Exhibit 13

FINANCIAL INFORMATION

|Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 17
|------------------------------------------------------------------------------------- |  | --
|Consolidated Statements of Income                                                     |  | 33
|Consolidated Balance Sheets                                                           |  | 34
|Consolidated Statements of Cash Flow                                                  |  | 35
|Consolidated Statements of Stockholders' Equity                                       |  | 36
|Notes to Consolidated Financial Statements                                            |  | 37
|Report of Independent Public Accountants                                              |  | 53
|Predecessor Auditor's Report                                                          |  | 54
|Supplementary Financial Information                                                   |  | 55
|Five Year Summary                                                                     |  | 57

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

THE COMPANY

We are engaged in the ownership, management and development of hotels, resorts and timeshare properties and the franchising of lodging properties. At
December 31, 2002, our system contained 2,084 properties totaling over 337,000 rooms worldwide. Our brands include Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Hampton, Homewood
Suites by Hilton and Conrad. In addition, we develop and operate timeshare resorts through Hilton Grand Vacations Company and its related entities. We are also engaged in various other activities
related or incidental to the operation of hotels.

The
number of properties and rooms at December 31, 2002 by brand and by type are as follows:

|Brand                     |  | Properties |  | Rooms  
|------------------------- |  | ---------- |  | -------
|Hilton                    |  | 231        |  | 87,710 
|Hilton Garden Inn         |  | 161        |  | 22,097 
|Doubletree                |  | 154        |  | 41,342 
|Embassy Suites            |  | 169        |  | 41,142 
|Homewood Suites by Hilton |  | 121        |  | 13,728 
|Hampton                   |  | 1,206      |  | 123,041
|Other                     |  | 15         |  | 4,939  
|Timeshare                 |  | 27         |  | 3,117  
|                          |  |            |  |        
|Total                     |  | 2,084      |  | 337,116
|                          |  |            |  |        



|Type          |  | Properties |  | Rooms  
|------------- |  | ---------- |  | -------
|Owned         |  | 63         |  | 34,664 
|Leased        |  | 7          |  | 2,650  
|Joint Venture |  | 65         |  | 19,093 
|              |  |            |  |        
|              |  | 135        |  | 56,407 
|              |  |            |  |        
|Managed       |  | 201        |  | 52,004 
|Franchised    |  | 1,721      |  | 225,588
|              |  |            |  |        
|              |  | 1,922      |  | 277,592
|              |  |            |  |        
|Timeshare     |  | 27         |  | 3,117  
|              |  |            |  |        
|Total         |  | 2,084      |  | 337,116
|              |  |            |  |        

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Our
operations consist of three reportable segments which are based on similar products or services: Hotel Ownership, Managing and Franchising, and Timeshare. The Hotel Ownership segment
derives revenue from owned, majority owned and leased hotel properties and equity earnings from unconsolidated affiliates (primarily hotel joint ventures). The Managing and Franchising segment
provides services including hotel management and licensing of our family of brands to franchisees. This segment generates its revenue from fees charged to hotel owners. As a manager of hotels, we are
typically responsible for supervising or operating the hotel in exchange for fees based on a percentage of the hotel's gross revenue, operating profits, cash flow, or a combination thereof. We charge
franchise fees, depending on the brand, of up to five percent of rooms revenue in exchange for the use of one of our brand names. The Timeshare segment consists of multi-unit timeshare
resorts. This segment sells and finances timeshare intervals and operates timeshare resorts.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the 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. We evaluate our estimates and assumptions, including those related to bad debts, investments and notes receivable, valuation of long-lived
assets, intangible assets, self-insurance reserves, tax reserves, and contingencies and litigation, on an ongoing basis. We base our estimates and judgments on historical experience and
other factors that are believed to be reasonable under the circumstances, which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent
from other sources. We believe the following critical accounting policies, among others, affect our more significant estimates and assumptions used in preparing our consolidated financial statements.
Actual results could differ from our estimates and assumptions.

Notes
receivable are reflected net of an estimated allowance for uncollectable amounts. For timeshare notes receivable, this estimate is based primarily on historical experience and
assumptions with respect to future payment trends. Allowances for uncollectable amounts of other notes receivable, which includes notes from managed, franchised and unconsolidated joint venture
properties, are estimated based primarily on historical trends and analysis of underlying real estate collateral. Assessment of collateral may include estimates of future cash flow from the underlying
real estate.

Property
and equipment are stated at cost less accumulated depreciation. We also maintain cost and equity method investments in entities that own and operate hotel properties and
entities that perform other activities related or incidental to the operation of hotels. The assessment of long-lived assets for possible impairment requires us to make certain judgments,
including estimates of real estate values and future cash flow from the respective properties and investments. We review the recoverability of
our long-lived assets when events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.

Our
intangible assets include management and franchise contracts, leases, brands and goodwill. The values of our management and franchise contracts and leases are amortized using the
straight-line method over the life of the agreements. The assessment of management and franchise contracts and leases requires us to make certain judgments, including estimates of future
cash flow from the respective properties. Effective January 1, 2002, we account for brands and goodwill in accordance with Statement of Financial Accounting Standard (FAS) 142, which requires
that intangible assets with indefinite lives are not amortized, but are reviewed annually for impairment. The annual impairment review requires estimates of future cash flow with respect to the brands
and estimates of the fair value of our company and its components with respect to goodwill.

We
are self-insured for various levels of general liability, workers' compensation and employee medical and dental insurance coverage. Insurance reserves include the present
values of projected settlements for known and incurred, but not reported claims. Projected settlements are estimated based on historical trends and actuarial data.

We
have issued letters of credit and guaranteed certain debt and other obligations of unconsolidated affiliates and third parties. Under certain circumstances, we may be obligated to
provide additional letters of credit or guarantees. Assessment of the probability that we will be required to fund under these commitments requires us to make estimates of the ability of others to
meet their obligations.

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DEVELOPMENT AND CAPITAL SPENDING

Overview

We intend to grow our hotel brands primarily through franchising and the addition of management contracts, which require little or no capital investment. In
addition, we will continue to invest in capital improvements and select projects at our owned hotels and we may seek to acquire hotel properties on a strategic and selective basis. We will also
continue to invest in the development of timeshare properties.

During
2002, we added 143 properties with approximately 18,000 rooms to our portfolio. A total of 45 properties with approximately 8,400 rooms were removed from our system in 2002,
primarly due to asset sales and the termination of our affiliation with the Camino Real chain. In 2003, we expect to add 100 to 115 hotels with 12,000 to 15,000 rooms to our system, with Hampton and
Hilton Garden Inn accounting for most of the new development. Conversions from outside of our family of brands to one of our brands are expected to account for approximately ten percent of the unit
growth. Virtually all of the growth is expected to be through franchise and management agreements.

Our
ability to grow the number of managed and franchised hotels is affected by the factors set forth under "Forward-Looking Statements," including national and regional economic
conditions, including the magnitude and duration of the current economic downturn in the United States; the effects of actual and threatened terrorist attacks and international conflicts; credit
availability; relationships with franchisees and property owners; and competition from other hotel brands.

