Interests” refer to Barron Hilton and theConrad N. Hilton Fund and the shares of Common Stock beneficially owned bythem.

The Rights Agreement, asamended, has been filed as Exhibits 4.8 and 4.9 to this Form 10-K,and the foregoing summary is qualified in its entirety by reference thereto.

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**Performance Graph**

Thegraph below shows the cumulative total stockholder return for the five yearsended December 31, 2006, assuming the investment of $100 on December 31,2001 (and the reinvestment of dividends and common stock equivalents) in eachof our Common Stock, the S&P 500 Stock Index and the S&P 500 Hotels,Resorts and Cruise Lines Index.

**Comparison ofFive-Year Cumulative Total Return of the Company, S&P 500 Stock Indexand S&P 500 Hotels, Resorts and Cruise Lines Index**

****

| ** **                                                 | ** ** | **12/01** | ** ** | **12/02** | ** ** | **12/03** | ** ** | **12/04** | ** ** | **12/05** | ** ** | **12/06** | ** ** |
|------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|-----------|------------|
| Hilton Hotels  Corporation                                 |       | $         | 100.00     |      | 117.13     |      | 158.76     |      | 211.65     |      | 225.59     |      | 328.43     |   |
| S&P 500 Stock  Index                                   |       | $         | 100.00     |      | 77.90      |      | 100.25     |      | 111.15     |      | 116.61     |      | 135.03     |   |
| S&P 500 Hotels,  Resorts & Cruise Lines Index |       | $         | 100.00     |      | 89.56      |      | 136.22     |      | 198.37     |      | 201.40     |      | 230.83     |   |

 

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**Item 6. SelectedFinancial Data**

Thefollowing selected financial data as of and for the years ended December 31,2002 through 2006 has been derived from our consolidated financial statements. Thefollowing data should be read in conjunction with our consolidated financialstatements, the related notes thereto contained under Item 8 and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” underItem 7.

| ** **                         | ** ** | **Year Ended December 31,**                           | ** ** |
|------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                         | ** ** | **2002**                                                             | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                         | ** ** | **(in millions, except per share amounts)** | ** ** |
| **Results  of Operations:**        |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Revenue                            |       | $                                                                    | 3,816      |   | 3,819 |   | 4,146 |   | 4,437 |   | 8,162 |   |
| Net income                         |       | 198                                                                  |       | 164 |   | 238 |   | 460 |   | 572 |   |
| Net income per  share—Basic   |       | .53                                                                  |       | .43 |   | .62 |   | 1.20 |   | 1.49 |   |
| Net income per  share—Diluted |       | .53                                                                  |       | .43 |   | .60 |   | 1.13 |   | 1.39 |   |
| **Other Financial Data:**          | ** ** |                                                                 |       |   |   |   |   |   |   | ** ** | ** ** |
| Dividends per  common share        |       | $                                                                    | .08        |   | .08 |   | .08 |   | .12 |   | .16 |   |
| **Balance Sheet Data:**            |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Total assets                       |       | $                                                                    | 8,348      |   | 8,183 |   | 8,242 |   | 8,743 |   | 16,481 |   |
| Long-term debt                     |       | 4,565                                                                |       | 4,139 |   | 3,647 |   | 3,619 |   | 6,968 |   |

 

Long-term debt includes current maturities andexcludes non-recourse debt and capital lease obligations of non-controlledentities.

On February 23, 2006,we acquired Hilton International in a business combination accounted for as apurchase. Accordingly, our consolidated financial results include the resultsof Hilton International from the date of acquisition. See “Note 3: Purchase ofHilton International” to the consolidated financial statements under Item 8.

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**Item 7.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**OVERVIEW**

We are engaged inthe ownership, management and development of hotels, resorts and timeshareproperties and the franchising of lodging properties. At December 31,2006, our system contained 2,935 properties totaling approximately 501,000rooms in 78 countries and territories. Our brands include Hilton, Hilton GardenInn, Doubletree, Embassy Suites, Homewood Suites by Hilton, Hampton, Scandic,Conrad and the Waldorf=Astoria Collection. In addition, we develop and operatetimeshare resorts through Hilton Grand Vacations Company and its relatedentities. We are also engaged in various other activities related or incidentalto the operation of hotels.

Thenumber of properties and rooms at December 31, 2006 by brand and by typeare as follows:

| **Brand**                  | ** ** | ** ** | ** ** | **Properties** | ** ** | **Rooms**     | ** ** | **Type** | ** ** | ** ** | ** ** | **Properties** | ** ** | **Rooms** | ** ** |
|----------------------------|------------|------------|------------|----------------|------------|---------------|------------|----------|------------|------------|------------|----------------|------------|-----------|------------|
| Hilton                     |       | 498        |       | 172,605        |       | Owned(1)      |       | 60       |       | 29,647     |       |
| Hilton Garden Inn          |       | 302        |       | 41,669         |       | Leased        |       | 203      |       | 46,663     |       |
| Doubletree                 |       | 173        |       | 45,119         |       | Joint Venture |       | 53       |       | 17,232     |       |
| Embassy Suites             |       | 185        |       | 45,172         |       |          |       | 316      |       | 93,542     |       |
| Homewood Suites  by Hilton |       | 192        |       | 21,141         |       |          |       |     |       |       |       |
| Hampton                    |       | 1,392      |       | 138,487        |       | Managed       |       | 343      |       | 97,536     |       |
| Scandic                    |       | 129        |       | 22,808         |       | Franchised    |       | 2,242    |       | 306,660    |       |
| Conrad                     |       | 15         |       | 5,152          |       |          |       | 2,585    |       | 404,196    |       |
| Other                      |       | 15         |       | 5,585          |       |          |       |     |       |       |       |
| Timeshare                  |       | 34         |       | 3,740          |       | Timeshare     |       | 34       |       | 3,740      |       |
| Total                      |       | 2,935      |       | 501,478        |       | Total         |       | 2,935    |       | 501,478    |       |

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(1)          Includes majority ownedand controlled hotels.

Our operations consist of three reportable segmentswhich are based on similar products or services: Hotel Ownership, Managing andFranchising, and Timeshare. The Hotel Ownership segment derives earnings fromowned, majority owned and leased hotel properties and equity earnings fromunconsolidated affiliates (primarily hotel and other real estate jointventures). The Managing and Franchising segment provides services includinghotel management and licensing of our family of brands to franchisees. Thissegment generates its revenue from fees charged to hotel owners. As a managerof hotels, we are typically responsible for supervising or operating the hotelin exchange for fees based on a percentage of the hotel’s gross revenue,operating profits, cash flow, or a combination thereof. We charge franchisefees, depending on the brand, of up to five percent of rooms revenue inexchange for the use of one of our brand names.  The Timeshare segment consists of multi-unittimeshare resorts. This segment sells and finances timeshare intervals andoperates timeshare resorts.

Our results are significantly affected by occupancyand room rates achieved by our hotels, our ability to manage costs, foreigncurrency exchange rate movements related to our international operations, our relativemix of owned, leased, managed and franchised hotels, the quantity and pricingof timeshare interval sales and changes in the number of available hotel roomsand timeshare intervals through acquisition, development and disposition. Resultsare also impacted by economic conditions and capacity. Unfavorable changes inthese factors could negatively impact hotel room demand and pricing which, inturn, could limit our ability to pass through operating cost increases in theform of higher room rates.   Additionally, our ability to manage costscould be adversely impacted by significant increases in operating expenses,resulting in lower operating margins. See “Risk Factors” under Item 1A for adescription of these and other conditions that could adversely affect ourresults of operations.

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Thehospitality industry is seasonal in nature. However, the periods during whichour properties experience higher or lower levels of demand vary from propertyto property and depend principally upon location. Based upon historicalresults, we generally expect our revenue to be lower in the first fiscalquarter of each year than in each of the three subsequent quarters.

We anticipate that afavorable economic environment will continue to benefit the lodging industryand us in 2007. A continuation of strong hotel demand among business, group andleisure travelers, combined with limited full-service hotel supply growth,should enable us to charge higher room rates. We also anticipate growth in ourmanagement and franchise fee business as the number of hotels in our systemcontinues to increase. Increases in construction costs could result in downwardpressure on the margins achieved by our timeshare business. Reported revenueand expenses from our timeshare business are also expected to be negativelyimpacted by deferrals required under percentage-of-completion accounting as webegin construction of new timeshare projects. We will continue to focus onmanaging our costs, achieving revenue per available room (“RevPAR”) premiums inthe markets where we operate, increasing occupancy, adding new units to ourfamily of brands, leveraging technology and delivering outstanding customerservice. We believe that our focus on these objectives, combined with ourfinancial strength, diverse market presence, strong brands, strategicallylocated properties and ability to grow our brands internationally will enableus to remain competitive.

In July 2006, weannounced a five-year agreement with UNITE HERE, the union representing amajority of our unionized employees, termed a “partnership for future growth”which includes agreement by the parties to work together toward labor peace incities with collective bargaining. Since the announcement, collectivebargaining agreements have been reached and ratified in key markets includingNew York, Chicago, Puerto Rico, San Francisco, Toronto and Honolulu. Adescription of certain risks relating to potential labor disputes is described in“Risk Factors” under Item 1A. At this time, we cannot predict when or whethernew agreements will be reached in other markets in which we have employeescovered by collective bargaining agreements, and what the impact of prolongednegotiations could be.

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States (“GAAP”) requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities and thedisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period. We evaluate our estimates and assumptions on an ongoing basis.We base our estimates and judgments on historical experience and other factorswe believe to be reasonable under the circumstances, which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources.

We believe the followingcritical accounting policies, among others, affect our more significantestimates and assumptions used in preparing our consolidated financialstatements. Actual results could differ from our estimates and assumptions.

***NotesReceivable***

Notesreceivable are reflected net of an estimated allowance for uncollectibleamounts. For timeshare notes receivable, this estimate is based primarily onhistorical experience and assumptions with respect to future payment trends.Allowances for uncollectible amounts of other notes receivable, which includenotes from managed, franchised and unconsolidated joint venture properties, areestimated based primarily on historical trends and analysis of underlying realestate collateral. Assessment of collateral may include estimates of futurecash flow from the underlying real estate. Total notes receivable, includingtimeshare, totaled $401 million and $479 million, net of allowances foruncollectible amounts of $24 million and $35 million as of December 31,2005 and 2006, respectively.

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***Property and Investments***

Propertyand equipment acquired in acquisitions that were accounted for as purchases arerecorded at their estimated fair value as of the date acquired, lessaccumulated depreciation. Other property and equipment are stated at cost lessaccumulated depreciation. We also maintain cost and equity method investmentsin entities that own and operate hotel properties and entities that performother activities related or incidental to the operation of hotels. Theassessment of long-lived assets for possible impairment requires us to makecertain judgments, including estimates of real estate values and future cashflow from the respective properties and investments. We review therecoverability of our long-lived assets when events or changes in circumstancesindicate that the carrying amount of an asset may not be fully recoverable. Resultsin 2004 and 2005 include pre-tax impairment charges to long-lived assets ofapproximately $5 million in each year to reduce the value of property andequipment and equity method investments to estimated fair value. There were noimpairment charges in 2006.

***Sales of Real Estate***

We account for the sale ofreal estate in accordance with Statement of Financial Accounting Standards (“FAS”)66, “Accounting for Sales of Real Estate.” To the extent we realize gains from the sale of real estate and maintainsignificant continuing involvement in the form of a long-term managementcontract, the gain is deferred and recognized in revenue over the term of thecontract. The deferral of pre-tax gains on such sales totaled $5 million, $236million and $5 million in 2004, 2005 and 2006 respectively. Results in 2004,2005 and 2006 include the recognition of pre-tax deferred gains totaling $15million, $23 million and $38 million, respectively. The deferral of gainrecognition is dependent on the structure of individual sale transactions.

***Intangible Assets***

Our intangible assetsinclude management and franchise contracts, leases, brands and goodwill. Weaccount for management and franchise contracts and leases in accordance withFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” whichrequires that we review our management and franchise contracts and leases forimpairment when circumstances indicate that their carrying amounts may not berecoverable. The values of our management and franchise contracts and leasesare amortized using the straight-line method over the life of the agreements. Theassessment of management and franchise contracts and leases requires us to makecertain judgments, including estimates of future cash flow from the respectiveproperties. Management and franchise contracts, net, totaled $302 million and$1.18 billion at December 31, 2005 and 2006, respectively. Leases, net,totaled $107 million and $319 million at December 31, 2005 and2006, respectively. We account for brands and goodwill in accordance with FAS 142,“Goodwill and Other Intangible Assets,” which requires that intangible assetswith indefinite lives are not amortized, but are reviewed annually forimpairment. The annual impairment review requires estimates of future cash flowwith respect to the brands and estimates of the fair value of our company andits components with respect to goodwill.

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***Self-Insurance***

We areself-insured for various levels of general liability, workers’ compensation andemployee medical and dental insurance coverage at our owned locations. Wepurchase insurance coverage for claim amounts which exceed our self-insuredretentions. Depending on the type of insurance, these self-insured retentionsgenerally range from $250,000 to $500,000 per occurrence in the U.S. and approximately$2,000 to $500,000 internationally. Our self-insurance reserves totaled $146million and $156 million at December 31, 2005 and 2006, respectively. Ourinsurance reserves are accrued based on estimates of the ultimate cost ofclaims expected to occur during the covered period. These estimates areprepared with the assistance of outside actuaries and consultants. Ouractuaries periodically review the volume and amount of claims activity, andbased upon their findings, we adjust our insurance reserves accordingly. Theultimate cost of claims for a covered period may differ from our originalestimates.

***Commitments and Contingencies***

We have issued letters of credit and guaranteedcertain debt and obligations of unconsolidated affiliates and third partiestotaling $153 million at December 31, 2006. Under certain circumstances,we may be obligated to provide additional letters of credit or guaranteestotaling $74 million. Assessment of the probability that we will be required tofund under these commitments requires us to make estimates of the ability ofothers to meet their obligations.

We have also provided performance guarantees tocertain owners of hotels we operate under management contracts. Most of theseguarantees allow us to terminate the contract rather than fund shortfalls ifspecified performance levels are not achieved. In limited cases, we areobligated to fund performance shortfalls. At December 31, 2006, we havesix contracts containing performance guarantees with possible cash outlaystotaling approximately $523 million through 2020. Funding under theseperformance guarantees totaled approximately $2 million in 2006 and isexpected to total approximately $3 million in 2007. Funding under theseguarantees in future periods is dependent upon the operating performance levelsof these hotels over the remaining term of the performance guarantees. In 2006we increased the reserve for the performance guarantee at a managed hotel byapproximately $12 million based on our estimate of the guarantee payment thatwill be required at the end of the contract term in 2012. Although weanticipate that the future operating performance levels of these hotels will belargely achieved, there can be no assurance that this will be the case. Inaddition, we do not anticipate losing a significant number of managementcontracts in 2007 pursuant to these guarantees.

Our consolidated financialstatements at December 31, 2005 and 2006 include liabilities ofapproximately $6 million and $18 million, respectively, for potentialobligations under our outstanding guarantees.

***Currency Translation***

Assets and liabilitiesdenominated in foreign currencies are translated into U.S. dollars at year-endexchange rates and the related gains and losses, net of applicable deferredincome taxes, are reflected in stockholders’ equity. Gains and losses fromforeign currency transactions are included in earnings. Income and expenseaccounts are translated at the average exchange rate for the period. Gains andlosses from foreign exchange rate changes related to intercompany receivablesand payables of a long-term nature are generally included in othercomprehensive income. Gains and losses from foreign exchange rate movementrelated to intercompany receivables and payables that are not of a long-termnature are reported currently in income.

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***Hilton HHonors***

Hilton HHonors is aguest loyalty program operated by Hilton HHonors Worldwide, LLC (“HHW”), awholly owned and consolidated subsidiary as of December 31, 2006. At December 31,2005, HHW was a 50% joint venture accounted for under the equity method ofaccounting. As part of the acquisition of the lodging assets of Hilton Groupplc on February 23, 2006 (the “HI Acquisition”), we acquired the remaining 50%ownership interest. The HHonors program is operated for the benefit of ourfamily of brands worldwide. Members of the HHonors program earn points based ontheir spending at most of the hotel properties operated and franchised by us. HHWaccumulates and tracks points on the member’s behalf and fulfills awards uponrequest. Points can be redeemed for hotel stays at participating properties andfor a variety of other awards such as airline tickets, cruises and car rentals.

HHonors is provided as a guest loyalty program toparticipating hotels. HHW charges the cost of operating the program, includingthe estimated cost of award redemptions, to participating hotels based onmembers’ qualifying expenditures. These charges do not include a markup orprofit element. Our owned hotels record our share of program costs whenqualified members stay at our owned hotels. When the members redeem awards atour hotels, our owned hotels recognize revenue for reward stays.

We use outside actuariesto assist in determining the fair value of the future award redemptionobligation based on statistical formulas which project future point redemptionsbased on factors including historical experience, an estimate of points thatwill never be redeemed, an estimate of the points that will eventually beredeemed and the cost of reimbursing hotels and other third parties in respectto other redemption opportunities available to members. These estimates areused to determine the required liability for outstanding points. Actualexpenditures for awards may differ from the actuarially determined liability. Thetotal liability recorded for outstanding points as of December 31, 2006was $421 million.

***Purchase Accounting***

In connection with the HIAcquisition, we allocated the purchase price to the assets acquired, includinggoodwill and other intangible assets, and liabilities assumed based on theirrespective fair values at the acquisition date in accordance with FAS 141 “BusinessCombinations.”  In valuing acquiredassets and assumed liabilities, fair values are based on factors including, butnot limited to, quoted market prices, expected future cash flows, current replacementcost, disposition values of certain assets acquired in the HI Acquisition,market rate assumptions and appropriate discount and growth rates. See “Note 3:Purchase of Hilton International” to our consolidated financial statements underItem 8 for more information.

***Revenue Recognition***

Revenue is generally recognized as services areperformed. Owned and leased hotel revenue represents primarily room rentals andfood and beverage sales from owned, majority owned and leased hotels.

Management fees represent fees earned from hotelsmanaged by us, usually under long-term contracts with the hotel owner. Managementfees include a base fee, which is generally a percentage of hotel revenue, andan incentive fee, which is generally based on a fixed or variable percent ofhotel profits after a stated return threshold to the owner. We recognize basefees as revenue when earned in accordance with the terms of the contract. Ininterim periods we recognize the incentive fees that would be due if the contractwere terminated at the end of the interim period.

Franchise fees represent fees received in connectionwith the licensing of our brand names, usually under long-term contracts withthe hotel owner. Depending on the brand, we charge franchise royalty fees of upto five percent of room revenue. We recognize fee revenue as earned, inaccordance with FAS 45, “Accounting for Franchise Fee Revenue.”

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Timeshare and otherincome primarily consists of earnings from our timeshare operations. Timesharerevenue is generated primarily from the sale and financing of timeshareintervals and operating timeshare resorts. We recognize revenue from deededtimeshare sales in accordance with FAS 66, “Accounting for Real Estate Sales.”  Sales are included in revenue when a minimumof a 10 percent down payment has been received, certain minimum salesthresholds have been attained, the purchaser’s period to cancel for a refundhas expired and the related receivable is deemed to be collectible. We deferrevenue recognition for sales that do not meet these criteria. During periodsof construction, profits from timeshare sales are recognized under thepercentage-of-completion method. Our Hilton City Club timeshare product isaccounted for as a long-term lease with a reversionary interest rather than thesale of a deeded interest in real estate. Hilton City Club sales revenue isrecognized on a straight-line basis over the term of the lease.

We incur certainreimbursable costs on behalf of managed hotel properties and franchisees. Wereport reimbursements received from managed properties and franchisees asrevenue and the costs incurred on their behalf as expenses. These costs, whichrelate primarily to payroll costs at managed properties where we are theemployer, are included in other revenue and expenses from managed andfranchised properties in the consolidated statements of income. Since thereimbursements are made based upon the costs incurred with no added margin, thepresentation of these reimbursable costs has no effect on our operating income,total or per share net income, cash flow or financial position.

***Income Taxes***

We account for income taxes in accordance with FAS109, “Accounting for Income Taxes.”  Theobjectives of accounting for income taxes are to recognize the amount of taxespayable or refundable for the current year and to recognize deferred taxliabilities and assets for the future tax consequences of events that have beenrecognized in our financial statements or tax returns.

Current and deferred taxassets and liabilities are recognized for estimated taxes payable or refundabledue to temporary differences and carryforwards. All available evidence, bothpositive and negative, is considered to determine whether, based on the weightof that evidence, a valuation allowance is needed for some portion or all of adeferred tax asset. Judgment is used in considering the relative impact ofnegative and positive evidence.

***Use of Estimates***

The estimates andassumptions related to notes receivable, long-lived assets, intangible assets,self-insurance, commitments and contingencies, HHonors, purchase accounting,revenue recognition and income taxes are subject to change based on the factorsidentified above. We believe that our estimates and assumptions are reasonableand have resulted in accurate measurement of the related accounts in ourhistorical financial statements in conformity with GAAP. Because estimates areused, it is reasonably likely that there will be some variability betweenprojected results and actual results over time. In addition, given thesignificance of these accounts to our consolidated financial position, thevariability between projected and actual results could be material to ourfinancial position or results of operations.

**DEVELOPMENT ANDCAPITAL SPENDING**

***Overview***

On February 23, 2006, we completed theacquisition of the lodging assets of Hilton Group plc for cash consideration ofapproximately £3.3 billion, equivalent to approximately $5.7 billion as of thetransaction date, excluding acquisition costs. The HI Acquisition was financedwith existing cash on hand and with borrowings under our new senior creditfacilities (see “Liquidity and Capital Resources—Financing” and “Note 3:Purchase of Hilton International” to the consolidated financial statementsunder Item 8). As a result of the HI Acquisition, we added approximately 400properties and 103,000 rooms to our system.

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We also intend to grow our hotel system throughfranchising and the addition of management contracts. We will also continue toinvest in capital improvements and select projects at our owned hotels and thedevelopment of timeshare properties. In addition, we may seek to acquireownership interests in hotel properties on a strategic and selective basis,either directly or through investments in joint ventures.

In addition to theproperties added to our system in the HI Acquisition, we added a total of 223properties, primarily franchises, with approximately 36,000 rooms to our systemduring 2006. A total of 74 properties, primarily franchises, with approximately12,000 rooms were removed from our system in 2006. We believe the continuedstrong performance of our brands has enabled us to significantly enhance ourdevelopment pipeline versus our industry competitors. We have more than 775hotels, primarily franchises, with 110,000 rooms in our development pipeline atDecember 31, 2006. Approximately 90 percent of the hotels in the currentdevelopment pipeline are in the Americas (U.S., Canada, Mexico and SouthAmerica), though international development is expected to comprise anincreasingly larger percentage of our development pipeline over the next fewyears. In 2007, we expect to add approximately 255 hotels and 35,000 roomsto our hotel system. We expect virtually all of this growth to be throughfranchise and management agreements. The actual opening of hotels in ourdevelopment pipeline is subject to various conditions and uncertainties.

We believe our brand growth strategy continues tobenefit from the significant market share premiums most of our brands commandover their respective competitive sets. With 100 representing a brand’s fairshare of the market, our domestic brands (according to Smith Travel Research)posted RevPAR index numbers as follows for 2006: Embassy Suites, 124.7; HamptonInn, 122.9; Homewood Suites by Hilton, 114.3; Hilton Garden Inn, 112.4; Hilton,105.6; and Doubletree, 101.5.

Our ability to grow the number of hotels in our systemis affected by the factors referenced under Item 1A “Risk Factors,” such asinternational, national and regional economic conditions; the effects of actualand threatened terrorist attacks and international conflicts; acts of God, suchas natural disasters; credit availability; relationships with franchisees andproperty owners; and competition from other hotel brands.

In total, we anticipate spending approximately $985million on capital expenditures in 2007, which includes approximately $320million for routine improvements and technology, approximately $315 million fortimeshare projects and approximately $350 million for hotel renovation, hotelinvestment and special projects. Routine improvements include expenditures forequipment, hotel fixtures, and wall and floor coverings. Expenditures requiredto complete our capital spending programs are expected to be financed throughavailable cash flow from operations and general corporate borrowings. To theextent we complete additional asset sales in 2007, capital expenditures can beexpected to decrease. Anticipated capital expenditures are subject to changedue to, among other things, changes in business operations and economicconditions.

We will continue to reviewour owned hotel portfolio for potential repositioning or re-brandingopportunities (see “Liquidity and Capital Resources—Acquisitions andDispositions”) and we may seek to sell certain assets, including assetsacquired in the HI Acquisition. It is our intention to be opportunistic whenevaluating potential asset sales and we will look to sell particular hotelproperties to the extent we can obtain premium prices. We are currentlymarketing for sale certain of our owned and leased hotels, including ten hotelsin continental Europe, the Hilton Caledonian in Scotland and six properties inthe U.S. We are also marketing for sale the Scandic brand of hotels. Asdiscussed in “Note 5: Acquisitions and Dispositions” to the consolidatedfinancial statements under Item 8, until the necessary approvals have beenreceived and substantive conditions to the buyer’s obligation to perform havebeen satisfied, we do not consider a sale to be probable. When we sell a hotelproperty, it is generally our preference to retain a management or franchiseagreement; however, we may sell hotels without retaining our brand.

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***Hotel Ownership***

Capital expendituresduring 2006 excluding timeshare projects totaled $613 million, consistingprimarily of routine improvements and renovation projects at our owned andleased hotels. The 2006 expenditures include approximately $92 million forrenovations at the Waldorf=Astoria, Hilton New York and Hilton Hawaiian Village.Renovation projects are expected to continue at these three properties in 2007.We continue to place a priority on making appropriate capital expenditures tomaintain and upgrade our owned assets.

***Managing andFranchising***

Total property additionsto our system in 2006 included 204 franchise properties, 17 managed propertiesowned by third parties and two leased properties. These additions included 32properties which, due in part to the market share leadership of our brands,were converted to our family of brands in 2006. The 32 conversions included 16Doubletrees, eight Hiltons, five Hamptons and three Hilton Garden Inns.

Inearly 2006, we introduced a new brand line, the Waldorf=Astoria Collection.This elite brand designation debuted with New York’s legendary Waldorf=Astoria,along with three world-class luxury resorts managed by us: the Grand WaileaResort Hotel & Spa on the island of Maui in Hawaii; the ArizonaBiltmore Resort & Spa in Phoenix; and the La Quinta Resort &Club in La Quinta, California. Also in 2006, we commenced management of theQasr Al Sharq in Jeddah, Saudi Arabia. We anticipate that the Waldorf=AstoriaCollection will continue to grow primarily through branding of existinglandmark or boutique hotels and opening newly built properties in selectcities.

In the fourth quarter of2006, we announced plans to form a joint venture with real estate developer DLFLimited to develop hotel properties and serviced apartments in India. Thejoint-venture company plans to develop and own 50 to 75 mid-scale and extended-stayhotels over the next seven years. We also announced an alliance with DeutscheAsset Management and HQ Asia Pacific in which they will develop an initial25 Hilton Garden Inns in Beijing, Shanghai and Tianjin, China, which areexpected to be franchised hotels.

***Timeshare***

We are currentlydeveloping new timeshare projects in Las Vegas, Nevada, Orlando, Florida, New York,New York, Honolulu and Waikoloa, Hawaii. The Waikoloa (Kohala Coast VacationSuites) project opened its remaining 98 units in 2006; this project contains120 units in total. At our International Drive property in Orlando (TuscanyVillage), the first six phases totaling 376 units are open, including 70 unitsopened in January 2007. Construction has begun on the final 64 units,which are scheduled to open in spring 2008. Also in Orlando, we added 48 unitsin 2006 to our existing property adjacent to Sea World. The second phase of ourproperty on the Las Vegas Strip, which consists of 431 units, was completed in2006. Approximately 45 percent of the planned four-tower, 1,582-unitproject has been completed.

In 2006, we beganconstruction of a new timeshare project in Honolulu, Hawaii at the HiltonHawaiian Village. Upon completion scheduled for late 2008, the Waikikian Toweris expected to contain 331 units. We also began development of a new project inWaikoloa, Hawaii (“Kings Land”). Phase I of the Kings Land development isexpected to contain 198 units and is scheduled for completion in 2010. InSeptember 2006, we announced our development of a new timeshare project inNew York, New York on West 57th Street. Uponcompletion in early 2009, the 57th Street Tower is expected to contain 161 units.In 2007, we began construction of our new timeshare project at Ruby Lake inOrlando. Phase I of the Ruby Lake project is expected to contain 141 units andis scheduled for completion in 2009.

As we are currentlyconstructing several new timeshare projects, our timeshare business is expectedto be negatively impacted, from a reporting standpoint, bypercentage-of-completion accounting associated with new projects in 2007. Weexpect the impact of percentage-of-completion accounting on 2007 results toreverse in 2008.

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Capitalexpenditures associated with our timeshare operations during 2006 totaled $261million. Timeshare capital expenditures are expected to increase toapproximately $315 million in 2007 as we continue to invest in the developmentof new product in Las Vegas, Orlando, Hawaii and New York. The capitalexpenditures associated with our non-lease timeshare products are reflected asinventory until the timeshare intervals are sold. We also provide financing tothe buyers of our timeshare intervals. During 2006, we issued approximately $335million of loans related to timeshare financings. Principal collections ontimeshare notes during the same period were approximately $226 million.

**LIQUIDITY AND CAPITAL RESOURCES**

***Overview***

Net cash provided byoperating activities totaled $548 million, $486 million and $652 million forthe years ended December 31, 2004, 2005 and 2006, respectively. The netincrease in 2006 relates primarily to improved operating results and operatingcash flow as a result of the HI Acquisition, partially offset by net cash usedfor timeshare construction in excess of timeshare sales and increasedrestricted cash balances. The net decrease in 2005 compared to 2004 relatesprimarily to net cash used by timeshare construction in excess of timesharesales and a reduction in deferred income taxes resulting from the sale ofassets in 2005. These decreases were partially offset by improved operatingresults.

Net cash provided byoperating activities in 2004 and 2005 each benefited from a reduction in thevaluation allowance for capital loss tax carryforwards which reduced theprovision for income taxes (See “Liquidity and Capital Resources—Acquisitionsand Dispositions” below, and “Note 13: Income Taxes” to the consolidatedfinancial statements under Item 8). Our ability to utilize capital loss taxcarryforwards to reduce our provision for income taxes is dependent on theavailability of capital loss tax carryforwards and the existence oftransactions that enable these capital loss carryforwards to be utilized. Therefore,it should not be assumed that such benefits will be available to us in thefuture.

Net cash used in investingactivities totaled $4.598 billion in 2006 and net cash provided by investingactivities totaled $620 million in 2005. The net cash used in investingactivities in 2006 was primarily due to the HI Acquisition (see “Note 3:Purchase of Hilton International” to the consolidated financial statementsunder Item 8), the acquisition of management contracts and higher capitalexpenditures. These increases in cash used in investing activities werepartially offset by an increase in proceeds from asset sales in 2006 over theprior year and an increase in payments received on notes and other. Net cashused in investing activities totaled $132 million in 2004 and net cash providedby investing activities totaled $620 million in 2005. The increase in net cashprovided by investing activities was primarily due to an increase in netproceeds from asset dispositions in 2005 compared to the prior year, partiallyoffset by higher capital expenditures.

Net cash used in financingactivities totaled $255 million in 2005 and net cash provided by financingactivities totaled $2.918 billion in 2006. The net change between periods isprimarily due to the new senior credit facilities used to partially fund the HIAcquisition, net of repayments, and share repurchases in the prior year. Netcash used in financing activities totaled $122 million in 2004 compared to $255million in 2005. The increase in 2005 reflects increased share repurchases andlower proceeds from the issuance of common stock, reflecting a lower volume ofstock option exercises, partially offset by a lower level of debt repayments inthe 2005 period.

Our ratio of earnings tofixed charges for the years ended December 31, 2004, 2005 and 2006 was2.2x, 3.1x and 2.3x, respectively.

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Cash and equivalentstotaled $138 million at December 31, 2006, a decrease of $1.016 billionfrom December 31, 2005. The decrease in cash and equivalents is dueprimarily to cash being used to partially fund the HI Acquisition. Restrictedcash totaled $293 million, an increase of $111 million from the prior yearresulting primarily from an increase in cash reserves related to ourcollateralized borrowings and the addition of three consolidated non-controlledentities as part of the HI Acquisition. Restricted cash includes cash relatedto certain consolidated hotels, the use of which is restricted for hotelpurposes under the terms of collateralized borrowings; refundable deposits onthe sale of timeshare intervals; and cash balances held by consolidatednon-controlled entities. We believe that our operating cash flow, availableborrowings under our revolving credit facilities and our ability to obtainadditional financing through various financial markets are sufficient to meetour liquidity needs (see “Liquidity and Capital Resources—Financing”). However,any projections of future financial needs and sources of working capital aresubject to uncertainty. See “Results of Operations” below and “AdditionalInformation—Forward-Looking Statements” under Item 1 and “Risk Factors” underItem 1A for further discussion of conditions that could adversely affect ourestimates of future financial needs and sources of working capital.

