Exhibit 13

MANAGEMENT'S DISCUSSION AND ANALYSIS OF        FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE COMPANY

On November 30, 1999, Hilton Hotels Corporation ("Hilton" or the "Company") completed the acquisition of Promus Hotel Corporation ("Promus"). As a
result of the Promus acquisition, the Company expanded its hotel count by over 1,450 properties representing more than 200,000 rooms. The discussion and analysis of results of operations include the
results of Promus from the date of acquisition.

On
December 31, 1998, Hilton completed a spin-off that split the Company's operations into two independent public corporations, one for conducting its hotel
business and one for conducting its gaming business. Hilton retained ownership of the hotel business. The Company transferred the gaming business to a new corporation named Park Place Entertainment
Corporation ("Park Place"), and distributed the stock of Park Place tax-free to Hilton stockholders on a one-for-one basis. As a result of the spin-off,
Hilton's historical financial statements reflect the gaming business as discontinued operations. The following discussion and analysis of results of operations is that of Hilton's continuing
operations.

Hilton's
operations include the consolidated results of the Company's owned, partially owned and leased hotel assets, management and franchise fees, equity income from unconsolidated
affiliates and earnings from vacation ownership and conference center operations. At December 31, 2000, the Company's hotel system contained 1,895 properties totaling approximately 318,000
rooms worldwide. The Company's brands include Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Hampton, Homewood Suites by Hilton, Red Lion, Conrad and Harrison Conference Centers. The Company's
hotel system also includes certain properties that are not Company-branded. In addition, the Company develops and operates vacation ownership resorts through Hilton Grand Vacations Company and its
related entities, which are wholly owned by the Company. The Company is also engaged in various other activities incidental or related to the operation of hotels.

Properties
by brand at December 31, 2000 are as follows:

Brand

Hotels

RoomsHilton

228

85,243Hilton Garden Inn

89

12,575Doubletree

159

42,548Embassy Suites

158

38,510Homewood Suites by Hilton

94

10,474Hampton

1,073

111,231Other

94

17,242Total

1,895

317,823


Of
the 1,895 total hotels at December 31, 2000, 1,492 are owned and operated by franchisees and 403 are operated by the Company. Depending on the brand, the Company charges
franchise royalty fees of up to five percent of rooms revenue in exchange for the use of one of its brand names and franchise related services. Company operated properties include 139 owned or
partially owned hotels, 73 leased hotels and 191 hotels managed for third parties. As a manager of hotels, the Company is typically responsible for supervising or operating the hotel in exchange for
fees based on a percentage of the hotel's gross revenues, operating profits, cash flow, or a combination thereof.

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DEVELOPMENT

OverviewHilton intends to grow its brands primarily through franchising and the addition of management contracts. In
addition, the Company will continue to review its hotel portfolio for potential repositioning or re-branding opportunities and may seek to sell certain owned assets. The Company did not
purchase any hotel properties during 2000 and acquisition spending is not expected to be significant in 2001.

During
2000, the Company added a total of 170 hotels or approximately 23,500 rooms to its portfolio, including an increase of 157 franchise properties and seven managed properties
owned by third parties. A total of 27 properties or approximately 6,000 rooms were removed from the Company's system during the same period. Most of these removals occurred in the first six months of
2000 and related to former Promus brand franchise hotels which did not meet the Company's quality standards; only eight properties were removed in the second half of 2000. During 2000, the Company
continued to enhance its development pipeline by approving 223 new hotels, primarily franchises, representing approximately 32,000 rooms.

In
the fourth quarter of 2000, Hilton announced a joint venture agreement with Hilton Group plc to develop, through management contracts, the Conrad brand of luxury hotels throughout
the world. The Company currently operates nine Conrad luxury properties in Europe, the Middle East and Asia. In January 2001, the Company entered into an agreement to affiliate 13 Camino Real
hotels and resorts located in Mexico, and one Camino Real hotel in Texas, with the Company's family of brands. Effective April 1, 2001, the Camino Real hotels will participate in the Company's
loyalty program, the Hilton Reservations Worldwide reservation system and our sales and marketing programs. Following the completion of a $40 million rehabilitation program funded by the
owners, the Company anticipates that these properties will be rebranded either as Hilton hotels or another of our hotel brands. Also in January 2001, the Company announced an agreement to
manage 16 hotels owned by Equity Inns, Inc. The two-year management agreement includes 15 Hampton Inn and one Homewood Suites by Hilton hotels.

The
Company anticipates that its hotel owners will open approximately 180 properties during 2001, with Hampton Inn, Hilton Garden Inn and Homewood Suites by Hilton accounting for most
of the new development. Our ability to grow the number of franchised and managed hotels is affected by, among other things, national and regional economic conditions, capital markets, credit
availability,
relationships with franchisees and owners as well as competition from other hotel franchisors and managers.

AlliancesIn 1997, the Company entered into agreements with Hilton Group plc, whose wholly owned subsidiary Hilton
International Co. ("HI") owns the rights to the Hilton name outside the United States. The agreements provide for the reunification of the Hilton brand worldwide through a strategic alliance between
the companies, including cooperation on sales and marketing, loyalty programs and other operational matters. Pursuant to these agreements, the Company and HI re-launched the Hilton HHonors
("HHonors") loyalty program on a worldwide basis. In April 2000, HHonors was further expanded to include the Hampton, Doubletree, Embassy Suites and Homewood Suites by Hilton brands. HHonors
related stays have accounted for over 20 percent of total stays at these four brands since the program expansion. HHonors is now featured in more than 2,100 hotels worldwide and continues to
experience solid enrollment activity, with approximately 11 million travelers enrolled since the program was introduced, including nearly 3 million enrolled during 2000. Since the
expansion of HHonors in April 2000, over 25 percent of the enrollment activity has been completed through the Hilton.com website. The Company expects the expansion of HHonors to continue
to have a positive impact on the brands that participate in the program.

As
of December 31, 2000, Hilton owned approximately 1.5 million shares of FelCor Lodging Trust Inc. ("FelCor") common stock, representing approximately three
percent of FelCor's outstanding

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shares. FelCor owned or had an interest in 84 Company brand hotels as of December 31, 2000. In addition, the Company has guaranteed repayment of a third party loan to FelCor of up to
$25 million.

At
December 31, 2000, the Company owned approximately 2.6 million shares of Candlewood Hotel Company ("Candlewood") common stock, representing approximately
29 percent of Candlewood's outstanding shares. The Company also has a note receivable from Candlewood with a balance at December 31, 2000 of $15 million.

Development FinancingIn order to assist prospective owners in obtaining financing for hotel projects, the Company has
initiated programs to provide alternative capital sources to owners.

Hilton
Acceptance Corp. ("HilMAC"), a third party lending entity, provides first mortgage construction financing to franchisees for select Hilton Garden Inn, Homewood Suites by
Hilton, Hampton and Embassy Suites hotels. The Company has guaranteed $33 million of loans outstanding under the HilMAC program. The Company also has provided secondary financing to franchisees
under a mezzanine financing program. Loans outstanding under this program at December 31, 2000 totaled approximately $51 million.

The
Company has provided credit support for a loan facility utilized by Candlewood to provide construction and permanent financing to Candlewood and its franchisees. The Company's
aggregate maximum exposure for such credit support is capped at $30 million. As of December 31, 2000, the Company has guaranteed $10 million of such financing.

Acquisitions and Capital SpendingAggregate consideration in the November 30, 1999 acquisition of Promus
consisted of approximately 113 million shares of the Company's common stock and $1.7 billion in cash, for a combined equity value of approximately $2.8 billion, transaction costs
of $175 million, and the assumption of debt totaling $750 million. The Promus acquisition has created a more diversified and balanced income stream by increasing the percentage of
revenue that the Company derives from management and franchise fees, both of which require little or no ongoing capital investment by the Company. The integration of Promus was substantially completed
during the first quarter of 2000. The Company believes the Promus acquisition has and will continue to yield significant synergies, economies of scale and revenue enhancements by providing greater
opportunity for expansion with multiple brands and market segments; spreading overhead over a wider base of properties; and including the Promus brands in Hilton's HHonors program, its central
reservation system and its sales and marketing initiatives.

In
September 2000, the Company completed a transaction with Boykin Lodging Company ("Boykin") in which the two companies exchanged hotel properties that were of equal value,
but which would have more strategic value in each other's portfolios. In the transaction, Hilton transferred ownership of the Doubletree San Antonio Airport and the Doubletree Guest Suites in
Southfield, Michigan to Boykin in exchange for the Cleveland Marriott East in Beachwood, Ohio, which has been renamed the Hilton Cleveland. The Company retained franchise agreements on the properties
transferred to Boykin.

Capital
expenditures at owned properties during 2000 totaled $458 million, representing maintenance capital expenditures and several significant renovation and construction
projects. These projects include construction of the 453-room Kalia Tower at the Hilton Hawaiian Village Beach Resort & Spa, which will feature a world class health club and
wellness spa, exciting retail shops and an interactive Hawaiian cultural center. The project is scheduled to be completed in May 2001. Significant 2000 construction projects also include the
construction of a 319-room tower addition at the Hilton Portland, which is scheduled for completion in the second quarter of 2002, and the renovation of existing rooms and
construction of a 222-room addition at the Hilton Seattle Airport. The renovation portion of the Seattle project was completed in October 2000 and the room addition was completed in
February 2001. The Company is also currently completing construction of two Homewood Suites by Hilton properties.

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Construction was completed on a 264-unit vacation ownership resort at the Hilton Hawaiian Village Beach Resort & Spa which opened in January 2001. Interval
sales, which commenced during the first quarter of 2000, are well ahead of forecast and the Company began to recognize the income from these sales in the first quarter of 2001. Construction costs
associated with the Company's vacation ownership (timeshare) operations during 2000 totaled approximately $60 million. These costs are reflected as inventory until the intervals are sold. In
January 2001, the Company announced the development of a new 1,500-unit timeshare property in Las Vegas, the Company's third timeshare development in that market, along with its
successful timeshare properties at the Las Vegas Hilton and Flamingo hotels. In February 2001, the Company announced the development of a 384-unit timeshare property in Orlando,
Florida, the Company's second timeshare development in that market. The Company provides financing to the buyers of its timeshare units. During 2000, new investments totaled $140 million, which
consists primarily of loans related to such financing.

In
January 2001, the Hilton New Orleans Riverside started the most extensive renovation in the history of the hotel. 1,150 guest rooms and suites will be completely renovated
with new furniture, fixtures and equipment, with completion scheduled for Fall of 2002. Construction also began in January 2001 on the refurbishment of the Waldorf=Astoria's Starlight Roof
Ballroom and construction of 13 new executive meeting rooms. The Starlight Roof portion is scheduled for completion in May 2001, while the meeting room construction is expected to run through
October 2001. In May 2001, renovation will begin at the Hilton San Francisco encompassing 568 suites and guest rooms, along with construction of a new two story world class health spa
and spectacular 44th floor executive lounge, with completion scheduled for Spring of 2002. During 2001, the Company anticipates spending approximately $160 million on renovation and
construction projects (including timeshare), as well as approximately $290 million on normal capital replacements, upgrades and technology. Expenditures required to complete capital spending
programs in 2001 will be financed through available cash flow and general corporate borrowings.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $390 million, $279 million and $589 million for the years ended December 31,
1998, 1999 and 2000, respectively. The increase in 2000 was primarily attributable to continued strength at many of the Company's owned full-service hotels and the benefit of cash flow
from the hotel properties acquired in the Promus acquisition. The decrease in 1999 compared to 1998 was primarily attributable to working capital variances.