In
total, we anticipate spending approximately $355 million on capital expenditures in 2003, which includes $165 million for routine improvements and technology,
$105 million on timeshare projects, $50 million on special "return on investment" projects at owned hotels and $35 million at the Hilton Hawaiian Village related to the mold
situation (see "Results of OperationsFiscal 2002 Compared with Fiscal 2001"). Routine improvements include expenditures for equipment, fixtures, and wall and floor coverings. Expenditures
required to complete our capital spending programs will be financed through available cash flow and general corporate borrowings.

We
will continue to review our owned hotel portfolio for potential repositioning or re-branding opportunities and may seek to sell certain assets (see "Liquidity and Capital
ResourcesAsset Dispositions").

Owned Hotels

Capital expenditures during 2002 totaled $245 million, including routine improvements and technology expenditures and several major construction and
renovation projects at owned, majority owned and leased properties. Construction projects in 2002 included the 327-room tower addition at the Hilton Portland, which was completed in
June 2002. Significant renovation projects during the period included an extensive renovation program at the Hilton New Orleans Riverside. A total of 1,150 guest rooms and suites were
completely renovated with new furniture, fixtures and equipment. The Hilton San Francisco completed a renovation of 568 suites and guest rooms and the construction of a 44th floor executive lounge in
June 2002, while construction of a new two-story health spa continues, with completion scheduled for the first quarter of 2003.

In
May 2002, we purchased our partner's interest in the 1,240-room Hilton Waikoloa Village on Hawaii's Big Island, a property we manage and in which we previously had
an ownership interest of approximately 13%. We acquired the remaining 87% interest for approximately $155 million, consisting
of $75 million in cash and 5.2 million shares of our common stock. The cash portion of the transaction is not included in our aforementioned capital expenditures for the year. This
property is strategically important to maintaining our strong presence in the Hawaii market, as well as to the members of the Hilton HHonors guest loyalty program.

Management and Franchise Contracts

Of the total 143 property additions in 2002, 134 were franchise properties, six were managed properties owned by third parties and two were managed properties in
which we own a minority interest. Included in these additions are 26 properties which, due in part to the market share leadership of our brands and the challenging environment for many hotel
operators, were converted to our family of brands in 2002. The 26 conversions include nine Hamptons, six Homewood Suites by Hilton, five Doubletrees, four Hiltons, one Hilton Garden Inn and one Conrad
property.

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During
2002, our Embassy Suites and Hilton Garden Inn brands earned first place J.D. Power Awards for "Highest Customer Satisfaction" in their respective categories. Embassy Suites was a
winner for a fourth consecutive year, a first in the history of the J.D. Power Award in the lodging category.

In
2002, franchisees announced the development of five new Hampton hotels in New York City, representing the brand's first entry into the country's largest metropolitan area. We also
announced an agreement to manage a new 450-room convention hotel in Omaha, Nebraska. The Hilton Omaha, adjacent to the new Omaha Convention Center, is scheduled to open in the second
quarter of 2004. We were previously selected to manage a new 1,200-room convention hotel in Houston, Texas and a new 800-room convention hotel in Austin, Texas. The Houston
property is scheduled to open in the fourth quarter of 2003 and the Austin property is scheduled to open in the first quarter of 2004.

Timeshare

In December 2002, we opened our newest timeshare property, the 78-unit Hilton ClubNew York, located on two floors of the Hilton
New York in midtown Manhattan. The total cost of this project was approximately $10 million. Development continues on two additional properties in Las Vegas, Nevada and Orlando, Florida. The
new Las Vegas project, located at the north end of the Las Vegas Strip, will have 283 units in its first phase, which is scheduled for completion in November 2003. In Orlando, the new project
will have 96 units in its first two phases, with phase one scheduled for completion in February 2004 and phase two scheduled for completion in May 2004. The total construction cost for
phase one at the new Las Vegas property and phases one and two at the new Orlando property is estimated at $165 million, with approximately $95 million estimated to be spent in 2003.

Capital
expenditures for our timeshare projects (including the development of the Hilton Club at the Hilton New York) totaled approximately $56 million in 2002. As the Hilton Club
product represents a long-term lease rather than the sale of a deeded interest in real estate, construction costs totaling $10 million were capitalized as fixed assets. The capital
expenditures associated with our non-lease timeshare products are reflected as inventory until the timeshare intervals are sold. We also provide financing to the buyers of our timeshare
intervals. During 2002, we issued approximately $142 million of loans related to timeshare financings, which comprised the majority of our $174 million in additional investments.
Principal collections on timeshare notes during the same period totaled approximately $106 million. During 2002, we sold approximately $119 million of our timeshare notes receivable to a
third party in two separate transactions (see "Liquidity and Capital ResourcesAsset Dispositions").

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities totaled $589 million, $585 million and $675 million for the years ended December 31, 2000,
2001 and 2002, respectively. The increase in 2002 was due primarily to working capital variances, including the realization of an income tax receivable. The decrease in 2001 compared to 2000 was due
to lower levels of business at our hotel properties, offset by a reduction in accounts receivable and other working capital variances.

Net
cash used in investing activities totaled $154 million in 2001 and $189 million in 2002. The increase in net cash used in investing activities was primarily due to the
Waikoloa purchase, an increase in additional investments and a reduction in proceeds from asset dispositions in 2002, partially offset by reduced capital expenditures. The increase in additional
investments was due primarily to an increase in notes receivable issued to the buyers of our timeshare intervals, while the decrease in capital expenditures reflects higher levels of spending in 2001
related to expansion projects at the Hilton Hawaiian Village, Hilton Portland and Hilton Seattle. Net cash used in investing activities decreased $89 million from $243 million in 2000 to
$154 million in 2001 due to a lower level of hotel capital expenditures in 2001 as well as greater proceeds from asset dispositions.

Net
cash used in financing activities totaled $403 million, $443 million and $467 million in 2000, 2001 and 2002, respectively. The increase in cash used in each
year reflects the repayment of long-term debt and revolving loans in excess of additional long-term borrowings. For the three years ended December 31, 2002, total debt
has been reduced by approximately $1.25 billion.

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Our
ratio of earnings to fixed charges for the years ended December 31, 2000, 2001 and 2002 was 1.9x, 1.5x and 1.8x, respectively. The decrease in 2001 is primarily the result of
reduced earnings following the September 11th terrorist attacks.

Cash
and equivalents totaled $54 million at December 31, 2002, an increase of $19 million from December 31, 2001. We believe that our operating cash flow,
available borrowings under our revolving credit facilities, and our ability to obtain additional financing through various financial markets are sufficient to meet our liquidity needs. However, any
projections of future financial needs and sources of working capital are subject to uncertainty. See "Results of Operations" and "Forward-Looking Statements" for further discussion of conditions that
could adversely affect our estimates of future financial needs and sources of working capital.