***Financing***

Inconnection with the HI Acquisition in February 2006 (see “Note 3: Purchaseof Hilton International” to the consolidated financial statements under Item8), we entered into new senior credit facilities in an initial aggregateprincipal U.S. dollar equivalent of approximately $5.75 billion with asyndicate of financial institutions. These facilities replaced our $1 billionrevolving credit facility and are secured by a pledge of the capital stock ofcertain of our wholly owned subsidiaries. The senior credit facilities consistof the following:

·       U.S.Dollar Denominated Revolver—5 year, $3.25 billion available in U.S. dollars,British Pounds, Euros and Swedish Kronor or other currencies acceptable to theadministrative agent. Interest is at a variable rate depending upon ourleverage ratio and senior debt ratings, with initial borrowings at applicableLondon Interbank Offered Rate (“LIBOR”) plus 150 basis points (which includes a25 basis point annual facility fee). The capacity under our revolver was alsoused to support certain outstanding letters of credit. Total revolving debtcapacity of approximately $1.42 billion was available to us at December 31,2006.

·       ForeignCurrency Denominated Term Loan A—5 year, approximate equivalent of $2.32billion at December 31, 2006, denominated in £675 million, €675million and Australian $140 million. Interest is at a variable rate dependingupon our leverage ratio and senior debt ratings, with initial borrowings atapplicable LIBOR plus 150 basis points.

·       U.S.Dollar Denominated Term Loan B—7 year, $500 million term loan available only inU.S. dollars. Interest at LIBOR plus 137.5 basis points.

We also have the option toincrease the credit facilities by $500 million. At December 31, 2006, wehave an aggregate principal U.S. dollar equivalent of approximately $3.219billion outstanding under these facilities.

Subsequent to ourannouncement in December 2005 of our agreement to acquire the lodgingassets of Hilton Group plc, Standard & Poor’s Ratings Group loweredour senior debt rating from BBB- to BB. In addition, Moody’s Investor Serviceslowered our senior debt rating from Baa3 to Ba2. These downgrades are reflectedin the interest rates and facility fee of our $5.75 billion senior creditfacilities. On February 26, 2007, Moody’s Investor Services upgraded oursenior debt rating to Ba1.

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Under the terms of thesenior credit facilities, proceeds, if any, from the sale of certain ownedproperties acquired as part of the HI Acquisition are required to be used forthe repayment of our senior credit facilities. In addition, we expect thatexcess cash flow, if any, will be used to repay outstanding debt balances.

In October 1997, wefiled a shelf registration statement with the Securities and ExchangeCommission registering up to $2.5 billion in debt or equity securities. At December 31,2006, available financing under the shelf totaled $825 million. The terms ofany additional securities offered under the shelf will be determined by marketconditions at the time of issuance.

Provisionsunder various loan agreements require us to comply with certain covenants whichinclude limiting the amount of our outstanding indebtedness. Our revolvingcredit facilities contain two significant financial covenants: a leverage ratioand debt service coverage ratio. We are in compliance with our financialcovenants as of December 31, 2006.

Provisions of thefinancing agreement related to our 7.95% collateralized borrowings due 2010require that certain cash reserves be maintained and also restrict the transferof excess cash generated by the related properties to us if net cash flow fallsbelow a specified level (the cash trap). The cash trap became effective in 2003due to reduced cash flow from the collateralized properties, primarily theHilton San Francisco. As of December 31, 2006, cash restricted under theterms of the collateralized borrowings, including required reserves and thecash trap, totaled $214 million. The impact of the cash trap, which is expectedto remain in effect throughout 2007, is not expected to have a material impacton our liquidity.

As of December 31,2006, approximately 53% of our long-term debt, including the impact of interestrate swaps and excluding non-recourse debt and capital lease obligations ofnon-controlled entities, was floating rate debt. Our total debt, excludingnon-recourse debt and capital lease obligations, has a weighted-average life ofapproximately 6.1 years and a weighted-average interest rate of approximately 6.6%.

The following tablesummarizes our significant contractual obligations as of December 31,2006, including long-term debt and operating lease commitments:

| ** **                                                                        | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                                                                        | ** ** | ** ** | ** ** | **Less than**                        | ** ** | **1 – 3** | ** ** | **4 – 5** | ** ** | **After** | ** ** |
| **Contractual Obligations (in millions)**                          | ** ** | ** ** | ** ** | **Total**                                 | ** ** | **1 year** | ** ** | **years** | ** ** | **years** | ** ** | **5 years** | ** ** |
| Long-term debt                                                                    |       |       | $          | 7,468                                     |       |   |   | 522 |   |   |   | 1,447 |   |   |   | 3,810 |   |   |   | 1,689 |   |   |
| Operating leases                                                                  |       |       | 4,159      |                                      |       |   | 294 |   |   |   | 564 |   |   |   | 526 |   |   |   | 2,775 |   |   |
| Less:  Non-recourse debt and capital lease obligations of non-controlled entities |       |       | (500       | )                                         |       |   | (110 | ) |   |   | (25 | ) |   |   | (26 | ) |   |   | (339 | ) |   |
| Total contractual  obligations                                                    |       |       | $          | 11,127                                    |       |   |   | 706 |   |   |   | 1,986 |   |   |   | 4,310 |   |   |   | 4,125 |   |   |
|                                                                                   |            |            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Both total debt andoperating lease commitments increased from December 31, 2005 as a resultof the HI Acquisition (see “Note 3: Purchase of Hilton International” and “Note11: Long-Term Debt” to the consolidated financial statements under Item 8 forfurther information). Our total debt includes debt and capital leaseobligations related to variable interest entities consolidated under FIN 46(R) thatare non-recourse to us. These balances, totaling $500 million, have beendeducted in arriving at the total contractual obligations as of December 31,2006. These amounts are reflected on our consolidated balance sheets asnon-recourse debt and capital lease obligations of non-controlled entities.

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***DevelopmentFinancing and Other Commercial Commitments***

Wehave issued guarantees in connection with development financing programs inorder to support the growth of our brands. The following table summarizes ourdevelopment financing and other commercial commitments as of December 31,2006:

| ** **                                              | ** ** | ** ** | ** ** | **Amount of Commitment Expiration  Per Period** | ** ** |
|---------------------------------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|
| ** **                                              | ** ** | ** ** | ** ** | **Less than**                                                  | ** ** | **1 – 3** | ** ** | **4 – 5** | ** ** | **After** | ** ** |
| **Commercial Commitments (in millions)** | ** ** | **Total**  | ** ** | **1 year**                                                     | ** ** | **years** | ** ** | **years** | ** ** | **5 years** | ** ** |
| Letters of credit                                       |       |       | $          | 110                                                                 |       |   |   | 110 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Guarantees                                              |       |       | 43         |                                                                |       |   | 4 |   |   |   | 19 |   |   |   | — |   |   |   | 20 |   |   |
| Total commercial  commitments                           |       |       | $          | 153                                                                 |       |   |   | 114 |   |   |   | 19 |   |   |   | — |   |   |   | 20 |   |   |

 

See “Note 18: Commitmentsand Contingencies” to the consolidated financial statements under Item 8 forfurther discussion of our development financing and other commercialcommitments.

***Acquisitions and Dispositions***

InFebruary 2006, we completed the acquisition of the lodging assets ofHilton Group plc (see “Note 3: Purchase of Hilton International” to theconsolidated financial statements under Item 8). Additionally, during 2006, weacquired four long-term management contracts and sold 11 wholly owned hotels,three joint venture interests, one leased hotel and the LivingWell health clubs(see “Note 5:  Acquisitions andDispositions” to the consolidated financial statements under Item 8).

***Stockholders’ Equity***

In the 2005 third quarter, our Board of Directorsapproved an increase to our common stock dividend of $.02 per share to $.04 pershare. Annual dividends paid on common shares were $.08, $.12 and $.16 per sharein 2004, 2005 and 2006 respectively.

In 2004, we repurchasedapproximately 2.3 million shares of our common stock at a total cost ofapproximately $48 million. During 2005, we repurchased approximately12.3 million shares of our common stock at a total cost of approximately$271 million. No shares were repurchased in 2006. The timing of stock purchasesis made at the discretion of management. As of December 31, 2006,approximately 44.7 million shares remained authorized for repurchase.

**OFF-BALANCE SHEETARRANGEMENTS**

We have outstandingguarantees issued in connection with our development financing programs andother guarantees of debt and other obligations of unconsolidated affiliates andthird parties, as well as commitments under letters of credit. See “Note 18:Commitments and Contingencies” to the consolidated financial statements underItem 8. We maintain investments in unconsolidated affiliates, including hoteljoint ventures as well as other entities that support the operations of ourhotel properties. We do not have investments in or obligations with respect tounconsolidated special purpose entities.

**RESULTS OFOPERATIONS**

The following discussionpresents an analysis of our results of operations for the three years ended December 31,2006. Our operations consist of three reportable segments which are based onsimilar products or services: Hotel Ownership, Managing and Franchising, andTimeshare.

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**FISCAL 2006COMPARED WITH FISCAL 2005**

***Overview***

Asummary of our consolidated results for the years ended December 31, 2005and 2006 is as follows:

| ** **       | ** ** | **2005**                                                             | ** ** | **2006** | ** ** | **% Change** | ** ** |
|------------------|------------|----------------------------------------------------------------------|------------|----------|------------|-------------------|------------|
| ** **       | ** ** | **(in millions, except per share amounts)** | ** ** |
| Revenue          |       |                                                                 | $          | 4,437    |       |              |       | 8,162 |   |   |   | 84 | % |   |
| Operating income |       |                                                                 | 805        |     |       |              | 1,274      |   |   |   | 58 |   |   |
| Net income       |       |                                                                 | 460        |     |       |              | 572        |   |   |   | 24 |   |   |
| Basic EPS        |       |                                                                 | 1.20       |     |       |              | 1.49       |   |   |   | 24 |   |   |
| Diluted EPS      |       |                                                                 | 1.13       |     |       |              | 1.39       |   |   |   | 23 |   |   |

 

Revenue and operating income in 2006 benefited fromthe HI Acquisition and from strong rate increases and high demand in most ofour major markets, which resulted in significant RevPAR gains at many of ourcomparable owned hotels. Management and franchise fee revenue was our highestever, increasing 51 percent over the prior year as a result of the HIAcquisition, continued RevPAR growth and the addition of new units. Results in2006 also benefited from strong results at our timeshare business. Net incomein 2006 was impacted by increases in depreciation, amortization and interestexpense due to the HI Acquisition, and benefited from net gains on foreigncurrency transactions. Net income in 2005 benefited from higher gains onproperty transactions compared to 2006, as well as a lower effective tax ratecompared to 2006.

Revenue from owned hotels totaled $2.521 billion in2006, a 23 percent increase from $2.049 billion in 2005, and total expenses in2006 were up 22 percent to $1.780 billion. Strong results at our comparableowned hotels and the impact of the HI Acquisition were partially offset by theimpact of asset sales and renovation disruptions in New York and Hawaii. Totalrevenue from comparable owned hotels (excluding the impact of asset sales,revenue from our two owned properties in New Orleans which were impacted byHurricane Katrina, and the results of the acquired HI owned hotels) was upeight percent to $1.675 billion from $1.558 billion in the 2005 period, whilecomparable owned hotel expenses increased seven percent to $1.180 billion in2006 from $1.098 billion in 2005.

Results at our comparable owned properties benefitedfrom continued strong demand and average rate increases from groups, businessand leisure travelers. Results in Chicago, San Francisco and Phoenix wereparticularly strong in 2006, each reporting double-digit RevPAR gains over theprior year. RevPAR growth at our owned hotels in New York City (theWaldorf=Astoria and the Hilton New York) and at the Hilton Hawaiian Village wassignificantly impacted by renovation disruptions, though all three propertiesachieved strong gains in average daily rate (“ADR”). Renovation disruptions areexpected to continue to impact these three properties in 2007. RevPAR forcomparable North American owned properties increased 8.8 percent for the year,with occupancy rising 0.2 points to 78.7 percent and ADR up 8.6 percent to$199.24.

Margins at our comparable North American owned hotels(revenue less expenses as a percentage of revenue for comparable owned hotels)improved 10 basis points in 2006 to 29.6 percent. The aforementioned renovationdisruptions combined with higher insurance and marketing costs in the yearnegatively impacted margins by approximately 170 basis points. Cost-per-occupied-roomincreased 7.7 percent in 2006.

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Leased hotel revenue totaled $2.347 billion in 2006compared to $111 million in 2005, while leased hotel expenses were $1.985billion in the current year versus $99 million in the prior year. In the 2006period, leased hotel revenue and expenses include approximately 200 leasedhotels acquired in the HI Acquisition. Prior to the HI Acquisition, we operatedsix leased hotels. Results from the leased hotels acquired in the HIAcquisition reflect business strength in the U.K., continental Europe and theNordic region. Due to the relatively large size of the lease payments requiredin a hotel operating lease, the leased properties operate at marginssignificantly lower than our owned hotels. Leased hotel revenue and expensesare included with our owned hotels in our Hotel Ownership segment results.

Operating income from unconsolidated affiliates increased$13 million in 2006 to $57 million. The increase relates primarily to theaddition of unconsolidated affiliates acquired in the HI Acquisition combinedwith improved operating results over the 2005 period. Operating income fromunconsolidated affiliates is included in our Hotel Ownership segment results.

Management and franchise fee revenue in 2006 increased$232 million or 51 percent to $684 million. Fee revenue is based primarily onrooms revenue at franchise properties and total operating revenue (and to alesser extent gross operating profits or cash flow) at managed properties. Thestrong demand among business, groups and leisure travelers that benefited ourowned hotels also resulted in strong RevPAR gains for each of our brands on asystem-wide basis (including managed and franchised properties). The increasein management and franchise fees in 2006 also reflects $109 million of feerevenue as a result of the HI Acquisition and $26 million of contracttermination fees related to the Hilton Times Square and the Embassy SuitesBattery Park in New York. The Times Square and Battery Park properties weresold in 2006 and we entered into franchise agreements with the new owners. Additionally,strong domestic development activity as well as the large number of conversionsto management and franchise contracts resulting from our owned asset salesfavorably impacted fee revenue.

Revenue from our timeshare operations (included intimeshare and other income) totaled $650 million, an increase of $96 million or17 percent from $554 million in 2005. Timeshare expenses in 2006 (included inother operating expenses) were $491 million compared to $420 million in theprior year. Timeshare revenue and earnings are generated through developingtimeshare resorts and selling the related intervals, financing the sale oftimeshare intervals and through management of timeshare resorts. Overalltimeshare unit sales were up two percent in 2006, while the average unit salesprice increased 10 percent across the system. Timeshare revenue andprofitability also benefited from higher financing income and the recognitionof previously deferred revenue and expenses due to the requiredpercentage-of-completion accounting.

Depreciation and amortization expense increased $142million in 2006 to $441 million. This net increase reflects additionaldepreciation and amortization associated with the tangible and intangibleassets acquired in the HI Acquisition, partially offset by a reduction indepreciation expense associated with asset sales.

Results in 2005 includeimpairment loss and related costs totaling $7 million, which includes a pre-taxcharge of $5 million to reduce the value of an owned hotel and our minorityinterests in eight joint venture hotels to their estimated fair values and a $2million pre-tax charge representing the write down of a non-hotel cost basisinvestment to its estimated fair value. The $5 million charge is included inour Hotel Ownership segment results, while the $2 million charge is notallocated among our reportable segments. There were no impairment losses in the2006 period.

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***Corporate Activity***

Corporate expense totaled $171 million in 2006, anincrease of $68 million, or 66 percent, from 2005. The increase is primarilythe result of incremental corporate costs related to the HI Acquisition, $12million of non-recurring charges related to the HI Acquisition and theexpensing of stock options under FAS 123(R) (see “Note 4: Stock BasedCompensation” to the consolidated financial statements under Item 8). Otheroperating expenses in 2006 include a $12 million pre-tax charge to increase aperformance guarantee reserve for a managed hotel (see “Note 18: Commitmentsand Contingencies” to the consolidated financial statements under Item 8). Corporateexpense is not allocated among our reportable business segments.

Interest and dividend income decreased $5 millioncompared to the prior year. This decrease reflects higher cash balances in 2005due primarily to proceeds from asset sales prior to the HI Acquisition. Interestexpense, net of amounts capitalized, increased $239 million compared to 2005,due primarily to borrowings under our new senior credit facilities in order topartially fund the HI Acquisition. Net interest from unconsolidated affiliatesand non-controlled interests increased by $19 million to $45 million in 2006,primarily due to the addition of non-consolidated interests as part of the HIAcquisition.

The net gain on foreign currency transactions of $24million in 2006 is primarily the result of movement in the value of the BritishPound prior to our completion of the HI Acquisition, which was funded inBritish Pounds. The net gain also includes the impact of foreign currencymovements on intercompany loans that are deemed to be short-term in nature.

The $72 million net other gain in 2006 includes netgains from asset sales of $1 million (see “Note 5: Acquisitions andDispositions” to the consolidated financial statements under Item 8), a$33 million gain from settlement recoveries related to mold found in certainareas of the Hilton Hawaiian Village in 2002, a $24 million gain on sales ofcertain marketable securities, a $17 million net gain related to insuranceproceeds received in excess of the book value of assets written off as a resultof damage from Hurricane Katrina (see “Note 19: Insurance Recoveries” to theconsolidated financial statements under Item 8), a $3 million pre-tax loss onderivative instruments (see “Note 2: Summary of Significant Accounting Policies—DerivativeInstruments” to the consolidated financial statements under Item 8) based onthe market value of the derivatives at December 31, 2006, a $3 millionloss on the termination of various management and franchise contracts to whichwe had value assigned, and $3 million in net other gains. The $103 million netother gain in 2005 includes gains from asset sales of $112 million, a $10million loss on our foreign currency options based on the market value of theoptions at December 31, 2005, a $3 million gain on our oil futuresderivative, and $2 million of other losses.

The loss from non-operating affiliates totaling $17million and $16 million in 2005 and 2006, respectively, represents equitylosses associated with our 24 percent minority interest in a coal-basedsynthetic fuel facility. The synthetic fuel produced at this facility qualifiesfor tax credits based on Section 45K of the Internal Revenue Code; these creditsreduce our provision for income taxes (see “Note 5: Acquisitions andDispositions” to the consolidated financial statements under Item 8).

The effective income tax rate for 2006 increased to31% from 26% in 2005. The effective rate in 2006 reflects the utilization of Section 45Ksynthetic fuel production credits of approximately $11 million and a netbenefit of $15 million primarily due to the favorable resolution of IRS auditsfor the years 2002 and 2003 and the required treatment of certain foreigncurrency gains. The effective rate in 2005 includes a benefit of $28 millionresulting from closures of IRS audits, a reduction in the valuation allowancefor capital loss tax carryforwards totaling $34 million associated with assetsales and the utilization of Section 45K synthetic fuel production creditsof approximately $17 million. The 2005 effective tax rate also includes netstate tax credits of approximately $2 million. Our effective tax rate isdetermined by the level and composition of pre-tax income and the mix of incomesubject to varying foreign, state and local taxes.

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Excluding the aforementioned items, our effective ratewas 34% in 2006 and 39% in 2005. The reduction in effective rate for 2006compared to 2005 is primarily the result of the HI Acquisition. In 2005 andearlier, our tax liability was principally comprised of U.S. and state taxesimposed on domestic income. As a result of our acquisition of HI, our taxliability is comprised of both U.S. and foreign taxes and is impacted by thecomposition of pre-tax income by jurisdiction. Income from foreignjurisdictions is subject to lower levels of tax resulting in an overallworldwide blended effective rate that is lower than our 2005 effective rate.

Minority andnon-controlled interests expense, net, decreased $5 million to $7 million in2006, primarily due to a distribution to our minority partner on the sale ofthe Hilton Glendale in 2005 (see “Note 5: Acquisitions and Dispositions” to theconsolidated financial statements under Item 8).

***Hotel Statistics***

RevPAR for U.S. owned hotels and system-wide for theyears ended December 31, 2005 and 2006 is as follows:

| ** ** | ** ** | **North America (U.S. owned)(1)** | ** ** |
|------------|------------|--------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                         | ** ** | **2006** | ** ** | **% Change** | ** ** |
| Hilton     |       |                                             | $          | 151.85 |   |   |   | 165.03 |   |   |   | 8.7 | % |   |
| All other  |       |                                             | 91.45      |   |   |   | 101.06 |   |   |   | 10.5 |   |   |
| Total      |       |                                             | 144.05     |   |   |   | 156.73 |   |   |   | 8.8 |   |   |

 

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(1)          Statisticsare for comparable U.S. hotels, and include only hotels in the system as of December 31,2006, and owned by us since January 1, 2005. Comparable hotels exclude ourowned hotels in New Orleans due to the interruption in operations as a resultof Hurricane Katrina.

| ** **                 | ** ** | **System-wide(2)** | ** ** |
|----------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2005**           | ** ** | **2006** | ** ** | **% Change** | ** ** |
| Hilton                     |       |               | $          | 99.50 |   |   |   | 109.11 |   |   |   | 9.7 | % |   |
| Hilton Garden Inn          |       |               | 72.70      |   |   |   | 79.55 |   |   |   | 9.4 |   |   |
| Doubletree                 |       |               | 79.30      |   |   |   | 87.60 |   |   |   | 10.5 |   |   |
| Embassy Suites             |       |               | 95.85      |   |   |   | 105.05 |   |   |   | 9.6 |   |   |
| Homewood Suites  by Hilton |       |               | 76.19      |   |   |   | 82.14 |   |   |   | 7.8 |   |   |
| Hampton                    |       |               | 62.87      |   |   |   | 68.66 |   |   |   | 9.2 |   |   |
| Scandic                    |       |               | 67.11      |   |   |   | 71.58 |   |   |   | 6.7 |   |   |
| Conrad                     |       |               | 107.90     |   |   |   | 120.94 |   |   |   | 12.1 |   |   |
| Other                      |       |               | 99.98      |   |   |   | 115.36 |   |   |   | 15.4 |   |   |
| Total                      |       |               | 82.46      |   |   |   | 90.27 |   |   |   | 9.5 |   |   |

 

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(2)          Statistics are presentedpro forma as if the HI Acquisition had occurred January 1, 2005. Includeshotels in our system as of December 31, 2006 which were in our hotelsystem or the hotel system of HI since January 1, 2005. Comparable hotelsexclude data for HI franchise hotels and our owned hotels in New Orleans due tothe interruption in operations as a result of Hurricane Katrina.

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**FISCAL 2005COMPARED WITH FISCAL 2004**

***Overview***

Asummary of our consolidated results for the years ended December 31, 2004and 2005 is as follows:

| ** **       | ** ** | **2004**                                                             | ** ** | **2005** | ** ** | **% Change** | ** ** |
|------------------|------------|----------------------------------------------------------------------|------------|----------|------------|-------------------|------------|
| ** **       | ** ** | **(in millions, except per share amounts)** | ** ** |
| Revenue          |       |                                                                 | $          | 4,146    |       |              |       | 4,437 |   |   |   | 7 | % |   |
| Operating income |       |                                                                 | 658        |     |       |              | 805        |   |   |   | 22 |   |   |
| Net income       |       |                                                                 | 238        |     |       |              | 460        |   |   |   | 93 |   |   |
| Basic EPS        |       |                                                                 | .62        |     |       |              | 1.20       |   |   |   | 94 |   |   |
| Diluted EPS      |       |                                                                 | .60        |     |       |              | 1.13       |   |   |   | 88 |   |   |

 

Results in 2005 benefited from strong increases inroom nights and ADR across all business segments, with particularly strongincreases in ADR, resulting in double-digit RevPAR growth and marginimprovement at many of our comparable owned hotels. Management and franchisefee revenue increased 18 percent over 2004 as a result of RevPAR growth and theaddition of new units. Results in 2005 also benefited from strong results atour timeshare business. Net income in 2005 also benefited from gains associatedwith the sale of owned hotels and a reduction in the provision for income taxes.Revenue growth was adversely impacted by the aforementioned asset sales and theimpact of Hurricane Katrina on our two owned hotels in New Orleans.

Revenue from owned hotels totaled $2.049 billion in2005, a one percent decrease from $2.062 billion in 2004, and total expenses in2005 were down three percent to $1.459 billion. Strong results at ourcomparable owned hotels were partially offset by the impact of asset sales andHurricane Katrina. Our two owned hotels in New Orleans are excluded from thecomparable numbers due to interruptions in operations caused by the hurricane. Excludingthe impact of assets sales and our two owned hotels in New Orleans, ownedhotel revenue in 2005 was up 10 percent to $1.670 billion from $1.519 billionin 2004, while owned hotel expenses increased seven percent to $1.190 billionfrom $1.109 billion in 2004.

Results at our comparable owned properties benefitedfrom continued strong demand and average rate increases from groups, businessand leisure travelers, including double-digit rate and RevPAR increases fromthe leisure and business segments. Results in New York and Hawaii wereparticularly strong in 2005. Strong results were also reported at our ownedhotels in Boston, Washington D.C. and Atlanta, while San Francisco remainedcomparably weak. RevPAR for comparable owned properties increased 11.9 percentfor the year, with occupancy rising 2.2 points to 77.3 percent and ADR up 8.7 percentto $178.35. Approximately 75 percent of the RevPAR increase in comparable ownedhotels was attributable to rate gains.

While strong RevPAR increases led to solid growth inrooms revenue, other comparable owned hotel revenue also performed well, withfood and beverage revenue increasing seven percent over 2004. Group roomnights, which typically generate higher margin food and beverage business, wereup two percent at our comparable owned hotels. Margins at our comparable ownedhotels (revenue less expenses as a percentage of revenue for comparable ownedhotels) improved 180 basis points in 2005 to 28.8 percent. Cost-per-occupied-roomincreased 4.5 percent in 2005, reflecting a 17 percent increase in energycosts.

Leased hotel revenue totaled $111 million in 2005,consistent with 2004, while leased hotel expenses decreased two percent to $99million. Operating income from unconsolidated affiliates decreased $5 millionin 2005 to $44 million. The decrease relates primarily to a $10 million pre-taxgain in the 2004 period, resulting from a joint venture that developed acondominium project in Myrtle Beach, South Carolina. This decrease waspartially offset by improved results at joint venture properties and thetermination or sale of certain joint venture interests that generated losses in2004.

46

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Management and franchise fee revenue increased $68million or 18 percent to $452 million in 2005. The strong demand amongbusiness, groups and leisure travelers that benefited our owned hotels alsoresulted in strong RevPAR gains for each of our brands on a system-wide basis(including managed and franchised properties). The increase in management andfranchise fees in 2005 also reflects the addition of new units to our system ofhotels.

Revenue from our timeshare operations totaled $554million, an increase of $133 million or 32 percent from $421 million in 2004.Timeshare expenses in 2005 were $420 million compared to $316 million in theprior year. Overall timeshare unit sales were up eight percent in 2005,reflecting continued strong sales at our projects in Hawaii, Las Vegas andOrlando. The average unit sales price increased two percent across the system. Timesharerevenue and profitability also benefited from higher resort fees and higherfinancing income due to increased sales. Timeshare results in 2005 also reflectthe recognition of previously deferred revenue and expenses at our Waikoloaproject, due to the required percentage-of-completion accounting. Constructionat the Waikoloa project was approximately 75 percent complete at the end of2005. In contrast, construction was not beyond a preliminary stage at the endof 2004.

Depreciation and amortization expense decreased $31million in 2005 to $299 million, primarily due to asset sales and loweramortization expense related to certain long-term management and franchiseagreements that were either terminated or expired.

Results in 2005 includeimpairment loss and related costs totaling $7 million, which includes a pre-taxcharge of $2 million related to an owned hotel and a $3 million pre-tax chargerelated to our minority interests in eight joint venture hotels to reduce theirrespective carrying values to their estimated fair values. The 2005 charge alsoincludes a $2 million pre-tax charge representing the write down of a non-hotelcost basis investment to its estimated fair value. The $5 million impairmentcharge is included in our Hotel Ownership segment results, while the $2 millioncharge on the non-hotel investment is not allocated among our reportablesegments. Results in 2004 include impairment loss and related costs totaling $5 million.This pre-tax charge was to reduce the value of an owned hotel to its estimatedfair value and is included in Hotel Ownership segment results.

***Corporate Activity***

Corporate expense totaled $103 million in 2005, anincrease of $18 million from 2004. The increase is primarily the result of increasedexpense associated with stock-based compensation, increased hotel team memberperformance awards and contributions to Hurricane Katrina relief efforts.

Interest and dividend income in 2005 increased $6million compared to 2004. This increase reflects higher cash balances in 2005due primarily to proceeds from asset sales. This increase was partially offsetby lower interest income due to the repayment by Caesars Entertainment, Inc.of the $325 million 7% Senior Notes in July 2004. Interest on the notes isreflected as both interest income and interest expense in our consolidatedstatements of income through repayment in July 2004. Interest expense, netof amounts capitalized, decreased $15 million compared to 2004, due primarilyto the aforementioned repayment by Caesars.

The $103 million net other gain in 2005 includes gainsfrom asset sales of $112 million, a $10 million loss on our foreigncurrency options based on the market value of the options at December 31,2005, and a $3 million gain on our oil futures derivative based on the marketvalue of the contract at December 31, 2005. Also included in 2005 is a netloss of $1 million related to the write-off of several long-term management andfranchise agreements which were terminated during the year and a $1 millionloss on the disposition of other fixed assets. The $5 million net other loss in2004 represents the sale of two Doubletree properties, the write off of thevalue assigned to several long-term management and franchise agreements whichwere terminated during the year and a loss due to the fair market valueadjustment of our derivative instruments, partially offset by the gain from thesale of certain investments.

47

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The loss from non-operating affiliates of $6 millionand $17 million in 2004 and 2005, respectively, represents equity lossesassociated with our 24 percent minority interest in a coal-based synthetic fuelfacility. The synthetic fuel produced at this facility qualifies for taxcredits based on Section 45K of the Internal Revenue Code; these creditsreduce our provision for income taxes. We acquired our minority interest in August 2004,which results in the comparably low amount in that year.

The effectiveincome tax rate for 2005 decreased to 26% from 34% in 2004. The effective ratein 2005 includes a benefit of $28 million resulting from the resolution of IRSaudits, a reduction in the valuation allowance for capital loss taxcarryforwards totaling $34 million associated with asset sales and theutilization of Section 45K synthetic fuel production credits ofapproximately $17 million. The 2005 effective tax rate also includes netstate tax credits of approximately $2 million. The effective tax rate in 2004benefited from a reduction in the valuation allowance for capital loss taxcarryforwards of approximately $7 million resulting from the sale of threeDoubletree properties (La Posada in Arizona, as well as Bakersfield andModesto in California) and the sale of our interest in Travelweb. In addition,the 2004 effective tax rate also reflects the utilization of Section 45Ksynthetic fuel production credits of approximately $7 million. Excluding theaforementioned items, our effective rate was 39% in 2005 and 38% in 2004. Oureffective tax rate is determined by the level and composition of pre-tax incomeand the mix of income subject to varying foreign, state and local taxes.

Minority andnon-controlled interests expense, net, increased $4 million to $12 million in2005, reflecting a distribution to our minority partner on the sale of theHilton Glendale.

***Hotel Statistics***

RevPARfor U.S. owned hotels and system-wide for the years ended December 31,2004 and 2005 is as follows:

| ** ** | ** ** | **U.S. owned(1)** | ** ** |
|------------|------------|------------------------|------------|
| ** ** | ** ** | **2004**               | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Hilton     |       |                   | $          | 128.32 |   |   |   | 144.00 |   |   |   | 12.2 | % |   |
| All other  |       |                   | 84.58      |   |   |   | 91.45 |   |   |   | 8.1 |   |   |
| Total      |       |                   | 123.24     |   |   |   | 137.90 |   |   |   | 11.9 |   |   |

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(1)          Statisticsare for comparable U.S. hotels, and include only hotels in the system as of December 31,2005 and owned by us since January 1, 2004. Comparable hotels exclude ourowned hotels in New Orleans due to the interruption in operations as aresult of Hurricane Katrina.

| ** **                 | ** ** | **System-wide(2)** | ** ** |
|----------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2004**           | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Hilton                     |       |               | $          | 90.06 |   |   |   | 100.68 |   |   |   | 11.8 | % |   |
| Hilton Garden Inn          |       |               | 68.14      |   |   |   | 74.47 |   |   |   | 9.3 |   |   |
| Doubletree                 |       |               | 69.78      |   |   |   | 77.01 |   |   |   | 10.4 |   |   |
| Embassy Suites             |       |               | 87.01      |   |   |   | 95.09 |   |   |   | 9.3 |   |   |
| Homewood Suites by  Hilton |       |               | 70.93      |   |   |   | 76.05 |   |   |   | 7.2 |   |   |
| Hampton                    |       |               | 56.00      |   |   |   | 62.22 |   |   |   | 11.1 |   |   |
| Other                      |       |               | 95.33      |   |   |   | 106.33 |   |   |   | 11.5 |   |   |

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(2)          Statistics are forcomparable hotels, and include only hotels in the system as of December 31,2005 and owned, operated or franchised by us since January 1, 2004. Comparablehotels exclude our owned hotels in New Orleans due to the interruption inoperations as a result of Hurricane Katrina.