Net
cash used in investing activities was $2.3 billion in 1999 compared to $243 million in 2000. 1999 investments included $1.7 billion for the Promus acquisition
as well as hotel acquisition spending. Increased capital expenditures and additional investments in the 2000 period were offset by proceeds received from the sale of securities and the collection of
notes receivable related to Homewood Suites by Hilton properties sold in 1999. Net cash used in investing activities increased $1.2 billion from 1998 to 1999 due primarily to the Promus
acquisition, partially offset by a lower level of hotel acquisition spending in 1999 compared to 1998.

Net
cash provided by financing activities totaled $2.1 billion in 1999 and net cash used in financing activities totaled $403 million in 2000. The decrease in cash
provided by financing activities is primarily attributable to additional revolving debt borrowings in 1999 to fund the cash portion of the Promus acquisition compared to the repayment of commercial
paper borrowings and revolving loans in excess of additional long-term fixed rate borrowings in 2000. Net cash provided by financing activities in 1999 increased approximately
$1.7 billion in comparison to 1998, primarily representing financing of the cash portion of the Promus acquisition.

Cash
and equivalents totaled $47 million at December 31, 2000, a decrease of $57 million from December 31, 1999. Hilton believes that its operating cash
flow, available borrowings under its

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revolving credit facilities, and the Company's ability to obtain additional financing through various financial markets are sufficient to meet its liquidity needs.

FinancingIn September 2000, the Company entered into a financing agreement pursuant to which it borrowed
$500 million for ten years at a fixed rate of 7.95 percent. Five of the Company's hotels serve as collateral for the agreement, the proceeds of which were used to pay down the Company's
floating rate revolving debt. In August 2000, the Company and its partners refinanced the debt on the Hilton New Orleans Riverside, of which Hilton owns 67.4 percent. The new
$155 million mortgage has a term of ten years at a fixed rate of 8.62 percent.

The
Company has three revolving credit facilities. In October 1996, Hilton entered into a $1.75 billion five-year revolving credit facility (the "1996
facility"). In October 2000, the Company extended the term of the 1996 facility from 2001 to 2003 and reduced the commitment under the facility to $1.145 billion, which was the amount
outstanding under the facility at the time of the reduction. As of December 31, 2000, the 1996 facility had been reduced to $1.084 billion through the repayment of outstanding
balances. In November 1999, Hilton entered into a $1.8 billion revolving credit facility consisting of a $1.4 billion revolver which expires in 2004 and a $400 million
364-day revolver which expires in November 2001. As of December 31, 2000, $850 million of borrowings were outstanding under the $1.4 billion revolver and
$235 million of the $1.4 billion revolver supported the issuance of commercial paper. The 364-day revolver was undrawn at December 31, 2000. In June 1998,
Hilton entered into a five-year $500 million revolving credit facility to acquire the remaining 50% interest in the Hilton Hawaiian Village Beach Resort & Spa. As of
December 31, 2000, $438 million of borrowings were outstanding under the $500 million revolver. Total revolving debt capacity of approximately $780 million was available to
the Company at December 31, 2000.

In
October 1997, the Company filed a shelf registration statement ("Shelf") with the Securities and Exchange Commission ("SEC") registering up to $2.5 billion in debt or
equity securities. At December 31, 2000, available financing under the Shelf totaled $2.1 billion. In February 2001, the Company issued $300 million of 8.25% Senior Notes
due 2011, leaving $1.8 billion available under the Shelf. The net proceeds were used to pay down outstanding amounts and to further reduce the commitment under the 1996 facility. The terms of
any additional securities offered pursuant to the Shelf will be determined by market conditions at the time of issuance.

The
1999 and 2000 debt balances include $625 million of long-term debt which, although allocated to Park Place under a debt assumption agreement, remains the legal
obligation of Hilton. At the time of the spin-off, Park Place assumed and agreed to pay 100% of the amount of each payment required to be made by Hilton under the terms of the indentures
governing Hilton's $300 million 7.375% Senior Notes due 2002 and its $325 million 7% Senior Notes due 2004. These notes remain in Hilton's long-term debt balance and a
long-term receivable from Park Place in an equal amount is included in the Company's 1999 and 2000 consolidated balance sheets. In the event of an increase in the interest rate on these
notes as a result of certain actions taken by Hilton or in certain other limited circumstances, Hilton will be required to reimburse Park Place for any such increase. Hilton is obligated to make any
payment Park Place fails to make, and in such event Park Place would be obligated to pay to Hilton the amount of such payment together with interest, at the rate per annum borne by the applicable
notes plus two percent, to the date of reimbursement.

As
of December 31, 2000, 53% of the Company's long-term debt (excluding the Park Place allocated debt) was floating rate debt. Including the impact of the
February 2001 $300 million Senior Note issuance, the percentage of floating rate debt was reduced to 47%. The Company will continue to pursue a balance in its exposure to changes in
short-term interest rates by seeking to opportunistically refinance a portion of its floating rate debt, subject to appropriate market conditions. The Company's fixed/floating rate target
ratio is currently 65/35.

Asset DispositionsDuring 2000, the Company sold approximately $175 million of non-strategic assets
and securities for pre-tax gains of $32 million. Included in this total are nine Homewood Suites by Hilton properties on which Hilton has retained long-term management
and franchise contracts.

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In January 2000, the Company entered into an agreement with RFS Hotel Investors, Inc. ("RFS"), which gave RFS the option to terminate 52 operating leases and four
management contracts on hotels owned by RFS. In November 2000, RFS notified the Company of its intention to exercise the option to terminate these agreements. In January 2001, RFS paid
the Company approximately $60 million in cash as consideration for terminating the leases and management contracts. The Company also sold 973,684 shares of RFS preferred stock to RFS for
$13 million in cash. The values of these leases, management contracts and shares of preferred stock are reflected as assets held for sale in the Company's December 31, 2000 consolidated
balance sheet.

In
January 2001, the Company sold the Red Lion Houston for approximately $20 million, resulting in a pre-tax gain of approximately $1 million.

Stockholders' EquityDividends paid on common shares were $.32 per share in 1998, and $.08 per share in 1999 and 2000.

The
Company's Board of Directors has approved the repurchase by the Company of up to 20 million shares of its common stock pursuant to a stock repurchase program. The timing of
the stock purchases are made at the discretion of the Company's management. There were no shares repurchased during 2000 as the Company sought to improve its credit position by using excess cash flow
to repay outstanding debt balances. At December 31, 2000, the Company had repurchased 10.7 million shares or 54 percent of the total authorized to be repurchased. The Company may
at any time repurchase up to 9.3 million of the remaining shares authorized for repurchase.

RESULTS OF OPERATIONS

The following discussion presents an analysis of the Company's results of operations for the three years ended December 31, 2000. EBITDA (earnings
before interest, taxes, depreciation, amortization, pre-opening expense and non-cash items) is presented supplementally in the tables below and in the discussion of operating
results because management believes it allows for a more complete analysis of results of operations. Non-cash items, such as asset write-downs and impairment losses, are excluded from
EBITDA as these items do not impact operating results on a recurring basis. EBITDA can be computed by adding depreciation, amortization, pre-opening expense, interest and dividend income
from
investments related to operating activities and non-cash items to operating income. This information should not be considered as an alternative to any measure of performance as promulgated
under generally accepted accounting principles (such as operating income or net income), nor should it be considered as an indicator of the overall financial performance of the Company. The Company's
calculation of EBITDA may be different from the calculation used by other companies and therefore comparability may be limited.

The
Company operates in one business segment, hospitality and leisure. The Company's results are significantly affected by growth in the number of available rooms through acquisition
and development, occupancy and room rates achieved by hotels, the Company's ability to manage costs and the relative mix of owned, leased, managed and franchised hotels. Although the supply-demand
balance in the Company's major markets generally remains favorable, future operating results could be adversely impacted by increased capacity and weak demand. These conditions could limit the
Company's ability to pass through inflationary increases in operating costs in the form of higher room rates. The Company's ability to manage costs could be adversely impacted by significant increases
in energy costs and other operating expenses, resulting in lower operating margins. Increases in transportation and fuel costs or sustained recessionary periods in the U.S. (affecting domestic travel)
and internationally (affecting inbound travel from abroad) could also unfavorably impact future results. However, the Company believes that its financial strength and diverse market presence will
enable it to remain competitive.

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FISCAL 2000 COMPARED WITH FISCAL 1999

OverviewA summary of the Company's consolidated results for the years ended December 31, 1999 and 2000
is as follows:

|                                             |                                                       | 1999 |       | 2000 |       | % Change |   
|-------------------------------------------- | ----------------------------------------------------- | ---- | ----- | ---- | ----- | -------- | --
|
|Summary of Results                           |                                                       |      |       |      |       |          |   
|Revenue                                      |                                                       | $    | 2,150 |      | 3,451 |          | 61
|Operating income                             |                                                       |      | 495   |      | 830   |          | 68
|Income from continuing operations            |                                                       |      | 176   |      | 272   |          | 55
|Income from continuing operations per share: |                                                       |      |       |      |       |          |   
|                                             | Basic                                                 |      |       | .66  |       | .74      |   
|                                             | Diluted                                               |      |       | .66  |       | .73      |   
|Other Operating Data                         |                                                       |      |       |      |       |          |   
|Reconciliation of Net Income to EBITDA:      |                                                       |      |       |      |       |          |   
|Net Income                                   |                                                       | $    | 174   |      | 272   |          | 56
|                                             | Cumulative effect of accounting change                |      |       | 2    |       |         |   
|                                             | Minority interest, net                                |      |       | 7    |       | 7        |   
|                                             | Provision for income taxes                            |      |       | 130  |       | 200      |   
|                                             | Net gain on asset dispositions                        |      |       |     |       | (32      | ) 
|                                             | Interest expense, net, from unconsolidated affiliates |      |       | 2    |       | 16       |   
|                                             | Interest expense                                      |      |       | 237  |       | 453      |   
|                                             | Interest and dividend income                          |      |       | (57  | )     | (86      | ) 
|                                             |                                                       |      |       |      |       |          |   
|Operating Income                             |                                                       |      | 495   |      | 830   |          | 68
|                                             | Pre-opening expense                                   |      |       | 2    |       | 4        |   
|                                             | Operating interest and dividend income                |      |       | 3    |       | 32       |   
|                                             | Depreciation and amortization (1)                     |      |       | 195  |       | 405      |   
|                                             |                                                       |      |       |      |       |          |   
|Total EBITDA                                 |                                                       | $    | 695   |      | 1,271 |          | 83
|                                             |                                                       |      |       |      |       |          |   

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Total
revenue for 2000 was $3.45 billion, an increase of $1.3 billion over 1999. Total EBITDA was $1.3 billion for 2000, an 83 percent increase from
$695 million in 1999. The Company's consolidated EBITDA margin increased 4.5 points to 36.8 percent in 2000 from 32.3 percent in 1999. Total operating income increased
$335 million to $830 million. The 2000 results benefited from the Promus acquisition, which was completed on November 30, 1999, and from other 1999 acquisition and development
activity. Results were also positively impacted by significant increases in revenue per available room ("RevPAR") at most of the Company's major market owned hotels and increases in management and
franchise fee revenue due to unit growth and system-wide RevPAR gains across all brands. Continued high demand for hotel rooms in many major U.S. cities and limited new competitive supply
in markets where Hilton has a major ownership presence contributed to the Company's strong RevPAR increases. Overall operating results also reflect the benefit of the April 2000 introduction of
the HHonors loyalty program to the former Promus brands as well as the Company's cross-selling and other marketing initiatives.