Financing

We currently have two revolving credit facilities. In June 1998, we entered into a five-year $500 million revolving credit facility to
acquire the remaining 50% interest in the Hilton Hawaiian Village. In 2001, we reduced the commitment under the $500 million revolver to $425 million. As of December 31, 2002,
approximately $375 million of borrowings were outstanding under the $425 million revolver. Although the $425 million revolver expires in June 2003, we continue to classify
the outstanding borrowings as long-term debt based on our ability and intent to refinance the obligation. In November 1999, we 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. The 364-day revolver has been extended through
November 2003 and the commitment has been reduced to $150 million. In December 2002, we reduced the commitment under the $1.4 billion revolver to $1.2 billion. As of
December 31, 2002, $295 million of borrowings were outstanding under the $1.2 billion revolver. The 364-day revolver was undrawn at December 31, 2002. Total
revolving debt capacity of approximately $960 million was available to us at December 31, 2002.

In
October 1997, we filed a shelf registration statement with the Securities and Exchange Commission registering up to $2.5 billion in debt or equity securities. In
November 2002, we issued $375 million of 7.625% Senior Notes due 2012. The net proceeds from the issuance were used to pay down outstanding amounts under the 1999 revolving credit
facility. At December 31, 2002, available financing under the shelf totaled $825 million. The terms of any additional securities offered under the shelf will be determined by market
conditions at the time of issuance.

In
connection with the spin-off in 1998 of our gaming business to a new corporation named Park Place Entertainment Corporation, Park Place assumed and agreed to pay 100% of
the amount of each payment required to be made by us under the terms of the indentures governing our $300 million 7.375% Senior Notes due 2002 and our $325 million 7% Senior Notes due
2004. Because these notes remain our legal obligation, they are included in our 2001 debt balance and a receivable from Park Place in an equal amount is included in our 2001 consolidated balance
sheet. The $300 million 7.375% Senior Notes, which were classified as current maturities of long-term debt with the offsetting receivable classified in other current assets at
December 31, 2001, were repaid as scheduled by Park Place in June 2002. The $325 million 7% Senior Notes due 2004 remain in our 2002 debt balance and a receivable from Park Place
in an equal amount is included in our 2002 consolidated balance sheet. We remain obligated to make any payment Park Place fails to make under these notes.

In
November 2002, we entered into a derivative contract which swaps the fixed interest payments on our $375 million 7.95% Senior Notes due 2007 to a floating interest rate
equal to the six-month London Interbank Offered Rate plus 415 basis points. In connection with our $100 million 7.43% bonds due 2009 denominated in Chilean pesos, we have a
derivative contract which swaps the principal payment to a fixed U.S. dollar amount of $100 million with fixed interest payments at 7.65% of that amount. We also have a derivative contract
which swaps the floating rate mortgage of one of our majority owned hotels, which had a principal balance of $36 million at December 31, 2002, to a fixed interest rate. As of
December 31, 2002, approximately 27% of our long-term debt (excluding the Park Place allocated debt and including the impact of interest rate swaps) was floating rate debt.

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Provisions
under various loan agreements require us to comply with certain covenants which include limiting the amount of our outstanding indebtedness. Our revolving credit facilities
contain two significant financial covenants: a leverage ratio and a debt service coverage ratio. We are in compliance with our loan covenants as of December 31, 2002.

The
following table summarizes our significant contractual obligations as of December 31, 2002, including long-term debt and operating lease commitments:

|                              |  |   |       | Payments Due by Period
|----------------------------- |  | - | ----- | ----------------------
|
|
|Long-term debt                |  | $ | 4,565 |                       
|Operating leases              |  |   | 722   |                       
|                              |  |   |       |                       
|Total contractual obligations |  | $ | 5,287 |                       
|                              |  |   |       |                       

Development Financing and Other Commercial Commitments

To assist prospective franchisees in obtaining financing for hotel projects, we have programs to provide alternative capital sources to qualified franchisees. We
have provided secondary financing to franchisees under a mezzanine financing program. Loans outstanding under this program at December 31, 2002 totaled approximately $48 million.

Hilton
Managers 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. As of December 31, 2002, we guaranteed $38 million of loans outstanding under the HilMAC program. In addition to HilMAC, we have guaranteed
$15 million of obligations of our franchisees.

As
of December 31, 2002, in addition to the guarantees issued in connection with our development financing programs, we have guaranteed $60 million of debt and other
obligations of unconsolidated affiliates and third parties, bringing our total guarantees to approximately $113 million. We also have commitments under letters of credit totaling
$61 million as of December 31, 2002. We believe it is unlikely that significant payments will be required under these agreements.

The
following table summarizes our development financing and other commercial commitments as of December 31, 2002:

|                             |  |   |     | Amount of Commitment
Expiration Per Period
|---------------------------- |  | - | --- | ------------------------------------------
|
|
|Letters of credit            |  | $ | 61  |                                           
|Guarantees                   |  |   | 113 |                                           
|                             |  |   |     |                                           
|Total commercial commitments |  | $ | 174 |                                           
|                             |  |   |     |                                           

In
addition, we remain a guarantor on 12 operating leases sold to WestCoast Hospitality Corporation as part of the Red Lion sale on December 31, 2001 (see "Liquidity and Capital
ResourcesAsset Dispositions"). However, we have entered into an indemnification and reimbursement agreement with WestCoast, which requires WestCoast to reimburse us for any costs and
expenses incurred in connection with the guarantee. The minimum lease commitment under these 12 operating leases totals approximately $5 million annually through 2020.

We
have also provided performance guarantees to certain owners of hotels we operate under management contracts. Most of these guarantees allow us to terminate the contract rather than
fund shortfalls if specified performance levels are not achieved. In limited cases, we are obligated to fund performance shortfalls. At December 31, 2002, we have two contracts containing
performance guarantees with possible cash outlays totaling approximately $215 million

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through
2012. Funding under these performance guarantees was not significant in 2002. We anticipate that the future operating performance levels of these hotels will be substantially achieved,
therefore funding under these guarantees is expected to be limited. In addition, we do not anticipate losing any significant management contracts in 2003.

Under
certain circumstances, we may be obligated to provide additional guarantees or letters of credit totaling $76 million, including future construction loan guarantees of an
unconsolidated joint venture totaling $43 million at December 31, 2002.

Asset Dispositions

During 2002, we entered into a $125 million facility with a wholly owned subsidiary of GE Capital for the sale of notes receivable originated by our
timeshare business. The sale of notes under the facility is non-recourse to us; however, we have provided a limited deficiency guarantee (which would be triggered as a result of certain
termination events) with a maximum liability equal to the greater of 5% of the purchaser's unamortized investment basis in the outstanding portfolio or 1.5% of the aggregate principal amount of notes
sold. We also have an option, but not the obligation, to repurchase defaulted notes from the purchaser. The facility allows for our participation in the future cash flow of sold notes receivable once
the purchaser has received 100% of the principal amount of the notes and a preferred return. Under a separate agreement, we will continue to service the notes for a market-based fee calculated on the
outstanding balance of the notes receivable sold. In 2002, we completed two sales of notes receivable under the facility, totaling approximately $119 million. These transactions resulted in a
gain of approximately $5 million. Our retained interest in notes receivable sold as of December 31, 2002 is approximately $4 million.