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**OTHER MATTERS**

***New Accounting Standards***

See “Note 2: Summary ofSignificant Accounting Policies—New Accounting Standards” to the consolidated financialstatements under Item 8, for discussion of new accounting standards.

***Other***

Weare involved in various legal matters arising in the normal course of business,some of which include claims for substantial sums. Accruals are recorded whenthe outcome is probable and can be reasonably estimated. While the ultimateresults of claims and litigation cannot be predicted with certainty, we do notexpect that the resolution of all pending overtly threatened claims andlitigation as of December 31, 2006 will have a material adverse effect onour consolidated results of operations or financial position. However,depending on the amount and timing, an unfavorable resolution of some or all ofthese matters could materially affect our future results of operations in aparticular period.

**Item 7A.**                Quantitativeand Qualitative Disclosures about Market Risk

We are exposed to market risk in the form of changesin interest rates and foreign currency exchange rate movements. In certaininstances, we attempt to reduce volatility in earnings and cash flow associatedwith interest rate and foreign exchange rate risks by entering into financialarrangements intended to provide hedges against a portion of the associatedrisks. We continue to have exposure to such risks to the extent that they arenot hedged.

We are exposed to market risk in the form of changesin interest rates and the potential impact such changes may have on the cashflow from our floating rate debt and the fair values of our fixed rate debt. Weattempt to limit the impact of changes in interest rates to our debt portfolioby attaining an appropriate mix of floating rate borrowings relative to ourlong-term fixed rate debt. We are also exposed to interest rate risk on ourfloating rate notes receivable and the fair values of our fixed rate notesreceivable. We utilize, on a selective basis, interest rate swaps to manage ourrelative levels of fixed and floating rate debt. As of December 31, 2006,we had a derivative contract which swaps the fixed interest payments on our$375 million 7.95% Senior Notes due 2007 to a floating interest rate equalto the six-month LIBOR rate plus 415 basis points.

We are also exposed to market risk in the form ofchanges in foreign currency exchange rates and the potential impact suchchanges may have on the cash flow related to our foreign currency denominateddebt and our cash flows from operations. In limited circumstances, we seek toreduce volatility in earnings and by entering into financial arrangementsintended to provide a hedge against a potion of the associated risk. In August 2001,we issued $100 million of 7.43% bonds due 2009 denominated in ChileanPesos. Payments of principal and interest on the bonds are adjusted formovements of the Unidad de Fomento (the Chilean inflation index) publishedmonthly by the Central Bank of Chile. We have swapped out the Chilean currencyexchange rate and inflation risk by entering into a derivative contract whichswaps the principal payment to a fixed U.S. dollar amount of $100 millionwith fixed interest payments at 7.65% of that amount. We believe it is unlikelythat the counterparty will be unable to perform under the terms of thederivative instrument.

We have three tranches of long-term debt denominatedin foreign currencies which qualify as hedges of the foreign currency exposureof our net investment in foreign operations acquired as part of the HIAcquisition. The gains or losses on the long-term debt are included inaccumulated other comprehensive income as part of the cumulative translationadjustment to the extent that the instruments are effective as a hedge. Thegains or losses recorded in accumulated other comprehensive income are relievedwhen we substantially exit foreign operations in a market covered by ourhedging instruments.

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We also enter intoshort-term foreign currency forward and swap agreements in the normal course ofbusiness to hedge certain of our cash flows from foreign operations. The gainsor losses on the hedging instruments are largely offset by gains or losses onthe underlying asset or liability. At December 31, 2006, the notionalamount of our foreign currency hedging instruments is approximately $72 million.A theoretical 10 percent change in the foreign currency exchange rateswould result in an increase or decrease of approximately $7 million in the fairvalue of the hedging instruments at December 31, 2006. Such a change wouldbe offset by an opposite effect on the underlying assets and liabilities.

In January 2006, we entered into a derivativecontract covering 1.85 million barrels of oil relating to our investment in asynthetic fuel facility. This contract was effective for the calendar yearending December 31, 2006. The contract involved two call options thatprovided for net cash settlement at expiration based on the full year 2006average trading price of oil in relation to the strike price of the options. Thesettlement of the options yielded no payment at December 31, 2006. Thepurpose of the transaction was to provide economic protection against anincrease in oil prices that could limit or eliminate the amount of tax creditsavailable under Section 45K of the Internal Revenue Code to the point of anegative return on our investment. The strike prices of the two options wereintended to approximate the price ranges under which the expected tax creditsavailable under Section 45K of the Internal Revenue Code would be reducedto an amount which no longer covered our after-tax production costs in theinvestment for the 2006 calendar year.

In December 2006, we entered into a derivativecontract covering two million barrels of oil relating to our investment in asynthetic fuel facility. This contract is effective for the calendar yearending December 31, 2007. The contract involves two call options thatprovide for net cash settlement at expiration based on the full year 2007average trading price of oil in relation to the strike price of the options. Ifthe average price of oil in 2007 is less than $72 per barrel, the derivativewill yield no payment. If the average price of oil exceeds $72 per barrel, thederivative will yield a payment equal to the excess of the average price over$72 per barrel, up to a maximum price per barrel of $76. The purpose of thetransaction is to provide economic protection against an increase in oil pricesthat could limit or eliminate the amount of tax credits available under Section 45Kof the Internal Revenue Code to the point of a negative return on ourinvestment. The strike prices of the two options are intended to approximatethe price ranges under which the expected tax credits available under Section 45Kof the Internal Revenue Code could be reduced to an amount which no longercovers our after-tax production costs in the investment for the 2007 calendaryear.

50

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The following table sets forth the scheduledmaturities and the total fair value of our derivative and other financialinstruments, excluding non-recourse debt and capital lease obligations ofnon-controlled entities, as of December 31, 2006:

| ** **                                                                                                                                   | ** ** | **Maturities by Period** | ** ** | **Total**        | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                                                   | ** ** | **Within 1**                  | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | **After** | ** ** | **Carrying** | ** ** | **Total Fair** | ** ** |
| ** **                                                                                                                                   | ** ** | **year**                           | ** ** | **2 years** | ** ** | **3 years** | ** ** | **4 years** | ** ** | **5 years** | ** ** | **5 years** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                                                                                                                   | ** ** | **($ in millions)**      | ** ** |
| ***ASSETS******—Maturities represent principal receipts, fair values represent  assets***                                               | * *   |                               | * *   | * *         |       |             | * *   | * * |   |   | * * | * * |   |   | * * | * * |   | * * | * * |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |
| Timeshare notes  receivable                                                                                                                  |       |                               | $          | 54               | * *   |             |       | 63 | * * |   |   | 67 | * * |   |   | 68 | * * |   | 64 | * * |   | 138 | * * |   |   | 454 | * * |   |   | 459 | * * |   |
| Average interest  rate                                                                                                                       |       |                               |       | * *         |       |             |       | * * |   |   |   | * * |   |   |   | * * |   | * * | * * |   |   | * * |   |   | 12.9 | *%* |   |   | * * | * * |   |
| Other notes  receivable                                                                                                                      |       |                               | $          | 1                | * *   |             |       | — | * * |   |   | 5 | * * |   |   | — | * * |   | — | * * |   | 19 | * * |   |   | 25 | * * |   |   | 24 | * * |   |
| Average interest  rate                                                                                                                       |       |                               |       | * *         |       |             |       | * * |   |   |   | * * |   |   |   | * * |   | * * | * * |   |   | * * |   |   | 6.7 | *%* |   |   | * * | * * |   |
| ***LIABILITIES******—Maturities represent principal  payments, fair values represent liabilities***                           | * *   |                               | * *   | * *         |       |             | * *   | * * |   |   | * * | * * |   |   | * * | * * |   | * * | * * |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |
| Fixed rate debt                                                                                                                              |       |                               | $          | (18              | *)*        |             |       | (995 | *)* |   |   | (409 | *)* |   |   | (559 | *)* |   | (304 | *)* |   | (985 | *)* |   |   | (3,270 | *)* |   |   | (4,058 | *)* |   |
| Average interest  rate                                                                                                                       |       |                               |       | * *         |       |             |       | * * |   |   |   | * * |   |   |   | * * |   | * * | * * |   |   | * * |   |   | 6.9 | *%* |   |   | * * | * * |   |
| Floating rate debt                                                                                                                           |       |                               | $          | (394             | *)*        |             |       | (13 | *)* |   |   | (5 | *)* |   |   | (5 | *)* |   | (2,916 | *)* |   | (365 | *)* |   |   | (3,698 | *)* |   |   | (3,326 | *)* |   |
| Average interest  rate                                                                                                                       |       |                               |       | * *         |       |             |       | * * |   |   |   | * * |   |   |   | * * |   | * * | * * |   |   | * * |   |   | 6.4 | *%* |   |   | * * | * * |   |
| ***INTEREST RATE SWAPS******—******Maturities  represent******notional amounts, fair values represent assets (liabilities)*** | * *   |                               | * *   | * *         |       |             | * *   | * * |   |   | * * | * * |   |   | * * | * * |   | * * | * * |   | * * | * * |   |   | * * | * * |   |   | * * | * * |   |
| Fixed to variable                                                                                                                            |       |                               | $          | 372              | * *   |             |       | — | * * |   |   | — | * * |   |   | — | * * |   | — | * * |   | — | * * |   |   | 372 | * * |   |   | (3 | *)* |   |
| Average pay rate                                                                                                                             |       |                               |       | * *         |       |             |       | * * |   |   |   | * * |   |   |   | * * |   | * * | * * |   |   | * * |   |   | 9.5 | *%* |   |   | * * | * * |   |
| Average receive  rate                                                                                                                        |       |                               |       | * *         |       |             |       | * * |   |   |   | * * |   |   |   | * * |   | * * | * * |   |   | * * |   |   | 8.0 | *%* |   |   | * * | * * |   |
| Fixed (CLP) to  Fixed ($US)                                                                                                                  |       |                               | $          | —           | * *   |             |       | — | * * |   |   | 145 | * * |   |   | — | * * |   | — | * * |   | — | * * |   |   | 145 | * * |   |   | 57 | * * |   |
| Average pay rate                                                                                                                             |       |                               |       | * *         |       |             |       | * * |   |   |   | * * |   |   |   | * * |   | * * | * * |   |   | * * |   |   | 7.7 | *%* |   |   | * * | * * |   |
| Average receive  rate                                                                                                                        |       |                               |       | * *         |       |             |       | * * |   |   |   | * * |   |   |   | * * |   | * * | * * |   |   | * * |   |   | 7.4 | *%* |   |   | * * | * * |   |
| ***OTHER DERIVATIVE CONTRACTS***                                                                                                             | ** ** |                               | * *   | * *         | ** ** | ** **       | ** ** | * * | ** ** | ** ** | ** ** | * * | ** ** | ** ** | ** ** | * * | ** ** | * * | * * | ** ** | ** ** | * * | ** ** | ** ** | ** ** | * * | ** ** |   | * * | * * |   |
| Call options on oil  prices                                                                                                                  |       |                               | $          | 1                | * *   |             |       | — | * * |   |   | — | * * |   |   | — | * * |   | — | * * |   | — | * * |   |   | 1 | * * |   |   | 1 | * * |   |

 

At December 31,2006, our senior credit facilities contain approximately $1.601 billion infloating rate foreign currency denominated loans, including €675million, £326 million and Australian $93 million. At December 31, 2006,these facilities have interest rates ranging from 4.49% to 7.39% and have amaturity date of February 2011.

As of December 31, 2006, approximately 53% of ourlong-term debt (including the impact of interest rate swaps and excludingnon-recourse debt and capital lease obligations of non-controlled entities) wasfloating rate debt.

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**Item 8.**                        FinancialStatements and Supplementary Data

**Hilton Hotels Corporation and SubsidiariesConsolidated Statements of Income(in millions, except per share amounts)**

| ** **                                                                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| Revenue                                                                   |       |                                       |       |   |   |   |   |
| Owned hotels                                                              |       | $                                          | 2,062      |   | 2,049 |   | 2,521 |   |
| Leased hotels                                                             |       | 111                                        |       | 111 |   | 2,347 |   |
| Management and franchise fees                                             |       | 384                                        |       | 452 |   | 684 |   |
| Timeshare and other income                                                |       | 463                                        |       | 606 |   | 767 |   |
|                                                                      |       | 3,020                                      |       | 3,218 |   | 6,319 |   |
| Other revenue from managed and franchised properties                      |       | 1,126                                      |       | 1,219 |   | 1,843 |   |
|                                                                      |       | 4,146                                      |       | 4,437 |   | 8,162 |   |
| Expenses                                                                  |       |                                       |       |   |   |   |   |
| Owned hotels                                                              |       | 1,501                                      |       | 1,459 |   | 1,780 |   |
| Leased hotels                                                             |       | 101                                        |       | 99 |   | 1,985 |   |
| Depreciation and amortization                                             |       | 330                                        |       | 299 |   | 441 |   |
| Impairment loss and related costs                                         |       | 5                                          |       | 7 |   | — |   |
| Other operating expenses                                                  |       | 395                                        |       | 497 |   | 736 |   |
| Corporate expense                                                         |       | 85                                         |       | 103 |   | 171 |   |
|                                                                      |       | 2,417                                      |       | 2,464 |   | 5,113 |   |
| Other expenses from managed and franchised  properties                    |       | 1,120                                      |       | 1,212 |   | 1,832 |   |
|                                                                      |       | 3,537                                      |       | 3,676 |   | 6,945 |   |
| Operating income from unconsolidated affiliates                           |       | 49                                         |       | 44 |   | 57 |   |
| Operating Income                                                          |       | 658                                        |       | 805 |   | 1,274 |   |
| Interest and dividend income                                              |       | 26                                         |       | 32 |   | 27 |   |
| Interest expense                                                          |       | (274                                       | )          | (259 | ) | (498 | ) |
| Net interest from unconsolidated affiliates and  non-controlled interests |       | (26                                        | )          | (26 | ) | (45 | ) |
| Net gain on foreign currency transactions                                 |       | —                                     |       | — |   | 24 |   |
| Net other (loss) gain                                                     |       | (5                                         | )          | 103 |   | 72 |   |
| Loss from non-operating affiliates                                        |       | (6                                         | )          | (17 | ) | (16 | ) |
| Income Before Taxes and Minority and Non-Controlled  Interests            |       | 373                                        |       | 638 |   | 838 |   |
| Provision for income taxes                                                |       | (127                                       | )          | (166 | ) | (259 | ) |
| Minority and non-controlled interests, net                                |       | (8                                         | )          | (12 | ) | (7 | ) |
| Net Income                                                                |       | $                                          | 238        |   | 460 |   | 572 |   |
| Basic Earnings Per Share                                                  |       | $                                          | .62        |   | 1.20 |   | 1.49 |   |
| Diluted Earnings  Per Share                                               |       | $                                          | .60        |   | 1.13 |   | 1.39 |   |

 

See notes to consolidated financial statements.

52

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**Hilton Hotels Corporationand SubsidiariesConsolidated Balance Sheets(in millions)**

| ** **                                                                                        | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                        | ** ** | **2005**              | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                        | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| **Current  Assets**                                                                               | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Cash and equivalents                                                                              |       |                  | $          | 1,154                 |       |   |   | 138 |   |   |
| Restricted cash                                                                                   |       |                  | 182        |                  |       |   | 293 |   |   |
| Accounts receivable, net                                                                          |       |                  | 312        |                  |       |   | 659 |   |   |
| Inventories                                                                                       |       |                  | 219        |                  |       |   | 430 |   |   |
| Deferred income taxes                                                                             |       |                  | 85         |                  |       |   | 95 |   |   |
| Current portion of notes receivable, net                                                          |       |                  | 40         |                  |       |   | 55 |   |   |
| Prepaid expenses and other                                                                        |       |                  | 97         |                  |       |   | 239 |   |   |
| Total current assets                                                                              |       |                  | 2,089      |                  |       |   | 1,909 |   |   |
| **Investments,  Property and Other Assets**                                                       | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Investments and notes receivable, net                                                             |       |                  | 707        |                  |       |   | 759 |   |   |
| Property and equipment, net                                                                       |       |                  | 2,985      |                  |       |   | 4,983 |   |   |
| Management and franchise contracts, net                                                           |       |                  | 302        |                  |       |   | 1,184 |   |   |
| Leases, net                                                                                       |       |                  | 107        |                  |       |   | 319 |   |   |
| Brands                                                                                            |       |                  | 970        |                  |       |   | 2,846 |   |   |
| Goodwill                                                                                          |       |                  | 1,216      |                  |       |   | 3,710 |   |   |
| Deferred income taxes                                                                             |       |                  | —     |                  |       |   | 85 |   |   |
| Other assets                                                                                      |       |                  | 367        |                  |       |   | 686 |   |   |
| Total investments, property and other assets                                                      |       |                  | 6,654      |                  |       |   | 14,572 |   |   |
| **Total  Assets**                                                                                 |       |                  | $          | 8,743                 |       |   |   | 16,481 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                    | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| **Current  Liabilities**                                                                          | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Accounts payable and accrued expenses                                                             |       |                  | $          | 772                   |       |   |   | 1,901 |   |   |
| Current maturities of long-term debt                                                              |       |                  | 47         |                  |       |   | 412 |   |   |
| Current maturities of non-recourse debt and capital  lease obligations of non-controlled entities |       |                  | —     |                  |       |   | 110 |   |   |
| Income taxes payable                                                                              |       |                  | 45         |                  |       |   | 44 |   |   |
| Total current liabilities                                                                         |       |                  | 864        |                  |       |   | 2,467 |   |   |
| Long-term debt                                                                                    |       |                  | 3,572      |                  |       |   | 6,556 |   |   |
| Non-recourse debt and capital lease obligations of  non-controlled entities                       |       |                  | 100        |                  |       |   | 390 |   |   |
| Deferred income taxes                                                                             |       |                  | 678        |                  |       |   | 2,065 |   |   |
| Insurance reserves and other                                                                      |       |                  | 718        |                  |       |   | 1,276 |   |   |
| Total liabilities                                                                                 |       |                  | 5,932      |                  |       |   | 12,754 |   |   |
| **Commitments and Contingencies**                                                                 | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| **Stockholders’ Equity**                                                                     | ** ** |                  | ** ** | ** **            |       |   | ** ** | ** ** |   |
| Common Stock, $2.50 par value, 382 million and 387  million shares outstanding, respectively      |       |                  | 1,010      |                  |       |   | 1,023 |   |   |
| Additional paid-in capital                                                                        |       |                  | 1,158      |                  |       |   | 1,248 |   |   |
| Retained earnings                                                                                 |       |                  | 1,125      |                  |       |   | 1,663 |   |   |
| Accumulated other comprehensive (loss) income                                                     |       |                  | (11        | )                     |       |   | 262 |   |   |
|                                                                                              |       |                  | 3,282      |                  |       |   | 4,196 |   |   |
| Less treasury stock, at cost                                                                      |       |                  | (471       | )                     |       |   | (469 | ) |   |
| Total stockholders’ equity                                                                   |       |                  | 2,811      |                  |       |   | 3,727 |   |   |
| **Total Liabilities and  Stockholders’ Equity**                                              |       |                  | $          | 8,743                 |       |   |   | 16,481 |   |   |

 

See notes toconsolidated financial statements.

53

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**Hilton HotelsCorporation and SubsidiariesConsolidated Statements of Cash Flow(in millions)**

| ** **                                                                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| **Operating Activities**                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                          | 238        |   | 460 |   | 572 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Depreciation and  amortization                                                     |       | 330                                        |       | 299 |   | 441 |   |
| Amortization of  loan costs                                                        |       | 9                                          |       | 9 |   | 17 |   |
| Net other loss  (gain)                                                             |       | 5                                          |       | (103 | ) | (72 | ) |
| Loss from  non-operating affiliates                                                |       | 6                                          |       | 17 |   | 16 |   |
| Impairment loss  and related costs                                                 |       | 5                                          |       | 7 |   | — |   |
| Change in working capital  components:                                             |       |                                       |       |   |   |   |   |
| Inventories                                                                        |       | 45                                         |       | (77 | ) | (163 | ) |
| Accounts  receivable                                                               |       | (24                                        | )          | (41 | ) | 4 |   |
| Other current  assets                                                              |       | (9                                         | )          | 18 |   | (69 | ) |
| Accounts payable  and accrued expenses                                             |       | 59                                         |       | 99 |   | 44 |   |
| Income taxes  payable                                                              |       | —                                     |       | 41 |   | (119 | ) |
| Restricted cash                                                                    |       | (90                                        | )          | (19 | ) | (79 | ) |
| Change in deferred  income taxes                                                   |       | 27                                         |       | (63 | ) | 67 |   |
| Change in other  liabilities                                                       |       | 49                                         |       | (35 | ) | 93 |   |
| Unconsolidated  affiliates’ distributions in excess of earnings               |       | 20                                         |       | 1 |   | 9 |   |
| Change in  timeshare notes receivable                                              |       | (105                                       | )          | (99 | ) | (109 | ) |
| Excess tax  benefits from share-based payment arrangements                         |       | —                                     |       | — |   | (12 | ) |
| Other                                                                              |       | (17                                        | )          | (28 | ) | 12 |   |
| Net cash provided  by operating activities                                         |       | 548                                        |       | 486 |   | 652 |   |
| **Investing Activities**                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital  expenditures                                                              |       | (178                                       | )          | (423 | ) | (613 | ) |
| Additional  investments                                                            |       | (72                                        | )          | (47 | ) | (146 | ) |
| Proceeds from  asset dispositions                                                  |       | 80                                         |       | 1,041 |   | 1,450 |   |
| Payments received  on notes and other                                              |       | 38                                         |       | 49 |   | 171 |   |
| Acquisitions, net  of cash acquired                                                |       | —                                     |       | — |   | (5,460 | ) |
| Net cash (used in)  provided by investing activities                               |       | (132                                       | )          | 620 |   | (4,598 | ) |
| **Financing Activities**                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Change in  revolving loans, net of issuance costs                                  |       | (160                                       | )          | — |   | 1,582 |   |
| Long-term  borrowings, net of issuance costs                                       |       | —                                     |       | 14 |   | 2,626 |   |
| Reduction of long-term  debt                                                       |       | (14                                        | )          | (15 | ) | (1,303 | ) |
| Issuance of common  stock                                                          |       | 131                                        |       | 63 |   | 63 |   |
| Repurchase of  common stock                                                        |       | (48                                        | )          | (271 | ) | — |   |
| Cash dividends                                                                     |       | (31                                        | )          | (46 | ) | (62 | ) |
| Excess tax  benefits from share-based payment arrangements                         |       | —                                     |       | — |   | 12 |   |
| Net cash (used in)  provided by financing activities                               |       | (122                                       | )          | (255 | ) | 2,918 |   |
| Exchange rate effect on  Cash and Equivalents                                      |       | —                                     |       | — |   | 12 |   |
| Increase (Decrease) in  Cash and Equivalents                                       |       | 294                                        |       | 851 |   | (1,016 | ) |
| Cash and Equivalents at  Beginning of Year                                         |       | 9                                          |       | 303 |   | 1,154 |   |
| **Cash and Equivalents at End of Year**                                            |       | $                                          | 303        |   | 1,154 |   | 138 |   |

 

See notes to consolidated financial statements.

54

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**Hilton Hotels Corporation and SubsidiariesConsolidated Statements of Stockholders’ Equity(in millions, except per share amounts)**

| ** **                                                                      | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                   | ** ** | **2005** | ** ** | **2006** | ** ** |
| **COMMON STOCK**                                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of  year                                                   |       | $                                          | 971        |   | 997 |   | 1,010 |   |
| Issuance of common stock                                                        |       | —                                     |       | 1 |   | 1 |   |
| Exercise of stock options                                                       |       | 26                                         |       | 12 |   | 12 |   |
| **Balance  at end of year**                                                     |       | $                                          | 997        |   | 1,010 |   | 1,023 |   |
| **ADDITIONAL PAID-IN CAPITAL**                                                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of  year                                                   |       | $                                          | 970        |   | 1,086 |   | 1,158 |   |
| Issuance of common stock                                                        |       | (4                                         | )          | 6 |   | (8 | ) |
| Exercise of stock options                                                       |       | 105                                        |       | 51 |   | 51 |   |
| Deferred compensation                                                           |       | 15                                         |       | 15 |   | 47 |   |
| **Balance  at end of year**                                                     |       | $                                          | 1,086      |   | 1,158 |   | 1,248 |   |
| **RETAINED EARNINGS**                                                           | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of  year                                                   |       | $                                          | 456        |   | 689 |   | 1,125 |   |
| Net income                                                                      |       | 238                                        |       | 460 |   | 572 |   |
| Exercise of stock options                                                       |       | 26                                         |       | 22 |   | 28 |   |
| Common dividends ($.08,  $.12 and $.16 per share, respectively)                 |       | (31                                        | )          | (46 | ) | (62 | ) |
| **Balance  at end of year**                                                     |       | $                                          | 689        |   | 1,125 |   | 1,663 |   |
| **ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**                               | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of  year                                                   |       | $                                          | (1         | ) | (3 | ) | (11 | ) |
| Cash flow hedge  adjustment, net of deferred tax                                |       | 7                                          |       | — |   | — |   |
| Cumulative translation  adjustment, net of deferred tax                         |       | —                                     |       | (1 | ) | 251 |   |
| Change in unrealized gain  / loss on marketable securities, net of deferred tax |       | 3                                          |       | 2 |   | (10 | ) |
| Minimum pension  obligation adjustment, net of deferred tax                     |       | (12                                        | )          | (9 | ) | 32 |   |
| **Balance  at end of year(1)**                                                  |       | $                                          | (3         | ) | (11 | ) | 262 |   |
| **TREASURY STOCK, AT COST**                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of  year                                                   |       | $                                          | (157       | ) | (201 | ) | (471 | ) |
| Issuance of common stock                                                        |       | 4                                          |       | 1 |   | 2 |   |
| Repurchase of common  stock                                                     |       | (48                                        | )          | (271 | ) | — |   |
| **Balance  at end of year**                                                     |       | $                                          | (201       | ) | (471 | ) | (469 | ) |
| **TOTAL STOCKHOLDERS’ EQUITY**                                             | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Balance at beginning of  year                                                   |       | $                                          | 2,239      |   | 2,568 |   | 2,811 |   |
| Net income                                                                      |       | 238                                        |       | 460 |   | 572 |   |
| Cash flow hedge adjustment,  net of deferred tax                                |       | 7                                          |       | — |   | — |   |
| Cumulative translation  adjustment, net of deferred tax                         |       | —                                     |       | (1 | ) | 251 |   |
| Change in unrealized gain  / loss on marketable securities, net of deferred tax |       | 3                                          |       | 2 |   | (10 | ) |
| Minimum pension  obligation adjustment, net of deferred tax                     |       | (12                                        | )          | (9 | ) | 32 |   |
| Comprehensive  income                                                           |       | 236                                        |       | 452 |   | 845 |   |
| Issuance of common stock                                                        |       | —                                     |       | 8 |   | (5 | ) |
| Exercise of stock options                                                       |       | 157                                        |       | 85 |   | 91 |   |
| Repurchase of common  stock                                                     |       | (48                                        | )          | (271 | ) | — |   |
| Deferred compensation                                                           |       | 15                                         |       | 15 |   | 47 |   |
| Common dividends ($.08,  $.12 and $.16 per share, respectively)                 |       | (31                                        | )          | (46 | ) | (62 | ) |
| **Balance  at end of year**                                                     |       | $                                          | 2,568      |   | 2,811 |   | 3,727 |   |

----

(1)           At December 31, 2006, accumulated other comprehensive incomeconsists of $250 million of cumulative translation adjustment, $8 million ofcumulative adjustments to derivative instruments, $3 million of cumulativeminimum pension liability adjustments and $1 million of cumulative unrealizedgains on securities.

See notes to consolidated financial statements.

55

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**Notes To Consolidated Financial Statements December 31, 2006**

**NOTE**1: BASIS OFPRESENTATION AND ORGANIZATION****

Hilton Hotels Corporation is engaged, together withits subsidiaries, in the ownership, management and development of hotels,resorts and timeshare properties and the franchising of lodging properties. We operatein 78 countries and territories and believe we are one of the largest lodgingcompanies in the world. Revenue and income are derived from three reportablesegments: Hotel Ownership, Managing and Franchising, and Timeshare.

On February 23, 2006,we acquired the lodging assets of Hilton Group plc (known collectively as “HiltonInternational” or “HI”) in a business combination accounted for as a purchase(the “HI Acquisition”). Accordingly, our consolidated financial results includethe results of Hilton International from the date of acquisition. See “Note 3:Purchase of Hilton International” for more information.

**NOTE 2: SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

**Principles ofConsolidation**

The consolidated financialstatements include the accounts of Hilton Hotels Corporation, our wholly ownedsubsidiaries, variable interest entities where we are the primary beneficiaryand entities in which we have a controlling financial interest. Thedetermination of controlling financial interest is based upon the terms ofindividual joint venture agreements, including evaluation of rights held byother ownership interests. Entities in which we have a controlling financialinterest are generally comprised of majority owned joint ventures. All materialintercompany transactions are eliminated and net earnings are reduced by theportion of earnings of affiliates applicable to other ownership interests.

**Cash andEquivalents**

Cash and equivalentsinclude all highly liquid investments with initial maturities of three monthsor less.

**Restricted Cash**

Restricted cash includescash related to certain consolidated hotels, the use of which is restricted forhotel purposes under the terms of collateralized borrowings, refundabledeposits on the sale of timeshare intervals and cash balances held byconsolidated non-controlled entities.

**Accounts Receivable**

Accounts receivable arereflected net of allowance for uncollectible accounts of $25 million and $31 millionas of December 31, 2005 and 2006, respectively.

**Inventories**

Inventories are valued atthe lower of cost or estimated net realizable value. Included in inventories atDecember 31, 2005 and 2006, are unsold intervals at our timeshareproperties of $209 million and $392 million, respectively. Thecapital expenditures associated with our non-lease timeshare products arereflected as inventory until the timeshare intervals are sold. The company usesthe relative sales value method of costing our timeshare sales and relievinginventory in accordance with Statement of Financial Accounting Standards (“FAS”)67, “Accounting for Costs and Initial Rental Operations of Real EstateProjects.”

56

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

**Investments**

We maintain investments inunconsolidated affiliates, primarily hotel joint ventures. Investments areaccounted for using the equity method when we exercise significant influenceover the venture but lack a controlling financial interest, which is determinedbased upon the terms of individual joint venture agreements, includingevaluation of rights held by other ownership interests. Generally, we accountfor investments using the equity method when we own more than a minimalinvestment but have no more than a 50% ownership interest. When we have acontrolling financial interest in the venture, which is generally when ourownership exceeds 50%, the balance sheet and results of operations areconsolidated. We also consolidate variable interest entities when we are theprimary beneficiary. Net earnings are reduced by the portion of earningsapplicable to other ownership interests. All other investments inunconsolidated affiliates are generally accounted for under the cost method. Thehotels in which we own a non-controlling financial interest are an integralcomponent of our hotel ownership segment and are strategically andoperationally important to that segment’s results. Therefore, our operatingincome from unconsolidated affiliates is included as a component ofconsolidated operating income in the accompanying consolidated statements ofincome.

***Notes Receivable***

Notesreceivable are reflected net of an estimated allowance for uncollectibleamounts. For timeshare notes receivable, this estimate is based primarily onhistorical experience and assumptions with respect to future payment trends.Allowances for uncollectible amounts of other notes receivable, which includenotes from managed, franchised and unconsolidated joint venture properties, areestimated based primarily on historical trends and analysis of underlying realestate collateral. Assessment of collateral may include estimates of futurecash flow from the underlying real estate. Total notes receivable, includingtimeshare, totaled $401 million and $479 million, net of allowances foruncollectible amounts of $24 million and $35 million as ofDecember 31, 2005 and 2006, respectively.

**CurrencyTranslation**

Assets and liabilitiesdenominated in foreign currencies are translated into U.S. dollars at year-endexchange rates and the related gains and losses, net of applicable deferredincome taxes, are reflected in stockholders’ equity. Income and expenseaccounts are translated at the average exchange rate for the period. Gains andlosses from foreign exchange rate changes related to intercompany receivablesand payables of a long-term nature are generally included in othercomprehensive income. Gains and losses from foreign exchange rate changes relatedto intercompany receivables and payables that are not of a long-term nature arereported currently in income and amounted to a net gain of approximately $6million in 2006. The net gains or losses in 2004 and 2005 were insignificant. Gainsand losses from foreign currency transactions are reported currently in incomeand amounted to a net gain of approximately $18 million in 2006 andinsignificant amounts in 2004 and 2005.