The
Company's domestic owned hotels contributed $858 million of EBITDA in 2000, compared to $618 million in the prior year. The 2000 results benefited from the Promus
acquisition, the 1999 acquisition of the Pointe Hilton Squaw Peak Resort and the Hilton Minneapolis, and the September 1999 opening of the Hilton Boston Logan Airport. In total, acquisition and
development

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activity provided $162 million of incremental domestic owned EBITDA in the 2000 period, of which $130 million related to the Promus acquisition.

Results
in 2000 benefited from double digit EBITDA and RevPAR gains at many of the Company's owned Hilton properties. Particularly strong results were seen in major market locations,
including New York, San Francisco and Honolulu. The Company's properties in both New York and San Francisco benefited from strong group business, while San Francisco also achieved strong occupancy and
rate increases in the individual business traveler ("IBT") segment. Results in Honolulu reflect a strong turnaround in the market in 2000, with a year over year comparable EBITDA increase in excess of
35 percent. RevPAR for comparable owned Hilton properties improved 9.7 percent in 2000, with occupancy up 2.6 points to 77.4 percent and average daily rate ("ADR") up
6.0 percent to $174.95.

In
addition to the $130 million of incremental EBITDA from domestic owned properties, the Promus acquisition provided incremental EBITDA of $51 million from
unconsolidated affiliates which own interests in hotels pursuant to joint venture agreements and $34 million from properties operated by the Company under operating lease agreements. The
Company did not operate properties under operating lease agreements prior to the Promus acquisition.

The
Promus acquisition also generated incremental EBITDA of $221 million from management and franchise fees. This incremental fee income includes the impact of unit growth and
system-wide RevPAR gains across the former Promus brands. Including this $221 million of incremental fee income, management and franchise fee revenue increased $230 million
in 2000 to $350 million. Fee growth was negatively impacted by a decrease of $9 million in fee income from Hilton brand properties included in the prior year which have left the system
or were subsequently acquired by the Company. Fee revenue for all brands benefited from the expansion of the HHonors program as well as the Company's cross-selling and other marketing initiatives.

Depreciation
and amortization, including the Company's proportionate share of depreciation and amortization from its unconsolidated affiliates, increased $210 million in 2000
to $405 million due primarily to the depreciation of fixed assets and the amortization of identifiable intangible assets and goodwill associated with the Promus acquisition.

Corporate ActivityCorporate expense decreased $11 million in 2000 to $62 million. The 2000 expense
includes an $8 million benefit from the termination of the Company's post-retirement life insurance programs as part of the integration of the Hilton and Promus employee benefit
plans. The 1999 expense includes non-recurring charges incurred by Hilton related to the Promus acquisition. These expenses totaled $26 million in 1999, $21 million of which
are included in corporate expense. Excluding these non-recurring items, corporate expense increased $18 million over the prior year, primarily from incremental costs as a result of
the Promus acquisition.

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Interest and dividend income increased $29 million compared with the prior year, primarily due to an increase in notes receivable as the result of balances acquired in the
Promus acquisition. Interest expense, net of amounts capitalized, increased $216 million reflecting higher debt levels due to the Promus acquisition and higher interest rates on the Company's
floating rate debt.

The
Company realized a pre-tax gain on asset dispositions of $32 million in 2000 from the sale of marketable securities.

The
effective income tax rate for 2000 increased to 41.8% from 41.5% in 1999. The Company's effective income tax rate is determined by the level and composition of pretax income and
the mix of income subject to varying foreign, state and local taxes.

Hotel StatisticsRevPAR for U.S. owned-or-operated hotels and for all hotels
system-wide for the year ended December 31, 2000 is as follows:

|U.S. owned-or-
operated hotels(1) |  | 2000 |        | Change
vs. 1999 |     | System-wide(2) |                           | 2000 |   | Change
vs. 1999 | 
|--------------------------------- |  | ---- | ------ | --------------- | --- | -------------- | ------------------------- | ---- | - | --------------- | 
|Hilton                            |  | $    | 127.27 |                 | 9.9 | %              | Hilton                    |      | $ | 98.62           | 
|Doubletree                        |  |      | 79.07  |                 | 6.2 |                | Hilton Garden Inn         |      |   | 67.39           | 
|Embassy Suites                    |  |      | 99.59  |                 | 6.7 |                | Doubletree                |      |   | 75.12           | 
|Other                             |  |      | 64.46  |                 | 4.4 |                | Embassy Suites            |      |   | 93.75           | 
|Total                             |  |      | 97.53  |                 | 7.8 |                | Homewood Suites by Hilton |      |   | 72.45           | 
|                                  |  |      |        |                 |     |                | Hampton                   |      |   | 50.42           | 
|                                  |  |      |        |                 |     |                | Other                     |      |   | 72.96           | 

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FISCAL 1999 COMPARED WITH FISCAL 1998

OverviewA summary of the Company's consolidated results for the years ended December 31, 1998 and 1999
is as follows:

|                                             |                                                       | 1998 |       | 1999 |       | % Change |    
|-------------------------------------------- | ----------------------------------------------------- | ---- | ----- | ---- | ----- | -------- | ---
|
|Summary of Results                           |                                                       |      |       |      |       |          |    
|Revenue                                      |                                                       | $    | 1,769 |      | 2,150 |          | 22 
|Operating income                             |                                                       |      | 464   |      | 495   |          | 7  
|Income from continuing operations            |                                                       |      | 188   |      | 176   |          | (6 
|Income from continuing operations per share: |                                                       |      |       |      |       |          |    
|                                             | Basic                                                 |      |       | .71  |       | .66      |    
|                                             | Diluted                                               |      |       | .71  |       | .66      |    
|Other Operating Data                         |                                                       |      |       |      |       |          |    
|Reconciliation of Net Income to EBITDA:      |                                                       |      |       |      |       |          |    
|Net Income                                   |                                                       | $    | 297   |      | 174   |          | (41
|                                             | Cumulative effect of accounting change                |      |       |     |       | 2        |    
|                                             | Income from discontinued operations                   |      |       | (109 | )     |         |    
|                                             | Minority interest, net                                |      |       | 12   |       | 7        |    
|                                             | Provision for income taxes                            |      |       | 136  |       | 130      |    
|                                             | Interest expense, net, from unconsolidated affiliates |      |       | 4    |       | 2        |    
|                                             | Interest expense                                      |      |       | 137  |       | 237      |    
|                                             | Interest and dividend income                          |      |       | (13  | )     | (57      | )  
|                                             |                                                       |      |       |      |       |          |    
|Operating Income                             |                                                       |      | 464   |      | 495   |          | 7  
|                                             | Pre-opening expense                                   |      |       |     |       | 2        |    
|                                             | Operating interest and dividend income                |      |       |     |       | 3        |    
|                                             | Depreciation and amortization(1)                      |      |       | 132  |       | 195      |    
|                                             |                                                       |      |       |      |       |          |    
|Total EBITDA                                 |                                                       | $    | 596   |      | 695   |          | 17 
|                                             |                                                       |      |       |      |       |          |    

---

Total
revenue for 1999 was $2.2 billion, an increase of 22 percent over 1998. Total EBITDA was $695 million for 1999, a 17 percent increase over the prior
year. Total operating income increased seven percent to $495 million. The Promus acquisition resulted in incremental revenue and EBITDA of $69 million and $19 million,
respectively, representing operations for the month of December 1999. The impact of the Promus acquisition was not significant to operating income in 1999. Results in 1999 were also impacted by
non-recurring charges incurred by Hilton related to the Promus acquisition totaling approximately $26 million. Excluding the one month results from the Promus acquisition, the
Company's domestic owned hotels generated $611 million of EBITDA in 1999. EBITDA margins at these hotels totaled 34 percent. Occupancy in 1999 at comparable owned hotels was essentially
flat with the prior year at 75.3 percent, with the average rate increasing two percent to $168.22, resulting in a 2.7 percent improvement in RevPAR.

Strong
volume and average rate increases in the group segment drove a year over year RevPAR increase of nine percent at the Hilton New Orleans Riverside resulting in a
14 percent increase in EBITDA from 1998. EBITDA at the Hilton San Francisco increased ten percent compared to the prior year due to a significant increase in IBT volume and higher average rates
in the group segment.
RevPAR at this property increased seven percent. EBITDA from the Waldorf=Astoria increased six percent over 1998. Nearly all of the increase occurred in the fourth quarter as the property benefited

10

---

from higher rates, strong banquet activity and millennium related activities. Combined EBITDA from the Hilton Washington and the Capital Hilton increased eight percent on a combined RevPAR increase of
five percent. Both properties benefited from occupancy growth in the higher rate IBT segment, and the Hilton Washington increased average rates nearly eight percent. Combined EBITDA from the Hilton
Chicago, the Hilton Chicago O'Hare Airport and the Palmer House Hilton increased two percent from the prior year. A strong city-wide convention market in the first quarter of 1999 was
offset by a softer group market and lower convention attendance experienced in subsequent quarters. Higher property tax expense in the 1999 period also impacted results. EBITDA from the Hilton New
York decreased two percent from the prior year, primarily due to disruptions caused by the property's major renovation project. This project was substantially complete at the end of 1999.

On
a comparable basis, EBITDA from the Hilton Hawaiian Village Beach Resort & Spa declined ten percent from the prior year. In 1999, results at the property continued to be
affected by the Asian economic situation. Excluding the Hilton Hawaiian Village Beach Resort & Spa and the impact of the Promus acquisition, comparable EBITDA at the Company's domestic owned
hotels increased $15 million or three percent for the year. Occupancy for comparable domestic owned hotels (excluding the Hilton Hawaiian Village Beach Resort & Spa and Promus) was
essentially flat at 75.4 percent. The average room rate increased 3.2 percent to $168.71 in 1999 and RevPAR improved 3.6 percent.

Hotel
acquisition and development activity, excluding the impact of the Promus acquisition, contributed approximately $66 million of EBITDA in 1999. The Company opened one
new-build hotel and acquired four full service domestic properties during 1999.

Management
and franchise fee revenue increased $16 million in 1999 to $120 million. This increase is attributable primarily to $12 million of incremental fee
income as a result of the Promus acquisition, a $2 million increase in initial and termination fees from franchise properties, and increased fees as a result of the Hilton Garden Inn franchise
expansion.

Depreciation
and amortization, including the Company's proportionate share of depreciation and amortization from its unconsolidated affiliates, increased $63 million in 1999 to
$195 million due primarily to acquisition activity.

Corporate ActivityCorporate expense increased $9 million in 1999 to $73 million. The 1999 expense
includes non-recurring charges incurred by Hilton related to the Promus acquisition. These expenses totaled $26 million in 1999, $21 million of which are included in
corporate expense. The 1998 expense includes $13 million for the Company's proportionate share of costs associated with the gaming spin-off.

Interest
and dividend income increased $44 million compared with the prior year, primarily due to interest on the $625 million of Hilton public debt assumed by Park
Place at the time of the spin-off of Hilton's gaming operations. Interest expense, net of amounts capitalized, increased $100 million reflecting the $625 million of debt
assumed by Park Place, higher debt levels due to the Promus acquisition, individual hotel acquisition activity during the year and significant construction and renovation project expenditures.