Also
in 2002, we completed the sale of two owned, two leased and seven managed properties operating as Harrison Conference Centers for approximately $49 million. We recorded a
$16 million pre-tax book loss on the sale. However, the sale generated a capital gain for tax purposes, which enabled us to utilize capital loss tax carryforwards generated by the
sale of the Red Lion hotel chain in 2001. These carryforwards were fully reserved through a valuation allowance in prior periods. The valuation allowance was reduced when evidence indicated it was
more likely than not that the benefit would be realized, as was the case with the sale of these assets. The transaction, including the impact of the reduction of the valuation allowance associated
with the capital loss tax carryforwards and the reversal of book deferred tax balances no longer required, resulted in a $16 million book tax benefit. Thus, on an after-tax basis,
the sale had no impact on reported net income.

The
total pre-tax loss on asset dispositions of $14 million in 2002 represents the $11 million net loss on the aforementioned asset sales and a loss of
approximately $3 million primarily as a result of writing off the value assigned to several long-term management and franchise agreements which were terminated during the year.
Proceeds from asset sales in 2002 were used to reduce outstanding debt.

On
December 31, 2001, we sold the Red Lion hotel chain to WestCoast Hospitality Corporation through a sale of the capital stock of Red Lion Hotels, Inc. The Red Lion
portfolio consisted of 41 Red Lion hotels (eight owned, 11 leased and 22 franchised) and two Doubletree hotels (one owned and one leased) with a total of approximately 6,500 rooms. Total consideration
of approximately $51 million included approximately $21 million of cash and approximately $30 million in redeemable preferred stock of WestCoast. The preferred stock is in two
$15 million series, which pay preferred dividends of 7% and 10% annually. The preferred stock is accounted for as a cost basis investment in our consolidated financial statements.

Our
total pre-tax loss on asset dispositions was $44 million in 2001, $42 million of which was attributable to the Red Lion sale. As the Red Lion sale also
resulted in a large capital loss for tax purposes, we were able to carry back a portion of this loss to offset capital gains recorded in prior years. The transaction, including the impact of the tax
loss carrybacks, resulted in a $47 million book tax benefit. Thus, on an after-tax basis, the sale of Red Lion Hotels, Inc. capital stock resulted in a gain of approximately
$5 million.

We
will continue to review our portfolio of owned assets and may seek to sell certain non-strategic assets from time to time.

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Joint Ventures / Alliances

We maintain investments in unconsolidated affiliates, including hotel joint ventures as well as other entities that support the operations of our hotel
properties. Investments are accounted for using the equity method when we exercise significant influence over the venture but lack a controlling financial interest, which is determined based upon the
terms of individual joint venture agreements, including evaluation of rights held by other ownership interests. Generally, we account for investments using the equity method when we own more than a
minimal investment but have no more than a 50% ownership interest. When we have a controlling financial interest in a venture, which is generally when our ownership exceeds 50%, the balance sheet and
results of operations are consolidated, with net earnings reduced by the portion of earnings applicable to other ownership interests. All other investments in unconsolidated affiliates are generally
accounted for under the cost method. We do not have investments in unconsolidated special purpose entities and we have not entered into synthetic leasing arrangements.

Our
investment in unconsolidated affiliates accounted for under the equity method totaled $291 million and $285 million at December 31, 2001 and 2002, respectively,
representing approximately three percent of total assets at the end of each period. At December 31, 2002, our unconsolidated affiliates accounted for under the equity method had total assets of
approximately $1.91 billion and total debt of
approximately $1.01 billion. Of the $1.01 billion of total debt, $971 million is secured solely by the affiliate's assets or is guaranteed by other partners without recourse to
us.

Our
joint venture investments at December 31, 2002 include 50% interests in Hilton HHonors Worldwide, which operates the Hilton HHonors guest loyalty program, and Hilton
Reservations Worldwide, which provides reservation services. Pricing on these programs is determined on an annual basis to ensure that the fees charged to each hotel will be sufficient to cover
program costs with no element of profit. Both companies are joint ventures with Hilton Group plc, whose wholly owned subsidiary, Hilton International Co., owns the rights to the Hilton brand name
outside the United States. These companies were formed as part of a 1997 agreement to reunify the Hilton brand worldwide through a strategic alliance between Hilton and Hilton Group plc, which
included cooperation on loyalty programs, reservations and other operational matters.

In
the fourth quarter of 2002, we entered into a partnership agreement with CNL Hospitality Corp. to acquire seven hotel properties. In the first phase of the transaction, the
partnership acquired the 500-room Doubletree at Lincoln Centre in Dallas, Texas and the 428-room Sheraton El Conquistador Resort and Country Club in Tucson, Arizona in
December 2002. Both properties will operate under the Hilton brand. In February 2003, we contributed the 437-room Hilton Rye Town in Rye Brook, New York and CNL contributed
the 630-room Doubletree Crystal City in Arlington, Virginia to the partnership. The gain resulting from the contribution of the Hilton Rye Town will be deferred and recognized over the
life of the long-term management contract retained on the property. Also in February 2003, the partnership acquired the 257-suite Embassy Suites Santa Clara in Santa
Clara, California, the 267-suite Embassy Suites Crystal City in Arlington, Virginia, and the 174-suite Embassy Suites Orlando Airport in Orlando, Florida. We will operate all
seven hotels under long-term management contracts and retain a minority ownership interest in the partnership. In 2001, we entered into a separate partnership agreement with CNL in which
we also retained a minority interest; that partnership owns four hotels that we operate under long-term management contracts.

As
of December 31, 2002, we owned approximately 1.5 million shares of FelCor Lodging Trust Inc. common stock, representing approximately two percent of FelCor's
outstanding shares. FelCor owned or had an interest in 82 of our hotels as of December 31, 2002.

Stockholders' Equity

Dividends paid on common shares were $.08 per share in 2000, 2001 and 2002.

Our
Board of Directors has approved the repurchase of up to 20 million shares of our common stock pursuant to a stock repurchase program. The timing of stock purchases are made at
the discretion of management. There were no shares repurchased during 2000, 2001 or 2002 as we sought to improve our credit position by using excess cash flow to repay outstanding debt balances. As of
December 31, 2002, 9.3 million shares remained authorized for repurchase under this authority.

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RESULTS OF OPERATIONS

The following discussion presents an analysis of our results of operations for the three years ended December 31, 2002. We use EBITDA (earnings before
interest, taxes, depreciation, amortization, pre-opening expense and non-cash items) as a supplemental measure of performance in the tables below and in the discussion of
operating results because we believe it gives the reader a more complete understanding of our operating results before the impact of investing and financing transactions. Non-cash items,
such as asset write-downs and impairment losses, are also excluded from EBITDA, as these items do not impact operating results on a recurring basis. EBITDA and EBITDA margins are among the more
significant factors in management's evaluation of company-wide and individual property performance. 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.

EBITDA
should not be considered as an alternative to any measure of operating results as promulgated under accounting principles generally accepted in the United States (such as
operating income or net income), nor should it be considered as an indicator of our overall financial performance. EBITDA does not fully consider the impact of investing or financing transactions as
it specifically excludes depreciation and interest charges, which should also be considered in the overall evaluation of results. Additionally, our method of calculating EBITDA may be different from
the method used by other companies and therefore comparability may be limited.