**Valuation ofLong-Lived Assets**

The carrying value of ourlong-lived assets are reviewed when events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. If it isdetermined that an impairment loss has occurred based on the lowest level ofidentifiable expected future cash flow, then a loss is recognized in the incomestatement using a fair value based model.

57

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

**Property andEquipment**

Property and equipment acquired in acquisitions thatwere accounted for as purchases are recorded at their estimated fair value asof the date acquired, less accumulated depreciation. Other property andequipment are stated at cost less accumulated depreciation. Interest incurredduring construction of facilities is capitalized and depreciated over the lifeof the asset. Costs of improvements are capitalized. These capitalized costsmay include structural costs, equipment, fixtures and floor and wall coverings.Costs of normal repairs and maintenance are charged to expense as incurred.

Depreciation is providedusing the straight-line method over the estimated useful life of the assets. Leaseholdimprovements are depreciated over the shorter of the asset life or lease term. Theestimated useful lives of assets are generally 40 years for buildings and threeto eight years for building improvements and furniture and equipment. Depreciationexpense, including depreciation of assets recorded under capital leases, for2004, 2005 and 2006 was $271 million, $247 million and $324 million,respectively.

**AmortizableIntangible Assets**

Management and franchise contracts acquired inacquisitions that were accounted for as purchases are recorded at the estimatedpresent value of net cash flow expected to be received over the lives of thecontracts. This value is amortized using the straight-line method over theremaining contract lives. Costs incurred to acquire individual management andfranchise contracts are amortized using the straight-line method over the lifeof the respective contract. Accumulated amortization of management andfranchise contracts totaled $227 million and $291 million at December 31,2005 and 2006, respectively.

Leases acquired in acquisitions that were accountedfor as purchases are recorded at the estimated present value of net cash flowexpected to be received over the lives of the lease agreements. This value isamortized using the straight-line method over the remaining lease terms.Accumulated amortization of leases totaled $23 million and$41 million at December 31, 2005 and 2006, respectively.

The estimated aggregateamortization expense for amortizable intangible assets is expected to be $121million, $115 million, $107 million, $101 million and $97 million for the yearsended December 31, 2007 through 2011, respectively.

**Brands**

The brand names of hotels acquiredin acquisitions that were accounted for as purchases are assigned a fair marketvalue. To arrive at a value for each brand name, an estimation is made of theamount of royalty income that could be generated from the brand name if it waslicensed to an independent third-party owner. The resulting cash flow isdiscounted back using the estimated weighted-average cost of capital for eachrespective brand name. We account for brands in accordance with FAS 142, “Goodwilland Other Intangible Assets,” which requires that intangible assets withindefinite lives are not amortized, but are reviewed annually for impairment.

58

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

**Goodwill**

Goodwill represents theexcess of the purchase price over the fair value of net assets of businessesacquired. We account for goodwill in accordance with FAS 142, which requiresthat goodwill is not amortized, but is reviewed annually for impairment. During2006, the amount of goodwill increased by $2.49 billion due to an addition ofapproximately $2.33 billion as a result of the HI Acquisition (see “Note 3:Purchase of Hilton International”) and a $176 million increase due to foreignexchange rate movements, partially offset by a $10 million decrease resultingfrom the sale of the Pointe Hilton Tapitio Cliffs (see “Note 5: Acquisitionsand Dispositions”).

**DerivativeInstruments**

We have an outstanding swap agreement which qualifiesfor hedge accounting as a cash flow hedge of a foreign currency denominatedliability. The gain or loss on the change in fair value of the derivative isincluded in earnings to the extent it offsets the earnings impact of changes infair value of the hedged obligation. Any difference is deferred in accumulatedother comprehensive income, a component of stockholders’ equity.

We have an interest rate swap on certain fixed ratesenior notes which qualifies as a fair value hedge. This derivative impactsearnings to the extent of increasing or decreasing actual interest expense onthe hedged notes to simulate a floating interest rate. Changes in the fairvalue of the derivative are offset by an adjustment to the value of the hedgednotes.

We have three tranches of long-term debt denominatedin foreign currencies which qualify as hedges of the foreign currency exposureof our net investment in foreign operations acquired as part of the HIAcquisition. The gains or losses on the long-term debt are included inaccumulated other comprehensive income as part of the cumulative translationadjustment to the extent that the instruments are effective as a hedge. The netloss included in accumulated other comprehensive income related to our netinvestment hedge totaled $254 million at December 31, 2006. The gainsor losses recorded in accumulated other comprehensive income are relieved whenwe substantially exit foreign operations in a market covered by our hedginginstruments.

We assess on a quarterly basis the effectiveness ofour hedges in offsetting the variability in the cash flow or fair values of thehedged assets or obligations. There were no amounts recognized or reclassifiedinto earnings for the years ended December 31, 2004, 2005 or 2006 due tohedge ineffectiveness or due to excluding from the assessment of effectivenessany component of the derivatives.

We enter into short-term foreign currency forward andswap agreements in the normal course of business to hedge certain of our cashflows from foreign operations. The gains or losses on the hedging instrumentsare largely offset by gains or losses on the underlying asset or liability. AtDecember 31, 2006, the notional amount of our foreign currency hedginginstruments is approximately $72 million. We do not enter into derivativefinancial instruments for trading or speculative purposes.

59

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

In August 2004, January 2006 and December 2006,we entered into derivative contracts relating to our investment in a syntheticfuel facility effective for the calendar years ending December 31, 2005,2006 and 2007, respectively. These contracts covered 2.5 million, 1.85 million,and 2.0 million barrels of oil, respectively. The contracts involved two calloptions that provide for net cash settlement at expiration based on theeffective full year average trading price of oil in relation to the strikeprice of the options. The call prices of the options were $55 and $68 perbarrel for 2005, $68.50 and $72.50 per barrel for 2006 and $72 and $76 perbarrel for 2007. If the average price of oil in the effective year was lessthan the low call price per barrel, the derivative will yield no payment. Ifthe average price of oil exceeds the low call price per barrel, the derivativewill yield a payment equal to the excess of the average price over the low callprice per barrel, up to a maximum price per barrel of the high call price perbarrel. The purpose of these transactions is to provide economic protectionagainst increases in oil prices that could limit or eliminate the amount of taxcredits available under Section 45K of the Internal Revenue Code to thepoint of a negative return on our investment. The strike prices of the twooptions for each year are intended to approximate the price ranges under whichthe expected tax credits could be reduced to an amount which no longer coveredour after-tax production costs for the respective calendar years. Theseagreements do not qualify for hedge accounting and, as a result, changes in thefair value of the derivative agreements are reflected in earnings. Results in2004, 2005 and 2006 include a pre-tax loss of $1 million, a pre-tax gain of $3million, and a pre-tax loss of $3 million, respectively, resulting from changesin the market value of the derivative contracts. These amounts are included innet other (loss) gain in the accompanying consolidated statements of income.

Concurrent with theannouncement of our agreement to acquire HI in December 2005 (see “Note 3:Purchase of Hilton International”), we entered into foreign currency options tomitigate the risk associated with changes in foreign currency exchange rates onour agreement to fund the acquisition price in British Pounds. These options,which were sold in the 2006 first quarter, were purchased for a total ofapproximately $54 million and covered approximately £2.3 billion. Thesederivatives included options to purchase British Pounds with U.S. dollars andEuros. As of December 31, 2005, the options had a carrying value ofapproximately $44 million and were reflected in the accompanying consolidatedbalance sheet in other current assets. These foreign currency options did notqualify for hedge accounting and, as a result, changes in the fair value of thederivative instruments were reflected in earnings. Results in 2005 include apre-tax loss of $10 million which is reflected in net other (loss) gain in theaccompanying consolidated financial statements.

**Unamortized LoanCosts**

Debt discount and issuancecosts incurred in connection with the placement of long-term debt arecapitalized and amortized to interest expense over the lives of the relateddebt using the effective interest method. These balances are included in otherassets in our consolidated balance sheets.

60

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

**Self-Insurance**

We are self-insured for various levels of generalliability, workers’ compensation and employee medical and dental insurancecoverage at our owned locations. Managed properties may be required toparticipate in certain of the programs where we are the employer of the employeesat the hotel. Managed properties may also elect to participate in ourself-insured liability insurance program. We purchase insurance coverage forclaim amounts which exceed our self-insured retentions. Depending on the typeof insurance, these self-insured retentions range from $250,000 to $500,000 peroccurrence in the U.S. and approximately $2,000 to $500,000 internationally.Our self-insurance reserves are included in accounts payable and accruedexpenses (current portion) and insurance reserves and other (long-term portion)in the accompanying consolidated balance sheets. Our self-insurance reservestotaled $146 million and $156 million at December 31, 2005 and 2006,respectively.

Our insurance reserves areaccrued based on estimates of the ultimate cost of claims expected to occurduring the covered period. These estimates are prepared with the assistance ofoutside actuaries and consultants. Our actuaries periodically review the volumeand amount of claims activity, and based upon their findings, we adjust ourinsurance reserves accordingly. The ultimate cost of claims for a coveredperiod may differ from our original estimates.

**Revenue Recognition**

Revenue is generally recognized as services areperformed. Owned and leased hotel revenue represents primarily room rentals andfood and beverage sales from owned, majority owned and leased hotels.

Management fees represent fees earned from hotelsmanaged by us, usually under long-term contracts with the hotel owner. Managementfees include a base fee, which is generally a percentage of hotel revenue, andan incentive fee, which is generally based on a fixed or variable percent ofhotel profits after a stated return threshold to the owner. We recognize basefees as revenue when earned in accordance with the terms of the contract. Ininterim periods we recognize the incentive fees that would be due if thecontract were terminated at the end of the interim period.

Franchise fees represent fees received in connectionwith the licensing of our brand names, usually under long-term contracts withthe hotel owner. Depending on the brand, we charge franchise royalty fees of upto five percent of room revenue. We recognize fee revenue as earned, inaccordance with FAS 45, “Accounting for Franchise Fee Revenue.”

Timeshare and other income primarily consists ofearnings from our timeshare operations. Timeshare revenue is generatedprimarily from the sale and financing of timeshare intervals and operatingtimeshare resorts. We recognize revenue from deeded timeshare sales inaccordance with FAS 66, “Accounting for Real Estate Sales.” Sales are includedin revenue when a minimum of a 10 percent down payment has been received,certain minimum sales thresholds have been attained, the purchaser’s period tocancel for a refund has expired and the related receivable is deemed to becollectible. We defer revenue recognition for sales that do not meet thesecriteria. During periods of construction, profits from timeshare sales arerecognized under the percentage-of-completion method. Our Hilton City Clubtimeshare product is accounted for as a long-term lease with a reversionaryinterest rather than the sale of a deeded interest in real estate. Hilton CityClub sales revenue is recognized on a straight-line basis over the term of thelease.

61

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Timeshare and other income also includes revenuegenerated by the incidental support of hotel operations and the recognition ofdeferred gains on asset sales. We account for the sale of real estate inaccordance with FAS 66. To the extent we realize gains from the sale of realestate and maintain significant continuing involvement in the form of along-term management contract, the gain is deferred and recognized in revenue overthe term of the contract. The deferral of pre-tax gains on such sales totaled$5 million, $236 million and $5 million in 2004, 2005 and 2006,respectively. Results in 2004, 2005 and 2006 include the recognition of pre-taxdeferred gains totaling $15 million, $23 million and $38 million, respectively.The deferral of gain recognition is dependent on the structure of individualsale transactions.

We incur certainreimbursable costs on behalf of managed hotel properties and franchisees. Wereport reimbursements received from managed properties and franchisees as revenueand the costs incurred on their behalf as expenses. These costs, which relateprimarily to payroll costs at managed properties where we are the employer, areincluded in other revenue and expenses from managed and franchised propertiesin the consolidated statements of income. Since the reimbursements are madebased upon the costs incurred with no added margin, the presentation of thesereimbursable costs has no effect on our operating income, total or per sharenet income, cash flow or financial position.

**Hilton HHonors**

Hilton HHonors is a guest loyalty program operated byHilton HHonors Worldwide, LLC (“HHW”), a wholly owned and consolidatedsubsidiary as of December 31, 2006. At December 31, 2005, HHW was a50% joint venture accounted for under the equity method of accounting as weexercised significant influence over the operation of HHW but lacked acontrolling financial interest. As part of the HI Acquisition, we acquired theremaining 50% ownership interest. The HHonors program is operated for thebenefit of our family of brands worldwide.

Members of the HHonors program earn points based ontheir spending at most of the hotel properties operated and franchised by us. HHWaccumulates and tracks points on the member’s behalf and fulfills awards uponrequest. Points can be redeemed for hotel stays at participating properties andfor a variety of other awards such as airline tickets, cruises and car rentals.

HHonors is provided as a guest loyalty program toparticipating hotels. HHW charges the cost of operating the program, includingthe estimated cost of award redemptions, to participating hotels based onmembers’ qualifying expenditures. These charges do not include a markup orprofit element. Our owned hotels record our share of program costs whenqualified members stay at our owned hotels. When the members redeem awards atour hotels, our owned hotels recognize revenue for reward stays.

We use outside actuaries to assist in determining thefair value of the future award redemption obligation based on statisticalformulas which project future point redemptions based on factors includinghistorical experience, an estimate of points that will never be redeemed, anestimate of the points that will eventually be redeemed and the cost ofreimbursing hotels and other third parties in respect to other redemptionopportunities available to members. These estimates are used to determine therequired liability for outstanding points.

The total liabilityrecorded for outstanding points as of December 31, 2006 was $421 million. Approximately$126 million is classified as current and is recorded in accounts payable andaccrued expenses in our consolidated balance sheets. The remaining $295 millionis long-term and is recorded in insurance reserves and other in ourconsolidated balance sheets.

62

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

**Earnings Per Share(EPS)**

Basic EPS is computed bydividing net income available to common stockholders by the weighted averagenumber of common shares outstanding for the period. The weighted average numberof common shares outstanding for 2004, 2005 and 2006 were 384 million,383 million and 385 million, respectively. Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted. The dilutive effect of stock-basedcompensation and convertible securities increased the weighted average numberof common shares by 34 million in 2004 and 2005 and 35 million in2006. In addition, the increase to net income resulting from interest onconvertible securities assumed to have not been paid for use in calculatingdiluted EPS was approximately $12 million in 2004, 2005 and 2006.

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States (“GAAP”) requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenue and expenses during the reporting period. Actualresults could differ from our estimates and assumptions.

**Reclassifications**

The consolidated financialstatements for prior years reflect certain reclassifications to conform withclassifications adopted in 2006. These classifications have no effect on netincome.

**New AccountingStandards**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued FAS 123(R), “Share-Based Payment,” whicheliminates the ability to account for share-based compensation transactionsusing Accounting Principles Board (“APB”) Opinion No. 25, “Accounting forStock Issued to Employees,” and generally requires that such transactions beaccounted for using a fair-value-based method. Pro forma disclosure is nolonger an alternative. FAS 123(R) also requires that the tax benefit associatedwith these share-based payments be classified as financing activities in thestatement of cash flow rather than operating activities. We adopted FAS 123(R)effective January 1, 2006 (see “Note 4: Stock-Based Compensation” for adetailed discussion).

As permitted by FAS 123(R), we previously accountedfor share-based payments to employees using APB 25’s intrinsic value methodand, as such, generally recognized no compensation expense for employee stockoptions. Had we adopted FAS 123(R) in prior periods, the impact of the standardwould have approximated the impact of FAS 123(R) as described in the disclosureof pro forma net income and earnings per share (see “Note 4: Stock-BasedCompensation”).

63

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

In December 2004, the FASB issued FAS 152, “Accountingfor Real Estate Time-Sharing Transactions.” FAS 152 amends existing accountingguidance to reference the financial accounting and reporting guidance for realestate time-sharing transactions provided in AICPA Statement of Position 04-02,“Accounting for Real Estate Time-Sharing Transactions.” FAS 152 is effectivefor our financial statements issued after January 1, 2006. The newaccounting guidance requires, among other things, that costs incurred to selltimeshare units generally be charged to expense as incurred, including indirectsales and marketing expenses. The new standard also requires a change in theclassification of certain items previously reported as expenses, requiringthese items to be reflected as reductions of revenue. The new classificationshave not affected timeshare operating income, and the timeshare segment operatingmargin has improved.

FAS 152 also impacts the timing of expense recognitionwhen pre-sales of projects under construction occur and we use the percentage-of-completionmethod of accounting. We were previously allowed to defer sales and marketingexpenses in the same proportion as the deferred revenue during construction.FAS 152 allows only the deferral of “direct” sales and marketing expenses.This results in earlier recognition of sales and marketing expenses during theconstruction period but does not impact the total sales and marketing expensesrecognized. This change has not materially affected reported results in 2006.

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), toclarify the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FAS 109, “Accounting forIncome Taxes.” Effective January 1, 2007, FIN 48 prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return. Theadoption of FIN 48 is not expected to result in a material adjustment toretained earnings.

In September 2006, the FASB issued FAS 157, “FairValue Measurements.” FAS 157 defines fair value, provides a framework formeasuring fair value, and expands the disclosures required for fair valuemeasurements. SFAS No. 157 applies to other accounting pronouncements thatrequire fair value measurements; it does not require any new fair valuemeasurements. SFAS No. 157 is effective for financial statements forfiscal years beginning after November 15, 2007. We do not expect thisstatement will have a material impact on our results of operations or financialposition.

In September 2006, the FASB issued FASNo. 158, “Employers’ Accounting for Defined Benefit Pension and OtherPostretirement Plans.” FAS 158 requires an employer to recognize the overfundedor underfunded status of a defined benefit postretirement plan (other than amultiemployer plan) as an asset or liability, respectively, in its balancesheet and to recognize changes in that funded status as unrealized gain or lossthrough accumulated other comprehensive income when the changes occur. FAS 158 alsorequires an employer to measure its defined benefit plan assets and obligationsas of the date of the employer’s fiscal year-end. FAS 158 is effective for ourfiscal year ending December 31, 2006 (see “Note 15: Employee Benefit Plans”).

64

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Theincremental pre-tax effect of adopting FAS 158 in our consolidated balancesheets is as follows:

| ** **                                     | ** ** | **Before Adopting** | ** ** | **Adjustments to**     | ** ** | **After Adopting** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **FAS 158**         | ** ** | **Adopt FAS 158** | ** ** | **FAS 158**        | ** ** |
| ** **                                     | ** ** | **(in millions)**   | ** ** |
| Assets                                         |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Other assets                                   |       |                     | $          | 11                          |       |                    |       | 17 |   |   |   | 28 |   |   |
| Liabilities                                    |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Insurance reserves and other                   |       |                     | (81        | )                           |       |                    | 6          |   |   |   | (75 | ) |   |
| Shareholders’ Equity                      |       |                     |       |                        |       |                    |       |   |   |   |   |   |   |
| Accumulated other  comprehensive (income) loss |       |                     | 17         |                        |       |                    | (23        | ) |   |   | (6 | ) |   |
|                                                |            |                          |            |                             |            |                         |            |  |  |  |  |  |  |  |

 

Theseparate pre-tax adjustments of retained earnings and accumulated othercomprehensive income resulting from adopting FAS 158 are as follows:

| ** **                                                                                    | ** ** | ** **             | ** ** | ** **        | ** ** | **Accumulated**   | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                                    | ** ** | ** **             | ** ** | ** **        | ** ** | **Other**         | ** ** |
| ** **                                                                                    | ** ** | ** **             | ** ** | ** **        | ** ** | **Comprehensive** | ** ** |
| ** **                                                                                    | ** ** | **Adjustments to**     | ** ** | **Comprehensive** | ** ** | **(Income)**      | ** ** |
| ** **                                                                                    | ** ** | **Adopt FAS 158**      | ** ** | **(Income)**      | ** ** | **Loss**          | ** ** |
| ** **                                                                                    | ** ** | **(in millions)** | ** ** |
| Balance at  December 31, 2005                                                            |       |                   | $          | —            |       |              |       | — |   |   |   | 47 |   |   |
| Decrease in  additional minimum liability included in  accumulated other comprehensive income |       |                   | —     |              |       |              | (30        | ) |   |   | (30 | ) |   |
| Adjustments to  adopt FAS 158                                                                 |       |                   | (23        | )                 |       |              | —     |   |   |   | (23 | ) |   |
| Balance at  December 31, 2006                                                            |       |                   |       |              |       |              |       |   |   |   | $ | (6 | ) |   |
|                                                                                               |            |                        |            |                   |            |                   |            |  |  |  |  |  |  |  |  |

 

**NOTE 3:  PURCHASE OF HILTON INTERNATIONAL**

On December 29, 2005, we announced an agreementto acquire HI for approximately £3.3 billion, equivalent to approximately $5.7billion on the transaction date, excluding acquisition costs. OnFebruary 23, 2006, we completed the acquisition of the lodging assetsof Hilton Group plc in an all-cash transaction (the “HI Acquisition”). TheHI properties that we acquired consisted of 392 hotels with approximately102,000 rooms, including 39 owned, 201 leased, four partially ownedthrough joint ventures, 118 managed and 30 franchised properties. The hotels weacquired in the HI Acquisition consisted of 249 properties operated under theHilton brand, 131 properties operated under the mid-market Scandic brand, oneproperty operated under the Conrad brand and 11 other properties. We alsoacquired 80 LivingWell health clubs, primarily in Europe, and six timeshareproperties. As a result of the HI Acquisition, we now wholly own the HiltonHHonors Worldwide frequent guest program and the Hilton Reservations Worldwidereservation system, both of which were previously owned equally by us and HI.We also obtained worldwide ownership of the luxury Conrad hotel brand, whichhad been operated as a joint venture between us and HI since 2002. As a resultof the HI Acquisition, we now own all the rights to the Hilton and Conradbrands, including the right to develop these brands, along with all of ourother proprietary brands, on a worldwide basis. Results of operations in 2006include the income of the acquired properties from February 23, 2006.

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

In order to fund the HI Acquisition, we usedapproximately $867 million of cash and equivalents and borrowed approximately$4.8 billion under new senior credit facilities with a syndicate of financialinstitutions (see “Note 11: Long-Term Debt”). The aggregate cash considerationfor the HI Acquisition is as follows:

| ** **                                                     | ** ** | **(in millions)** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|
| Payment to Hilton  Group plc from cash on hand                 |       |                   | $          | 867 |   |   |
| Payment to Hilton  Group plc from new senior credit facilities |       |                   | 4,809      |   |   |
| Total consideration paid to Hilton Group plc                   |       |                   | 5,676      |   |   |
| Direct  acquisition costs                                      |       |                   | 85         |   |   |
| Total                                                          |       |                   | $          | 5,761 |   |   |

 

*Allocation ofPurchase Price*

FAS 141, “Business Combinations,” requires that thetotal purchase price be allocated to the assets acquired and liabilitiesassumed based on their fair values at the acquisition date. In valuing acquiredassets and assumed liabilities, fair values are based on factors including, butnot limited to, quoted market prices, expected future cash flows, currentreplacement costs, market rate assumptions and appropriate discount and growthrates.

Under the purchase method of accounting, the assetsand liabilities of Hilton International were recorded at their respective fairvalues as of the date of the acquisition. Subsequent to the acquisition date,we reduced the preliminary goodwill balance by approximately $389 millionreflecting adjustments to the preliminary purchase price allocations of certainitems including property and equipment, amortizable intangible assets, brands,deferred income taxes and other assets and liabilities to reflect revised fairvalues. The following table summarizes the fair values of the assets acquiredand liabilities assumed as of the acquisition date.

|                                                         | ** ** | **Fair Value**    | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|
| ** **                                              | ** ** | **(in millions)** | ** ** |
| Current assets,  including $467 in cash and equivalents |       |                   | $          | 961 |   |   |
| Property and  equipment                                 |       |                   | 2,911      |   |   |
| Amortizable  intangible assets                          |       |                   | 963        |   |   |
| Brands                                                  |       |                   | 1,741      |   |   |
| Goodwill                                                |       |                   | 2,328      |   |   |
| Other assets                                            |       |                   | 310        |   |   |
| Current  liabilities                                    |       |                   | (1,269     | ) |   |
| Long-term debt,  including capital lease obligations    |       |                   | (612       | ) |   |
| Deferred income  taxes                                  |       |                   | (1,282     | ) |   |
| Other liabilities                                       |       |                   | (290       | ) |   |
|                                                    |       |                   | $          | 5,761 |   |   |

 

66

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

*Pro Forma FinancialInformation*

The following proforma consolidated results of operations for the years ended December 31,2005 and 2006 assume that the HI Acquisition was completed as of January 1,2005:

| ** **                  | ** ** | **2005**                                                           | ** ** | **2006** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------|------------|----------|------------|
| ** **                  | ** ** | **(unaudited)**                                                    | ** ** |
| ** **                  | ** ** | **(in millions,  except per share   amounts)** | ** ** |
| Total revenue               |       | $                                                                  | 8,333      |     | 8,675      |   |
| Net income                  |       | $                                                                  | 454        |     | 552        |   |
| Diluted earnings per  share |       | $                                                                  | 1.12       |     | 1.34       |   |

 

The pro forma amountsrepresent the historical operating results of Hilton Hotels Corporation and HIwith adjustments for purchase price allocation and for translation fromInternational Financial Reporting Standards to United States GAAP.

*Goodwill and IntangibleAssets Acquired*

Goodwill resulting from the HI Acquisition totaledapproximately $2.33 billion. We do not expect any of the goodwill to be taxdeductible. Goodwill has been assigned to our segments as follows:  Hotel Ownership - $1.35 billion; and Managingand Franchising - $976 million. We also have an intangible asset relating tothe brand names acquired in the HI Acquisition totaling $1.74 billion as of theacquisition date. Goodwill and brands are considered to have an indefinite lifeand are not amortized, but rather are reviewed annually for impairment or morefrequently if indicators of impairment exist.

Intangibleassets with definite lives subject to amortization acquired in the HIAcquisition are as follows:

| ** **            | ** ** | ** **             | ** ** | **Weighted-Average**         | ** ** |
|-----------------------|------------|------------------------|------------|------------------------------|------------|
| ** **            | ** ** | **Fair Value**    | ** ** | **Amortization Period** | ** ** |
| ** **            | ** ** | **(in millions)** | ** ** | **(in years)**          | ** ** |
| Leases                |       |                   | $          | 263                          |       |   |   | 25 |   |   |
| Management  contracts |       |                   | 648        |                         |       |   | 20 |   |   |
| Franchise  contracts  |       |                   | 52         |                         |       |   | 14 |   |   |
|                  |       |                   | $          | 963                          |       |   |   | 21 |   |   |

 

**NOTE 4:  STOCK-BASED COMPENSATION**

As of December 31, 2006, we maintained the 2004Omnibus Equity Compensation Plan (“2004 Plan”) which provides for the grant ofoptions, stock units, performance units and other stock-based awards. Inaddition, we maintained three stock plans with substantially identical termsthat provide for the grant of options. At December 31, 2006, there areapproximately 21 million shares available for issuance under the 2004 Plan andno authorized shares remaining available for grant under the other three stockplans.

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Effective January 1,2006, we adopted FAS 123(R). In accordance with the modified prospectivetransition method of FAS 123(R), financial results for prior periods have notbeen restated. We recognize compensation expense on a straight-line basis overthe requisite service period of the award, taking into consideration theapplicable estimated forfeiture rates. Compensation expense associated withperformance units is subject to adjustments for changes in estimates relatingto whether the performance objective will be achieved (see Restricted StockUnits below). Total pre-tax compensation expense included in net income was $10million, $22 million and $46 million for the years ended December 31,2004, 2005, and 2006, respectively. The adoption of FAS 123(R) resulted inincremental pre-tax expense of $16 million ($10 million, net of tax) for 2006. Theimpact to both basic and diluted EPS was $.03 and $.02 for the years ended December 31,2004 and 2005, respectively. For the year ended December 31, 2006, theimpact to basic and diluted EPS, was $.03 and $.02, respectively.

Prior to the adoption ofFAS 123(R), benefits of tax deductions in excess of recognized compensationcosts were reported as operating cash flows. FAS 123(R) requires that excesstax benefits be reported as a financing cash inflow rather than as a reductionof taxes paid. Such amounts totaled $12 million for 2006. As of December 31,2006, there was $73 million of unrecognized compensation cost which is expectedto be recognized over a weighted-average period of 23 months.

Prior to January 1,2006, we applied APB Opinion 25 and related interpretations in accounting forour stock-based compensation plans. Compensation cost for stock units andperformance units awarded in 2004 and 2005 is being expensed over therespective vesting periods and is included in net income. No compensation costrelated to stock option awards was reflected in net income for the periodsprior to 2006, as all stock options had an exercise price greater than or equalto the market value of the underlying common stock on the date of grant.

Had the expense for all forms of our stock-basedcompensation been determined using the fair value based method defined in FAS123(R), our net income and net income per share would have been reduced to thepro forma amounts indicated as follows:

| ** **                                                                  | ** ** | **Year Ended December 31,**                           | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                                                             | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                                                                  | ** ** | **(in millions, except per share amounts)** | ** ** |
| Net income:                                                                 |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                 |       |                                                                 | $          | 238 |   |   |   | 460 |   |   |   | 572 |   |   |
| Add back: Compensation expense included in reported net  income, net of tax |       |                                                                 | 6          |   |   |   | 14 |   |   |   | 28 |   |   |
| Deduct: Fair-value compensation expense for all awards,  net of tax         |       |                                                                 | (18        | ) |   |   | (23 | ) |   |   | (28 | ) |   |
| As adjusted                                                                 |       |                                                                 | $          | 226 |   |   |   | 451 |   |   |   | 572 |   |   |
| Basic earnings per  share:                                                  |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                 |       |                                                                 | $          | .62 |   |   |   | 1.20 |   |   |   | 1.49 |   |   |
| As adjusted                                                                 |       |                                                                 | $          | .59 |   |   |   | 1.18 |   |   |   | 1.49 |   |   |
| Diluted earnings per  share:                                                |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                 |       |                                                                 | $          | .60 |   |   |   | 1.13 |   |   |   | 1.39 |   |   |
| As adjusted                                                                 |       |                                                                 | $          | .57 |   |   |   | 1.11 |   |   |   | 1.39 |   |   |

 

The total intrinsic valueof stock options exercised was $67 million, $48 million and $68 million for theyears ended December 31, 2004, 2005 and 2006, respectively. The total fairvalue of restricted stock units vested was $8 million and $15 million for theyears ended December 31, 2005 and 2006, respectively. No restricted stockunits vested in 2004.

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

*Stock Options*

Options may be granted tosalaried officers, directors and other key employees to purchase our commonstock at not less than the fair market value at the date of grant. Generally,options vest over a four year period, contingent upon continued employment, andremain outstanding for ten years from the date of grant. Options are generallyexercisable in installments commencing one year after the date of grant.

We granted 400,000 and2,530,165 stock options in 2005 and 2006 with weighted-average exercise pricesof $22.19 and $25.35 per share, respectively, and estimated weighted-averagegrant date fair values of approximately $13.12 and $13.44 per share,respectively. No options were granted in 2004. Cash received from optionsexercised under all share-based payment arrangements in 2006 was $63 million. Theactual tax benefit realized for the tax deductions from options exercised was$26 million, $22 million and $28 million for 2004, 2005 and 2006, respectively.

Thefair values of the options granted in 2005 and 2006 were estimated on the grantdate using the Black-Scholes option-pricing model with the followingweighted-average assumptions used for grants in the years ended December 31,2005 and 2006:

| ** **                                | ** ** | **2005** | ** ** | **2006** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Dividend yield                            |       | 1.0      | %          | 0.7      | %          |
| Expected  volatility                      |       | 55.0     | %          | 55.0     | %          |
| Weighted-average  risk-free interest rate |       | 4.1      | %          | 4.5      | %          |
| Expected term of option  (in years)       |       | 8        |       | 6        |       |

 

Volatility is based on historical information withterms consistent with the expected life of our non-qualified stock options. Therisk-free rate is based on the quoted treasury yield curve at the time ofgrant, with terms consistent with the expected life of our non-qualified stockoptions. The dividend yield is based on the annual dividend payment of $0.12 and$0.16 per share for 2005 and 2006, respectively.