The
effective income tax rate in 1999 increased to 41.5% from 40.5% in 1998.

11

---

Hotel StatisticsRevPAR for U.S. owned-or-operated hotels and for all hotels
system-wide for the year ended December 31, 1999 is as follows:

|U.S. owned-or-
operated hotels(1) |  | 1999 |        | Change
vs. 1998 |       | System-wide(2) |                           | 1999 |   | Change
vs. 1998 | 
|--------------------------------- |  | ---- | ------ | --------------- | ----- | -------------- | ------------------------- | ---- | - | --------------- | 
|Hilton                            |  | $    | 119.07 |                 | 2.5   | %              | Hilton                    |      | $ | 92.34           | 
|Doubletree                        |  |      | 75.70  |                 | .5    |                | Hilton Garden Inn         |      |   | 60.63           | 
|Embassy Suites                    |  |      | 93.25  |                 | 1.6   |                | Doubletree (3)            |      |   | 75.70           | 
|Other                             |  |      | 65.88  |                 | (1.1) |                | Embassy Suites            |      |   | 88.84           | 
|Total                             |  |      | 91.52  |                 | 1.2   |                | Homewood Suites by Hilton |      |   | 69.98           | 
|                                  |  |      |        |                 |       |                | Hampton                   |      |   | 48.57           | 
|                                  |  |      |        |                 |       |                | Other                     |      |   | 66.70           | 

---

OTHER MATTERS

New Accounting StandardsIn June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". The effective date for implementation of this new standard is January 1,
2001. Adoption of the statement is not expected to have a material impact on the Company's consolidated financial statements.

In
December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101, which summarized the SEC's views and provides guidance on the topic of revenue recognition.
The Company adopted SAB 101 in the fourth quarter of 2000. Adoption of the SAB did not have a material impact on the Company's results of operations.

OtherVarious lawsuits are pending against the Company. In management's opinion, the resolution of these lawsuits is
not expected to have a material adverse effect on the Company's financial position or results of operations.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this report, including without limitation, those set forth under the captions "Development," "Liquidity and Capital Resources,"
"Results of Operations" and "Other Matters," and statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.

The
words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. These forward-looking statements reflect the Company's
current views with respect to future events and financial performance, and are subject to certain risks and uncertainties, including those identified above under "Results of Operations" and those in
the Company's Annual

12

---

Report on Form 10-K for the fiscal year ended December 31, 2000 under the captions "Additional InformationBusiness Risks" and "Competition," the effects of
economic conditions, supply and demand changes for hotel rooms, competitive conditions in the lodging industry, relationships with clients and property owners, the impact of government regulations and
the availability of capital to finance growth, which could cause actual results to differ materially from historical results or those anticipated. Although the Company believes the expectations
reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained.

13

---



HILTON HOTELS CORPORATION  CONSOLIDATED STATEMENTS OF INCOME

|                                                                                 |  | Year ended December 31, |      
|-------------------------------------------------------------------------------- |  | ----------------------- | -----
|
|
|Revenue                                                                          |  |                         |      
|Owned hotels                                                                     |  | $                       | 1,485
|Leased hotels                                                                    |  |                         |     
|Management and franchise fees                                                    |  |                         | 104  
|Other fees and income                                                            |  |                         | 180  
|                                                                                 |  |                         |      
|                                                                                 |  |                         | 1,769
|                                                                                 |  |                         |      
|Expenses                                                                         |  |                         |      
|Owned hotels                                                                     |  |                         | 964  
|Leased hotels                                                                    |  |                         |     
|Depreciation and amortization                                                    |  |                         | 125  
|Other operating expenses                                                         |  |                         | 152  
|Corporate expense, net                                                           |  |                         | 64   
|                                                                                 |  |                         |      
|                                                                                 |  |                         | 1,305
|                                                                                 |  |                         |      
|Operating Income                                                                 |  |                         | 464  
|Interest and dividend income                                                     |  |                         | 13   
|Interest expense                                                                 |  |                         | (137 
|Interest expense, net, from unconsolidated affiliates                            |  |                         | (4   
|Net gain on asset dispositions                                                   |  |                         |     
|                                                                                 |  |                         |      
|Income Before Income Taxes and Minority Interest                                 |  |                         | 336  
|Provision for income taxes                                                       |  |                         | (136 
|Minority interest, net                                                           |  |                         | (12  
|                                                                                 |  |                         |      
|Income from Continuing Operations                                                |  |                         | 188  
|Income from discontinued gaming operations, net of tax provision of $111 in 1998 |  |                         | 109  
|Cumulative effect of accounting change, net of tax benefit of $1 in 1999         |  |                         |     
|                                                                                 |  |                         |      
|Net Income                                                                       |  | $                       | 297  
|                                                                                 |  |                         |      
|Basic Earnings Per Share                                                         |  |                         |      
|Income from continuing operations                                                |  | $                       | .71  
|Discontinued gaming operations                                                   |  |                         | .44  
|Cumulative effect of accounting change                                           |  |                         |     
|                                                                                 |  |                         |      
|Net Income Per Share                                                             |  | $                       | 1.15 
|                                                                                 |  |                         |      
|Diluted Earnings Per Share                                                       |  |                         |      
|Income from continuing operations                                                |  | $                       | .71  
|Discontinued gaming operations                                                   |  |                         | .41  
|Cumulative effect of accounting change                                           |  |                         |     
|                                                                                 |  |                         |      
|Net Income Per Share                                                             |  | $                       | 1.12 
|                                                                                 |  |                         |      

See
notes to consolidated financial statements

14

---



HILTON HOTELS CORPORATION  CONSOLIDATED BALANCE SHEETS

|                                                                     |                            | December 31,                                 |      
|-------------------------------------------------------------------- | -------------------------- | -------------------------------------------- | -----
|
|
|ASSETS                                                               |                            |                                              |      
|Current Assets                                                       |                            |                                              |      
|Cash and equivalents                                                 |                            | $                                            | 104  
|Accounts receivable, net of allowance of $12 in 1999 and $15 in 2000 |                            |                                              | 396  
|Inventories                                                          |                            |                                              | 90   
|Deferred income taxes                                                |                            |                                              | 15   
|Current portion of notes receivable                                  |                            |                                              | 78   
|Assets held for sale                                                 |                            |                                              |     
|Other current assets                                                 |                            |                                              | 80   
|                                                                     |                            |                                              |      
|                                                                     | Total current assets       |                                              |      
|                                                                     |                            |                                              |      
|Investments, Property and Other Assets                               |                            |                                              |      
|Investments and notes receivable                                     |                            |                                              | 676  
|Long-term receivable                                                 |                            |                                              | 625  
|Property and equipment, net                                          |                            |                                              | 3,892
|Management and franchise contracts, net                              |                            |                                              | 647  
|Leases, net                                                          |                            |                                              | 216  
|Brands, net                                                          |                            |                                              | 1,048
|Goodwill, net                                                        |                            |                                              | 1,277
|Other assets                                                         |                            |                                              | 109  
|                                                                     |                            |                                              |      
|                                                                     |                            | Total investments, property and other assets |      
|                                                                     |                            |                                              |      
|Total Assets                                                         |                            | $                                            | 9,253
|                                                                     |                            |                                              |      
|LIABILITIES AND STOCKHOLDERS' EQUITY                                 |                            |                                              |      
|Current Liabilities                                                  |                            |                                              |      
|Accounts payable and accrued expenses                                |                            | $                                            | 615  
|Current maturities of long-term debt                                 |                            |                                              | 9    
|Income taxes payable                                                 |                            |                                              | 5    
|                                                                     |                            |                                              |      
|                                                                     | Total current liabilities  |                                              |      
|                                                                     |                            |                                              |      
|Long-term debt                                                       |                            |                                              | 6,085
|Deferred income taxes                                                |                            |                                              | 879  
|Insurance reserves and other                                         |                            |                                              | 245  
|                                                                     |                            |                                              |      
|                                                                     | Total liabilities          |                                              |      
|                                                                     |                            |                                              |      
|Commitments and Contingencies                                        |                            |                                              |      
|Stockholders' Equity                                                 |                            |                                              |      
|Common stock, 368 and 369 shares outstanding, respectively           |                            |                                              | 946  
|Additional paid-in capital                                           |                            |                                              | 853  
|Retained (deficit) earnings                                          |                            |                                              | (197 
|Accumulated other comprehensive income                               |                            |                                              | 24   
|                                                                     |                            |                                              |      
|                                                                     |                            |                                              | 1,626
|Less treasury stock, at cost                                         |                            |                                              | (211 
|                                                                     |                            |                                              |      
|                                                                     | Total stockholders' equity |                                              |      
|                                                                     |                            |                                              |      
|Total Liabilities and Stockholders' Equity                           |                            | $                                            | 9,253
|                                                                     |                            |                                              |      

See
notes to consolidated financial statements

15

---



HILTON HOTELS CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOW

|                                                                                  |                                                                            | Year ended December 31,               |       
|--------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | ------------------------------------- | ------
|
|
|Operating Activities                                                              |                                                                            |                                       |       
|Net income                                                                        |                                                                            | $                                     | 297   
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                            |                                       |       
|                                                                                  | Income from discontinued gaming operations                                 |                                       |       
|                                                                                  | Cumulative effect of accounting change                                     |                                       |       
|                                                                                  | Depreciation and amortization                                              |                                       |       
|                                                                                  | Amortization of loan costs                                                 |                                       |       
|                                                                                  | Gain on asset dispositions                                                 |                                       |       
|                                                                                  | Change in working capital components:                                      |                                       |       
|                                                                                  |                                                                            | Inventories                           |       
|                                                                                  |                                                                            | Accounts receivable                   |       
|                                                                                  |                                                                            | Other current assets                  |       
|                                                                                  |                                                                            | Accounts payable and accrued expenses |       
|                                                                                  |                                                                            | Income taxes payable                  |       
|                                                                                  | Change in deferred income taxes                                            |                                       |       
|                                                                                  | Change in other liabilities                                                |                                       |       
|                                                                                  | Unconsolidated affiliates' distributions (less than) in excess of earnings |                                       |       
|                                                                                  | Other                                                                      |                                       |       
|                                                                                  |                                                                            |                                       |       
|Net cash provided by operating activities                                         |                                                                            |                                       | 390   
|                                                                                  |                                                                            |                                       |       
|Investing Activities                                                              |                                                                            |                                       |       
|Capital expenditures                                                              |                                                                            |                                       | (171  
|Additional investments                                                            |                                                                            |                                       | (98   
|Proceeds from asset dispositions                                                  |                                                                            |                                       |      
|Payments on notes and other                                                       |                                                                            |                                       | 49    
|Acquisitions, net of cash acquired                                                |                                                                            |                                       | (842  
|                                                                                  |                                                                            |                                       |       
|Net cash used in investing activities                                             |                                                                            |                                       | (1,062
|                                                                                  |                                                                            |                                       |       
|Financing Activities                                                              |                                                                            |                                       |       
|Change in commercial paper borrowings and revolving loans                         |                                                                            |                                       | 355   
|Long-term borrowings                                                              |                                                                            |                                       | 400   
|Reduction of long-term debt                                                       |                                                                            |                                       | (247  
|Issuance of common stock                                                          |                                                                            |                                       | 25    
|Purchase of common stock                                                          |                                                                            |                                       | (81   
|Cash dividends                                                                    |                                                                            |                                       | (90   
|                                                                                  |                                                                            |                                       |       
|Net cash provided by (used in) financing activities                               |                                                                            |                                       | 362   
|                                                                                  |                                                                            |                                       |       
|Net transfers to discontinued gaming operations                                   |                                                                            |                                       | 352   
|                                                                                  |                                                                            |                                       |       
|Increase (Decrease) in Cash and Equivalents                                       |                                                                            |                                       | 42    
|Cash and Equivalents at Beginning of Year                                         |                                                                            |                                       | 5     
|                                                                                  |                                                                            |                                       |       
|Cash and Equivalents at End of Year                                               |                                                                            | $                                     | 47    
|                                                                                  |                                                                            |                                       |       