Our
operations consist of three reportable segments which are based on similar products or services: Hotel Ownership, Managing and Franchising, and Timeshare. Our results are
significantly affected by occupancy and room rates achieved by hotels, our ability to manage costs, the relative mix of owned, leased, managed and franchised hotels, the number and pricing of
timeshare intervals sales and the change in the number of available hotel rooms through acquisition, development and disposition.

Results
are also impacted by, among other things: national and regional economic trends, including the magnitude and duration of the current economic downturn in the United States;
actual and threatened terrorist attacks and international conflicts and their impact on domestic and international travel; capital market volatility; credit availability; relationships with
franchisees and property owners; and competition from other hotel brands. Future operating results could also be adversely impacted by increased capacity. These conditions could negatively impact
hotel room demand and pricing which could limit our ability to pass through operating cost increases in the form of higher room rates. Additionally, our ability to manage costs could be adversely
impacted by significant increases in energy, healthcare, insurance 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.

Results
in 2002 were adversely impacted by a slowly improving, but still fragile U.S. economy in the aftermath of the September 11, 2001 terrorist attacks, which impacted business
travel and led to downward pressure on room rates. Results in 2002 were also adversely impacted by a charge related to mold remediation in certain areas of the Hilton Hawaiian Village. We anticipate
that economic and political factors beyond our control will continue to create challenges for the lodging industry and our company in 2003. Soft economic conditions and the uncertain world political
situation are expected to impact the recovery of independent business travel, placing continued pressure on room rates. Higher insurance costs and property taxes, coupled with this rate pressure, are
expected to adversely affect margins. In 2003, we will continue to focus on areas within our control, including managing our costs, achieving revenue per available room (RevPAR) premiums in the
markets where we operate, building occupancy, adding new units to our family of brands, and delivering outstanding customer service. We believe that our focus on these core strategies, combined with
our financial strength, diverse market presence, strong brands and well-maintained, strategically located properties, will enable us to remain competitive.

25

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FISCAL 2002 COMPARED WITH FISCAL 2001

Overview

A summary of our consolidated results for the years ended December 31, 2001 and 2002 is as follows:

|                                        |                                                       | 2001 |       | 2002 |       | % Change |   
|--------------------------------------- | ----------------------------------------------------- | ---- | ----- | ---- | ----- | -------- | --
|
|Summary of Results                      |                                                       |      |       |      |       |          |   
|Revenue                                 |                                                       | $    | 3,993 |      | 3,847 |          | (4
|Operating income                        |                                                       |      | 632   |      | 603   |          | (5
|Net income                              |                                                       |      | 166   |      | 198   |          | 19
|Net income per share:                   |                                                       |      |       |      |       |          |   
|                                        | Basic                                                 |      |       | .45  |       | .53      |   
|                                        | Diluted                                               |      |       | .45  |       | .53      |   
|Other Operating Data                    |                                                       |      |       |      |       |          |   
|Reconciliation of EBITDA to Net Income: |                                                       |      |       |      |       |          |   
|EBITDA                                  |                                                       | $    | 1,072 |      | 990   |          | (8
|                                        | Pre-opening expense                                   |      |       | (3   | )     | (1       | ) 
|                                        | Non-cash items                                        |      |       | (7   | )     | (2       | ) 
|                                        | Operating interest and dividend income                |      |       | (15  | )     | (9       | ) 
|                                        | Depreciation and amortization(1)                      |      |       | (415 | )     | (375     | ) 
|                                        |                                                       |      |       |      |       |          |   
|Operating Income                        |                                                       |      | 632   |      | 603   |          | (5
|                                        | Interest and dividend income                          |      |       | 64   |       | 43       |   
|                                        | Interest expense                                      |      |       | (385 | )     | (328     | ) 
|                                        | Interest expense, net, from unconsolidated affiliates |      |       | (17  | )     | (19      | ) 
|                                        | Net loss on asset dispositions                        |      |       | (44  | )     | (14      | ) 
|                                        | Provision for income taxes                            |      |       | (77  | )     | (81      | ) 
|                                        | Minority interest, net                                |      |       | (7   | )     | (6       | ) 
|                                        |                                                       |      |       |      |       |          |   
|Net Income                              |                                                       | $    | 166   |      | 198   |          | 19
|                                        |                                                       |      |       |      |       |          |   

---

Total
revenue for 2002 was $3.847 billion, a decrease of $146 million or four percent from 2001. Total EBITDA was $990 million for 2002, an eight percent decrease
from $1.072 billion in 2001. Our consolidated EBITDA margin (EBITDA as a percentage of revenue before other revenue from managed and franchised properties) decreased .9 points to
34.2 percent in 2002 from 35.1 percent in 2001. Total operating income decreased $29 million to $603 million.

Results
in 2002 were adversely impacted by a soft U.S. economy, resulting in sluggish demand, primarily from independent business travelers. This reduced demand led to downward pressure
on average daily room rates. Along with the effects of the soft economy, the impact of asset sales in 2002 and 2001 contributed to the decline in revenue, EBITDA and operating income. Results were
also negatively impacted by a charge related to mold remediation in certain areas of the Hilton Hawaiian Village. Comparisons were also negatively impacted by increased healthcare and insurance costs,
and the recognition of previously deferred revenue, EBITDA and operating income from our timeshare property at the Hilton Hawaiian Village in the first quarter of 2001.

Results
in 2002, however, benefited from strong cross-selling among the brands and the success of the Hilton HHonors loyalty program which contributed to gains in market share across our
family of brands. According to data from Smith Travel Research, our Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Homewood Suites by Hilton and Hampton brands all achieved growth in the
system-wide RevPAR index, which represents the share of RevPAR these properties attain versus their respective competitive sets. Results in 2002 also benefited from our cost containment
programs which resulted in solid margins in a challenging environment, strong sales at our timeshare operations, a decline in average debt levels and interest rates, a lower effective tax rate and
easy comparisons with the latter half of 2001.

26

---

Our
domestic owned and majority owned hotels generated $638 million of EBITDA in 2002, compared to $654 million in the prior year. Operating income for these properties
totaled $374 million, a decline of $45 million from $419 million in 2001. Results in 2002 were adversely impacted by the economic downturn in the United States compared to 2001,
resulting in comparative softness across many of our major brands. Reduced demand from independent business travelers and overall price sensitivity were particularly prevalent in 2002. Occupancy
increased compared to 2001, as the decrease in independent business traveler volume was offset by increases in leisure and group room nights, however at lower average room rates. Markets in which our
hotels achieved strong results in 2002 included New York, Boston, Chicago and Washington, D.C., while the San Francisco and Phoenix markets were soft compared to the prior year. The impact of property
sales in 2002 and 2001 was partially offset by the May 2002 acquisition of the Hilton Waikoloa Village. Owned hotel operating income was also negatively impacted by mold remediation efforts at
the Hilton Hawaiian Village, which resulted in a $17 million pre-tax charge and the closure of the hotel's Kalia Tower guest rooms in July 2002. The charge includes the
estimated impairment loss for certain fixed assets as well as estimates of investigatory and remediation costs based upon an evaluation of currently available facts. We anticipate being able to
re-open the Kalia Tower guest rooms in the third quarter of 2003.