Asummary of stock option activity under our equity plans for the year ended December 31,2006 is as follows:

| ** **                             | ** ** | ** ** | ** ** | ** **           | ** ** | **Weighted-**   | ** ** | ** **             | ** ** |
|----------------------------------------|------------|------------|------------|----------------------|------------|-----------------|------------|------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | ** **           | ** ** | **Average**     | ** ** | ** **             | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Weighted-**        | ** ** | **Remaining**   | ** ** | **Aggregate**          | ** ** |
| ** **                             | ** ** | ** ** | ** ** | **Average Exercise** | ** ** | **Contractual** | ** ** | **Intrinsic**          | ** ** |
| **Option Activity**               | ** ** | ** ** | ** ** | **Shares**           | ** ** | **Price**       | ** ** | **Term**               | ** ** | **Value** | ** ** |
| ** **                             | ** ** | ** ** | ** ** | ** **           | ** ** | **(years)**     | ** ** | **(in millions)** | ** ** |
| Balance at  December 31, 2005     |       |       | 16,896,920 |                 |       |            | $          | 14.52                  |       |   |   |   |   |   |   |   |   |   |
| Granted                                |       |       | 2,530,165  |                 |       |            | 25.35      |                   |       |   |   |   |   |   |   |   |   |
| Exercised                              |       |       | (4,834,204 | )                    |       |            | 13.03      |                   |       |   |   |   |   |   |   |   |   |
| Forfeited                              |       |       | (177,043   | )                    |       |            | 18.08      |                   |       |   |   |   |   |   |   |   |   |
| Expired                                |       |       | (15,000    | )                    |       |            | 18.66      |                   |       |   |   |   |   |   |   |   |   |
| Balance at December 31, 2006      |       |       | 14,400,838 |                 |       |            | 16.87      |                   |       |   | 5.0 |   |   |   | $ | 265 |   |   |
| Exercisable at  December 31, 2006 |       |       | 8,186,604  |                 |       |            | 12.31      |                   |       |   | 4.4 |   |   |   | $ | 188 |   |   |
|                                        |            |            |            |                      |            |                 |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

69

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

At December 31,2006, outstanding stock options issued under our stock plans are as follows:

| ** **                                | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | ** **                   | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                | ** ** | ** **                   | ** ** | **Average**                  | ** ** | **Weighted-** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                | ** ** | **Number**                   | ** ** | **Remaining**                | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise Price**                   | ** ** | **Outstanding**              | ** ** | **Contractual Life**    | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| $  6.65 –   9.81 |       |                         | 787,842    |                         |       |   | 3.0 |   |   |   | $ | 9.16 |   |   |   | 787,842 |   |   |   | $ | 9.16 |   |   |
| 11.18 – 13.40                        |       |                         | 7,619,726  |                         |       |   | 5.3 |   |   |   | 11.93 |   |   |   | 6,255,142 |   |   |   | 11.94 |   |   |
| 13.95 – 20.56                        |       |                         | 1,143,620  |                         |       |   | 1.5 |   |   |   | 16.52 |   |   |   | 1,143,620 |   |   |   | 16.52 |   |   |
| 22.19 – 27.53                        |       |                         | 4,849,650  |                         |       |   | 9.1 |   |   |   | 25.98 |   |   |   | — |   |   |   | — |   |   |
| 6.65 – 27.53                         |       |                         | 14,400,838 |                         |       |   | 5.0 |   |   |   | 16.87 |   |   |   | 8,186,604 |   |   |   | 12.31 |   |   |

 

A summary of unvested options as of December 31,2006 and the changes during the year then ended is as follows:

| ** **                             | ** ** | ** ** | ** ** | **Weighted-**          | ** ** |
|----------------------------------------|------------|------------|------------|------------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **Average Grant** | ** ** |
| **Unvested Option Activity** | ** ** | ** ** | ** ** | **Shares**             | ** ** | **Date Fair Value** | ** ** |
| Balance at  December 31, 2005     |       |       | 6,796,688  |                   |       |   | $ | 4.97 |   |   |
| Granted                                |       |       | 2,530,165  |                   |       |   | 13.44 |   |   |
| Vested                                 |       |       | (2,935,576 | )                      |       |   | 8.35 |   |   |
| Forfeited                              |       |       | (177,043   | )                      |       |   | 4.18 |   |   |
| Balance at  December 31, 2006     |       |       | 6,214,234  |                   |       |   | 8.70 |   |   |
|                                        |            |            |            |                        |            |  |  |  |  |  |  |  |

 

*Restricted StockUnits*

During 2004, 2005 and 2006, we awarded restrictedstock under our 2004 Plan in the form of time-based units (“TBU”) andperformance-based units (“PBU”). TBU awards generally vest annually in astraight-line method over four years. PBU awards have a performance and vestingperiod established by our Compensation Committee, which was three years for thePBUs granted in 2004, 2005 and 2006. PBUs are payable from 0% to 150% of thetarget amount depending upon on the level of achievement of performance goalsestablished by the Compensation Committee. Compensation expense for the TBU andPBU awards is measured at the fair value of the underlying stock at the date ofgrant and is adjusted for estimated forfeitures. Compensation expenseassociated with the PBU awards is also subject to adjustments for changes inestimates relating to the achievement of the established performance goals.

In 2004, we granted 1,560,670 TBUs and 765,309 PBUs,both with grant date fair values of approximately $17.37 per share.

In 2005, we granted 1,272,313 TBUs and 810,749 PBUs(the “Original 2005 PBUs”), both with a grant date fair value of approximately$22.19 per share.  On March 31,2006, the Compensation Committee determined that, in light of the HIAcquisition on February 23, 2006, the performance goals established forthe Original 2005 PBUs were no longer appropriate because they do not take intoaccount the impact of the HI Acquisition on the performance of the new combinedcompany. Accordingly, to encourage retention and to better align compensationincentives with the performance of the new combined company, the CompensationCommittee issued new grants under the 2004 Plan consisting of PBUs, TBUs andstock options to all of the recipients of the Original 2005 PBU grants, asdescribed in the table below (the “Special Grants”).

70

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

With respect to the Special Grants, the PBUs have aperformance and vesting period ending on December 31, 2007, and the TBUsand stock options vest in full on January 5, 2008. On March 31, 2006,the Compensation Committee cancelled the Original 2005 PBUs, except for grantsmade to certain executive officers. With respect to those executive officers,following the December 31, 2007 simultaneous close of the performanceperiods for both the Original 2005 PBUs and the PBU portion of the SpecialGrants, the Compensation Committee will assess our overall performance inrelation to the performance objectives established for the Original 2005 PBUs andthe PBU portion of the Special Grants and the individual performance of eachholder of those units and determine what payment is warranted based on suchperformance. The Compensation Committee believes that the amount payable withrespect to the Original 2005 PBUs based on actual performance will be minimalor zero at the end of the full performance period. However, in the unlikelyevent that any amount becomes payable with respect to the Original 2005 PBUs,the Compensation Committee may nevertheless exercise its discretionaryauthority under the Original 2005 PBUs and the PBU portion of the SpecialGrants to reduce the amount payable thereunder so that the total compensationpaid to each holder reflects the Compensation Committee’s intent with regard toappropriate pay-for-performance under both grants and remains fair andreasonable in light of both company and individual performance over the period.

In the first quarter 2006, we granted 2,845,001 TBUsand 910,272 PBUs with weighted-average grant date fair values of approximately$23.69 and $24.30 per share, respectively. The TBUs vest in full on January 5,2009 and the PBUs have a performance and vesting period ending on December 31,2008. On March 31, 2006, the Compensation Committee adjusted the 2006 PBUgrants for all recipients as follows: (i) the target number of PBUsgranted to each recipient was reduced by 50%; and (ii) each recipientreceived a nonqualified stock option grant under the 2004 Plan at a fair marketvalue exercise price of $25.53, which vests in three equal annual installmentson January 5 of each of 2007, 2008 and 2009.

The changes to the original 2005 and 2006 PBU awardsare as follows:

| **Original 2005 PBU Grants** | ** ** | **Special Grants** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | ** **              | ** ** | **Weighted-** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **              | ** ** | **Average Grant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average Grant** | ** ** |
| ** **                                  | ** ** | ** **              | ** ** | **Date Fair** | ** ** | ** ** | ** ** | ** ** | ** ** | **Date Fair** | ** ** |
| **Type**                                    | ** ** | ** **              | ** ** | **Units** | ** ** | **Value** | ** ** | **Type** | ** ** | **Units** | ** ** | **Value** | ** ** |
| PBU                                         |       |                    | 810,749    |   |   |   | $ | 22.19 |   |   |   | TBU |   |   |   | 253,295 |   |   |   | $ | 25.53 |   |   |
|                                        |       |                    |       |   |   |   |   |   |   |   | PBU |   |   |   | 253,295 |   |   |   | 25.53 |   |   |
|                                        |       |                    |       |   |   |   |   |   |   |   | Options |   |   |   | 759,884 |   |   |   | 13.56 |   |   |
|                                             |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

| **Original 2006 PBU Grants** | ** ** | **Adjusted 2006 Grants** | ** ** |
|---------------------------------------------|------------|------------------------------------|------------|
| ** **                                  | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                         | ** ** | **Weighted-** | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **                                  | ** ** | ** **                         | ** ** | **Average Grant** | ** ** | ** ** | ** ** | ** ** | ** ** | **Average Grant** | ** ** |
| ** **                                  | ** ** | ** **                         | ** ** | **Date Fair** | ** ** | ** ** | ** ** | ** ** | ** ** | **Date Fair** | ** ** |
| **Type**                                    | ** ** | ** **                         | ** ** | **Units** | ** ** | **Value** | ** ** | **Type** | ** ** | **Units** | ** ** | **Value** | ** ** |
| PBU                                         |       |                               | 910,272    |   |   |   | $ | 24.30 |   |   |   | PBU |   |   |   | 456,761 |   |   |   | $ | 25.53 |   |   |
|                                        |       |                               |       |   |   |   |   |   |   |   | Options |   |   |   | 1,370,281 |   |   |   | 13.56 |   |   |
|                                             |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Total incremental cost resulting from the grants madeon March 31, 2006 is expected to be approximately $13 million, expensedover 33 months from the date of grant. As a result of the modification, werecognized additional compensation expense of approximately $5 million for theyear ended December 31, 2006.

In the third quarter of 2006, we granted 13,540 TBUswith a grant date fair value of $27.76 per share.

71

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Asummary of the activity of TBUs and PBUs granted under our 2004 Plan for theyear ended December 31, 2006 is as follows:

| ** **                         | ** ** | ** ** | ** ** | **Weighted-**                 | ** ** |
|------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                         | ** ** | ** ** | ** ** | **Average Grant**        | ** ** |
| ** **                         | ** ** | **Units**  | ** ** | **Date Fair Value** | ** ** |
| TBUs                               |       |       |       |                          |       |   |   |   |   |
| Balance at  December 31, 2005 |       |       | 2,330,078  |                          |       |   | $ | 19.84 |   |   |
| Granted                            |       |       | 3,111,836  |                          |       |   | 23.86 |   |   |
| Vested                             |       |       | (639,402   | )                             |       |   | 19.62 |   |   |
| Forfeited                          |       |       | (317,764   | )                             |       |   | 21.27 |   |   |
| Balance at  December 31, 2006 |       |       | 4,484,748  |                          |       |   | 22.56 |   |   |
| PBUs                               |       |       |       |                          |       |   |   |   |   |
| Balance at  December 31, 2005 |       |       | 1,519,907  |                          |       |   | $ | 19.84 |   |   |
| Granted                            |       |       | 1,620,328  |                          |       |   | 24.84 |   |   |
| Forfeited                          |       |       | (89,774    | )                             |       |   | 20.83 |   |   |
| Cancelled                          |       |       | (1,459,871 | )                             |       |   | 23.50 |   |   |
| Balance at  December 31, 2006 |       |       | 1,590,590  |                          |       |   | 21.51 |   |   |

 

*SupplementalRetention and Retirement Plan*

We also providesupplemental retirement benefits to eligible senior officers in the form ofstock units that settle in shares of our common stock on a one-for-one basis. Thecompensation expense associated with the benefits is expensed over thefour-year vesting period. At December 31, 2006, an insignificant amount ofstock units remain unvested. The pre-tax compensation expense under these planswas $4 million, $1 million  and $1million for the years ended December 31, 2004, 2005 and 2006, respectively.

**NOTE 5:  ACQUISITIONS AND DISPOSITIONS**

We consider properties to be held for sale whenmanagement approves and commits to a formal plan to actively market a propertyfor sale, executes a formal sales contract, allows the buyer to complete itsdue diligence review and receives a non-refundable deposit. Until necessary approvalshave been received and substantive conditions to the buyer’s obligation toperform have been satisfied, we do not consider a sale to be probable.

Upon designation as an asset held for sale, we reviewthe carrying value of the property and, as appropriate, adjust the value to thelower of its carrying value or its estimated fair value less estimated cost tosell, and we stop recording depreciation expense.

To the extent we realize again from the sale of real estate and maintain significant continuinginvolvement in the form of a long-term management contract, the gain isdeferred and recognized in revenue over the term of the contract. The deferralof pre-tax gains on such sales totaled $5 million, $236 million and$5 million in 2004, 2005 and 2006, respectively. Results for the yearsended December 31, 2004, 2005 and 2006 include the recognition of pre-taxdeferred gains totaling $15 million, $23 million and $38 million, respectively.

72

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

*Fiscal Year 2006Transactions*

In the first quarter of 2006, we acquired thelong-term management contracts for the Hilton Anatole, in Dallas, Texas; theGrand Wailea Resort Hotel & Spa in Maui, Hawaii; the Arizona BiltmoreResort & Spa in Phoenix, Arizona; and the La Quinta Resort &Club in La Quinta, California.

On February 23, 2006, we completed theacquisition of the lodging assets of Hilton Group plc operated by itssubsidiary, Hilton International Co., for approximately £3.3 billion, equivalentto approximately $5.7 billion on the transaction date, excluding acquisitioncosts, in an all-cash transaction (see “Note 3: Purchase of Hilton International”).

In March 2006, we completed the sale of twowholly owned hotels. The Pointe Hilton Tapatio Cliffs in Arizona was sold forcash of approximately $85 million, resulting in a pre-tax loss of approximately$33 million. The sale of the Pointe Hilton Tapatio Cliffs resulted in areduction in our consolidated goodwill balance of approximately $10 million.The Hilton Minneapolis in Minnesota was sold for cash of approximately $92million, resulting in a pre-tax loss of approximately $5 million. We haveretained long-term management agreements on both of the aforementionedproperties. In addition to the sales of these wholly owned hotels, we sold ourminority interest in the Hilton Times Square in New York, a joint ventureproperty, for cash of approximately $27 million, resulting in a pre-tax gain ofapproximately $11 million.

In May 2006, in connection with the sale of theHilton Pittsburgh in Pennsylvania, we received cash of approximately $17million, resulting in a pre-tax gain of approximately $8 million. The hotelwill continue to operate as a Hilton-branded property under the terms of a 20-yearfranchise agreement. In addition, we sold our minority interest in the EmbassySuites Hotel San Diego-La Jolla in California, a joint venture property, forcash of approximately $5 million, resulting in a pre-tax loss of approximately$2 million.

In the three months ended September 30, 2006, wesold certain assets acquired as part of the HI Acquisition. The assets soldinclude the Hilton Toronto Airport, the Hilton Toronto Downtown, the HiltonQuebec City, the Hilton Montreal Airport and the Hilton Saint John, all in Canada;the Wembley hotel in the United Kingdom; the stand alone LivingWell healthclubs; and the leasehold in the Drake Hotel in Chicago. We have retained multi-yearmanagement agreements on all of these dispositions except for LivingWell.Proceeds totaled a U.S. dollar equivalent of approximately $467 million as ofthe transaction dates. No gains or losses have been recognized in earningsrelated to the sale of assets previously acquired as part of the HI Acquisition.In accordance with FAS 141, the preliminary purchase price allocation has beenadjusted to reflect revised fair values based on the sales transactions, withthe differences between the preliminary and final valuations reflected ingoodwill (see “Note 3: Purchase of Hilton International”).

In October 2006, we sold our minority interest inthe Embassy Battery Park in New York, a joint venture property, for cash ofapproximately $35 million, resulting in a pre-tax gain of approximately $22million. We maintain a long-term franchise contract on this property.

In November 2006, we completed the sale of twowholly owned hotels. The Hilton London Metropole and the Hilton BirminghamMetropole were sold for cash of a U.S. dollar equivalent of approximately $814million as of the transaction date. We have retained long-term managementagreements on both of the aforementioned properties. No gains or losses havebeen recognized in earnings related to the sale of assets previously acquiredas part of the HI Acquisition in accordance with FAS 141.

73

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

The $72 million net other gain in our consolidatedstatements of income for 2006 also includes $33 million of gains on settlementrecoveries related to mold found in certain areas of the Hilton HawaiianVillage in 2002, a $24 million gain on sales of certain marketable securities,a $17 million net gain from insurance proceeds related to Hurricane Katrina(see “Note 19: Insurance Recoveries”), a $3 million pre-tax loss on derivativeinstruments based on their market value at December 31, 2006 (see “Note 2:Summary of Significant Accounting Policies—Derivative Instruments”), a $3million loss on the termination of various management and franchise contractsto which we had value assigned, and $3 million in other net gains.

We have engaged EastdilSecured, LLC to act as our broker for the sale or financing of certain of ourowned hotels. Fees earned by Eastdil related to owned hotels in 2005 and 2006were approximately $3 million and $2 million,respectively. Benjamin V. Lambert, a director of our company, is Chairman ofEastdil.

*Fiscal Year 2005Transactions*

In the 2005 first quarter, we sold the HiltonTarrytown in New York for cash of approximately $9 million. The sale resultedin a pre-tax gain of approximately $5 million. After the sale, the hotel wasconverted to a Doubletree under a long-term franchise agreement.

In April 2005, we completed the sale of the RedLion Austin in Texas for cash of approximately $6 million. As the purchaseprice approximated our carrying value, no gain or loss was recorded on the sale.In May 2005, we completed the sale of two Homewood Suites by Hiltonproperties for total cash of approximately $17 million, resulting in a pre-taxloss of approximately $1 million. We continue to manage both hotels underlong-term management agreements.

In the second quarter of 2005, we completed twotransactions whereby we acquired land on Hawaii’s Big Island. The firsttransaction occurred in April 2005 involving the acquisition of 62 acresof land on which the Hilton Waikoloa Village is located. The purchase price forthis transaction was approximately $115 million. We had previously leased theland pursuant to an agreement expiring in 2061. In May 2005, we completedthe second transaction whereby we acquired 112 acres of undeveloped landlocated within the Waikoloa Beach Resort for approximately $65 million.

In June 2005, we completed the sale of sevenwholly owned and one majority owned hotel. The Hilton Suites Phoenix inArizona, Hilton Suites Anaheim in California and Embassy SuitesCleveland-Beachwood in Ohio were sold for cash totaling approximately $72million, resulting in a pre-tax gain totaling approximately $16 million. Eachof the hotels continues to operate under long-term franchise agreements. Inaddition, we continue to manage the Hilton Suites Phoenix under a long-termmanagement agreement. A pre-tax gain totaling approximately $13 million on theHilton Suites Phoenix has been deferred, due to our continuing involvement inmanagement of the hotel, and is being recognized over the life of the five-yearmanagement contract retained on this property. These three properties were soldto the RLJ Urban Lodging Fund, a hotel investment fund created by RLJDevelopment, LLC (“RLJ”). Robert L. Johnson was a director of the Company andthe Chairman and Chief Executive Officer of RLJ at the time of the sale. Inaddition, we have a limited partnership interest in the RLJ Urban Lodging Fundtotaling approximately $13 million at December 31, 2005, which isaccounted for as a cost basis investment.

74

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

The Doubletree Bellevue in Washington was sold in June 2005for approximately $49 million in cash, resulting in a pre-tax loss ofapproximately $13 million. The Hilton Suites Brentwood in Tennessee was soldfor approximately $6 million in cash, resulting in a pre-tax loss ofapproximately $5 million. The Hilton Alexandria in Virginia was sold for cashof approximately $93 million, resulting in a pre-tax gain of approximately $37million, and the Hilton Charlotte in North Carolina was sold for cash ofapproximately $56 million, resulting in a pre-tax gain of approximately $5million. The sale of the Hilton Charlotte resulted in a reduction in ourconsolidated goodwill balance of approximately $3 million. We have retainedlong-term franchise agreements on each of the aforementioned properties.

Also in June 2005, we sold the majority ownedHilton Glendale in California for cash of approximately $80 million, resultingin a pre-tax gain of approximately $30 million. Amounts attributable to theminority partner, totaling approximately $7 million on a pre-tax basis, arereflected in the consolidated statements of income, net of tax, in minority andnon-controlled interests, net. We have retained a long-term franchise agreementon the hotel.

In addition to the sales of wholly owned and majority ownedhotels, we sold our minority or non-controlling interests in five joint venturehotel properties in the second quarter. Proceeds totaled approximately $26million, resulting in a pre-tax gain of approximately $6 million.

In July 2005, we sold the Hilton East Brunswickin New Jersey for cash of approximately $43 million. Results in 2005 include animpairment charge of $2 million to reduce this asset to its fair market value. Wemanaged the hotel on a short-term basis and retain a long-term franchiseagreement. Also in July 2005, we sold our minority interests in eightjoint venture hotels. Proceeds totaled approximately $2 million. Results forthe year ended December 31, 2005 include an impairment charge of $3million to reduce the joint venture investment to its fair market value.

In August 2005, we sold the Palmer House Hiltonin Illinois for cash of approximately $230 million. We continue to manage thePalmer House Hilton under a long-term management agreement. A pre-tax gaintotaling approximately $168 million has been deferred, due to our continuinginvolvement in management of the hotel, and will be recognized over theten-year life of the management contract retained on this property.

In October 2005, we sold the Hilton Boston BackBay in Massachusetts for cash of approximately $110 million. We continue tomanage the Hilton Boston Back Bay under a long-term management agreement. Apre-tax gain totaling approximately $35 million has been deferred, due to ourcontinuing involvement in management of the hotel, and is being recognized overthe 20 year life of the management contract retained on this property. The saleof the Hilton Boston Back Bay resulted in a reduction in our consolidatedgoodwill balance of approximately $1 million.

In November 2005, we sold the Hilton Southfieldin Michigan for cash of approximately $6 million, resulting in a pre-tax gainof approximately $3 million. In addition, we have retained a long-termfranchise agreement.

75

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

In December 2005, we completed the sale of fourwholly owned hotels. The Hilton Portland in Oregon was sold for cash ofapproximately $84 million. We continue to manage the Hilton Portland under along-term management agreement. A pre-tax gain totaling approximately $19million has been deferred due to our continuing involvement in the managementof the hotel, and is being recognized over the 20 year life of the managementcontract retained on this property. The Hilton San Diego in California was soldfor cash of approximately $90 million, resulting in a pre-tax gain ofapproximately $66 million. The Hilton Dallas Fort Worth in Texas was sold forcash of approximately $66 million, resulting in a pre-tax loss of approximately$23 million and the Hilton Anchorage in Alaska was sold for cash ofapproximately $65 million, resulting in a pre-tax loss of approximately $1million. The sale of the Hilton Dallas Fort Worth resulted in a reduction inour consolidated goodwill balance of approximately $7 million. We retainlong-term franchise agreements on each of the aforementioned properties.

The $103 million net othergain in our consolidated statement of income for 2005 also includes a $3 millionunrealized gain on our oil futures derivative based on the market value of thecontract at December 31, 2005, and a $10 million loss on foreign currencyoptions based on the market value of the options as of December 31, 2005. Alsoincluded in the 2005 period are a net loss of $1 million related to thedisposition of certain management and franchise agreements to which value hadbeen assigned, and a $1 million loss on the sale of other fixed assets. Theasset dispositions in 2005 also generated capital gains for tax purposes, whichenabled us to utilize capital loss tax carryforwards that had been fullyreserved. The utilization of these capital loss carryforwards resulted in a netbenefit to our income tax provision of approximately $34 million in 2005.

*Tax-Deferred AssetExchange*

The sale of the Palmer House Hilton in 2005 waseffectuated through a reverse Internal Revenue Code Section 1031tax-deferred exchange with the two land acquisitions on Hawaii’s Big Island. Assuch, the sale was completed through an exchange facilitator that received andheld the cash proceeds for our benefit until the exchange was completed.

In addition, certain ofthe owned hotel sales closed in the second quarter of 2005 were also completedthrough an exchange facilitator in order to serve as potential substitutes tothe Palmer House in completing the exchange with the land in Hawaii or tofacilitate a separate exchange pursuant to which other property might beacquired. As a result, approximately $267 million of sale proceeds from assetsales completed in the second quarter of 2005 were held for our benefit by theexchange facilitator. As a result of the sale of the Palmer House Hilton in thethird quarter, approximately $119 million of these proceeds were released to usand the cash became unrestricted. In October, approximately $84 million of theproceeds from the sale of the Palmer House Hilton were released to us andbecame unrestricted with the completion of the tax deferred-exchange related tothe 112 acres of undeveloped land in Hawaii. The remaining $64 million ofrestricted cash related to exchange activity became unrestricted in the fourthquarter of 2005.

*Fiscal Year 2004Transactions*

In the 2004 first quarter, we sold the Doubletree LaPosada Resort - Scottsdale in Arizona for approximately $30 million, includingapproximately $6 million in cash and a note receivable for approximately $24million. The note receivable was repaid in the first quarter of 2005. No bookgain or loss was realized on the sale; however, the transaction generated acapital gain for tax purposes, which enabled us to utilize existing capitalloss tax carryforwards that had been fully reserved in prior periods. Thetransaction resulted in a net benefit to our income tax provision ofapproximately $2 million.

76

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

In the second quarter of 2004, we sold the DoubletreeModesto and Doubletree Bakersfield, both in California for a total ofapproximately $40 million in cash. Gains of approximately $3 million on Modestoand approximately $2 million on Bakersfield were deferred and, due to ourcontinuing involvement with each hotel, are being recognized over the life ofthe long-term management agreement retained on each hotel. Both managementagreements are for a term of ten years. The transaction also generated acapital gain for tax purposes, which enabled us to utilize existing capitalloss tax carryforwards that had been fully reserved in prior periods. Thetransaction resulted in a net benefit to our income tax provision ofapproximately $4 million.

In the fourth quarter of 2004, we sold the DoubletreeJantzen Beach and the Doubletree Columbia River, both near Portland Oregon, fora total of approximately $29 million in cash. The sale resulted in a pre-taxloss of approximately $3 million. The net other loss of $5 million in 2004includes the $3 million loss on the sale of the two Doubletrees, a $4 millionloss related to the write-off of values assigned to certain long-termmanagement and franchise agreements that were terminated in 2004 and a $1million loss due to the fair market value adjustment of our derivativeinstruments. These losses were partially offset by a $3 million gain from thesale of our investment in Travelweb.

In August 2004, we acquired a 24 percent minorityinterest in a coal-based synthetic fuel facility for approximately $32 million.Our investment is accounted for using the equity method as we lack acontrolling financial interest. The facility produced operating losses, ourshare of which totaled approximately $6 million, $17 million and $16 million in2004, 2005 and 2006 respectively. This loss is reflected as loss fromnon-operating affiliates in the accompanying consolidated statements of income.

The synthetic fuelproduced at this facility qualifies for tax credits based on Section 45Kof the Internal Revenue Code, which reduce our provision for income taxes. The Section 45Kcredits are expected to continue to be available for fuel produced at thefacility through 2007. The tax credits, combined with the tax benefitassociated with the operating losses, totaled approximately $9 million, $23million and $17 million in 2004, 2005 and 2006, respectively. As a result, thebenefit to our net income of the investment totaled approximately $3 million,$6 million and $1 million for the years ended December 31, 2004, 2005 and2006 respectively.

**NOTE 6:  VARIABLE INTEREST ENTITIES**

We manage two hotels in which we have variableinterests, as defined in FASB Interpretation No. (“FIN”)46(R) “Consolidation of Variable Interest Entities,” as revised, due tothe terms of performance guarantees. The performance guarantee associated withone of the hotel management agreements does not expose us to the majority ofexpected cash flow variability; therefore, we are not the primary beneficiaryand this hotel is not consolidated. Our maximum exposure to loss on thiscontract consists of future management fees and our potential obligation tofund the performance guarantee which, as of December 31, 2006, totaledapproximately $33 million through 2012.

77

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

The second of the two contracts contains provisionsthat expose us to the majority of expected cash flow variability. As a result,we are considered to be the primary beneficiary under FIN 46(R), and arerequired to consolidate the balance sheet and results of operations of thehotel. Our consolidated balance sheets at both December 31, 2005 and December 31,2006 include the assets and liabilities of this non-controlled hotel, includingapproximately $10 million and $9 million, respectively, of cash andequivalents (reflected as restricted cash) and $100 million of debt in bothyears, which is non-recourse to us. The debt is secured by the fixed assets ofthe hotel with a historical cost of approximately $82 million. The net equityof the hotel is a retained deficit of approximately $60 million and $63 millionat December 31, 2005 and 2006, respectively, and is reflected on ourconsolidated balance sheets in other assets. The revenue and operating expensesof this property are included in other revenue and expenses from managed andfranchised properties in the consolidated statements of income. Our financialexposure to this property consists of the fees we earn under the managementagreement and costs we may incur under the performance guarantee. The neteffect of the other earnings of this property, which belongs to the hotelowners, is eliminated from our consolidated results through minority andnon-controlled interests expense in the consolidated statements of income.

As part of the HI Acquisition on February 23,2006, we acquired a minority ownership interest in three joint ventures thatlease hotels which are managed by us. We have variable interests, as defined inFIN 46(R), which expose us to themajority of expected cash flow variability of the joint ventures. As a result,we are considered to be the primary beneficiary under FIN 46(R), and arerequired to consolidate the balance sheet and results of operations of thejoint ventures. In addition, two of the hotel leases are accounted for ascapital leases under FAS 13, “Accounting for Leases.” As of December 31,2006, our consolidated balance sheets include the assets and liabilities ofthese non-controlled joint ventures, including $14 million of cash andequivalents, which is reflected as restricted cash in our consolidated balancesheets and $400 million of debt and capital lease obligations, which arenon-recourse to us and are reflected in non-recourse debt and capital leaseobligations of non-controlled entities in our consolidated balance sheets.

The net equity of thehotels is a retained deficit of approximately $75 million at December 31,2006, and is reflected on our consolidated balance sheet in other assets. Therevenue and operating expenses of these properties are included in leased hotelrevenue and expenses in the consolidated statements of income. The net effectof the earnings of these properties applicable to other ownership interests iseliminated from our consolidated results through minority and non-controlledinterest expense in the consolidated statements of income.

**NOTE 7:  IMPAIRMENT LOSS AND RELATED COSTS**

There are no impairment loss and related costs for theyear ended December 31, 2006.

Results in 2005 include pre-tax impairment loss andrelated costs totaling $7 million. This includes a $2 million pre-tax chargerelated to an owned hotel and a $3 million pre-tax charge related to ourminority interests in eight joint venture hotels to reduce their respective carryingvalues to their estimated fair values. These two charges are included in HotelOwnership segment results. The hotel and joint venture interests were sold in July 2005(see “Note 5: Acquisitions and Dispositions”). The charge in 2005 also includesa $2 million pre-tax charge in the first quarter, representing the write downof a non-hotel cost basis investment to its estimated fair value. This chargeis included in corporate and other unallocated expenses in our reported segmentresults.

78

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Results in 2004 includeimpairment loss and related costs totaling $5 million. This pre-tax charge isto reduce the value of an owned hotel to its estimated fair value and isincluded in Hotel Ownership segment results.

**NOTE 8: INVESTMENTS AND NOTES RECEIVABLE**

Investments and notes receivable at December 31,2005 and 2006 are as follows:

| ** **                                                                   | ** ** | **2005**               | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                                   | ** ** | **(in millions)** | ** ** |
| Equity investments                                                           |       |                   |       |     |       |   |   |   |   |
| Hotels                                                                       |       |                   | $          | 269      |       |   |   | 309 |   |   |
| Other                                                                        |       |                   | 28         |     |       |   | 8 |   |   |
| Timeshare notes  receivable, with an average rate of 12.9%, due 2007 to 2016 |       |                   | 351        |     |       |   | 454 |   |   |
| Other notes  receivable, with an average rate of 6.7%, due 2007 to 2015      |       |                   | 50         |     |       |   | 25 |   |   |
| Marketable  securities                                                       |       |                   | 29         |     |       |   | 6 |   |   |
| Foreign currency  options                                                    |       |                   | 44         |     |       |   | — |   |   |
| Other investments                                                            |       |                   | 20         |     |       |   | 17 |   |   |
|                                                                         |       |                   | 791        |     |       |   | 819 |   |   |
| Less current  portion                                                        |       |                   | (84        | )        |       |   | (60 | ) |   |
| Total                                                                        |       |                   | $          | 707      |       |   |   | 759 |   |   |

 

Notes receivable are reflected net of an estimatedallowance for uncollectible amounts. For timeshare notes receivable, thisestimate is based primarily on historical experience and assumptions withrespect to future payment trends. Allowances for uncollectible amounts of othernotes receivable, which includes notes from managed, franchised andunconsolidated joint venture properties, are estimated based primarily onhistorical trends and analysis of underlying real estate collateral. Assessmentof collateral may include estimates of future cash flow from the underlyingreal estate. For timeshare notes receivable, interest income is recognizedmonthly from the date that the loan is closed. Any fees, including processingfees and late fees, are recognized in the month of collection. The activity inthe allowance for uncollectible amounts for timeshare notes receivable is asfollows:

| ** **              | ** ** | **2005**               | ** ** | **2006** | ** ** |
|-------------------------|------------|------------------------|------------|----------|------------|
| ** **              | ** ** | **(in millions)** | ** ** |
| Beginning balance       |       |                   | $          | 6        |       |   |   | 10 |   |   |
| Additions               |       |                   | 8          |     |       |   | 16 |   |   |
| Write-offs              |       |                   | (4         | )        |       |   | (10 | ) |   |
| Balance at December 31, |       |                   | $          | 10       |       |   |   | 16 |   |   |

 

Total notes receivable, including timeshare, totaled$401 million and $479 million, net of allowances for uncollectible amounts of$24 million and $35 million as of December 31, 2005 and 2006,respectively.