See
notes to consolidated financial statements

16

---



HILTON HOTELS CORPORATION  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                               |                                                                              | 8% PRIDES
Convertible
Preferred
Stock |     | Common
Stock |     | Additional
Paid-In
Capital |        | Retained
Earnings
(Deficit) |        | Accumulated
Other
Comprehensive
Income (Loss) |     | Treasury
Stock |      | Total |       
|-------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------------------- | --- | ------------ | --- | -------------------------- | ------ | --------------------------- | ------ | --------------------------------------------- | --- | -------------- | ---- | ----- | ------
|
|Balance at December 31, 1997                                   |                                                                              | $                                     | 15  |              | 628 |                            | 1,759  |                             | 1,040  |                                               | 11  |                | (70  | )     | 3,383 
|Net Income                                                     |                                                                              |                                       |    |              |    |                            |       |                             | 297    |                                               |    |                |     |       | 297   
|Other comprehensive income:                                    |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|                                                               | Cumulative translation adjustment, net of deferred tax                       |                                       |     |             |     |                           |        |                            |        |                                              |     | (9             | )    |      |       
|                                                               | Change in unrealized gain/loss on marketable securities, net of deferred tax |                                       |     |             |     |                           |        |                            |        |                                              |     | (10            | )    |      |       
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|Comprehensive income for 1998                                  |                                                                              |                                       |    |              |    |                            |       |                             | 297    |                                               | (19 | )              |     |       | 278   
|Issuance of common stock                                       |                                                                              |                                       |    |              | 1   |                            | 10     |                             |       |                                               |    |                |     |       | 11    
|Exercise of stock options                                      |                                                                              |                                       |    |              |    |                            |       |                             | (8     | )                                             |    |                | 22   |       | 14    
|Treasury stock acquired                                        |                                                                              |                                       |    |              |    |                            |       |                             |       |                                               |    |                | (81  | )     | (81   
|Conversion of PRIDES                                           |                                                                              |                                       | (15 | )            | 34  |                            | (19    | )                           |       |                                               |    |                |     |       |      
|Deferred compensation                                          |                                                                              |                                       |    |              |    |                            | 10     |                             |       |                                               |    |                |     |       | 10    
|Dividends                                                      |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|                                                               | PRIDES ($.67 per share)                                                      |                                       |     |             |     |                           |        |                            |        | (10                                           | )   |               |      |      |       
|                                                               | Common ($.32 per share)                                                      |                                       |     |             |     |                           |        |                            |        | (80                                           | )   |               |      |      |       
|Spin-off of Park Place Entertainment Corporation               |                                                                              |                                       |    |              |    |                            | (1,760 | )                           | (1,586 | )                                             | 8   |                |     |       | (3,338
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|Balance at December 31, 1998                                   |                                                                              |                                       |    |              | 663 |                            |       |                             | (347   | )                                             |    |                | (129 | )     | 187   
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|Net Income                                                     |                                                                              |                                       |    |              |    |                            |       |                             | 174    |                                               |    |                |     |       | 174   
|Other comprehensive income:                                    |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|                                                               | Cumulative translation adjustment, net of deferred tax                       |                                       |     |             |     |                           |        |                            |        |                                              |     | (1             | )    |      |       
|                                                               | Change in unrealized gain/loss on marketable securities, net of deferred tax |                                       |     |             |     |                           |        |                            |        |                                              |     | 25             |      |      |       
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|Comprehensive income for 1999                                  |                                                                              |                                       |    |              |    |                            |       |                             | 174    |                                               | 24  |                |     |       | 198   
|Issuance of common stock                                       |                                                                              |                                       |    |              | 283 |                            | 843    |                             |       |                                               |    |                |     |       | 1,126 
|Exercise of stock options                                      |                                                                              |                                       |    |              |    |                            |       |                             | (5     | )                                             |    |                | 8    |       | 3     
|Treasury stock acquired                                        |                                                                              |                                       |    |              |    |                            |       |                             |       |                                               |    |                | (90  | )     | (90   
|Deferred compensation                                          |                                                                              |                                       |    |              |    |                            | 10     |                             |       |                                               |    |                |     |       | 10    
|Common dividends ($.08 per share)                              |                                                                              |                                       |    |              |    |                            |       |                             | (23    | )                                             |    |                |     |       | (23   
|Adjustment to spin-off of Park Place Entertainment Corporation |                                                                              |                                       |    |              |    |                            |       |                             | 4      |                                               |    |                |     |       | 4     
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|Balance at December 31, 1999                                   |                                                                              |                                       |    |              | 946 |                            | 853    |                             | (197   | )                                             | 24  |                | (211 | )     | 1,415 
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|Net Income                                                     |                                                                              |                                       |    |              |    |                            |       |                             | 272    |                                               |    |                |     |       | 272   
|Other comprehensive income:                                    |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|                                                               | Cumulative translation adjustment, net of deferred tax                       |                                       |     |             |     |                           |        |                            |        |                                              |     | (1             | )    |      |       
|                                                               | Change in unrealized gain/loss on marketable securities, net of deferred tax |                                       |     |             |     |                           |        |                            |        |                                              |     | (17            | )    |      |       
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|Comprehensive income for 2000                                  |                                                                              |                                       |    |              |    |                            |       |                             | 272    |                                               | (18 | )              |     |       | 254   
|Issuance of common stock                                       |                                                                              |                                       |    |              | 1   |                            | 2      |                             |       |                                               |    |                |     |       | 3     
|Exercise of stock options                                      |                                                                              |                                       |    |              |    |                            |       |                             | (3     | )                                             |    |                | 4    |       | 1     
|Deferred compensation                                          |                                                                              |                                       |    |              |    |                            | 6      |                             |       |                                               |    |                |     |       | 6     
|Common dividends ($.08 per share)                              |                                                                              |                                       |    |              |    |                            |       |                             | (29    | )                                             |    |                |     |       | (29   
|Adjustment to spin-off of Park Place Entertainment Corporation |                                                                              |                                       |    |              |    |                            |       |                             | (8     | )                                             |    |                |     |       | (8    
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       
|Balance at December 31, 2000                                   |                                                                              | $                                     |    |              | 947 |                            | 861    |                             | 35     |                                               | 6   |                | (207 | )     | 1,642 
|                                                               |                                                                              |                                       |     |              |     |                            |        |                             |        |                                               |     |                |      |       |       

See notes to consolidated financial statements

17

---



HILTON HOTELS CORPORATION  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        DECEMBER 31, 2000

BASIS OF PRESENTATION AND ORGANIZATION

On November 30, 1999, Hilton Hotels Corporation ("Hilton" or the "Company") acquired Promus Hotel Corporation ("Promus") in a business combination
accounted for as a purchase. Accordingly, the consolidated financial results of Hilton include the results of Promus and its subsidiaries from the date of acquisition.

On
December 31, 1998, Hilton completed a spin-off that split the Company's operations into two independent public corporations, one for conducting its hotel
business and one for conducting its gaming business. Hilton retained ownership of the hotel business. Hilton transferred the gaming business to a new corporation named Park Place Entertainment
Corporation ("Park Place") and distributed the stock of Park Place tax-free to Hilton stockholders on a one-for-one basis. As a result of the spin-off,
Hilton's financial statements reflect the gaming business as discontinued operations.

Hilton
is primarily engaged in the ownership, management and development of hotels, resorts and vacation ownership properties and the franchising of lodging properties. Hilton
operates in select markets throughout the world, predominately in the United States.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of ConsolidationThe consolidated financial statements include the accounts of Hilton Hotels Corporation and
its majority owned and controlled subsidiaries. All material intercompany transactions are eliminated and net earnings are reduced by the portion of the earnings of affiliates applicable to other
ownership interests.

Cash and EquivalentsCash and equivalents include investments with initial maturities of three months or less. Cash and
equivalents at December 31, 2000 includes approximately $17 million of cash related to certain consolidated hotels, the use of which is restricted for hotel purposes under the terms of
collateralized borrowings.

Currency TranslationAssets and liabilities denominated in most foreign currencies are translated into U.S. dollars at
year-end exchange rates and related gains and losses, net of applicable deferred income taxes, are reflected in stockholders' equity. Gains and losses from foreign currency transactions
are included in earnings.

Valuation of Long-Lived AssetsThe carrying value of the Company's long-lived assets are
reviewed when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If it is determined that an impairment loss has occurred based on expected future
cash flows, then a loss is recognized in the income statement using a fair value based model.

Property and EquipmentProperty and equipment are stated at cost. Interest incurred during construction of facilities
is capitalized and amortized over the life of the asset. Costs of improvements are capitalized. Costs of normal repairs and maintenance are charged to expense as incurred. Upon the sale or retirement
of property and equipment, the cost and related accumulated depreciation are removed from the respective accounts, and the resulting gain or loss, if any, is included in income.

Depreciation
is provided on a straight-line basis over the estimated useful life of the assets. Leasehold improvements are amortized over the shorter of the asset life or
lease term. The service lives of assets are generally 40 years for buildings and eight years for building improvements and furniture and equipment.

18

---

Pre-Opening CostsIn April 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." This SOP requires that all nongovernmental entities expense the costs of
start-up activities (pre-opening, pre-operating and
organizational costs) as those costs are incurred and required the write-off of any unamortized balances upon implementation. The Company's adoption of SOP 98-5 resulted in a
cumulative effect of accounting change of $2 million, net of a tax benefit of $1 million, in the first quarter of 1999.

Management and Franchise ContractsManagement and franchise contracts acquired in acquisitions that were accounted for
as purchases are recorded at the estimated present value of net cash flows expected to be received over the lives of the contracts. This value is amortized using the straight-line method
over the remaining contract life. Costs incurred to acquire individual management and franchise contracts are amortized using the straight-line method over the life of the respective
contract. Accumulated amortization of management and franchise contracts totaled $4 million and $52 million at December 31, 1999 and 2000, respectively.

LeasesLeases acquired in acquisitions that were accounted for as purchases are recorded at the estimated present value
of net cash flows expected to be received over the lives of the lease agreements. This value is amortized using the straight-line method over the remaining lease term. Accumulated
amortization of leases totaled $1 million and $5 million at December 31, 1999 and 2000, respectively.

BrandsThe brand names of hotels acquired in acquisitions are assigned a fair market value. To arrive at a value for
each brand name, an estimation is made of the amount of royalty income that could be generated from the brand name if it was licensed to an independent third-party owner. The resulting cash flow is
discounted back using the estimated weighted average cost of capital for each respective brand name. The brand value is amortized on a straight-line basis over 40 years. Accumulated
amortization of brands totaled $2 million and $28 million at December 31, 1999 and 2000, respectively.