RevPAR
for comparable owned properties declined 2.6 percent for the year, with occupancy up 1.6 points to 71.1 percent and average daily rate down 4.8 percent to
$148.41. As anticipated, RevPAR at this group of hotels showed sequential quarterly improvement through the year. Compared with the respective 2001 quarters, RevPAR at comparable owned hotels declined
15.3 percent and 6.1 percent, respectively, in the first and second quarters of 2002, and increased 1.2 percent and 13.2 percent, respectively, in the third and fourth
quarters of 2002. Owned property comparable EBITDA margins were essentially flat at 30.2 percent. Our margins have remained strong, despite lower average daily room rates and increased
healthcare and insurance costs, due primarily to our cost containment initiatives. Cost containment, without compromising customer service and quality, will remain a top priority in 2003.

Leased
hotel revenue, EBITDA and operating income decreased $57 million, $6 million and $4 million, respectively, compared to 2001, primarily due to the sale of the
Red Lion hotel chain in 2001. Due to the relatively large size of the lease payments required in a hotel operating lease, the leased properties operate at margins significantly lower than our owned
hotels.

Management
and franchise fee revenue in 2002 decreased $13 million or 4 percent to $329 million. Fee revenue is based primarily on rooms revenue at franchised
properties and total operating revenue (and
to a lesser extent gross operating profits or cash flow) at managed properties. The decrease in fees reflects system-wide RevPAR declines across most of our brands and a decline in
incentive management fees, partially offset by new hotel openings. The decrease in RevPAR and incentive management fees reflects the comparative softness in the U.S. economy versus 2001.

The
decrease in other fees and income in 2002 is primarily the result of lower timeshare revenue and lower earnings from unconsolidated affiliates accounted for under the equity method
compared to 2001. Timeshare results in 2002 were negatively impacted by a $4 million charge for remediation efforts related to mold found in certain areas of the Lagoon Tower timeshare
development, the sale of receivables in June and November 2002, revisions to final construction costs in Hawaii (also related to the mold situation), and start-up costs in New York.
Results in 2002 were also affected by the required percentage-of-completion method of accounting for our new projects in Las Vegas and Orlando, and the required lease
accounting for our new Hilton Club project in New York, which limited the amount of reported revenue, EBITDA and operating income growth. However, despite a comparatively soft economic environment,
interval sales continue to be strong and average sales prices increased compared to the prior year. Timeshare results in 2001 benefited from the recognition of previously deferred amounts associated
with our timeshare project at the Hilton Hawaiian Village. This recognition increased revenue by $34 million and increased both EBITDA and operating income by $14 million in 2001.
Excluding the impact of sales deferrals in both periods, intervals sales were approximately flat in 2002 compared with 2001, while the average sales price increased 22 percent.

Depreciation
and amortization, including our proportionate share of depreciation and amortization from unconsolidated affiliates, decreased $40 million in 2002 to
$375 million. The decrease is primarily the result of discontinuing amortization of goodwill and brand values effective January 1, 2002 in accordance with FAS 142 (see "Other
MattersNew Accounting Standards"). As required by FAS 142, the results for periods prior to its adoption have not been restated.

27

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Corporate Activity

Corporate expense decreased $5 million in 2002 to $66 million. In 2002, we were repaid on a note receivable that we had partially reserved in 2001.
The 2002 corporate expense includes a benefit of approximately $4 million related to this reversal of bad debt expense. The 2001 expense includes a $7 million bad debt expense related to
certain notes receivable (acquired in the 1999 purchase of Promus Hotel Corporation) that, as a result of the economic impact of the events of September 11th, were unlikely to be collected.
Excluding these non-recurring items, corporate expense increased $6 million in 2002, primarily the result of increased legal costs.

Interest
and dividend income decreased $21 million compared with the prior year. The decrease reflects the repayment in June 2002 by Park Place of the $300 million
7.375% Senior Notes assumed by Park Place at the time of the spin-off of our gaming business (see "Liquidity and Capital ResourcesFinancing"). As these notes were assumed by
Park Place but remained our legal obligation prior to repayment, interest on the notes is reflected as both interest income and interest expense in our consolidated financial statements. The decrease
in interest income also reflects lower notes receivable balances in 2002. Interest expense, net of amounts capitalized, decreased $57 million primarily due to lower outstanding debt balances
and lower average interest rates, as well as the aforementioned repayment by Park Place.

The
total pre-tax loss on asset dispositions of $14 million in 2002 represents an $11 million net loss on asset sales (see "Liquidity and Capital
ResourcesAsset Dispositions") and a loss of approximately $3 million primarily as a result of writing off the value assigned to several long-term management and
franchise agreements which were terminated during the year. We realized a pre-tax loss on asset dispositions of $44 million in 2001, primarily due to the sale of the Red Lion hotel
chain.

The
effective income tax rate for 2002 decreased to 28.4% from 30.8% in 2001. The tax rate in 2002 reflects a reduction in the valuation allowance associated with capital loss tax
carryforwards and the reversal of book deferred tax balances no longer required resulting from asset sales. The 2002 tax rate also reflects the impact of a reduction in our valuation allowance for
capital loss tax carryforwards due to higher than expected utilization of these carryforwards on our 2001 Federal tax return filed in September 2002, as well as discontinuing goodwill
amortization effective January 1, 2002, which was not deductible for tax purposes. Excluding the impact on the provision for income taxes of asset sales and the third quarter carryforward
utilization, the effective tax rate for 2002 was 37.3%. The effective tax rate in 2001, excluding asset sales, was 42.5%. Our effective tax rate is determined by the level and composition of
pre-tax income and the mix of income subject to varying foreign, state and local taxes.

Hotel Statistics

RevPAR for U.S. owned-or-operated hotels and for our hotels system-wide for the year ended December 31, 2002 is as
follows:

|U.S. owned-or-operated hotels(1) |  | 2002 |        | Change
vs. 2001 |     
|-------------------------------- |  | ---- | ------ | --------------- | ----
|Hilton                           |  | $    | 106.32 |                 | (2.2
|Doubletree                       |  |      | 69.71  |                 | (5.7
|Embassy Suites                   |  |      | 85.58  |                 | (5.0
|Other                            |  |      | 61.34  |                 | (2.3
|Total                            |  |      | 87.43  |                 | (3.7

---

|System-wide(2)            |  | 2002 |       | Change
vs. 2001 |     
|------------------------- |  | ---- | ----- | --------------- | ----
|Hilton                    |  | $    | 86.61 |                 | (2.6
|Hilton Garden Inn         |  |      | 64.07 |                 | (1.1
|Doubletree                |  |      | 66.76 |                 | (5.5
|Embassy Suites            |  |      | 83.18 |                 | (3.0
|Homewood Suites by Hilton |  |      | 68.53 |                 | (2.2
|Hampton                   |  |      | 51.66 |                 | .4  
|Other                     |  |      | 76.49 |                 | (7.6

---

28

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FISCAL 2001 COMPARED WITH FISCAL 2000