79

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Timesharenotes receivable maturities are as follows:

| ** **                       | ** ** | **(in millions)** | ** ** |
|----------------------------------|------------|------------------------|------------|
| 2007                             |       |                   | $          | 56 |   |   |
| 2008                             |       |                   | 64         |   |   |
| 2009                             |       |                   | 69         |   |   |
| 2010                             |       |                   | 70         |   |   |
| 2011                             |       |                   | 66         |   |   |
| Thereafter                       |       |                   | 145        |   |   |
|                             |       |                   | 470        |   |   |
| Allowance for  doubtful accounts |       |                   | (16        | ) |   |
| Total                            |       |                   | $          | 454 |   |   |

 

Our investments in unconsolidated affiliates accountedfor under the equity method totaled $297 million and $317 million at December 31,2005 and 2006, respectively, representing approximately three percent and twopercent of total assets at the end of 2005 and 2006, respectively. At December 31,2006, our unconsolidated affiliates accounted for under the equity method hadtotal assets of approximately $2 billion and total debt of approximately$969 million. Of the $969 million of total debt, $966 million is secured solelyby the affiliate’s assets or is guaranteed by other partners without recourseto us. We are the creditor on $17 million of the $969 million of debt.

Sales of our marketable securities are accounted forusing the specific identification method. During 2006, we sold certainmarketable securities for proceeds of approximately $34 million, resulting in gainsof approximately $24 million which were reclassified out of accumulated othercomprehensive income and recognized in earnings during the year.

During December 2005we entered into foreign currency options to mitigate the risk associated withchanges in foreign currency exchange rates on our agreement to fund the HIAcquisition price in British Pounds. These options were sold in the 2006 firstquarter and were carried at fair market value in other current assets on theconsolidated balance sheets as of December 31, 2005. There were no foreigncurrency options outstanding as of December 31, 2006. (see “Note 2:Summary of Significant Accounting Policies—Derivative Instruments”).

**NOTE 9:  PROPERTY AND EQUIPMENT**

Property and equipment at December 31, 2005 and2006 are as follows:

| ** **                             | ** ** | **2005**               | ** ** | **2006** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                             | ** ** | **(in millions)** | ** ** |
| Land                                   |       | $                      | 590        |     |       | 1,065 |   |   |
| Buildings and  leasehold improvements  |       | 3,009                  |       |     | 4,335      |   |   |
| Furniture and  equipment               |       | 703                    |       |     | 1,041      |   |   |
| Property held for  sale or development |       | 48                     |       |     | 47         |   |   |
| Construction in  progress              |       | 32                     |       |     | 44         |   |   |
|                                   |       | 4,382                  |       |     | 6,532      |   |   |
| Less accumulated  depreciation         |       | (1,397                 | )          |     | (1,549     | ) |   |
| Total                                  |       | $                      | 2,985      |     |       | 4,983 |   |   |

 

80

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

At December 31, 2006,property and equipment included approximately $380 million of capital leaseassets, primarily buildings and leasehold improvements, net of $26 million ofaccumulated depreciation.  Amountsrecorded under capital leases at December 31, 2005 were insignificant.

**NOTE 10:  ACCOUNTS PAYABLE AND ACCRUED EXPENSES**

Accounts payableand accrued expenses at December 31, 2005 and 2006 are as follows:

| ** **                           | ** ** | **2005**               | ** ** | **2006** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                           | ** ** | **(in millions)** | ** ** |
| Accounts and  notes payable          |       |                   | $          | 139      |       |   | 429 |   |
| Accrued  compensation and benefits   |       |                   | 153        |     |       | 392 |   |
| HHonors current  point liability(1)  |       |                   | —     |     |       | 126 |   |
| Deposits                             |       |                   | 40         |     |       | 119 |   |
| Deferred income                      |       |                   | 19         |     |       | 90 |   |
| Accrued taxes                        |       |                   | 37         |     |       | 80 |   |
| Insurance  reserves                  |       |                   | 45         |     |       | 59 |   |
| Accrued interest                     |       |                   | 37         |     |       | 51 |   |
| Foreign currency  derivative payable |       |                   | 54         |     |       | — |   |
| Other accrued  expenses              |       |                   | 248        |     |       | 555 |   |
| Total                                |       |                   | $          | 772      |       |   | 1,901 |   |

----

(1)          Asa result of the HI Acquisition, the HHonors program is now consolidated (see“Note 2: Summary of Significant Accounting Policies”).

**NOTE 11:  LONG-TERM DEBT**

Long-term debt at December 31, 2005 and 2006 isas follows:

| ** **                                                            | ** ** | **2005**               | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                            | ** ** | **(in millions)** | ** ** |
| Industrial  development revenue bonds at adjustable rates, due 2015   |       | $                      | 82         |     |       | 82 |   |   |
| Senior notes,  with an average rate of 8.0%, due 2007 to 2031(1)      |       | 2,040                  |       |     | 2,045      |   |   |
| Mortgage notes,  5.8% to 8.6%, due 2007 to 2016                       |       | 310                    |       |     | 289        |   |   |
| 7.95%  Collateralized borrowings, due 2010                            |       | 463                    |       |     | 454        |   |   |
| Chilean  inflation-indexed note, effective rate of 7.65%, due 2009(1) |       | 148                    |       |     | 145        |   |   |
| 3.375%  Contingently convertible senior notes due 2023                |       | 575                    |       |     | 575        |   |   |
| Capital lease  obligations, 6.34% to 8.75%, due 2007 to 2097          |       | 1                      |       |     | 142        |   |   |
| Term loan A, at  adjustable rates, due 2011                           |       | —                 |       |     | 1,302      |   |   |
| Term loan B, at  adjustable rates, due 2013                           |       | —                 |       |     | 283        |   |   |
| Revolving loans,  at adjustable rates, due 2011                       |       | —                 |       |     | 1,634      |   |   |
| Other                                                                 |       | —                 |       |     | 17         |   |   |
|                                                                  |       | 3,619                  |       |     | 6,968      |   |   |
| Less current  maturities of long-term debt                            |       | (47                    | )          |     | (412       | ) |   |
| Net long-term  debt                                                   |       | $                      | 3,572      |     |       | 6,556 |   |   |

 

----

(1)          Interest rates includethe impact of interest rate swaps.

81

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

In addition to our long-term debt, our consolidatedbalance sheets include debt and capital lease obligations related to variableinterest entities consolidated under FIN 46(R) that are non-recourse to us.Non-recourse debt and capital lease obligations of non-controlled entities at December 31,2005 and 2006 are as follows:

| ** **                                                                                              | ** ** | **2005**               | ** ** | **2006** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                                                              | ** ** | **(in millions)** | ** ** |
| Mortgage note,  5.97%, due 2007                                                                         |       | $                      | 100        |     |       | 100 |   |   |
| Capital lease  obligations, 6.34%, due 2007 to 2025                                                     |       | —                 |       |     | 370        |   |   |
| Other                                                                                                   |       | —                 |       |     | 30         |   |   |
|                                                                                                    |       | 100                    |       |     | 500        |   |   |
| Less current  maturities of non-recourse debt and capital lease obligations of  non-controlled entities |       | —                 |       |     | (110       | ) |   |
| Net non-recourse debt  and capital lease obligations of non-controlled entities                         |       | $                      | 100        |     |       | 390 |   |   |

 

Interest paid, net of amounts capitalized, was $246 million,$244 million and $469 million in 2004, 2005 and 2006, respectively. Capitalizedinterest totaled $3 million, $8 million and $13 million in 2004, 2005and 2006, respectively.

Debt maturities, including non-recourse debt andcapital lease obligations of non-controlled entities, are as follows:

|            | ** ** | **(in millions)** | ** ** |
|------------|------------|------------------------|------------|
| 2007       |       |                   | $          | 522 |   |   |
| 2008       |       |                   | 1,020      |   |   |
| 2009       |       |                   | 427        |   |   |
| 2010       |       |                   | 577        |   |   |
| 2011       |       |                   | 3,233      |   |   |
| Thereafter |       |                   | 1,689      |   |   |
| Total      |       |                   | $          | 7,468 |   |   |

 

In February 2006,in connection with the HI Acquisition (see “Note 3: Purchase of HiltonInternational”), we entered into new senior credit facilities in an initial aggregateprincipal U.S. dollar equivalent of approximately $5.75 billion with asyndicate of financial institutions. These facilities replaced our $1 billionrevolving credit facility and are secured by a pledge of the capital stock ofcertain of our wholly owned subsidiaries. The senior credit facilities consistof the following:

·       U.S.Dollar Denominated Revolver—5 year, $3.25 billion available in U.S. dollars,British Pounds, Euros and Swedish Kronor or other currencies acceptable to theadministrative agent. Interest is at a variable rate depending upon ourleverage ratio and senior debt ratings, with initial borrowings at applicableLondon Interbank Offered Rate (“LIBOR”) plus 150 basis points (which includes a25 basis point annual facility fee). The capacity under our revolver was alsoused to support certain outstanding letters of credit. Total revolving debtcapacity of approximately $1.42 billion was available to us at December 31,2006.

·       ForeignCurrency Denominated Term Loan A—5 year, approximate equivalent of $2.32billion at December 31, 2006, denominated in £675 million, €675million and Australian $140 million. Interest is at a variable rate dependingupon our leverage ratio and senior debt ratings, with initial borrowings atapplicable LIBOR plus 150 basis points.

82

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

·       U.S.Dollar Denominated Term Loan B—7 year, $500 million term loan available only inU.S. dollars. Interest at LIBOR plus 137.5 basis points.

We also have the option to increase the creditfacilities by $500 million.

In February 2006, we borrowed an aggregateprincipal U.S. dollar equivalent of approximately $4.8 billion under thesefacilities to partially fund the HI Acquisition.

Subsequent to our announcement in December 2005of our agreement to acquire the lodging assets of Hilton Group plc, Standard &Poor’s Ratings Group lowered our senior debt rating from BBB- to BB. Inaddition, Moody’s Investor Services lowered our senior debt rating from Baa3 toBa2. These downgrades are reflected in the interest rates and facility fee ofour $5.75 billion senior credit facilities. On February 26, 2007, Moody’sInvestor Services upgraded our senior debt rating to Ba1.

Under the terms of the senior credit facilities,proceeds, if any, from the sale of certain owned properties acquired as part ofthe HI Acquisition are required to be used for the repayment of our seniorcredit facilities. In addition, we expect that excess cash flow, if any, willbe used to repay outstanding debt balances.

In addition to our new senior credit facilities, our December 31,2006 consolidated balance sheet includes approximately $25 million of long-termdebt, $140 million of capital lease obligations, and $400 million ofnon-recourse debt and capital lease obligations related to obligations assumedin the HI Acquisition.

In October 1997, we filed a shelf registrationstatement with the Securities and Exchange Commission registering up to$2.5 billion in debt or equity securities. At December 31, 2006,available financing under the shelf totaled $825 million. The terms of anyadditional securities offered under the shelf will be determined by marketconditions at the time of issuance.

In 2003, we sold $575 million of 3.375% ConvertibleSenior Notes due in 2023 in a private placement transaction. The notes areconvertible into approximately 25.6 million shares of our common stock at aninitial conversion price of $22.50 per share of common stock, upon our stocktrading at 120% of the conversion price for 20 consecutive days during the last30 day period of a financial quarter. As of December 31, 2006, theconversion trigger was met, and the notes are convertible at the discretion ofthe bond holders. No conversions have taken place as of December 31, 2006.

In November 2002, we entered into a derivativecontract which swaps the fixed interest payments on our $375 million 7.95%Senior Notes due 2007 to a floating interest rate equal to the six-month LIBORplus 415 basis points. In connection with our $100 million 7.43% bonds due2009 denominated in Chilean pesos, we have a derivative contract which swapsthe principal payment to a fixed U.S. dollar amount of $100 million andfixed interest payments at 7.65% of that amount.

As of December 31, 2006, approximately 53% of ourlong-term debt, including the impact of interest rate swaps and excludingnon-recourse debt and capital lease obligations of non-controlled entities, wasfloating rate debt.  Our total debt,excluding non-recourse debt and capital lease obligations, has aweighted-average life of approximately 6.1 years and a weighted-averageinterest rate of approximately 6.6%.

Provisions under various loan agreements require us tocomply with certain covenants which include limiting the amount of ouroutstanding indebtedness. Our revolving credit facilities contain twosignificant financial covenants: a leverage ratio and a debt service coverageratio. We are in compliance with our financial covenants as of December 31,2006.

83

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Provisions of thefinancing agreement related to our 7.95% collateralized borrowings due 2010require that certain cash reserves be maintained and also restrict the transferof excess cash generated by the related properties to us if net cash flow fallsbelow a specified level (the cash trap). The cash trap became effective in 2003due to reduced cash flow from the collateralized properties, primarily the HiltonSan Francisco. As of December 31, 2006, cash restricted under the terms ofthe collateralized borrowings, including required reserves and the cash trap,totaled $214 million. The impact of the cash trap, which is expected toremain in effect throughout 2007, is not expected to have a material impact onour liquidity.

**NOTE 12:  FINANCIAL INSTRUMENTS**

Theestimated fair values of our financial instruments at December 31, 2005and 2006 are as follows:

| ** **                                                | ** ** | **2005**               | ** ** | **2006**  | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|-----------|------------|
| ** **                                                | ** ** | **Carrying**           | ** ** | **Fair**  | ** ** | **Carrying** | ** ** | **Fair** | ** ** |
| ** **                                                | ** ** | **Amount**             | ** ** | **Value** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                                | ** ** | **(in millions)** | ** ** |
| Cash and  equivalents and long-term marketable securities |       | $                      | 1,183      |      |       | 1,183 |   |   |   | 144 |   |   |   | 144 |   |   |
| Restricted cash                                           |       | 182                    |       |      | 182        |   |   |   | 293 |   |   |   | 293 |   |   |
| Timeshare notes  receivable (including current portion)   |       | 351                    |       |      | 356        |   |   |   | 454 |   |   |   | 459 |   |   |
| Other notes  receivable (including current portion)       |       | 50                     |       |      | 59         |   |   |   | 25 |   |   |   | 24 |   |   |
| Derivative assets                                         |       | 107                    |       |      | 107        |   |   |   | 58 |   |   |   | 58 |   |   |
| Long-term debt  (including current maturities)            |       | (3,619                 | )          |      | (3,849     | ) |   |   | (6,968 | ) |   |   | (7,384 | ) |   |
| Derivative liabilities                                    |       | (6                     | )          |      | (6         | ) |   |   | (3 | ) |   |   | (3 | ) |   |
|                                                           |            |                        |            |           |            |  |  |  |  |  |  |  |  |  |  |  |

 

Our estimates of the fairvalue of financial instruments at December 31, 2005 and 2006 weredetermined using available market information and appropriate valuation methods.Considerable judgment is necessary to interpret market data and developestimated fair value. The use of different market assumptions or estimationmethods may have a material effect on the estimated fair value amounts.

**Cash Equivalents,Long-Term Marketable Securities and Restricted Cash**

The fair value of cash equivalents,long-term marketable securities and restricted cash is estimated based on thequoted market price of the investments.

**Timeshare and OtherNotes Receivable**

The estimated fair valueof timeshare and other notes receivable is based on recent market prices or theexpected future cash flows discounted at risk adjusted rates.

**Long-Term Debt**

The estimated fair valueof long-term debt is based on the quoted market prices for the same or similarissues or on the current rates offered to us for debt of the same remainingmaturities and considering the collateral. In determining the current marketrate for fixed rate debt, a market spread is added to the quoted yields onfederal government treasury securities with similar maturity dates.

**DerivativeInstruments**

The fair value ofderivative assets and liabilities is based on the present value of estimatedfuture cash flow, including the use of foreign currency forward exchange rates,as appropriate.

84

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

**NOTE 13:  INCOME TAXES**

Theprovisions for income taxes for the three years ended December 31 are asfollows:

| ** **      | ** ** | **2004**               | ** ** | **2005** | ** ** | **2006** | ** ** |
|-----------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **      | ** ** | **(in millions)** | ** ** |
| Pre-tax income  |       |                   |       |     |       |     |       |   |   |   |   |
| U.S.            |       | $                      | 350        |     |       | 619      |       |   |   | 594 |   |   |
| Foreign         |       | 23                     |       |     | 19         |     |       |   | 244 |   |   |
| Total           |       | $                      | 373        |     |       | 638      |       |   |   | 838 |   |   |
| Current         |       |                   |       |     |       |     |       |   |   |   |   |
| Federal         |       | $                      | 114        |     |       | 207      |       |   |   | 102 |   |   |
| Foreign         |       | 5                      |       |     | 2          |     |       |   | 55 |   |   |
| State and local |       | 20                     |       |     | 50         |     |       |   | 35 |   |   |
|            |       | 139                    |       |     | 259        |     |       |   | 192 |   |   |
| Deferred        |       |                   |       |     |       |     |       |   |   |   |   |
| Federal         |       | (12                    | )          |     | (89        | )        |       |   | 43 |   |   |
| Foreign         |       | —                 |       |     | 1          |     |       |   | 24 |   |   |
| State and local |       | —                 |       |     | (5         | )        |       |   | — |   |   |
| Total           |       | $                      | 127        |     |       | 166      |       |   |   | 259 |   |   |

 

During 2004, 2005 and 2006, we paid income taxes of$99 million, $209 million and $260 million, respectively, net ofrefunds received.

85

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Theincome tax effects of temporary differences between financial and income taxreporting that gave rise to deferred income tax assets and liabilities at December 31,2005 and 2006 are as follows:

| ** **                        | ** ** | **2005**               | ** ** | **2006** | ** ** |
|-----------------------------------|------------|------------------------|------------|----------|------------|
| ** **                        | ** ** | **(in millions)** | ** ** |
| Deferred tax assets               |       |                   |       |     |       |   |   |
| Foreign tax credits               |       |                   | $          | —   |       |   | 436 |   |
| Net operating loss carryforwards  |       |                   | 6          |     |       | 188 |   |
| Compensation                      |       |                   | 115        |     |       | 113 |   |
| Insurance reserves                |       |                   | 48         |     |       | 48 |   |
| Deferred income                   |       |                   | 68         |     |       | 32 |   |
| Other reserves                    |       |                   | 22         |     |       | 32 |   |
| System funds                      |       |                   | 22         |     |       | 29 |   |
| Other                             |       |                   | 1          |     |       | 37 |   |
|                              |       |                   | 282        |     |       | 915 |   |
| Valuation allowance               |       |                   | (11        | )        |       | (393 | ) |
|                              |       |                   | 271        |     |       | 522 |   |
| Deferred tax  liabilities         |       |                   |       |     |       |   |   |
| Brands                            |       |                   | (383       | )        |       | (1,010 | ) |
| Amortizable intangibles           |       |                   | (153       | )        |       | (530 | ) |
| Unrealized foreign currency gains |       |                   | —     |     |       | (301 | ) |
| Unremitted foreign earnings       |       |                   | —     |     |       | (217 | ) |
| Property and equipment            |       |                   | (186       | )        |       | (203 | ) |
| Prepaid royalties                 |       |                   | —     |     |       | (53 | ) |
| Accrued interest                  |       |                   | (33        | )        |       | (49 | ) |
| Investments                       |       |                   | (105       | )        |       | (44 | ) |
| Other                             |       |                   | (4         | )        |       | — |   |
|                              |       |                   | (864       | )        |       | (2,407 | ) |
| Net deferred tax  liability       |       |                   | $          | (593     | )          |   | (1,885 | ) |

 

Thereconciliations of the Federal income tax rate to our effective tax rate forthe three years ended December 31 are as follows:

| ** **                                                 | ** ** | **    2004    ** | ** ** | **    2005    ** | ** ** | **    2006    ** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                 | ** ** | **(in millions)**                                   | ** ** |
| Federal income  tax rate                                   |       |                                                     | 35.0       | %                                                        |       |                                                     | 35.0       |   |   |   | 35.0 |   |   |
| Increase  (reduction) in taxes                             |       |                                                     |       |                                                     |       |                                                     |       |   |   |   |   |   |   |
| State and local income taxes, net of Federal tax  benefits |       |                                                     | 4.7        |                                                     |       |                                                     | 5.9        |   |   |   | 2.1 |   |   |
| Foreign taxes                                              |       |                                                     | 1.3        |                                                     |       |                                                     | .4         |   |   |   | 9.4 |   |   |
| Foreign earnings subject to lower rates                    |       |                                                     | —     |                                                     |       |                                                     | —     |   |   |   | (6.8 | ) |   |
| Federal income tax credits                                 |       |                                                     | (4.3       | )                                                        |       |                                                     | (4.1       | ) |   |   | (11.2 | ) |   |
| Change in deferred tax asset valuation allowance           |       |                                                     | (2.3       | )                                                        |       |                                                     | (5.1       | ) |   |   | 2.5 |   |   |
| Closing of prior years’ tax audits                    |       |                                                     | —     |                                                     |       |                                                     | (8.0       | ) |   |   | — |   |   |
| Other                                                      |       |                                                     | (.4        | )                                                        |       |                                                     | 1.9        |   |   |   | (.1 | ) |   |
| Effective tax rate                                         |       |                                                     | 34.0       | %                                                        |       |                                                     | 26.0       |   |   |   | 30.9 |   |   |

 

86

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Net operating loss carryforwards are generallyrecorded as deferred tax assets and are fully reserved until evidence indicatesthat it is more likely than not that the benefit will be realized.Approximately $6 million of net operating loss carryforwards expirebetween 2008 and 2021 with approximately $5 million of that amount expiring in2009. Approximately $182 million of net operating loss carryforwards haveindefinite lives. Foreign tax credits are recorded as deferred tax assets. Withrespect to certain jurisdictions, foreign tax credits are reserved to theextent evidence indicates it is more likely than not that the federal taxbenefit of those foreign tax credits will not be realized.

Our tax provision, deferred taxes and effective ratein 2006 were impacted by the utilization of synthetic fuel tax credits ofapproximately $11 million (see “Note 5: Acquisitions and Dispositions”) and anet benefit of $15 million, primarily due to the favorable resolution of IRSaudits for the years 2002 and 2003 and the required treatment of certainforeign currency gains. Our tax provision,deferred taxes and effective rate in 2005 were impacted by the utilization ofsynthetic fuel tax credits of approximately $17 million, a reduction in thevaluation allowance for capital loss tax carryforwards of approximately $34million and a net benefit of $28 million from the reversal of tax reservesno longer required as the result of the completion of IRS audits of our 1997through 2001 Federal income tax returns, partially offset by increases in statetax reserves and deferred tax liabilities principally attributable to statutorytax increases in various jurisdictions. The provision for income taxes alsoreflects a net benefit of approximately $2 million related to state taxcredits received in 2005. Excluding the aforementioned items, our effectiverate was 34 percent in 2006 and 39 percent in 2005.

The reduction in effective rate for 2006 compared to2005 is primarily the result of the HI Acquisition. In 2005 and earlier, ourtax liability was principally comprised of U.S. and state taxes imposed ondomestic income. As a result of our acquisition of HI, our tax liability iscomprised of both U.S. and foreign taxes and is impacted by the composition ofpre-tax income by jurisdiction. Income from foreign jurisdictions is subject tolower levels of tax resulting in an overall worldwide blended effective ratethat is lower than our 2005 effective rate.

In accordance with theprovisions of FAS 109, the reversal of reserve balances arising from thecompletion of the IRS audits that relate to our acquisition of Promus HotelCorporation in 1999 were reflected as an adjustment of goodwill and did notimpact our tax provision in 2005. These adjustments resulted in a reduction ofboth goodwill and other liabilities totaling approximately $13 million in 2005.

Our tax provision,deferred taxes and effective rate in 2004 were impacted by a reduction in thevaluation allowance for capital loss tax carryforwards, primarily as a resultof the sale of three Doubletree properties and the sale of our interest inTravelweb. The 2004 effective rate also reflects the utilization of Section 45Ksynthetic fuel production credits. Excluding the impact of these items, oureffective rate in 2004 was 38 percent.

**NOTE 14:  STOCKHOLDERS’ EQUITY**

Five hundred million shares of common stock with a parvalue of $2.50 per share are authorized, of which 404 million and409 million were issued at December 31, 2005 and 2006, respectively,including treasury shares of 22 million at both December 31, 2005 and2006. We have 25 million shares of preferred stock with a par value of$1.00 per share authorized for issuance. No preferred shares were issued oroutstanding at December 31, 2005 and 2006.

87

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

There were no stock repurchases in the year ended December 31,2006. During 2005, we repurchased a total of 12.3 million shares of our commonstock at a total cost of approximately $271 million. During 2004, werepurchased approximately 2.3 million shares of our common stock at a totalcost of approximately $48 million. The timing of stock purchases is at thediscretion of management. As of December 31, 2006, approximately 44.7million shares remained authorized for repurchase.

We have a Preferred SharePurchase Rights Plan under which a right is attached to each share of ourcommon stock. The rights may only become exercisable under certain circumstancesinvolving actual or potential acquisitions of 20% or more of our common stockby certain people or groups. Depending on the circumstances, if the rightsbecome exercisable, the holder may be entitled to purchase units of our juniorparticipating preferred stock, shares of our common stock or shares of commonstock of the acquirer. The rights remain in existence until November 2009unless they are terminated, exercised or redeemed (see “Rights Agreement” underItem 5).

**NOTE 15:  EMPLOYEE BENEFIT PLANS**

We sponsor multiple domestic and international pensionplans. We have a noncontributory retirement plan in the United States (the “DomesticPlan”) which covers certain non-union employees. Benefits are based upon yearsof service and compensation. The annual measurement date for the Domestic Planis December 31. Since December 31, 1996, employees have not accruedadditional benefits under the Domestic Plan. Therefore, the projected benefitobligation is equal to the accumulated benefit obligation. Plan assets will beused to pay benefits due employees for service through December 31, 1996. Asemployees have not accrued additional benefits since 1996, we do not utilizesalary or pension inflation assumptions in calculating our benefit obligation forthe Domestic Plan.

As a result of the HI Acquisition, we acquiredmultiple employee benefit plans that cover many of our international employees.These plans include a plan that covers workers in the United Kingdom (the “U.K.Plan”) and a number of smaller plans that cover workers in various countriesacross the world (the “International Plans”). The measurement date for both theU.K. Plan and the International Plans is December 31.

The weighted-average assumptions used to determinebenefit obligations at December 31 were as follows:
|                   | ** ** | ** **             | ** ** | ** **         | ** ** | ** ** | ** ** | **International** | ** ** |
|-------------------|------------|------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|
| ** **        | ** ** | **Domestic Plan** | ** ** | **U.K. Plan** | ** ** | **Plans**  | ** ** |
| ** **        | ** ** | **2005**               | ** ** | **2006**           | ** ** | **2006**   | ** ** | **2006**          | ** ** |
| Discount rate     |       |                   | 5.3        | %                  |       |       | 5.8        |              |       |   | 5.1 |   |   |   | 4.8 |   |   |
| Salary inflation  |       |                   | —     |               |       |       | —     |              |       |   | 5.9 |   |   |   | 3.0 |   |   |
| Pension inflation |       |                   | —     |               |       |       | —     |              |       |   | 2.9 |   |   |   | 2.2 |   |   |

 

88

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Therollforwards of our benefit obligations and fair value of plan assets for theyears ended December 31, 2005 and 2006 are as follows:
|                                           | ** ** | ** **             | ** ** | ** **         | ** ** | ** ** | ** ** | **International** | ** ** |
|-------------------------------------------|------------|------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|
| ** **                                | ** ** | **Domestic Plan** | ** ** | **U.K. Plan** | ** ** | **Plans**  | ** ** |
| ** **                                | ** ** | **2005**               | ** ** | **2006**           | ** ** | **2006**   | ** ** | **2006**          | ** ** |
| ** **                                | ** ** | **(in millions)** | ** ** |
| Benefit  obligation at beginning of  year |       |                   | $ 324 |               |       |       | 328        |              |       |   | — |   |   |   | — |   |   |
| Acquisitions and divestures, net          |       |                   | —     |               |       |       | 6          |              |       |   | 342 |   |   |   | 221 |   |   |
| Service cost                              |       |                   | —     |               |       |       | —     |              |       |   | 9 |   |   |   | 11 |   |   |
| Interest cost                             |       |                   | 17         |               |       |       | 17         |              |       |   | 15 |   |   |   | 8 |   |   |
| Employee contributions                    |       |                   | —     |               |       |       | —     |              |       |   | 2 |   |   |   | — |   |   |
| Actuarial loss (gain)                     |       |                   | 8          |               |       |       | (19        | )                 |       |   | (17 | ) |   |   | (4 | ) |   |
| Benefits paid                             |       |                   | (21        | )                  |       |       | (18        | )                 |       |   | (9 | ) |   |   | (13 | ) |   |
| Curtailment gain                          |       |                   | —     |               |       |       | —     |              |       |   | — |   |   |   | (2 | ) |   |
| Settlement gain                           |       |                   | —     |               |       |       | —     |              |       |   | — |   |   |   | (1 | ) |   |
| Currency loss                             |       |                   | —     |               |       |       | —     |              |       |   | 41 |   |   |   | 9 |   |   |
| Benefit obligation at  end of year        |       |                   | $ 328 |               |       |       | 314        |              |       |   | 383 |   |   |   | 229 |   |   |

 
|                                                  | ** ** | ** **             | ** ** | ** **         | ** ** | ** ** | ** ** | **International** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|--------------------|------------|------------|------------|-------------------|------------|
| ** **                                       | ** ** | **Domestic Plan** | ** ** | **U.K. Plan** | ** ** | **Plans**  | ** ** |
| ** **                                       | ** ** | **2005**               | ** ** | **2006**           | ** ** | **2006**   | ** ** | **2006**          | ** ** |
| ** **                                       | ** ** | **(in millions)** | ** ** |
| Fair value of  plan assets at beginning  of year |       |                   | $ 288 |               |       |       | 279        |              |       |   | — |   |   |   | — |   |   |
| Acquisitions and divestures, net                 |       |                   | —     |               |       |       | 7          |              |       |   | 339 |   |   |   | 164 |   |   |
| Actual return on plan assets                     |       |                   | 12         |               |       |       | 28         |              |       |   | 22 |   |   |   | 12 |   |   |
| Employer contributions                           |       |                   | —     |               |       |       | —     |              |       |   | 8 |   |   |   | 12 |   |   |
| Employee contributions                           |       |                   | —     |               |       |       | —     |              |       |   | 2 |   |   |   | — |   |   |
| Benefits paid                                    |       |                   | (21        | )                  |       |       | (18        | )                 |       |   | (9 | ) |   |   | (13 | ) |   |
| Currency gain                                    |       |                   | —     |               |       |       | —     |              |       |   | 42 |   |   |   | 4 |   |   |
| Fair value of plan  assets at end of  year       |       |                   | $ 279 |               |       |       | 296        |              |       |   | 404 |   |   |   | 179 |   |   |

 

The accumulated benefit obligation for the U.K. Planand the International Plans totaled $361 million and $219 million,respectively, at December 31, 2006.

The investment objectives for the various plans arepreservation of capital, current income and long-term growth of capital. Substantiallyall plan assets are managed by outside investment managers. Asset allocationsare reviewed periodically.

For the Domestic Plan, equity securities includeS&P 500 and S&P 400 index funds and foreign equity funds. Equitysecurities also include our common stock in the amounts of $11 million and$16 million at December 31, 2005 and 2006, respectively, representingapproximately 4% and 5% of total plan assets in each period. Debt securitiesare primarily U.S. Treasury and government agency debt securities. The expectedlong-term return on plan assets is based on assumed rates of return for theassets held of 4% to 7% for debt securities and 7% to 9% for equity securities.

89

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

For the U.K. and International Plans, plan assets areprimarily in pooled funds managed by outside investment managers. Equitysecurities are in global equity and regional international funds. Debt fundsare in fixed interest and index-linked bond funds. Property funds are in aglobal real estate fund. The expected long-term return on plan assets is basedon assumed rates of return for the assets held of 3% to 6% for debt securities,7% to 9% for equity securities, and 6% to 8% for property funds.