GoodwillGoodwill arising in connection with purchase acquisitions is amortized using the straight-line
method over 40 years. Accumulated amortization of goodwill totaled $5 million and $39 million at December 31, 1999 and 2000, respectively.

Unamortized Loan CostsDebt discount and issuance costs incurred in connection with the placement of
long-term debt are capitalized and amortized to interest expense over the lives of the related debt.

Self-InsuranceThe Company is self-insured for various levels of general liability, workers'
compensation and employee medical and life insurance coverage. Insurance reserves include the present values of projected settlements for claims.

Revenue RecognitionRevenue is generally recognized as services are performed. Owned and leased hotel revenue
represents primarily rooms rental and food and beverage sales from owned, leased and consolidated joint venture hotels. Management and franchise fees represent fees earned on hotels managed by the
Company, usually under long-term contracts with the hotel owner, and fees received in connection with the franchise of the Company's brand names. Other fees and income includes primarily
equity income from unconsolidated affiliates and earnings from vacation ownership operations.

Earnings Per Share ("EPS")Basic EPS is computed by dividing net income available to common stockholders (net income
less preferred dividends of $10 million in 1998; no preferred stock was outstanding in 1999 or 2000) by the weighted average number of common shares outstanding for the period. The weighted
average number of common shares outstanding for 1998, 1999 and 2000 were

19

---

250 million, 266 million and 368 million, respectively. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted. The dilutive effect of the assumed exercise of stock options and convertible securities increased the weighted average number of common shares by 28 million,
24 million and 24 million for 1998, 1999 and 2000, respectively. In addition, the increase to net income resulting from interest on convertible securities assumed to have not been paid
was $15 million per year for 1998, 1999 and 2000.

Use of EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting StandardsIn June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". The effective date for implementation of this new standard is January 1,
2001. Adoption of the statement is not expected to have a material impact on the Company's consolidated financial statements.

In
December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, which summarized the SEC's views and provides guidance
on the topic of revenue recognition. The Company adopted SAB 101 in the fourth quarter of 2000. Adoption of the SAB did not have a material impact on the Company's results of operations.

ReclassificationsThe consolidated financial statements for prior years reflect certain reclassifications to conform
with classifications adopted in 2000. These classifications have no effect on net income.

ACQUISITIONS AND DIVESTITURES

Acquisition of Promus Hotel CorporationOn November 30, 1999, the Company completed the acquisition of Promus
pursuant to an agreement dated September 3, 1999. Aggregate consideration consisted of approximately $1.7 billion in cash in exchange for 55 percent of the outstanding shares of
Promus common stock and approximately 113 million shares of the Company's common stock in exchange for the remaining 45 percent of Promus stock for a combined equity value of
approximately $2.8 billion, transaction costs of $175 million, and the assumption of Promus and Promus subsidiary debt totaling $750 million. Transaction costs include
$46 million of severance costs, $42 million of which had been paid as of December 31, 2000, covering the termination of Promus employees whose positions were duplicative.

The
acquisition was accounted for using the purchase method of accounting, and accordingly, the acquisition cost has been allocated to the assets acquired and liabilities assumed
based on estimates of their fair value. A total of $1.27 billion, representing the excess of acquisition cost over the final determination of the fair value of Promus' tangible and identifiable
intangible net assets, has been allocated to goodwill and is being amortized over 40 years.

The
Company's consolidated results of operations incorporate Promus' activity from the date of the acquisition. The following unaudited pro forma information has been prepared
assuming that this acquisition had taken place at the beginning of the respective periods. This pro forma information does

20

---

not purport to be indicative of future results or what would have occurred had the acquisition been made as of those dates.

1998

1999(in millions, except per share amounts) (unaudited)Revenue

$
2,876

3,161Operating income


676

703Income from continuing operations


197

216Income from discontinued gaming operations


109

Net income


306

214Basic earnings per shareIncome from continuing operations


.51

.58Income from discontinued gaming operations


.30

Net income


.81

.58Diluted earnings per shareIncome from continuing operations


.51

.58Income from discontinued gaming operations


.30

Net income


.81

.58


Spin-Off of Gaming OperationsOn December 31, 1998, the Company completed a spin-off of
its gaming operations. Accordingly, results of operations and cash flows of Park Place have been reported as discontinued operations in the 1998 period presented in the consolidated financial
statements.

Income
from discontinued gaming operations for the year ended December 31, 1998 is as follows:

1998(in millions)Revenue

$
2,295Costs and expenses


(1,993
)Operating income


302Net interest expense


(79
)Income before income taxes and minority interest


223Provision for income taxes


(111
)Minority interest, net


(3
)Income from discontinued gaming operations

$
109


Net Gain on Asset DispositionsThe Company realized a pre-tax gain on asset dispositions of
$32 million in 2000 from the sale of marketable securities.

Assets Held for SaleIn January 2000, the Company entered into an agreement with RFS Hotel
Investors, Inc. ("RFS"), which gave RFS the option to terminate 52 operating leases and four management contracts on hotels owned by RFS. In November 2000, RFS notified the Company of
its intention to exercise the option to terminate these agreements. In January 2001, RFS paid the Company approximately $60 million in cash as consideration for terminating the leases
and management contracts. The Company also sold 973,684 shares of RFS preferred stock to RFS for $13 million in cash. The values of these leases, management contracts and shares of preferred
stock are reflected as assets held for sale in the Company's December 31, 2000 consolidated balance sheet.

21

---

INVENTORIES

Included in inventories at December 31, 1999 and 2000 are unsold intervals at the Company's vacation ownership properties of $70 million and
$111 million, respectively. Inventories are valued at the lower of cost or estimated net realizable value.

INVESTMENTS AND NOTES RECEIVABLE

Investments and notes receivable at December 31, 1999 and 2000 are as follows:

1999

2000(in millions)Equity investmentsHotels

$
220

236Other


74

34Vacation ownership notes receivable


123

147Other notes receivable


212

141Marketable securities


125

44754

602Less current portion of notes receivable


(78
)
(32
)Total

$
676

570


PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1999 and 2000 are as follows:

1999

2000(in millions)Land

$
590

569Buildings and leasehold improvements


3,256

3,258Furniture and equipment


872

912Property held for sale or development


22

45Construction in progress


86

2004,826

4,984Less accumulated depreciation


(934
)
(998
)Total

$
3,892

3,986


ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at December 31, 1999 and 2000 are as follows:

1999

2000(in millions)Accounts and notes payable

$
106

146Accrued compensation and benefits


140

149Deposits


23

38Deferred timeshare sales




34Accrued property tax


32

32Accrued interest


34

29Other accrued expenses


280

190Total

$
615

618


22

---

LONG-TERM DEBT

Long-term debt at December 31, 1999 and 2000 is as follows:

|                                                                   |  | 1999 |       | 2000 |      
|------------------------------------------------------------------ |  | ---- | ----- | ---- | -----
|
|Industrial development revenue bonds at adjustable rates, due 2015 |  | $    | 82    |      | 82   
|Senior notes, with an average rate of 7.7%, due 2001 to 2017       |  |      | 1,057 |      | 1,052
|Senior notes, with an average rate of 7.2%, due 2002 to 2004 (1)   |  |      | 625   |      | 625  
|Mortgage notes, 6.0% to 8.6%, due 2002 to 2022                     |  |      | 308   |      | 353  
|7.95% Collateralized borrowings, due 2010                          |  |      |      |      | 499  
|5% Convertible subordinated notes due 2006                         |  |      | 494   |      | 495  
|Commercial paper                                                   |  |      | 19    |      | 235  
|Revolving loans                                                    |  |      | 3,506 |      | 2,372
|Other                                                              |  |      | 3     |      | 3    
|                                                                   |  |      |       |      |      
|                                                                   |  |      | 6,094 |      | 5,716
|Less current maturities                                            |  |      | (9    | )    | (23  
|                                                                   |  |      |       |      |      
|Net long-term debt                                                 |  | $    | 6,085 |      | 5,693
|                                                                   |  |      |       |      |      

---

Interest
paid, net of amounts capitalized, was $130 million, $187 million and $402 million in 1998, 1999 and 2000, respectively. Capitalized interest totaled
$4 million, $7 million and $9 million in 1998, 1999 and 2000, respectively.

Debt
maturities during the next five years are as follows:

(in millions)2001

$
232002


6262003


1,5342004


1,4232005


14


In
September 2000, the Company entered into a financing agreement pursuant to which it borrowed $500 million for ten years at a fixed rate of 7.95 percent. Five
of the Company's hotels serve as collateral for the agreement, the proceeds of which were used to pay down the Company's floating rate revolving debt. In August 2000, the Company and its
partners refinanced the debt on the Hilton New Orleans Riverside, of which the Company owns 67.4 percent. The new $155 million mortgage has a term of ten years at a fixed rate of
8.62 percent.

The
Company has three revolving credit facilities. In October 1996, Hilton entered into a $1.75 billion five-year revolving credit facility (the "1996
facility"). In October 2000, the Company extended the term of the 1996 facility from 2001 to 2003 and reduced the commitment under the facility to $1.145 billion, which was the amount
outstanding under the facility at the time of the reduction. As of December 31, 2000, the 1996 facility had been reduced to $1.084 billion through the repayment of outstanding balances.
In November 1999, Hilton entered into a $1.8 billion revolving credit facility (the "1999 facility") consisting of a $1.4 billion revolver which expires in 2004 and a
$400 million 364-day revolver which expires in November 2001. As of December 31, 2000, $850 million of borrowings were outstanding under the $1.4 billion
revolver and $235 million of the $1.4 billion revolver supported the issuance of commercial paper. The 364-day revolver was undrawn at December 31, 2000. Borrowings
under the 1996 facility and the 1999 facility will generally bear interest

23

---

at the London Interbank Offered Rate ("LIBOR") plus a spread based on the Company's public debt rating or a leverage ratio. The all-in borrowing cost under both facilities was
approximately LIBOR plus 125 basis points as of December 31, 2000. In June 1998, Hilton entered into a five-year $500 million revolving credit facility to acquire the
remaining 50% interest in the Hilton Hawaiian Village Beach Resort & Spa. The all-in borrowing cost under this facility was approximately LIBOR plus 87.5 basis points as of
December 31, 2000. As of December 31, 2000, $438 million of borrowings were outstanding under the $500 million revolver. Total revolving debt capacity of approximately
$780 million was available to the Company at December 31, 2000.

In
October 1997, the Company filed a shelf registration statement ("Shelf") with the SEC registering up to $2.5 billion in debt or equity securities. At
December 31, 2000, available financing under the Shelf totaled $2.1 billion. The terms of any additional securities offered pursuant to the Shelf will be determined by market conditions
at the time of issuance.

Pursuant
to a debt assumption agreement entered into at the time of the Park Place spin-off, Park Place assumed and agreed to pay 100% of the amount of each payment
required to be made by Hilton under the terms of the indentures governing Hilton's $300 million 7.375% Senior Notes due 2002 and its $325 million 7% Senior Notes due 2004. These notes
remain in Hilton's long-term debt balance and a long-term receivable from Park Place in an equal amount is included in the Company's 1999 and 2000 consolidated balance sheets.
In the event of an increase in the interest rate on these notes as a result of certain actions taken by Hilton or in certain other limited circumstances, Hilton will be required to reimburse Park
Place for any such increase. Hilton is obligated to make any payment Park Place fails to make, and in such event Park Place shall pay to Hilton the amount of such payment together with interest, at
the rate per annum borne by the applicable notes plus two percent, to the date of such reimbursement.