Overview

A summary of our consolidated results for the years ended December 31, 2000 and 2001 is as follows:

|                                        |                                                       | 2000 |       | 2001 |       | % Change |    
|--------------------------------------- | ----------------------------------------------------- | ---- | ----- | ---- | ----- | -------- | ---
|
|Summary of Results                      |                                                       |      |       |      |       |          |    
|Revenue                                 |                                                       | $    | 4,396 |      | 3,993 |          | (9 
|Operating income                        |                                                       |      | 830   |      | 632   |          | (24
|Net income                              |                                                       |      | 272   |      | 166   |          | (39
|Net income per share:                   |                                                       |      |       |      |       |          |    
|                                        | Basic                                                 |      |       | .74  |       | .45      |    
|                                        | Diluted                                               |      |       | .73  |       | .45      |    
|Other Operating Data                    |                                                       |      |       |      |       |          |    
|Reconciliation of EBITDA to Net Income: |                                                       |      |       |      |       |          |    
|EBITDA                                  |                                                       | $    | 1,271 |      | 1,072 |          | (16
|                                        | Pre-opening expense                                   |      |       | (4   | )     | (3       | )  
|                                        | Non-cash items                                        |      |       |     |       | (7       | )  
|                                        | Operating interest and dividend income                |      |       | (32  | )     | (15      | )  
|                                        | Depreciation and amortization(1)                      |      |       | (405 | )     | (415     | )  
|                                        |                                                       |      |       |      |       |          |    
|Operating Income                        |                                                       |      | 830   |      | 632   |          | (24
|                                        | Interest and dividend income                          |      |       | 86   |       | 64       |    
|                                        | Interest expense                                      |      |       | (453 | )     | (385     | )  
|                                        | Interest expense, net, from unconsolidated affiliates |      |       | (16  | )     | (17      | )  
|                                        | Net gain (loss) on asset dispositions                 |      |       | 32   |       | (44      | )  
|                                        | Provision for income taxes                            |      |       | (200 | )     | (77      | )  
|                                        | Minority interest, net                                |      |       | (7   | )     | (7       | )  
|                                        |                                                       |      |       |      |       |          |    
|Net Income                              |                                                       | $    | 272   |      | 166   |          | (39
|                                        |                                                       |      |       |      |       |          |    

---

Total
revenue for 2001 was $3.993 billion, a decrease of $403 million from 2000. Total EBITDA was $1.072 billion for 2001, a 16 percent decrease from
$1.271 billion in 2000. Our total company EBITDA margin decreased 1.7 points to 35.1 percent in 2001 from 36.8 percent in 2000. Total operating income decreased $198 million to
$632 million.

The
2001 results were negatively impacted by a drop in U.S. lodging demand beginning in the second quarter, as well as severe declines in RevPAR and margins at most of our owned hotels
in urban markets in the weeks following the September 11th terrorist attacks. Along with the effects of the slowing U.S. economy and the September 11th terrorist attacks, the impact of
2000 and 2001 property sales (primarily the sale of 52 leases and four management contracts to RFS Hotel Investors, Inc., the CNL transaction and the sale of several Homewood Suites by Hilton
properties) contributed to the full year decline in revenue, EBITDA and operating income. Results for 2001 benefited from increased cross-selling among the brands, the positive impact of the Hilton
HHonors loyalty program, and other sales and marketing initiatives which contributed to gains in market share. Our Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Homewood Suites by Hilton and
Hampton brands all achieved growth in the system-wide RevPAR index compared to 2000. Results in 2001 also benefited from our cost containment programs, strong timeshare sales, the
recognition of previously deferred revenue from our timeshare operations and a decline in debt levels and interest rates.

Our
domestic owned and majority owned hotels contributed $654 million of EBITDA in 2001, compared to $858 million in the prior year. Operating income for these properties
totaled $419 million, a decline of $206 million from $625 million in 2000. Although the majority of the EBITDA and operating income declines can be attributed to the aftermath of
the September 11th terrorist attacks, growth for the year was also impacted by comparative softness in the New York, Chicago and San Francisco markets prior to September 11th. The market
softness reflected lower attendance at group meetings and decreased transient business due to a slowing U.S. economy, and was magnified when compared to the record-breaking results achieved in 2000.
Comparisons to 2000 were also negatively impacted

29

---

by
owned property sales, primarily several Homewood Suites by Hilton properties and ongoing renovation projects at the Hilton New Orleans Riverside and the Hilton San Francisco. RevPAR for comparable
owned properties declined 13.6 percent for the year, with occupancy down 6.1 points to 69.4 percent and average daily rate down 6.0 percent to $153.78. Owned property comparable EBITDA
margins declined 4.8 points to 30.4 percent. Margins were severely impacted by the immediate decline in business following September 11th and group meeting and convention cancellations
resulting in a significant decrease in high-margin food and beverage revenue.

The
margin decrease was partially mitigated by the implementation of cost containment programs at each of our properties. These initiatives, which included a company-wide
limitation on new hires, direct energy purchase agreements combined with reduced energy consumption as well as many hotel-level programs to improve operating efficiencies, were implemented late in the
first quarter of 2001. We also reduced hours and adjusted staffing levels as necessary at our hotels to reflect the reduction in demand. However, we kept our core staff in place and did not mandate
company-wide layoffs.

Leased
hotel revenue, EBITDA and operating income decreased $230 million, $17 million and $14 million, respectively, compared to 2000, primarily as a result of the
termination of the RFS leases in January 2001.

Management
and franchise fee revenue in 2001 decreased $8 million or two percent to $342 million. The decrease in fees reflected a decline in business volume as a result of
the September 11th terrorist attacks, partially offset by new hotel openings. As many of our franchised properties are located in "drive-to" markets, the events of
September 11th had less of an impact on those properties than it did on our owned hotels located in destinations more dependent on air travel. The decrease in fees was also partially offset by
the expansion in April 2000 of the Hilton HHonors guest loyalty program to include the Hampton, Doubletree, Embassy Suites and Homewood Suites by Hilton brands, as well as our cross-selling and
other initiatives.

Our
timeshare segment posted strong results despite the slowing U.S. economy and the September 11th terrorist attacks. Interval sales at our timeshare properties increased
33 percent over 2000. We also began to recognize revenue and expenses from our timeshare property at the Hilton Hawaiian Village in the first quarter of 2001. In addition, we also recognized
previously deferred revenue and expenses associated with this project in the first quarter of 2001. The increase in other fees and income and other operating expenses compared to 2000 is primarily the
result of strong sales at our timeshare properties. The recognition of deferred amounts from the Hawaiian project impacted revenue by $34 million and both EBITDA and operating income by
$14 million.

Depreciation
and amortization, including our proportionate share of depreciation and amortization from unconsolidated affiliates, increased $10 million in 2001 to
$415 million due primarily to additional depreciation at recently renovated and expanded properties.

Corporate Activity

Corporate expense increased $9 million in 2001 to $71 million. The 2001 expense includes a $7 million bad debt expense related to certain
notes receivable (acquired in the Promus purchase) that, as a result of the
economic impact of the events of September 11th, were unlikely to be collected. The 2000 expense included an $8 million benefit from the termination of our post-retirement
life insurance programs as part of the integration of the Hilton and Promus employee benefit plans. Excluding these non-recurring items, corporate expense decreased $6 million in
2001, reflecting cost control measures implemented at the corporate and regional offices.