Theasset allocations as a percentage of total plan assets at December 31,2005 and 2006, are as follows:
|                   | ** ** | **Domestic Plan** | ** ** | **U.K. Plan**     | ** ** | **International  Plans(1)** | ** ** |
|-------------------|------------|------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **        | ** ** | ** **             | ** ** | **Percentage of** | ** ** | ** **                  | ** ** | **Percentage of** | ** ** | **Percentage of** | ** ** |
| ** **        | ** ** | **Target**             | ** ** | **Plan Assets**   | ** ** | **Target**                  | ** ** | **Plan Assets** | ** ** | **Plan Assets** | ** ** |
| ** **        | ** ** | **Allocation**         | ** ** | **2005**               | ** ** | **2006**                    | ** ** | **Allocation** | ** ** | **2006** | ** ** | **2006** | ** ** |
| Equity securities |       |                   | 50         | %                      |       |                        | 62         |   |   |   | 54 |   |   |   | 56 |   |   |   | 56 |   |   |   | 50 |   |   |
| Debt securities   |       |                   | 50         |                   |       |                        | 38         |   |   |   | 46 |   |   |   | 30 |   |   |   | 29 |   |   |   | 31 |   |   |
| Property funds    |       |                   | —     |                   |       |                        | —     |   |   |   | — |   |   |   | 14 |   |   |   | 14 |   |   |   | 8 |   |   |
| Other             |       |                   | —     |                   |       |                        | —     |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | 11 |   |   |
| Total             |       |                   | 100        | %                      |       |                        | 100        |   |   |   | 100 |   |   |   | 100 |   |   |   | 100 |   |   |   | 100 |   |   |

----

(1)   InternationalPlans assets are managed to individual target allocations depending on the planand region.

At December 31,2006, we have adopted FAS 158 (see “Note 2: Summary of Significant AccountingPolicies—New Accounting Standards”). The following tables provide thereconciliation between the funded status of our plans and the accrued benefitcost liability on the consolidated balance sheets for the years ended December 31,2005 and 2006, as well as the other components recognized in our consolidatedbalance sheets:
|                                       | ** ** | ** **             | ** **    | ** **         | ** ** | ** ** | ** ** | **International** | ** ** |
|---------------------------------------|------------|------------------------|---------------|--------------------|------------|------------|------------|-------------------|------------|
| ** **                            | ** ** | **Domestic Plan** | ** **    | **U.K. Plan** | ** ** | **Plans**  | ** ** |
| ** **                            | ** ** | **2005**               | ** **    | **2006**           | ** ** | **2006**   | ** ** | **2006**          | ** ** |
| ** **                            | ** ** | **(in millions)** | ** **    |
| Funded status                         |       |                   | $ (50    | )                  |       |       | (18        | )                 |       |   | 21 |   |   |   | (50 | ) |   |
| Unrecognized actuarial loss           |       |                   | 47            |               |       |       | —     |              |       |   | — |   |   |   | — |   |   |
| Unrecognized prior service cost       |       |                   | 3             |               |       |       | —     |              |       |   | — |   |   |   | — |   |   |
| Net amount recognized at  end of year |       |                   | $ — |               |       |       | (18        | )                 |       |   | 21 |   |   |   | (50 | ) |   |

 

90

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Amountsrecognized in the consolidated balance sheets consist of:
|                                                               | ** ** | ** **             | ** **    | ** **         | ** ** | ** ** | ** ** | **International** | ** ** |
|---------------------------------------------------------------|------------|------------------------|---------------|--------------------|------------|------------|------------|-------------------|------------|
| ** **                                                    | ** ** | **Domestic Plan** | ** **    | **U.K. Plan** | ** ** | **Plans**  | ** ** |
| ** **                                                    | ** ** | **2005**               | ** **    | **2006**           | ** ** | **2006**   | ** ** | **2006**          | ** ** |
| ** **                                                    | ** ** | **(in millions)** | ** **    |
| Noncurrent asset                                              |       |                   | $ — |               |       |       | 1          |              |       |   | 21 |   |   |   | 6 |   |   |
| Current liability                                             |       |                   | —        |               |       |       | —     |              |       |   | — |   |   |   | (1 | ) |   |
| Noncurrent  liability                                         |       |                   | —        |               |       |       | (19        | )                 |       |   | — |   |   |   | (55 | ) |   |
| Additional minimum  liability                                 |       |                   | (50           | )                  |       |       | —     |              |       |   | — |   |   |   | — |   |   |
| Intangible asset                                              |       |                   | 3             |               |       |       | —     |              |       |   | — |   |   |   | — |   |   |
| Accumulated other  comprehensive income, excluding tax impact |       |                   | 47            |               |       |       | —     |              |       |   | — |   |   |   | — |   |   |
| Net amount recognized                                         |       |                   | $ — |               |       |       | (18        | )                 |       |   | 21 |   |   |   | (50 | ) |   |

 

Amounts recognized in accumulated other comprehensiveincome consist of:
|                            | ** ** | **Domestic**           | ** ** | ** **         | ** ** | **International** | ** ** |
|----------------------------|------------|------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                 | ** ** | **Plan**               | ** ** | **U.K. Plan** | ** ** | **Plans**         | ** ** |
| ** **                 | ** ** | **2006**               | ** ** | **2006**           | ** ** | **2006**          | ** ** |
| ** **                 | ** ** | **(in millions)** | ** ** |
| Net actuarial  loss (gain) |       |                   | $ 16  |               |       |              | (16        | ) |   |   | (8 | ) |   |
| Prior service  cost        |       |                   | 2          |               |       |              | —     |   |   |   | — |   |   |
| Net amount recognized      |       |                   | $ 18  |               |       |              | (16        | ) |   |   | (8 | ) |   |

 

Theweighted-average assumptions used to determine net periodic cost were asfollows:
|                                           | ** ** | ** **             | ** ** | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | **International** | ** ** |
|-------------------------------------------|------------|------------------------|------------|--------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                                | ** ** | **Domestic Plan** | ** ** | **U.K. Plan** | ** ** | **Plans**  | ** ** |
| ** **                                | ** ** | **2004**               | ** ** | **2005**           | ** ** | **2006**   | ** ** | **2006**   | ** ** | **2006**          | ** ** |
| Discount rate                             |       |                   | 6.0        | %                  |       |       | 5.5        |       |       |              | 5.3        |   |   |   | 4.7 |   |   |   | 4.4 |   |   |
| Expected  long-term return on plan assets |       |                   | 7.3        |               |       |       | 7.3        |       |       |              | 7.3        |   |   |   | 7.1 |   |   |   | 5.5 |   |   |
| Salary inflation                          |       |                   | —     |               |       |       | —     |       |       |              | —     |   |   |   | 5.7 |   |   |   | 2.6 |   |   |
| Pension inflation                         |       |                   | —     |               |       |       | —     |       |       |              | —     |   |   |   | 2.6 |   |   |   | 2.1 |   |   |

 

Ourannual benefit income (cost) for the years ended December 31, 2004, 2005and 2006 consisted of the following:
|                                     | ** ** | ** **             | ** **           | ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | **International** | ** ** |
|-------------------------------------|------------|------------------------|----------------------|--------------------|------------|------------|------------|------------|------------|-------------------|------------|
| ** **                          | ** ** | **Domestic Plan** | ** **           | **U.K. Plan** | ** ** | **Plans**  | ** ** |
| ** **                          | ** ** | **2004**               | ** **           | **2005**           | ** ** | **2006**   | ** ** | **2006**   | ** ** | **2006**          | ** ** |
| ** **                          | ** ** | **(in millions)** | ** **           |
| Expected return  on plan assets     |       |                   | $ 20            |               |       |       | 20         |       |       |              | 20         |   |   |   | 23 |   |   |   | 8 |   |   |
| Service cost                        |       |                   | —               |               |       |       | —     |       |       |              | —     |   |   |   | (9 | ) |   |   | (11 | ) |   |
| Interest cost                       |       |                   | (18                  | )                  |       |       | (17        | )          |       |              | (17        | ) |   |   | (15 | ) |   |   | (8 | ) |   |
| Amortization of  prior service cost |       |                   | (1                   | )                  |       |       | (1         | )          |       |              | (1         | ) |   |   | — |   |   |   | — |   |   |
| Curtailment gain                    |       |                   | —               |               |       |       | —     |       |       |              | —     |   |   |   | — |   |   |   | 1 |   |   |
| Settlement gain                     |       |                   | —               |               |       |       | —     |       |       |              | —     |   |   |   | — |   |   |   | 2 |   |   |
| Amortization of  net loss           |       |                   | —               |               |       |       | (1         | )          |       |              | (2         | ) |   |   | — |   |   |   | — |   |   |
| Net annual benefit  income (cost)   |       |                   | $   1 |               |       |       | 1          |       |       |              | —     |   |   |   | (1 | ) |   |   | (8 | ) |   |

 

91

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Weexpect to contribute approximately $9 million to the U.K. Plan andapproximately $14 million to the International Plans in 2007. We do not expectto make any contribution to the Domestic Plan in 2007. Amortization fromaccumulated other comprehensive income into net periodic benefit cost in 2007of actuarial losses and prior service cost is not expected to be material forthe Domestic, U.K. or International Plans. As of December 31, 2006, thebenefits expected to be paid in the next five years and in the aggregate forthe five years thereafter are as follows:
|             | ** ** | **Domestic**           | ** ** | ** **         | ** ** | **International** | ** ** |
|-------------|------------|------------------------|------------|--------------------|------------|-------------------|------------|
| ** **  | ** ** | **Plan**               | ** ** | **U.K. Plan** | ** ** | **Plans**         | ** ** |
| ** **  | ** ** | **(in millions)** | ** ** |
| 2007        |       |                   | $ 19  |               |       |              | 11         |   |   |   | 11 |   |   |
| 2008        |       |                   | 19         |               |       |              | 11         |   |   |   | 12 |   |   |
| 2009        |       |                   | 19         |               |       |              | 12         |   |   |   | 12 |   |   |
| 2010        |       |                   | 19         |               |       |              | 13         |   |   |   | 13 |   |   |
| 2011        |       |                   | 19         |               |       |              | 14         |   |   |   | 14 |   |   |
| 2012 - 2016 |       |                   | 101        |               |       |              | 83         |   |   |   | 68 |   |   |

 

As of January 1, 2007, the Domestic Plan and plansmaintained for certain domestic hotels currently or formerly managed by us weremerged into a multiple employer plan. We are the sponsor of this plan and assuch could be liable to fund any contributions not funded by the owners of anyof the properties covered by the plan. As of January 1, 2007, the multipleemployer plan had combined assets of $332 million and a projected benefitobligation of $340 million.

We also have plans covering qualifying employees andnon-officer directors (the “Supplemental Plans”). Benefits for the SupplementalPlans are based upon years of service and compensation. Since December 31,1996, employees and non-officer directors have not accrued additional benefitsunder the Supplemental Plans. These plans are self-funded by us and thereforehave no plan assets isolated to pay benefits due employees. At both December 31,2005 and 2006, these plans have benefit obligations of $10 million, whichare fully accrued in our consolidated balance sheets. Pension expense under theSupplemental Plans for the years ended December 31, 2004, 2005 and 2006was not significant.

Certain employees are covered by union sponsored,collectively bargained multi-employer pension plans. We contributed and chargedto expense $19 million, $23 million and $21 million for the years endedDecember 31, 2004, 2005 and 2006, respectively, for such plans.Information from the plans’ administrators is not sufficient to permit us todetermine our share, if any, of unfunded vested benefits.

**We havevarious employee investment plans whereby we contribute matching percentages ofemployee contributions. The aggregate expense under these plans totaled$12 million, $13 million and $26 million in 2004, 2005 and 2006,respectively.**

92

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

**NOTE 16:  SEGMENT INFORMATION**

Our operationsconsist of three reportable segments which are based on similar products orservices: Hotel Ownership, Managing and Franchising, and Timeshare. The HotelOwnership segment derives revenue primarily from owned, majority owned andleased hotel properties. The Managing and Franchising segment provides servicesincluding hotel management and licensing of our family of brands to franchisees.This segment generates its revenue from fees charged to hotel owners. Managingand Franchising revenue includes reimbursements from managed properties andfranchisees for certain costs incurred on their behalf, which are included inother revenue from managed and franchised properties in the consolidatedstatements of income. The Timeshare segment consists of multi-unit timeshareresorts. This segment produces its results from the sale and financing oftimeshare intervals and operating timeshare resorts. Segment results arepresented net of consolidating eliminations for fee-based services at theoperating income level, without allocating corporate expenses, which is thebasis used by management to evaluate segment performance.

Segmentresults for the three years ended December 31 are as follows:

| ** **                                                                 | ** ** | **2004**               | ** ** | **2005** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                                                 | ** ** | **(in millions)** | ** ** |
| Revenue                                                                    |       |                   |       |     |       |     |       |   |   |   |   |
| Hotel Ownership                                                            |       | $                      | 2,215      |     |       | 2,212    |       |   |   | 4,985 |   |   |
| Managing and Franchising                                                   |       | 1,510                  |       |     | 1,671      |     |       |   | 2,527 |   |   |
| Timeshare                                                                  |       | 421                    |       |     | 554        |     |       |   | 650 |   |   |
|                                                                       |       | $                      | 4,146      |     |       | 4,437    |       |   |   | 8,162 |   |   |
| Operating income                                                           |       |                   |       |     |       |     |       |   |   |   |   |
| Hotel Ownership                                                            |       | $                      | 394        |     |       | 450      |       |   |   | 904 |   |   |
| Managing and Franchising                                                   |       | 343                    |       |     | 417        |     |       |   | 600 |   |   |
| Timeshare                                                                  |       | 99                     |       |     | 129        |     |       |   | 152 |   |   |
| Corporate and other unallocated expenses                                   |       | (178                   | )          |     | (191       | )        |       |   | (382 | ) |   |
| Total operating  income                                                    |       | 658                    |       |     | 805        |     |       |   | 1,274 |   |   |
| Interest and dividend  income                                              |       | 26                     |       |     | 32         |     |       |   | 27 |   |   |
| Interest expense                                                           |       | (274                   | )          |     | (259       | )        |       |   | (498 | ) |   |
| Net interest from unconsolidated affiliates and  non-controlled  interests |       | (26                    | )          |     | (26        | )        |       |   | (45 | ) |   |
| Net gain on foreign currency transactions                                  |       | —                 |       |     | —     |     |       |   | 24 |   |   |
| Net other (loss) gain                                                      |       | (5                     | )          |     | 103        |     |       |   | 72 |   |   |
| Loss from non-operating affiliates                                         |       | (6                     | )          |     | (17        | )        |       |   | (16 | ) |   |
| Income before  taxes and minority and non-controlled interests             |       | 373                    |       |     | 638        |     |       |   | 838 |   |   |
| Provision for income taxes                                                 |       | (127                   | )          |     | (166       | )        |       |   | (259 | ) |   |
| Minority and non-controlled interests, net                                 |       | (8                     | )          |     | (12        | )        |       |   | (7 | ) |   |
| Net Income                                                                 |       | $                      | 238        |     |       | 460      |       |   |   | 572 |   |   |

 

93

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Segmentassets as of December 31 are as follows:

| ** **               | ** ** | **2005**               | ** ** | **2006** | ** ** |
|--------------------------|------------|------------------------|------------|----------|------------|
| ** **               | ** ** | **(in millions)** | ** ** |
| Assets                   |       |                   |       |     |       |
| Hotel Ownership          |       | $                      | 4,283      |     | 9,681      |   |
| Managing and Franchising |       | 2,083                  |       | 5,191    |       |
| Timeshare                |       | 659                    |       | 1,078    |       |
| Corporate and other      |       | 1,718                  |       | 531      |       |
| Total assets             |       | $                      | 8,743      |     | 16,481     |   |

 

At December 31, 2006, the Hotel Ownership segmentincludes goodwill and brand values totaling $2.05 billion and $1.02 billion,respectively, and the Managing and Franchising segment includes goodwill andbrand values totaling $1.66 billion and $1.83 billion, respectively.

Thefollowing table presents revenue and long-lived assets by geographical region(in millions):

|                         | ** ** | **Revenue**            | ** ** | **Long-Lived Assets** | ** ** |
|-------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **2004**               | ** ** | **2005**                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **              | ** ** | **(in millions)** | ** ** | **(in millions)**     | ** ** |
| United States           |       |                   | $          | 4,095                      |       |   |   | 4,382 |   |   |   | 4,926 |   |   |   | $ | 4,040 |   |   |   | 4,008 |   |   |
| United Kingdom          |       |                   | 1          |                       |       |   | 1 |   |   |   | 880 |   |   |   | — |   |   |   | 610 |   |   |
| All other international |       |                   | 50         |                       |       |   | 54 |   |   |   | 2,356 |   |   |   | 19 |   |   |   | 1,810 |   |   |
| Total                   |       |                   | $          | 4,146                      |       |   |   | 4,437 |   |   |   | 8,162 |   |   |   | $ | 4,059 |   |   |   | 6,428 |   |   |

 

Other than the UnitedKingdom, there are no individual international countries which comprised atleast 10 percent of our total revenue for the years ended December 31,2004, 2005 or 2006 or at least 10 percent of our total long-lived assets as of December 31,2005 or 2006.

**NOTE 17:  LEASES**

We lease hotel properties and land under operating andcapital leases. At December 31, 2005 and 2006, we leased six and 196hotels, respectively, under operating leases. We also operated seven hotelsunder capital leases as of December 31, 2006. Two of the capital leases atDecember 31, 2006 are consolidated under FIN 46(R) (see “Note 2:Summary of Significant Accounting Policies—Investments”) and are non-recourseto us. The increase in our operating and capital leases is due to the HIAcquisition on February 23, 2006 (see “Note 3: Purchase of HiltonInternational”). Our hotel operating leases may require the payment of fixed rentpayments, variable rent payments based on a percentage of revenue or income, orthe payment of rent equal to the greater of a minimum fixed rent or variablerent based on a percentage of revenue or income. Our hotel leases expirethrough 2097, with varying renewal options. Our land leases represent groundleases for certain owned hotels and, in addition to minimum rental payments,may require the payment of additional rents based on varying percentages ofrevenue or income. Total rent expense incurred under our leases was $57million, $55 million and $528 million in 2004, 2005 and 2006,respectively, which included minimum rent payments of approximately$41 million in both 2004 and 2005 and $269 million in 2006.

94

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

Minimumlease commitments under non-cancelable operating and capital leases are asfollows:

| ** **                                   | ** ** | **Operating**          | ** ** | **Capital** | ** ** | **Non-Recourse** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-------------|------------|------------------|------------|
| **December 31,**                        | ** ** | ** **             | ** ** | **Leases**  | ** ** | **Leases**       | ** ** | **Capital Leases** | ** ** |
| ** **                                   | ** ** | **(in millions)** | ** ** |
| 2007                                         |       |                   | $          | 294         |       |             |       | 15 |   |   |   | 30 |   |   |
| 2008                                         |       |                   | 292        |        |       |             | 15         |   |   |   | 30 |   |   |
| 2009                                         |       |                   | 272        |        |       |             | 56         |   |   |   | 30 |   |   |
| 2010                                         |       |                   | 266        |        |       |             | 8          |   |   |   | 30 |   |   |
| 2011                                         |       |                   | 260        |        |       |             | 8          |   |   |   | 30 |   |   |
| Thereafter                                   |       |                   | 2,775      |        |       |             | 178        |   |   |   | 447 |   |   |
|                                         |       |                   | $          | 4,159       |       |             |       | 280 |   |   |   | 597 |   |   |
| Less imputed  interest at 6.34%              |       |                   |       |        |       |             | (138       | ) |   |   | (227 | ) |   |
| Present value of net  minimum lease payments |       |                   |       |        |       |             | $          | 142 |   |   |   | 370 |   |   |
|                                              |            |                        |            |             |            |                  |            |  |  |  |  |  |  |  |  |  |  |

 

**NOTE 18:  COMMITMENTS AND CONTINGENCIES**

We have established franchise financing programs withthird party lenders to support the growth of our brands. As of December 31,2006, we have provided guarantees of $16 million on loans outstandingunder these programs. In addition, we have guaranteed $27 million of debtand other obligations of unconsolidated affiliates and third parties, bringingour total guarantees to approximately $43 million. Our outstandingguarantees have terms ranging from one to 14 years. We also have commitmentsunder letters of credit totaling $110 million as of December 31, 2006.We believe it is unlikely that material payments will be required under theseguarantees or letters of credit.

In addition, we remain a guarantor on 12 operatingleases sold as part of the sale of the Red Lion hotel chain in 2001. We haveentered into an indemnification and reimbursement agreement with Red LionHotels Corporation (“RLH”), which requires RLH to reimburse us for any costsand expenses incurred in connection with the guarantee. The minimum leasecommitment under these 12 operating leases totals approximately $5 millionannually through 2020.

We have also provided performance guarantees tocertain owners of hotels we operate under management contracts. Most of theseguarantees allow us to terminate the contract rather than fund shortfalls ifspecified performance levels are not achieved. In limited cases, we areobligated to fund performance shortfalls. At December 31, 2006, we havesix contracts containing performance guarantees with possible cash outlaystotaling approximately $523 million through 2020. Funding under theseperformance guarantees totaled approximately $2 million in 2006 and isexpected to total approximately $3 million in 2007. Funding under theseguarantees in future periods is dependent upon the operating performance levelsof these hotels over the remaining term of the performance guarantees. In 2006we increased the reserve for the performance guarantee at a managed hotel byapproximately $12 million based on our estimate of the guarantee payment thatwill be required at the end of the contract term in 2012.   The charge is included in other operatingexpenses in the accompanying consolidated statements of income. Although weanticipate that the future operating performance levels of these hotels will belargely achieved, there can be no assurance that this will be the case. Inaddition, we do not anticipate losing a significant number of managementcontracts in 2007 pursuant to these guarantees.

Our consolidated financial statements at December 31,2005 and 2006 include liabilities of approximately $6 million and $18 million,respectively, for potential obligations under our outstanding guarantees. Undercertain circumstances, we may be obligated to provide additional guarantees orletters of credit totaling $74 million at December 31, 2006.

95

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**Notes To Consolidated Financial Statements December 31, 2006 (Continued)**

At December 31, 2006, we had contractualcommitments of approximately $399 million for construction and renovationprojects at certain owned and majority owned properties, including timeshare. Ourconstruction contracts contain clauses which allow us to cancel all or someportion of the work. The minimum commitments would be for cost incurred underthe contract and two to five percent of the remaining contract value.

We are involved in variouslegal matters arising in the normal course of business, some of which includeclaims for substantial sums. Accruals are recorded when the outcome is probableand can be reasonably estimated in accordance with FAS 5, “Accounting forContingencies.” While the ultimate results of claims and litigation cannot bepredicted with certainty, we do not expect that the resolution of all pendingovertly threatened claims and litigation as of December 31, 2006 will havea material adverse effect on our consolidated results of operations orfinancial position. However, depending on the amount and the timing, anunfavorable resolution of some or all of these matters could materially affectour future results of operations in a particular period.

**NOTE 19:  INSURANCE RECOVERIES**

On August 29, 2005, Hurricane Katrina hit theGulf Coast, affecting two of our consolidated hotels; the majority owned HiltonNew Orleans Riverside and the wholly owned Hilton New Orleans Airport. Bothproperties suffered some physical damage, and both properties were closed topaying guests for a period following the hurricane. We have insurance policiesthat provide coverage for physical damage and business interruption, includinglost profits. These policies also reimburse us for other costs and expensesincurred relating to the damages and losses suffered.

Based on the claims we filed and initial estimatesfrom the insurance carriers, we expected to receive insurance payments inexcess of the approximate $4 million net book value of the damaged assets. As aresult, the impairment charge related to the damaged assets was offset by theexpected recovery in our consolidated statement of income for the year ended December 31,2005.

In addition, based on the claims we filed and initialestimates from the insurance carriers, we expected that the other costs andexpenses incurred during the period in the aftermath of the hurricane would beless than the business interruption and other insurance proceeds to be received.As such, post-storm costs incurred in 2005 totaling approximately $22 millionwere offset by the expected recovery and did not impact results in the year. Wereceived approximately $15 million in insurance recoveries in 2005.

In 2006, we recognized approximately $26 million ofbusiness interruption insurance proceeds. These proceeds are recorded as ownedhotel revenue in the consolidated statements of income. Additionally, we recognizedapproximately $17 million of insurance recoveries related to building andproperty losses during the year ended December 31, 2006, which arerecorded as net other gain in our consolidated statements of income.

96

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**Report ofIndependent Registered Public Accounting Firm**

The Board of Directors and Stockholders of HiltonHotels Corporation

We have audited the accompanying consolidated balancesheets of Hilton Hotels Corporation, a Delaware corporation, and subsidiaries(the Company) as of December 31, 2006 and 2005, and the relatedconsolidated statements of income, stockholders’ equity, and cash flow for eachof the three years in the period ended December 31, 2006. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Hilton Hotels Corporation and subsidiaries at December 31,2006 and 2005, and the consolidated results of their operations and their cashflow for each of the three years in the period ended December 31, 2006, inconformity with U.S. generally accepted accounting principles.

As discussed inNote 2 to the consolidated financial statements, the Company adoptedStatement of Financial Accounting Standards (“FAS”) No. 123(R), *Share-based Payment*, on January 1, 2006 and adopted FASNo. 158, *Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans*, on December 31, 2006.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Hilton Hotels Corporation’s internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated February 26, 2007 expressed an unqualified opinion thereon.

Los Angeles, CaliforniaFebruary 26, 2007

97

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**Report of Independent Registered Public AccountingFirmon Internal Control over Financial Reporting**

The Board of Directors and Stockholders of HiltonHotels Corporation

We have audited management’s assessment, included inthe accompanying Annual Report on Form 10-K, that Hilton HotelsCorporation, a Delaware corporation, and subsidiaries (the Company) maintainedeffective internal control over financial reporting as of December 31,2006, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Hilton Hotels Corporation’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

As indicated in the accompanying Annual Report on Form 10-K,management’s assessment of and conclusion on the effectiveness of internalcontrol over financial reporting did not include the internal controls of the lodgingassets acquired from Hilton Group plc on February 23, 2006, which isincluded in the December 31, 2006 consolidated financial statements ofHilton Hotels Corporation and constituted 51% of total assets as of December 31,2006 and 38% of revenue for the year then ended. Our audit of internal controlover financial reporting of Hilton Hotels Corporation also did not include anevaluation of the internal control over financial reporting of the lodgingassets acquired from Hilton Group plc on February 23, 2006.

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In our opinion, management’s assessment that HiltonHotels Corporation maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, Hilton HotelsCorporation maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2006, based on****theCOSO criteria**.**

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofHilton Hotels Corporation as of December 31, 2005 and 2006, and the relatedconsolidated statements of income, stockholders’ equity and cash flow for eachof the three years in the period ended December 31, 2006 of Hilton HotelsCorporation and our report dated February 26, 2007 expressed anunqualified opinion thereon.

|  |   |  |
|--|--------|--|

 

Los Angeles, CaliforniaFebruary 26, 2007

99

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**SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)**

**Quarterly Financial Data**

| ** **       | ** **   | **1st**                                                              | ** ** | **2nd**     | ** ** | **3rd**     | ** ** | **4th**     | ** ** | ** ** | ** ** |
|------------------|--------------|----------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **       | ** **   | **Quarter**                                                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| ** **       | ** **   | **(in millions, except per share amounts)** | ** ** |
| **2006**         |         |                                                                 |       |        |       |        |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Revenue          |         |                                                                 | $          | 1,519       |       |        |       | 2,204       |       |       |       | 2,207 |   |   |   | 2,232 |   |   |   | 8,162 |   |   |
| Operating income |         |                                                                 | 235        |        |       |        | 366        |        |       |       | 315        |   |   |   | 358 |   |   |   | 1,274 |   |   |
| Net income       |         |                                                                 | 104        |        |       |        | 144        |        |       |       | 117        |   |   |   | 207 |   |   |   | 572 |   |   |
| Basic EPS(1)     |         |                                                                 | $          | .27         |       |        |       | .37         |       |       |       | .30 |   |   |   | .53 |   |   |   | 1.49 |   |   |
| Diluted EPS(1)   |         |                                                                 | $          | .26         |       |        |       | .35         |       |       |       | .29 |   |   |   | .50 |   |   |   | 1.39 |   |   |
| **2005**         | *** *** |                                                                 |       |        |       |        |       |        |       |       |       |   |   |   |   |   | *** *** |   |   |   |   |
| Revenue          |         |                                                                 | $          | 1,076       |       |        |       | 1,176       |       |       |       | 1,102 |   |   |   | 1,083 |   |   |   | 4,437 |   |   |
| Operating income |         |                                                                 | 163        |        |       |        | 246        |        |       |       | 203        |   |   |   | 193 |   |   |   | 805 |   |   |
| Net income       |         |                                                                 | 64         |        |       |        | 202        |        |       |       | 89         |   |   |   | 105 |   |   |   | 460 |   |   |
| Basic EPS(1)     |         |                                                                 | $          | .17         |       |        |       | .53         |       |       |       | .23 |   |   |   | .28 |   |   |   | 1.20 |   |   |
| Diluted EPS      |         |                                                                 | $          | .16         |       |        |       | .49         |       |       |       | .22 |   |   |   | .26 |   |   |   | 1.13 |   |   |

----

(1)          EPS for the full year differs from the sumof quarterly EPS amounts due to the required method of computing EPS in therespective periods.

**Comparable System-WideStatistical Information(2)**

| ** **                                           | ** ** | ** ** | ** ** | ** **    | ** ** | ** **       | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------|------------|------------------|------------|
| **Year ended December 31, 2006** | ** ** | ** ** | ** ** | **Occupancy** | ** ** | **Average Rate** | ** ** | **RevPAR** | ** ** |
| Hilton                                               |       |       | 72.8       | %             |       |             | $          | 149.86 |   |   |   | $ | 109.11 |   |   |
| Change from prior year                               |       |       | 1.0pts     |          |       |             | 8.2        | % |   |   | 9.7 | % |   |
| Hilton Garden Inn                                    |       |       | 71.4       | %             |       |             | $          | 111.34 |   |   |   | $ | 79.55 |   |   |
| Change from prior year                               |       |       | 1.4pts     |          |       |             | 7.2        | % |   |   | 9.4 | % |   |
| Doubletree                                           |       |       | 71.6       | %             |       |             | $          | 122.32 |   |   |   | $ | 87.60 |   |   |
| Change from prior year                               |       |       | 1.2pts     |          |       |             | 8.7        | % |   |   | 10.5 | % |   |
| Embassy Suites                                       |       |       | 74.9       | %             |       |             | $          | 140.18 |   |   |   | $ | 105.05 |   |   |
| Change from prior year                               |       |       | 1.1pts     |          |       |             | 7.9        | % |   |   | 9.6 | % |   |
| Homewood Suites by Hilton                            |       |       | 75.8       | %             |       |             | $          | 108.31 |   |   |   | $ | 82.14 |   |   |
| Change from prior year                               |       |       | 0.6pts     |          |       |             | 6.9        | % |   |   | 7.8 | % |   |
| Hampton                                              |       |       | 72.5       | %             |       |             | $          | 94.69 |   |   |   | $ | 68.66 |   |   |
| Change from prior year                               |       |       | 0.9pts     |          |       |             | 7.8        | % |   |   | 9.2 | % |   |
| Scandic                                              |       |       | 65.1       | %             |       |             | $          | 109.92 |   |   |   | $ | 71.58 |   |   |
| Change from prior year                               |       |       | 1.1pts     |          |       |             | 4.8        | % |   |   | 6.7 | % |   |
| Conrad                                               |       |       | 69.6       | %             |       |             | $          | 173.75 |   |   |   | $ | 120.94 |   |   |
| Change from prior year                               |       |       | (0.8)pts   |          |       |             | 13.3       | % |   |   | 12.1 | % |   |
| Other                                                |       |       | 79.5       | %             |       |             | $          | 145.13 |   |   |   | $ | 115.36 |   |   |
| Change from prior  year                              |       |       | 4.3pts     |          |       |             | 9.1        | % |   |   | 15.4 | % |   |
|                                                      |            |            |            |               |            |                  |            |  |  |  |  |  |  |  |  |  |  |

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(2)          Statistics are presented pro forma as ifthe HI Acquisition had occurred January 1, 2005. Includes hotels in our systemas of December 31, 2006 which were in our hotel system or the hotel system ofHI since January 1, 2005. Comparable hotels exclude data for HI franchisehotels and our owned hotels in New Orleans due to the interruption in operationsas a result of Hurricane Katrina.

As of December 31,2006 there were approximately 11,500 stockholders of record.