As
of December 31, 2000, 53% of the Company's long-term debt (excluding the Park Place allocated debt) was floating rate debt.

Provisions
under various loan agreements require the Company to comply with certain financial covenants which include limiting the amount of outstanding indebtedness.

FINANCIAL INSTRUMENTS

Cash Equivalents and Long-Term Marketable SecuritiesThe fair value of cash equivalents and
long-term marketable securities is estimated based on the quoted market price of the investments.

Long-Term DebtThe estimated fair value of long-term debt is based on the quoted market prices
for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.

The
estimated fair values of the Company's financial instruments at December 31, 1999 and 2000 are as follows:

1999

2000Carrying
Amount

Fair
Value

Carrying
Amount

Fair Value(in millions)Cash and equivalents and long-term marketable securities

$
229

229

91

91Long-term debt (including current maturities)


6,094

5,837

5,716

5,481


24

---

INCOME TAXES

The provisions for income taxes for the three years ended December 31 are as follows:

1998

1999

2000(in millions)CurrentFederal

$
98

98

169State, foreign and local


31

34

33129

132

202Deferred


7

(2
)
(2
)Total

$
136

130

200


During
1998, 1999 and 2000, the Company paid income taxes, including amounts paid on behalf of the discontinued gaming operations during 1998, of $165 million,
$141 million and $138 million, respectively.

The
income tax effects of temporary differences between financial and income tax reporting that gave rise to deferred income tax assets and liabilities at December 31, 1999 and
2000 are as follows:

1999

2000(in millions)Deferred tax assetsCompensation

$
57

77Deferred income


7

15Insurance


25

19Business combination expense


45

11Foreign taxes


29

5Franchise system funds




4Reserves


11

3NOL carry forwards


3

2Other


9

10186

146Valuation allowance


(6
)
(3
)180

143Deferred tax liabilitiesBasis difference


(269
)
(299
)Property


(119
)
(169
)Investments


(207
)
(118
)Brand value


(420
)
(415
)Other


(29
)
(1,044
)
(1,001
)Net deferred tax liability

$
(864
)
(858
)


25

---

The
reconciliations of the Federal income tax rate to the Company's effective tax rate for the three years ended December 31 are as follows:

1998

1999

2000Federal income tax rate

35.0
%
35.0

35.0Increase (reduction) in taxesState and local income taxes, net of Federal tax benefits

4.2

4.7

4.2Foreign taxes, net

2.7

3.7

2.3Spin-off costs

.8



Goodwill



.3

2.4Federal income tax credits

(2.9
)
(3.4
)
(2.7
)Other

.7

1.2

.6Effective tax rate

40.5
%
41.5

41.8


26

---

STOCKHOLDERS' EQUITY

Five hundred million shares of common stock with a par value of $2.50 per share are authorized, of which 378 million and 379 million were issued
at December 31, 1999 and 2000, respectively, including treasury shares of ten million in both 1999 and 2000. Authorized preferred stock includes 25 million shares of preferred stock with
a par value of $1.00 per share. In October 1998, 15 million shares of 8% PRIDES convertible preferred stock were converted into 14 million shares of common stock. No preferred
shares were issued or outstanding at December 31, 1999 and 2000.

To
reflect the spin-off of the gaming business, the $3.3 billion book value of net assets of discontinued gaming operations as of December 31, 1998 was
charged against the Company's retained earnings and additional paid-in capital. During 1999 and 2000, additional spin-off adjustments totaling $4 million and
$8 million, respectively, were recorded through retained earnings.

The
Company's Board of Directors has approved the repurchase by the Company of up to 20 million shares of its common stock pursuant to a stock repurchase program. The timing of
the stock purchases are made at the discretion of the Company's management. There were no shares repurchased during 2000. At December 31, 2000, the Company had repurchased 10.7 million
shares or 54 percent of the total authorized to be repurchased. The Company may at any time repurchase up to 9.3 million of the remaining shares authorized for repurchase.

The
Company has a Preferred Share Purchase Rights Plan under which a right is attached to each share of the Company's common stock. The rights may only become exercisable under
certain circumstances involving actual or potential acquisitions of the Company's common stock by a specified person or affiliated group. Depending on the circumstances, if the rights become
exercisable, the holder may be entitled to purchase units of the Company's junior participating preferred stock, shares of the Company's common stock or shares of common stock of the acquiror. The
rights remain in existence until November 2009 unless they are terminated, exercised or redeemed.

STOCK PLANS

At December 31, 2000, 57 million shares of common stock were reserved for the exercise of options under the Company's Stock Incentive Plans.
Options may be granted to salaried officers, directors and other key employees of the Company to purchase common stock at not less than the fair market value at the date of grant. Generally, options
may be exercised in installments commencing one year after the date of grant. The Stock Incentive Plans also permit the granting of Stock Appreciation Rights ("SARs"). No SARs have been granted as of
December 31, 2000.

27

---

A summary of the status of the Company's stock option plans as of December 31, 1998, 1999 and 2000, and changes during the years ending on those dates is presented below:

|                             |  | Options
Price Range
(per share) |             | Weighted
Average
Price (per share) |   | Options
Outstanding |  | Available
for Grant |  
|---------------------------- |  | ------------------------------- | ----------- | ---------------------------------- | - | ------------------- |  | ------------------- | -
|Balance at December 31, 1997 |  | $                               | 4.6821.30  |                                    | $ | 13.23               |  | 14,631,619          |  
|                             |  |                                 |             |                                    |   |                     |  |                     |  
|Authorized                   |  |                                 |             |                                    |   |                     |  |                    |  
|Granted                      |  |                                 | 12.1727.53 |                                    |   | 18.23               |  | 9,113,850           |  
|Exercised                    |  |                                 | 4.7218.38  |                                    |   | 10.04               |  | (692,067            | )
|Cancelled                    |  |                                 | 10.4821.30 |                                    |   | 15.71               |  | (2,359,632          | )
|                             |  |                                 |             |                                    |   |                     |  |                     |  
|Balance at December 31, 1998 |  |                                 | 4.6827.53  |                                    |   | 15.25               |  | 20,693,770          |  
|                             |  |                                 |             |                                    |   |                     |  |                     |  
|Granted                      |  |                                 | 10.8415.31 |                                    |   | 14.84               |  | 3,157,400           |  
|Exercised                    |  |                                 | 4.7216.59  |                                    |   | 9.35                |  | (270,276            | )
|Cancelled                    |  |                                 | 10.4821.30 |                                    |   | 16.39               |  | (823,152            | )
|                             |  |                                 |             |                                    |   |                     |  |                     |  
|Balance at December 31, 1999 |  |                                 | 4.6827.53  |                                    |   | 15.22               |  | 22,757,742          |  
|                             |  |                                 |             |                                    |   |                     |  |                     |  
|Authorized                   |  |                                 |             |                                    |   |                     |  |                    |  
|Granted                      |  |                                 | 6.6615.28  |                                    |   | 9.20                |  | 7,765,000           |  
|Exercised                    |  |                                 | 4.6810.48  |                                    |   | 5.29                |  | (207,400            | )
|Cancelled                    |  |                                 | 7.7820.66  |                                    |   | 14.92               |  | (2,032,325          | )
|                             |  |                                 |             |                                    |   |                     |  |                     |  
|Balance at December 31, 2000 |  | $                               | 4.6827.53  |                                    | $ | 13.66               |  | 28,283,017          |  
|                             |  |                                 |             |                                    |   |                     |  |                     |  

The
following table summarizes information about stock options outstanding at December 31, 2000:

|             |  | Options Outstanding |  | Options Exercisable
|------------ |  | ------------------- |  | -------------------
|
|$ 4.689.22  |  | 7,306,900           |  | 8.6                
|9.8111.88   |  | 7,500,082           |  | 4.6                
|12.5114.84  |  | 7,424,000           |  | 7.6                
|15.0627.53  |  | 6,052,035           |  | 7.0                
|             |  |                     |  |                    
|$ 4.6827.53 |  | 28,283,017          |  | 6.9                
|             |  |                     |  |                    

The
Company applies Accounting Principles Board ("APB") Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly,
compensation expense recognized was different than what would have otherwise been recognized under the fair value based method defined in SFAS No. 123, "Accounting for Stock-Based
Compensation." Had compensation expense for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the
method of SFAS

28

---

No. 123, the Company's net income and net income per share would have been reduced to the pro forma amounts indicated as follows:

|                                       |                                        | 1998 |     | 1999 |     | 2000
|-------------------------------------- | -------------------------------------- | ---- | --- | ---- | --- | ----
|
|Income from continuing operations      |                                        | $    | 183 |      | 169 |     
|Discontinued gaming operations         |                                        |      | 92  |      |    |     
|Cumulative effect of accounting change |                                        |      |    |      | (2  | )   
|                                       |                                        |      |     |      |     |     
|Net income                             |                                        | $    | 275 |      | 167 |     
|                                       |                                        |      |     |      |     |     
|Basic EPS                              |                                        |      |     |      |     |     
|                                       | Income from continuing operations      |      | $   | .69  |     | .63 
|                                       | Discontinued gaming operations         |      |     | .37  |     |    
|                                       | Cumulative effect of accounting change |      |     |     |     | (.01
|                                       |                                        |      |     |      |     |     
|                                       | Net income                             |      | $   | 1.06 |     | .62 
|                                       |                                        |      |     |      |     |     
|Diluted EPS                            |                                        |      |     |      |     |     
|                                       | Income from continuing operations      |      | $   | .69  |     | .63 
|                                       | Discontinued gaming operations         |      |     | .35  |     |    
|                                       | Cumulative effect of accounting change |      |     |     |     | (.01
|                                       |                                        |      |     |      |     |     
|                                       | Net income                             |      | $   | 1.04 |     | .62 
|                                       |                                        |      |     |      |     |     

The
fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in
1998, 1999 and 2000, respectively: dividend yield of one percent for each of the three years; expected volatility of 34, 31 and 40 percent; risk-free interest rates of 5.5, 4.8 and
6.0 percent and expected lives of six years for 1998 and seven years for 1999 and 2000.

The
Company also has an Employee Stock Purchase Plan by which the Company is authorized to issue up to two million shares of common stock to its full-time employees. Under
the terms of the Plan, employees can elect to have a percentage of their earnings withheld to purchase the Company's common stock.

29

---

EMPLOYEE BENEFIT PLANS

The Company and its subsidiaries have various employee investment plans whereby the Company contributes certain percentages of employee contributions. The
aggregate expense to the Company under these plans totaled $4 million, $6 million and $10 million in 1998, 1999 and 2000, respectively.

The
Company has provided supplemental retirement benefits to certain eligible executives in the form of fixed stock units that settle for shares of the Company's common stock on a
one-for-one basis upon the participant's retirement. The compensation expense associated with the benefits is expensed over a four year vesting period. The aggregate expense to
the Company under these plans totaled $6 million in 2000; no such benefits were provided in 1998 or 1999.

A
significant number of the Company's employees are covered by union sponsored, collectively bargained multi-employer pension plans. The Company contributed and charged to expense
$11 million, $13 million and $14 million in 1998, 1999 and 2000, respectively, for such plans. Information from the plans' administrators is not sufficient to permit the Company
to determine its share, if any, of unfunded vested benefits.