100

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**FIVE YEAR SUMMARY**

| ** **                        | ** ** | **Year ended December 31,**                           | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2002**                                                             | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** |
| ** **                        | ** ** | **(in millions, except per share amounts)** | ** ** |
| **Operating data**                | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                           |       | $                                                                    | 3,816      | ** ** | 3,819 | ** ** | 4,146 | ** ** | 4,437 | ** ** | 8,162 | ** ** |
| Net income                        |       | $                                                                    | 198        | ** ** | 164 | ** ** | 238 | ** ** | 460 | ** ** | 572 | ** ** |
| Basic earnings per share          |       | $                                                                    | .53        | ** ** | .43 | ** ** | .62 | ** ** | 1.20 | ** ** | 1.49 | ** ** |
| Diluted earnings per share        |       | $                                                                    | .53        | ** ** | .43 | ** ** | .60 | ** ** | 1.13 | ** ** | 1.39 | ** ** |
| Cash dividends per common share   |       | $                                                                    | .08        | ** ** | .08 | ** ** | .08 | ** ** | .12 | ** ** | .16 | ** ** |
| **Other  information**            | ** ** | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of properties at year  end |       | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned(1)                          |       | 63                                                                   | ** ** | 55 | ** ** | 50 | ** ** | 30 | ** ** | 60 | ** ** |
| Leased                            |       | 7                                                                    | ** ** | 7 | ** ** | 7 | ** ** | 6 | ** ** | 203 | ** ** |
| Joint venture                     |       | 65                                                                   | ** ** | 67 | ** ** | 65 | ** ** | 54 | ** ** | 53 | ** ** |
| Managed                           |       | 201                                                                  | ** ** | 206 | ** ** | 206 | ** ** | 210 | ** ** | 343 | ** ** |
| Franchised                        |       | 1,721                                                                | ** ** | 1,808 | ** ** | 1,900 | ** ** | 2,054 | ** ** | 2,242 | ** ** |
| Timeshare                         |       | 27                                                                   | ** ** | 30 | ** ** | 31 | ** ** | 34 | ** ** | 34 | ** ** |
| Total                             |       | 2,084                                                                | ** ** | 2,173 | ** ** | 2,259 | ** ** | 2,388 | ** ** | 2,935 | ** ** |
| Available rooms  at year end      |       | ** **                                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Owned(1)                          |       | 34,664                                                               | ** ** | 32,526 | ** ** | 31,068 | ** ** | 22,971 | ** ** | 29,647 | ** ** |
| Leased                            |       | 2,650                                                                | ** ** | 2,643 | ** ** | 2,643 | ** ** | 2,245 | ** ** | 46,663 | ** ** |
| Joint venture                     |       | 19,093                                                               | ** ** | 20,556 | ** ** | 20,186 | ** ** | 17,040 | ** ** | 17,232 | ** ** |
| Managed                           |       | 52,004                                                               | ** ** | 52,088 | ** ** | 51,380 | ** ** | 53,115 | ** ** | 97,536 | ** ** |
| Franchised                        |       | 225,588                                                              | ** ** | 237,026 | ** ** | 249,391 | ** ** | 275,350 | ** ** | 306,660 | ** ** |
| Timeshare                         |       | 3,117                                                                | ** ** | 3,644 | ** ** | 3,740 | ** ** | 3,948 | ** ** | 3,740 | ** ** |
| Total                             |       | 337,116                                                              | ** ** | 348,483 | ** ** | 358,408 | ** ** | 374,669 | ** ** | 501,478 | ** ** |

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(1)          Includes majority ownedand controlled hotels.

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**Item 9.**                        Changesin and Disagreements with Accountants on Accounting and Financial Disclosure

None.

**Item 9A.**                Controlsand Procedures

**Evaluation ofDisclosure Controls and Procedures**

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in our reportsfiled under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the Security andExchange Commission’s rules and forms, and that such information isaccumulated and communicated to our management, including the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure. In designing and evaluating the disclosure controlsand procedures, management recognized that any controls and procedures, nomatter how well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and management is required to applyits judgment in evaluating the cost-benefit relationship of possible controlsand procedures. Also, we have investments in certain unconsolidated entities.As we do not control these entities, our disclosure controls and procedureswith respect to such entities are necessarily substantially more limited thanthose we maintain with respect to our consolidated subsidiaries.

As required by Rule 13a-15(b) underthe Exchange Act, we carried out an evaluation, under the supervision and withthe participation of our management, including our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures as of December 31, 2006, the end of theperiod covered by this report. Based on the foregoing, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective at the reasonable assurance level.

**Management’s Reporton Internal Control over Financial Reporting**

Management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f). Our internal control overfinancial reporting is a process designed under the supervision of our ChiefExecutive Officer and Chief Financial Officer to provide reasonable assuranceregarding the reliability of financial reporting and the preparation of ourfinancial statements for external reporting purposes in accordance with UnitedStates generally accepted accounting principles.

As of December 31, 2006, management assessed theeffectiveness of our internal control over financial reporting based on theframework established in “Internal Control—Integrated Framework” published bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO). Aspermitted by the Securities and Exchange Commission, management’s evaluation asof December 31, 2006 excludes the lodging assets acquired from Hilton Groupplc on February 23, 2006. Such businesses represent approximately 51% ofour total assets as of December 31, 2006 and 38% of our total revenue forthe year ended December 31, 2006 (see “Note 3: Purchase of Hilton Groupplc” under Item 8). Based on this assessment, management has concludedthat our internal control over financial reporting as of December 31, 2006was effective.

Ernst & Young LLP, the independent registeredpublic accounting firm that audited our consolidated financial statementsincluded in this Form 10-K, has issued an attestation report onmanagement’s assessment of the effectiveness of our internal control overfinancial reporting as of December 31, 2006. The report, which expressesunqualified opinions on management’s assessment and on the effectiveness of ourinternal control over financial reporting as of December 31, 2006, isincluded in Part II—Item 8 under the heading “Report of IndependentRegistered Public Accounting Firm on Internal Control over Financial Reporting.”

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There have been no changesin our internal control over financial reporting during our most recent fiscalquarter that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

**Item 9B.**               OtherInformation

None.

**PART III**

**Item 10.**                 Directors,Executive Officers and Corporate Governance

Certain of the information respecting executiveofficers required by this Item is set forth under the caption “ExecutiveOfficers of the Registrant” under Item 1. Other information respectingexecutive officers, as well as the required information for directors, will beset forth under “Election of Directors” and “Section 16(a) BeneficialOwnership Reporting Compliance” in our Proxy Statement, and reference isexpressly made to the Proxy Statement for the specific information incorporatedin this Form 10-K.

We have adopted a Code ofBusiness Conduct and Ethics (the “Code of Ethics”) that applies to ourofficers, employees and directors, including our principal executive officer,principal financial officer, principal accounting officer and controller orpersons performing similar functions. This Code of Ethics is also posted on ourinternet website located at www.hiltonworldwide.com (click on “Investor Relations,”then “Corporate Governance”), and is available in print to any person requestinga copy from the Secretary of the Company at our World Headquarters at 9336Civic Center Drive, Beverly Hills, California 90210. See “AdditionalInformation—Available Information” under Item 1. In the event of any amendmentto, or waiver from, a provision of the Code of Ethics that applies to anyof the aforementioned officers that relates to the requirements ofRegulation S-K Item 406, we intend to disclose such information onour website.

**Item 11.**                 ExecutiveCompensation

The information requiredby this Item will be set forth under “Executive Compensation” in our ProxyStatement, and reference is expressly made to the Proxy Statement for thespecific information incorporated in this Form 10-K.

**Item 12.**                 SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

Certain of the informationrequired by this Item will be set forth under “Security Ownership of CertainBeneficial Owners, Directors and Executive Officers” and “Election of Directors”in our Proxy Statement, and reference is expressly made to the Proxy Statementfor the specific information incorporated in this Form 10-K.

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**Equity CompensationPlan Information**

Thefollowing table provides information as of December 31, 2006 with respectto shares of our Common Stock that may be issued under our existing equitycompensation plans:

| **Plan category**                                         | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights**(a) | ** ** | **Weighted average exercise  price of outstanding  options, warrants and  rights**(b) | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))**(c) | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders(1)     |       |       | 20,476,176 |                                                                                                                                                |       |                                                                                                                | $          | 16.87                                                                                                                                                                                                               | (4)        |   |   | 20,553,501 | (6) |   |
| Equity  compensation plans not approved by security holders(2) |       |       | 2,495,501  | (3)                                                                                                                                                 |       |                                                                                                                | N/A        | (5)                                                                                                                                                                                                                 |       |   | 638,274 | (7) |   |
| Total                                                          |       |       | 22,971,677 |                                                                                                                                                |       |                                                                                                                | $          | 16.87                                                                                                                                                                                                               | (4)        |   |   | 21,191,775 |   |   |

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(1)          Consists of our 1990Stock Option and Stock Appreciation Rights Plan, 1996 Stock Incentive Plan,1997 Independent Director Stock Option Plan and 2004 Omnibus EquityCompensation Plan. Of such plans, the 2004 Omnibus Equity Compensation Plan isthe only plan with shares remaining available for grant as of December 31,2006.

(2)          Consists of ourSupplemental Retirement and Retention Plan and Directors’ Stock and DeferredRetainer Plan.

(3)          Consists of 2,453,947 unitsunder the Supplemental Retirement and Retention Plan and 41,554 units under theDirectors’ Stock and Deferred Retainer Plan that entitle the recipients toreceive an equivalent number of shares of Common Stock, subject to satisfactionof the conditions set forth in the respective plans.

(4)          Represents the weightedaverage exercise price of outstanding stock options. There are no exerciseprices associated with grants of restricted stock units and performance stockunits under the 2004 Omnibus Equity Compensation Plan.

(5)          There are no exerciseprices associated with units included in the referenced plans.

(6)          Consists of 20,553,501shares available for future issuance under the 2004 Omnibus Equity CompensationPlan.

(7)          Consistsof 638,274 shares available for future issuance under the SupplementalRetirement and Retention Plan. The Directors’ Stock and Deferred Retainer Plandoes not limit the number of shares that may be issued thereunder.

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*SupplementalRetirement and Retention Plan*

The Supplemental Retirementand Retention Plan (the “SRRP”) was approved by our Board of Directors as of June 9,2000. The SRRP is not a stockholder approved plan. Under the SRRP, a total ofup to 3,500,000 supplemental retirement benefit units (“Units”) may be grantedto our senior officers. Each grant of Units vests 25% per year over a four-yearperiod and entitles the grantee to receive shares of Common Stock on aone-for-one basis upon retirement, with limited distribution available duringemployment. The SRRP also provides for an upward adjustment in the number ofUnits in a participant’s account based upon dividends and distributions paid byus with respect to the underlying shares of Common Stock, until distribution ofsuch shares. The Units will become immediately vested in the event of a changeof control of Hilton, as defined in the SRRP. Shares of Common Stock issuedunder the SRRP consist of our treasury shares. As of December 31, 2006,2,453,947 Units were outstanding under the SRRP and 638,274 Units remainedavailable for grant.

*Directors’ Stockand Deferred Retainer Plan*

The Directors’ Stock andDeferred Retainer Plan (the “Director Retainer Plan”) was approved by our Boardof Directors on September 11, 2001, effective as of January 1, 2002.The Director Retainer Plan is not a stockholder approved plan. The DirectorRetainer Plan provides non-employee directors the right to elect to receivetheir annual retainer fees in the form of (i) cash; (ii) Common Stockpayable on a quarterly basis; or (iii) deferred units that vestimmediately and are payable in shares of Common Stock on a one-for-one basissubsequent to a director’s retirement from the Board. The number of shares ofCommon Stock or deferred units received by a participant each quarter is basedupon the closing price of our Common Stock on the New York Stock Exchange onthe last trading date of such quarter. Shares of Common Stock issued under theDirector Retainer Plan consist of our treasury shares. As of December 31,2006, nine non-employee directors were eligible to defer all or a portion oftheir annual retainer fees into Common Stock or deferred units under theDirector Retainer Plan. As of December 31, 2006, 41,720 shares of CommonStock had been issued under the Director Retainer Plan and 41,554 deferredunits were allocated to the accounts of non-employee directors.

**Item 13.**                 CertainRelationships and Related Transactions and Director Independence

The information requiredby this Item will be set forth under “Certain Relationships and RelatedTransactions” and “Corporate Governance Information—Director Independence” inour Proxy Statement, and reference is expressly made to the Proxy Statement forthe specific information incorporated in this Form 10-K.

**Item 14.**                 PrincipalAccounting Fees and Services

The information requiredby this Item will be set forth under “Election of Directors—Audit Fee Summary”and “—Audit Committee Pre-Approval Policy” in our Proxy Statement, andreference is expressly made to the Proxy Statement for the specific informationincorporated in this Form 10-K.

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**PART IV**

**Item 15.**                 Exhibits,Financial Statement Schedules

**(a)   Index to Financial Statements**

1.                 FinancialStatements:

The consolidated financial statements andsupplementary data are set forth under Part II—Item 8 of this Form 10-K.

2.                 FinancialStatement Schedules:

All schedules areinapplicable or the required information is included elsewhere herein.

**(b)   Exhibits**

Reference is made to the Index to Exhibits,immediately preceding the exhibits to this Form 10-K.

106

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**SIGNATURES**

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized, as ofFebruary 28, 2007.

|        |   | HILTON  HOTELS CORPORATION                             |
|--------|--------|--------------------------------------------------------|
|   |   | (Registrant)                                           |
|   |   |                                                   |
|   | By:    | /s/ ROBERT M. LA FORGIA                                |
|   |   | Robert M. La  Forgia                                   |
|   |   | Executive Vice  President and  Chief Financial Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities indicated as of February 28, 2007.

| /s/ STEPHEN F. BOLLENBACH                              |       | /s/ ROBERT M. LA FORGIA                                                           |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------|
| Stephen F.  Bollenbach                                 |       | Robert M. La  Forgia                                                              |
| Co-Chairman of  the Board and  Chief Executive Officer |       | Executive Vice  President and Chief Financial Officer  (Chief Accounting Officer) |
| /s/  BARBARA BELL COLEMAN                              |       | /s/  BENJAMIN V. LAMBERT                                                          |
| Barbara Bell  Coleman                                  |       | Benjamin V.  Lambert                                                              |
| Director                                               |       | Director                                                                          |
| /s/  A. STEVEN CROWN                                   |       | /s/  JOHN H. MYERS                                                                |
| A. Steven Crown                                        |       | John H. Myers                                                                     |
| Director                                               |       | Director                                                                          |
| /s/  CHRISTINE GARVEY                                  |       | /s/  JOHN L. NOTTER                                                               |
| Christine Garvey                                       |       | John L. Notter                                                                    |
| Director                                               |       | Director                                                                          |
| /s/  MATTHEW J. HART                                   | ** ** | /s/  DONNA F. TUTTLE                                                              |
| Matthew J. Hart                                        |       | Donna F. Tuttle                                                                   |
| Director                                               |       | Director                                                                          |
| /s/ BARRON HILTON                                      |       | /s/****PETER V. UEBERROTH                                                         |
| Barron Hilton                                          |       | Peter V.  Ueberroth                                                               |
| Co-Chairman of  the Board                              |       | Director                                                                          |

 

107

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**INDEX TO EXHIBITS**
| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                        | **Description** | ** ** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|------------|
| 2.1              |       | Sale and Purchase  Agreement, dated as of December 29, 2005, among Registrant, Hilton Group  plc, Ladbroke Group International Limited, Ladbroke Group Limited and  Town & County Factors Limited (incorporated herein by reference from  Exhibit 2.1 to Registrant’s Current Report on Form 8-K, dated  December 30, 2005)                                     |
| 3.1              |       | Restated  Certificate of Incorporation of Registrant, as amended (incorporated herein  by reference from Exhibit 4.1 to Registrant’s Registration Statement on  Form S-3 (File No. 333-18523))                                                                                                                                                                           |
| 3.2              |       | Amendment to  Restated Certificate of Incorporation of Registrant, relating to  Exhibit 3.1 hereto (incorporated herein by reference from  Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q for  the period ended June 30, 1997)                                                                                                                                |
| 3.3              |       | Amendment to  Restated Certificate of Incorporation of Registrant, relating to Exhibits 3.1  and 3.2 hereto (incorporated herein by reference from Appendix F to  Registrant’s Registration Statement on Form S-4 (File No. 333-89437))                                                                                                                                            |
| 3.4              |       | By-Laws of  Registrant, as amended and restated (incorporated herein by reference from  Exhibit 3.1 to Registrant’s Current Report on Form 8-K, dated  January 23, 2006)                                                                                                                                                                                                      |
| 4.1              |       | Indenture, dated  as of July 1, 1988, between Registrant and Morgan Guaranty Trust Company  of New York, as Trustee, regarding Registrant’s Senior Debt Securities  (incorporated herein by reference from Exhibit 4.1 to Post Effective  Amendment No. 1 to Registrant’s Registration Statement on Form S-3  (File No. 2-99967))                              |
| 4.2              |       | First  Supplemental Indenture, dated as of June 30, 1992, between Registrant  and Morgan Guaranty Trust Company of New York, as Trustee, regarding  Registrant’s Senior Debt Securities, relating to Exhibit 4.1 hereto  (incorporated herein by reference from Exhibit 4.3 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  1992) |
| 4.3              |       | Indenture, dated  as of April 22, 2003, between Registrant and BNY Western Trust Company,  as Trustee, regarding Registrant’s 3.375% Convertible Senior Notes due 2023,  including the form of Note thereof (incorporated herein by reference from  Exhibit 4.1 to Registrant’s Registration Statement on Form S-3  (File No. 333-107159))                          |
| 4.4.1            |       | Indenture, dated  as of April 15, 1997, between Registrant and BNY Western Trust Company,  as Trustee, regarding Registrant’s Debt Securities (incorporated herein by  reference from Exhibit 4.3 to Registrant’s Current Report on Form 8-K,  dated April 15, 1997)                                                                                                |
| 4.4.2            |       | Officers’  Certificate containing terms of 7.95% Senior Notes due 2007 (incorporated  herein by reference from Exhibit 99 to Registrant’s Current Report on  Form 8-K, dated April 15, 1997)                                                                                                                                                                             |
| 4.4.3            |       | Officers’  Certificate containing terms of 7.20% Senior Notes due 2009 and 7.5% Senior  Notes due 2017 (incorporated herein by reference from Exhibit 4.1 to  Registrant’s Current Report on Form 8-K, dated December 17,  1997)                                                                                                                                         |
| 4.4.4            |       | Officers’  Certificate containing terms of 8.25% Senior Notes due 2011 (incorporated  herein by reference from Exhibit 99.01 to Registrant’s Current Report on  Form 8-K, dated February 12, 2001)                                                                                                                                                                       |
| 4.4.5            |       | Officers’  Certificate containing terms of 7.625% Senior Notes due 2008 (incorporated  herein by reference from Exhibit 99.01 to Registrant’s Current Report on  Form 8-K, dated May 10, 2001)                                                                                                                                                                           |

108

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| 4.4.6 |   | Officers’  Certificate containing terms of 8% Quarterly Interest Bonds due 2031  (incorporated herein by reference from Exhibit 99.01 to Registrant’s  Current Report on Form 8-K, dated August 16, 2001)                                                                                                                                                                                                                                                         |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.4.7 |   | Officers’  Certificate containing terms of 7.43% Chilean Inflation Indexed (UF) Notes  due 2009 (incorporated herein by reference from Exhibit 99.01 to  Registrant’s Current Report on Form 8-K, dated August 29,  2001)                                                                                                                                                                                                                                         |
| 4.4.8 |   | Officers’  Certificate containing terms of 7.625% Senior Notes due 2012 (incorporated  herein by reference from Exhibit 99.01 to Registrant’s Current Report on  Form 8-K, dated November 21, 2002)                                                                                                                                                                                                                                                               |
| 4.5   |   | Credit Agreement,  dated as of February 22, 2006, among Registrant, Bank of America, N.A.,  as Administrative Agent, Swing Line Lender and Issuing Lender, UBS Loan  Finance, as Syndication Agent, and the financial institutions signatory  thereto (incorporated herein by reference from Exhibit 4.1 to  Registrant’s Current Report on Form 8-K, dated February 28,  2006)                                                                                   |
| 4.6   |   | Loan Agreement,  dated as of September 27, 2000, among Phoenix SP Hilton LLC,  S.F. Hilton, Inc., Chicago Hilton LLC, Short Hills Hilton LLC and  McLean Hilton LLC, as Borrowers, and Secore Financial Corporation, as Lender  (incorporated herein by reference from Exhibit 99.01 to Registrant’s  Quarterly Report on Form 10-Q for the period ended  September 30, 2000)                                                                           |
| 4.7   |   | First Amendment  to Loan Agreement, dated as of October 30, 2000, among Phoenix SP Hilton  LLC, S.F. Hilton, Inc., Chicago Hilton LLC, Short Hills Hilton LLC  and McLean Hilton LLC, as Borrowers, and Morgan Stanley Dean Witter Mortgage  Capital Inc., as Lender, relating to Exhibit 4.6 hereto (incorporated  herein by reference from Exhibit 99.02 to Registrant’s Quarterly Report  on Form 10-Q for the period ended September 30, 2000) |
| 4.8   |   | Rights Agreement,  dated as of November 29, 1999, between Registrant and ChaseMellon  Shareholder Services, L.L.C., as Rights Agent (incorporated herein by  reference from Exhibit 1 to Registrant’s Registration Statement on  Form 8-A, dated December 1, 1999)                                                                                                                                                                                                |
| 4.9   |   | Amendment to  Rights Agreement Changing Rights Agent, dated as of February 15, 2001,  between Registrant and The Bank of New York, as Rights Agent, relating to  Exhibit 4.8 hereto (incorporated herein by reference from Exhibit 4.22  to Registrant’s Annual Report on From 10-K for the year ended  December 31, 2000)                                                                                                                                   |
| 10.1  |   | 1990 Stock Option  and Stock Appreciation Rights Plan of Registrant, together with the Stock  Option Agreement relating thereto, both as amended (incorporated herein by  reference from Exhibit 10.4 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1990)*                                                                                                                                                                               |
| 10.2  |   | Amendment, dated  January 20, 1994, to the 1990 Stock Option and Stock Appreciation Rights  Plan of Registrant, relating to Exhibit 10.1 hereto (incorporated herein  by reference from Exhibit 10.5 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1993)*                                                                                                                                                                      |
| 10.3  |   | Amendment, dated  January 19, 1995, to the 1990 Stock Option and Stock Appreciation Rights  Plan of Registrant, relating to Exhibits 10.1 and 10.2 hereto (incorporated  herein by reference from Exhibit 10.5 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1994)*                                                                                                                                                                 |

109

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| 10.4    |   | Amendment, dated  November 14, 1996, to the 1990 Stock Option and Stock Appreciation  Rights Plan of Registrant, relating to Exhibits 10.1, 10.2 and 10.3 hereto  (incorporated herein by reference from Exhibit 10.7 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  1996)*     |
|---------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.5    |   | Fourth Amendment,  dated as of December 31, 1998, to the 1990 Stock Option and Stock  Appreciation Rights Plan of Registrant, relating to Exhibits 10.1 through  10.4 hereto (incorporated herein by reference from Exhibit 99.9 to  Registrant’s Current Report on Form 8-K, dated January 8, 1999)*         |
| 10.6    |   | Amended and  Restated 1996 Stock Incentive Plan of Registrant (incorporated herein by  reference from Exhibit 4.1 to Registrant’s Post-Effective Amendment  No. 1 to Registration Statement on Form S-8 (File  No. 333-04273))*                                                                               |
| 10.7    |   | Amendment, dated  as of November 14, 2001, to the Amended and Restated 1996 Stock  Incentive Plan of Registrant, relating to Exhibit 10.6 hereto  (incorporated herein by reference from Exhibit 10.11 to Registrant’s  Annual Report on Form 10-K for the year ended December 31, 2001)*                |
| 10.8    |   | 1997 Independent  Director Stock Option Plan of Registrant (incorporated herein by reference  from Exhibit 10.10 to Registrant’s Annual Report on Form 10-K  for the year ended December 31, 1997)*                                                                                                                |
| 10.9    |   | First Amendment,  dated as of December 31, 1998, to the 1997 Independent Director Stock  Option Plan of Registrant, relating to Exhibit 10.8 hereto (incorporated  herein by reference from Exhibit 99.11 to Registrant’s Current Report on  Form 8-K, dated January 8, 1999)*                           |
| 10.10   |   | Second Amendment,  dated as of November 11, 1999, to the 1997 Independent Director Stock  Option Plan of Registrant, relating to Exhibits 10.8 and 10.9 hereto  (incorporated herein by reference from Exhibit 10.15 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  1999)*      |
| 10.11   |   | Third Amendment,  dated as of November 14, 2001, to the 1997 Independent Director Stock  Option Plan of Registrant, relating to Exhibits 10.8, 10.9 and 10.10 hereto  (incorporated herein by reference from Exhibit 10.17 to Registrant’s Annual  Report on Form 10-K for the year ended December 31, 2001)* |
| 10.12   |   | 2004 Omnibus  Equity Compensation Plan of Registrant (incorporated herein by reference from  Exhibit B to Registrant’s Proxy Statement, dated as of April 8,  2004)*                                                                                                                                                    |
| 10.12.1 |   | Form of  stock unit grant agreement under 2004 Omnibus Equity Compensation Plan of  Registrant (incorporated herein by reference from Exhibit 10.12.1 to  Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2004)*                                                                     |
| 10.12.2 |   | Form of  performance unit grant agreement under 2004 Omnibus Equity Compensation Plan  of Registrant (incorporated herein by reference from Exhibit 10.12.2 to  Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2004)*                                                               |
| 10.13   |   | Amendment 2006-1  to 2004 Omnibus Equity Compensation Plan of Registrant, relating to  Exhibit 10.12 hereto (incorporated herein by reference from  Exhibit 99.1 to Registrant’s Quarterly Report on Form 10-Q  for the period ended September 30, 2006)*                                                     |
| 10.14   |   | Directors’ Stock  and Deferred Retainer Plan of Registrant (incorporated herein by reference  from Exhibit 99.1 to Registrant’s Registration Statement on Form S-8  (File No. 333-72906))*                                                                                                                    |

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| 10.15 |   | Amendment 2005-1  to Directors’ Stock and Deferred Retainer Plan of Registrant, relating to  Exhibit 10.14 hereto (incorporated herein by reference from  Exhibit 10.14 to Registrant’s Annual Report on Form 10-K for  the year ended December 31, 2005)*                                              |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16 |   | Annual Incentive  Plan of Registrant (incorporated herein by reference from Exhibit C to  Registrant’s Proxy Statement, dated as of April 8, 2004)*                                                                                                                                                                    |
| 10.17 |   | Supplemental  Executive Retirement Plan of Registrant, as amended (incorporated herein by  reference from Exhibit 10.6 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1991)*                                                                                                         |
| 10.18 |   | Amendment,  effective April 1, 1994, to the Supplemental Executive Retirement Plan  of Registrant, relating to Exhibit 10.17 hereto (incorporated herein by  reference from Exhibit 10.10 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1994)*                            |
| 10.19 |   | Amendment,  effective December 31, 1996, to the Supplemental Executive Retirement  Plan of Registrant, relating to Exhibits 10.17 and 10.18 hereto (incorporated  herein by reference from Exhibit 10.19 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1996)*                  |
| 10.20 |   | Doubletree Hotels  Corporation Supplemental Executive Retirement Plan, dated as of  February 15, 1997, as amended by letter dated December 9, 1997  (incorporated herein by reference from Exhibit 10.29 to the Promus Hotel  Corporation Annual Report on Form 10-K for the year ended  December 31, 1998)* |
| 10.21 |   | Directors’  Retirement Benefit Plan of Registrant, as amended (incorporated herein by  reference from Exhibit 10.7 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1991)*                                                                                                        |
| 10.22 |   | First Amendment,  dated July 31, 1997, to the Directors’ Retirement Benefit Plan of  Registrant, relating to Exhibit 10.21 hereto (incorporated herein by  reference from Exhibit 10.22 to Registrant’s Annual Report on Form 10-K  for the year ended December 31, 1997)*                         |
| 10.23 |   | Retirement  Benefit Replacement Plan of Registrant, as amended (incorporated herein by  reference from Exhibit 10.9 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1992)*                                                                                                            |
| 10.24 |   | Amendment, dated  as of January 1, 1994, to the Retirement Benefit Replacement Plan of  Registrant, relating to Exhibit 10.23 hereto (incorporated herein by  reference from Exhibit 10.12 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1993)*                           |
| 10.25 |   | Amendment,  effective April 1, 1994, to the Retirement Benefit Replacement Plan of  Registrant, relating to Exhibits 10.23 and 10.24 hereto (incorporated herein  by reference from Exhibit 10.14 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1994)*                         |
| 10.26 |   | Amendment,  effective December 31, 1996, to the Retirement Benefit Replacement Plan  of Registrant, relating to Exhibits 10.23, 10.24 and 10.25 hereto  (incorporated herein by reference from Exhibit 10.24 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  1996)*             |
| 10.27 |   | Executive  Deferred Compensation Plan of Registrant (incorporated herein by reference  from Exhibit 4.1 to Registrant’s Registration Statement on Form S-8  (File No. 333-122019))*                                                                                                                               |

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| 10.28 |   | Amendment 2005-1  to the Executive Deferred Compensation Plan of Registrant, relating to  Exhibit 10.27 hereto (incorporated herein by reference from  Exhibit 10.27 to Registrant’s Annual Report on Form 10-K for  the year ended December 31, 2005)*                                                    |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.29 |   | 2005 Executive  Deferred Compensation Plan of Registrant, as amended and restated  (incorporated herein by reference from Exhibit 10.28 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2005)*                                                                                     |
| 10.30 |   | Promus Hotel  Corporation Executive Deferred Compensation Plan, as amended and restated  (incorporated herein by reference from Exhibit 10.27 to the Promus Hotel  Corporation Annual Report on Form 10-K for the year ended  December 31, 1998)*                                                                    |
| 10.31 |   | Supplemental  Retirement and Retention Plan of Registrant, dated as of June 1, 2000  (incorporated herein by reference from Exhibit 10.42 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2000)*                                                                              |
| 10.32 |   | First Amendment  to the Supplemental Retirement and Retention Plan of Registrant, relating to  Exhibit 10.31 hereto (incorporated herein by reference from  Exhibit 10.46 to Registrant’s Annual Report on Form 10-K for  the year ended December 31, 2001)*                                               |
| 10.33 |   | Form of  Change of Control Agreement between Registrant and each of Matthew J. Hart, Madeleine  A. Kleiner and Robert M. La Forgia (incorporated herein by reference from  Exhibit 10.43 to Registrant’s Annual Report on Form 10-K for  the year ended December 31, 1999)*                                |
| 10.34 |   | First Amendment  to form of Change of Control Agreement, relating to Exhibit 10.33 hereto  (incorporated herein by reference from Exhibit 10.48 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2001)*                                                                        |
| 10.35 |   | Amended and  Restated Employment Agreement, dated as of November 11, 2004 and amended  as of January 27, 2005, between Registrant and Stephen F. Bollenbach  (incorporated herein by reference from Exhibit 10.30 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2004)* |
| 10.36 |   | Amendment to  Employment Agreement, dated as of March 31, 2006, between Registrant and  Stephen F. Bollenbach, relating to Exhibit 10.35 hereto (incorporated  herein by reference from Exhibit 10.1 to Registrant’s Current Report on  Form 8-K, dated April 6, 2006)*                               |
| 10.37 |   | Amendment to  Employment Agreement, dated as of January 18, 2007, between Registrant  and Stephen F. Bollenbach, relating to Exhibits 10.35 and 10.36 hereto  (incorporated herein by reference from Exhibit 10.1 to Registrant’s  Current Report on Form 8-K, dated January 19, 2007)*                    |
| 10.38 |   | Employment  Agreement, dated as of March 10, 2006, between Hilton U.K. Hotels  Limited and Ian R. Carter (incorporated herein by reference from  Exhibit 10.1 to Registrant’s Current Report on Form 8-K,  dated March 14, 2006)*                                                                          |
| 11    |   | Computation of Per Share  Earnings                                                                                                                                                                                                                                                                                                  |
| 12    |   | Computation of Ratios of  Earnings to Fixed Charges                                                                                                                                                                                                                                                                                 |
| 21    |   | List of Registrant’s  Subsidiaries                                                                                                                                                                                                                                                                                             |
| 23    |   | Consent of Independent  Registered Public Accounting Firm                                                                                                                                                                                                                                                                           |
| 31.1  |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                           |

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| 31.2 |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|------|--------|-----------------------------------------------------------------------------------------------------------|
| 32.1 |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
| 32.2 |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
| 99   |   | Undertakings                                                                                              |

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*                    Managementcontracts or compensatory plans or arrangements required to be filed asexhibits to this Form 10-K by Item 601(b)(10)(iii) ofRegulation S-K, previously filed where indicated and incorporated herein byreference.

Pursuant to Regulation§229.601, Item 601(b)(4)(iii) of Regulation S-K, upon request of theSecurities and Exchange Commission, the Registrant hereby undertakes to furnisha copy of any unfiled instrument which defines the rights of holders oflong-term debt of the Registrant and its consolidated subsidiaries (and for anyof its unconsolidated subsidiaries for which financial statements are requiredto be filed) wherein the total amount of securities authorized thereunder doesnot exceed 10% of the total consolidated assets of the Registrant.

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