In
addition, a significant number of the Company's employees are covered by a noncontributory retirement plan ("Basic Plan"). The Company also has plans covering qualifying employees
and non-officer directors ("Supplemental Plans"). Benefits for all plans are based upon years of service and compensation, as defined. Since December 31, 1996, employees and
non-officer directors have not accrued additional benefits under either the Basic or Supplemental Plans. Plan assets will be used to pay benefits due employees for service through this
date. As of December 31, 1999 and 2000, these plans have assets of $258 million and $261 million and a projected benefit obligation of $224 million and $234 million,
respectively. Accrued pension cost totaled $17 million and $16 million at December 31, 1999 and 2000, respectively. Pension expense for the years ended December 31, 1998,
1999 and 2000 was not significant.

POST-RETIREMENT BENEFITS OTHER THAN PENSIONS

As part of the integration of the Hilton and Promus employee benefit plans, Hilton terminated its post-retirement life insurance programs effective
December 31, 2000. As a result, the Company recorded an $8 million benefit in the fourth quarter of 2000. The annual cost of these benefits provided prior to termination of the program
was not significant. The Company does not provide post-retirement health care benefits to its employees.

LEASES

The Company leases hotel properties and land under operating leases. As of December 31, 2000, the Company leased 73 hotels, including the leases which
were terminated by RFS in January 2001. The Company's hotel leases require the payment of rent equal to the greater of fixed base rent or percentage rent based on a percentage of revenue, and
expire through July 2012, with varying renewal options. The Company's land leases represent ground leases for certain owned hotels and, in addition to minimum base rental payments, may require
the payment of additional rents based on varying percentages of revenue or income. Total rent expense incurred under the Company's leases was $22 million, $23 million and
$144 million in 1998, 1999 and 2000, respectively. Minimum lease commitments under noncancelable operating leases, excluding the terminated RFS leases, approximate $30 million annually
through 2005 with an aggregate commitment of $420 million through 2044.

COMMITMENTS AND CONTINGENCIES

The Company is liable under certain lease agreements pursuant to which it has assigned the direct obligation to third party interests. Additionally, the
Company manages certain hotels for others under

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agreements that provide for payments or loans to the hotel owners if stipulated levels of financial performance are not maintained. The Company has also provided guarantees for loans and leases
related to certain joint ventures. Management believes the likelihood is remote that material payments will be required under these agreements. The Company's estimated maximum exposure under such
agreements is approximately $78 million as of December 31, 2000.

At
December 31, 2000, the Company had contractual commitments for construction, major expansion and rehabilitation projects of approximately $140 million.

FelCorFelCor Lodging Trust Inc. ("FelCor") owns or has an interest in 84 Company hotels as of
December 31, 2000. The Company has guaranteed repayment of a third party loan to FelCor of up to $25 million.

CandlewoodA subsidiary of the Company has committed to provide credit support for a loan facility utilized by
Candlewood Hotel Company ("Candlewood") to provide construction and permanent financing to Candlewood and its franchisees, with the aggregate amount of exposure for all such credit support capped at
$30 million. As of December 31, 2000, the Company has guaranteed $10 million in such financing.

Franchise FinancingThe Company has established franchise financing programs with third party lenders to support the
growth of its Hampton, Homewood Suites by Hilton, Hilton Garden Inn and Embassy Suites hotels. As of December 31, 2000, the Company has guaranteed $33 million of loans outstanding under
the programs.

OtherVarious lawsuits are pending against the Company. In management's opinion, the resolution of these lawsuits is
not expected to have a material effect on the Company's financial position or results of operations.

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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF HILTON HOTELS CORPORATION:

We have audited the accompanying consolidated balance sheets of Hilton Hotels Corporation (a Delaware corporation) and subsidiaries as of December 31,
1999 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial
statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We
conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hilton Hotels Corporation and subsidiaries as of
December 31, 1999 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.

/s/
ARTHUR ANDERSEN LLP

Arthur
Andersen LLP
Los Angeles, California
January 24, 2001

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SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)

QUARTERLY FINANCIAL DATA

|                                                           |                                        | 1st
Quarter |     | 2nd
Quarter |     | 3rd
Quarter |     | 4th
Quarter |     | Total |      
|---------------------------------------------------------- | -------------------------------------- | ----------- | --- | ----------- | --- | ----------- | --- | ----------- | --- | ----- | -----
|
|2000                                                       |                                        |             |     |             |     |             |     |             |     |       |      
|Revenue                                                    |                                        | $           | 793 |             | 916 |             | 867 |             | 875 |       | 3,451
|EBITDA (1)                                                 |                                        |             | 280 |             | 361 |             | 317 |             | 313 |       | 1,271
|Operating income                                           |                                        |             | 173 |             | 250 |             | 203 |             | 204 |       | 830  
|Net income                                                 |                                        |             | 58  |             | 88  |             | 62  |             | 64  |       | 272  
|                                                           |                                        |             |     |             |     |             |     |             |     |       |      
|Basic EPS                                                  |                                        | $           | .16 |             | .24 |             | .17 |             | .17 |       | .74  
|                                                           |                                        |             |     |             |     |             |     |             |     |       |      
|Diluted EPS                                                |                                        | $           | .16 |             | .23 |             | .17 |             | .17 |       | .73  
|                                                           |                                        |             |     |             |     |             |     |             |     |       |      
|1999                                                       |                                        |             |     |             |     |             |     |             |     |       |      
|Revenue                                                    |                                        | $           | 475 |             | 539 |             | 498 |             | 638 |       | 2,150
|EBITDA (1)                                                 |                                        |             | 156 |             | 198 |             | 161 |             | 180 |       | 695  
|Operating income                                           |                                        |             | 116 |             | 154 |             | 114 |             | 111 |       | 495  
|Income from continuing operations                          |                                        |             | 42  |             | 66  |             | 42  |             | 26  |       | 176  
|Cumulative effect of accounting change, net of tax benefit |                                        |             | (2  | )           |    |             |    |             |    |       | (2   
|Net income                                                 |                                        |             | 40  |             | 66  |             | 42  |             | 26  |       | 174  
|Basic EPS (2)                                              |                                        |             |     |             |     |             |     |             |     |       |      
|                                                           | Continuing operations                  |             | $   | .16         |     | .26         |     | .16         |     | .09   |      
|                                                           | Cumulative effect of accounting change |             |     | (.01        | )   |            |     |            |     |      |      
|                                                           |                                        |             |     |             |     |             |     |             |     |       |      
|                                                           | Net income                             |             | $   | .15         |     | .26         |     | .16         |     | .09   |      
|                                                           |                                        |             |     |             |     |             |     |             |     |       |      
|Diluted EPS                                                |                                        |             |     |             |     |             |     |             |     |       |      
|                                                           | Continuing operations                  |             | $   | .16         |     | .25         |     | .16         |     | .09   |      
|                                                           | Cumulative effect of accounting change |             |     | (.01        | )   |            |     |            |     |      |      
|                                                           |                                        |             |     |             |     |             |     |             |     |       |      
|                                                           | Net income                             |             | $   | .15         |     | .25         |     | .16         |     | .09   |      
|                                                           |                                        |             |     |             |     |             |     |             |     |       |      

As
of December 31, 2000, there were approximately 21,100 stockholders of record.

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SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)

GENERAL INFORMATION

|                                              |                                        | Year ended December 31, |  
|--------------------------------------------- | -------------------------------------- | ----------------------- | -
|
|                                              | Operations                             |                         | $
|                                              | Corporate expense, net                 |                         |  
|                                              |                                        |                         |  
|                                              | Total EBITDA                           |                         | $
|                                              |                                        |                         |  
|Reconciliation of operating income to EBITDA: |                                        |                         |  
|                                              | Operating income                       |                         | $
|                                              | Pre-opening expense                    |                         |  
|                                              | Operating interest and dividend income |                         |  
|                                              | Depreciation and amortization(1)       |                         |  
|                                              |                                        |                         |  
|                                              | EBITDA                                 |                         | $
|                                              |                                        |                         |  

|                                       |                        | Year ended December 31, 2000 |    
|-------------------------------------- | ---------------------- | ---------------------------- | ---
|
|Comparative Statistical Information(2) |                        |                              |    
|Hilton                                 |                        | 72.6                         | %  
|                                       | Change from prior year |                              | 2.3
|Hilton Garden Inn                      |                        | 68.7                         | %  
|                                       | Change from prior year |                              | 5.6
|Doubletree                             |                        | 70.3                         | %  
|                                       | Change from prior year |                              | 1.4
|Embassy Suites                         |                        | 74.3                         | %  
|                                       | Change from prior year |                              | 1.2
|Homewood Suites by Hilton              |                        | 74.4                         | %  
|                                       | Change from prior year |                              | 1.9
|Hampton                                |                        | 68.1                         | %  
|                                       | Change from prior year |                              | .4 
|Other                                  |                        | 67.9                         | %  
|                                       | Change from prior year |                              | 1.3

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34

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FIVE YEAR SUMMARY

|                                 |                                        | Year ended December 31, |     
|-------------------------------- | -------------------------------------- | ----------------------- | ----
|
|
|Operating Data                   |                                        |                         |     
|Revenue                          |                                        | $                       | 947 
|                                 |                                        |                         |     
|Income                           |                                        |                         |     
|                                 | Income from continuing operations      |                         | $   
|                                 | Discontinued gaming operations         |                         |     
|                                 | Cumulative effect of accounting change |                         |     
|                                 |                                        |                         |     
|                                 | Net income                             |                         | $   
|                                 |                                        |                         |     
|Basic Earnings per Share         |                                        |                         |     
|                                 | Income from continuing operations      |                         | $   
|                                 | Discontinued gaming operations         |                         |     
|                                 | Cumulative effect of accounting change |                         |     
|                                 |                                        |                         |     
|                                 | Net income                             |                         | $   
|                                 |                                        |                         |     
|Diluted Earnings per Share       |                                        |                         |     
|                                 | Income from continuing operations      |                         | $   
|                                 | Discontinued gaming operations         |                         |     
|                                 | Cumulative effect of accounting change |                         |     
|                                 |                                        |                         |     
|                                 | Net income                             |                         | $   
|                                 |                                        |                         |     
|Cash Dividends per Common Share  |                                        | $                       | .305
|                                 |                                        |                         |     
|Other Information (unaudited)    |                                        |                         |     
|EBITDA                           |                                        |                         |     
|                                 | Operations                             |                         | $   
|                                 | Corporate expense, net                 |                         |     
|                                 |                                        |                         |     
|                                 | Total                                  |                         | $   
|                                 |                                        |                         |     
|Number of Properties at Year End |                                        |                         |     
|                                 | Owned (1)                              |                         |     
|                                 | Joint venture                          |                         |     
|                                 | Leased                                 |                         |     
|                                 | Managed                                |                         |     
|                                 | Franchised                             |                         |     
|                                 |                                        |                         |     
|                                 | Total                                  |                         |     
|                                 |                                        |                         |     
|Available Rooms at Year End      |                                        |                         |     
|                                 | Owned (1)                              |                         |     
|                                 | Joint venture                          |                         |     
|                                 | Leased                                 |                         |     
|                                 | Managed                                |                         |     
|                                 | Franchised                             |                         |     
|                                 |                                        |                         |     
|                                 | Total                                  |                         |     
|                                 |                                        |                         |     

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