Interest
and dividend income decreased $22 million compared with the prior year, primarily due to repayments on notes receivable which were outstanding for most of 2000. Interest
expense, net of amounts capitalized, decreased $68 million reflecting lower outstanding debt balances and lower average interest rates.

We
realized a pre-tax loss on asset dispositions of $44 million in 2001, primarily due to the sale of the Red Lion hotel chain, compared to a pre-tax gain
of $32 million in 2000 from the sale of marketable securities.

The
effective income tax rate for 2001 decreased to 30.8% from 41.8% in 2000. Excluding the impact of the Red Lion sale, the effective tax rate for 2001 increased to 42.5%.

30

---

Hotel Statistics

RevPAR for U.S. owned-or-operated hotels and for our hotels system-wide for the year ended December 31, 2001 is as
follows:

|U.S. owned-or-operated hotels(1) |  | 2001 |        | Change
vs. 2000 |      
|-------------------------------- |  | ---- | ------ | --------------- | -----
|Hilton                           |  | $    | 108.99 |                 | (13.1
|Doubletree                       |  |      | 73.35  |                 | (8.1 
|Embassy Suites                   |  |      | 90.12  |                 | (8.9 
|Other                            |  |      | 61.80  |                 | (6.2 
|Total                            |  |      | 89.73  |                 | (10.5

---

|System-wide(2)            |  | 2001 |       | Change
vs. 2000 |      
|------------------------- |  | ---- | ----- | --------------- | -----
|Hilton                    |  | $    | 88.48 |                 | (10.3
|Hilton Garden Inn         |  |      | 65.72 |                 | (2.5 
|Doubletree                |  |      | 69.99 |                 | (7.3 
|Embassy Suites            |  |      | 86.31 |                 | (7.7 
|Homewood Suites by Hilton |  |      | 70.14 |                 | (3.0 
|Hampton                   |  |      | 51.46 |                 | 1.3  
|Other                     |  |      | 69.63 |                 | (12.6

---

OTHER MATTERS

New Accounting Standards

Effective January 1, 2002, we adopted FAS 142, "Goodwill and Other Intangible Assets." The rules require that goodwill and other intangible assets
with indefinite lives are not amortized, but are reviewed annually for impairment. We expect to receive future benefits from previously acquired goodwill and brands over an indefinite period of time
and therefore no longer amortize them. Our impairment reviews of goodwill and brands did not result in an impairment charge in 2002. As required by FAS 142, the results for the periods prior to
its adoption have not been restated.

In
response to a Financial Accounting Standards Board staff announcement, and in accordance with the FASB's Emerging Issues Task Force Issue 01-14, "Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," effective January 1, 2002 we changed our method of reporting reimbursable costs
incurred on behalf of managed hotel properties and franchisees. Under the new method, we report reimbursements received from managed properties and franchisees as revenue and the costs incurred on
their behalf as expenses. These costs, which relate primarily to payroll costs at managed properties where we are the employer, are reflected in other revenue and expenses from managed and franchised
properties in the consolidated statements of income. Revenue and expenses for the 2000 and 2001 periods have been reclassified to conform with the presentation in the 2002 financial statements. Since
the reimbursements are made based upon the costs incurred with no added margin, the adoption of this guidance has no effect on our operating income, total or per share net income, cash flow or
financial position.

Effective
January 1, 2002, we adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of FAS 144 had no impact on
our financial statements.

In
November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires that guarantees issued after December 31, 2002 are recorded as liabilities at fair value, with the offsetting entry recorded based on the circumstances
in which the guarantee was issued. Adoption of FIN 45 will have no impact on our historical financial statements as existing guarantees are not subject to the measurement provisions of FIN 45. The
impact on future financial statements will depend on the nature and extent of guarantees issued, but is not expected to have a material impact on us.

31

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In
December 2002, the FASB issued FAS 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FAS 123." This
statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. This statement also amends the disclosure
requirements of FAS 123 and Accounting Principles Board Opinion 28, "Interim Financial Reporting," to require prominent disclosures in both annual and interim financial statements about
the method of accounting for stock-based compensation and the effect of the method used on reported results. We have adopted the disclosure provisions of FAS 148, which require expanded
disclosure regarding stock-based compensation in the Summary of Significant Accounting Policies footnote to the consolidated financial statements. The expanded disclosure will be required in our
quarterly financial reports beginning in the first quarter of 2003.

Other

We are subject to litigation in the ordinary course of our business. Management believes the resolution of pending lawsuits will not have a material adverse
effect on our 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 and Capital Spending," "Liquidity and
Capital Resources," "Results of Operations" and "Other Matters," and statements relating to our 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," "intends," "plans," "estimates" and similar expressions are intended to identify forward-looking statements. These forward-looking
statements reflect our current views with respect to future events and financial performance, and are subject to risks and uncertainties, including those identified above under "Results of Operations"
and those in our Annual Report of Form 10-K for the fiscal year ended December 31, 2002 under the captions "Operations" and "Additional Information," as well as:



Any
of these risks and uncertainties could cause actual results to differ materially from historical results or those anticipated. Although we believe the expectations reflected in these
forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be attained and caution you not to place undue reliance on such statements. We
undertake no obligation to publicly update or revise any forward-looking statements to reflect current or future events or circumstances.

32

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CONSOLIDATED STATEMENTS OF INCOME

|                                                 |                                                       | Year ended December 31, |      
|------------------------------------------------ | ----------------------------------------------------- | ----------------------- | -----
|
|
|Revenue                                          |                                                       |                         |      
|                                                 | Owned hotels                                          |                         | $    
|                                                 | Leased hotels                                         |                         |      
|                                                 | Management and franchise fees                         |                         |      
|                                                 | Other fees and income                                 |                         |      
|                                                 |                                                       |                         |      
|                                                 |                                                       |                         | 3,451
|                                                 | Other revenue from managed and franchised properties  |                         |      
|                                                 |                                                       |                         |      
|                                                 |                                                       |                         | 4,396
|Expenses                                         |                                                       |                         |      
|                                                 | Owned hotels                                          |                         |      
|                                                 | Leased hotels                                         |                         |      
|                                                 | Depreciation and amortization                         |                         |      
|                                                 | Impairment loss and related costs                     |                         |      
|                                                 | Other operating expenses                              |                         |      
|                                                 | Corporate expense, net                                |                         |      
|                                                 |                                                       |                         |      
|                                                 |                                                       |                         | 2,621
|                                                 | Other expenses from managed and franchised properties |                         |      
|                                                 |                                                       |                         |      
|                                                 |                                                       |                         | 3,566
|                                                 |                                                       |                         |      
|Operating Income                                 |                                                       |                         | 830  
|                                                 | Interest and dividend income                          |                         |      
|                                                 | Interest expense                                      |                         |      
|                                                 | Interest expense, net, from unconsolidated affiliates |                         |      
|                                                 | Net gain (loss) on asset dispositions                 |                         |      
|                                                 |                                                       |                         |      
|Income Before Income Taxes and Minority Interest |                                                       |                         | 479  
|                                                 | Provision for income taxes                            |                         |      
|                                                 | Minority interest, net                                |                         |      
|                                                 |                                                       |                         |      
|Net Income                                       |                                                       | $                       | 272  
|                                                 |                                                       |                         |      
|Basic Earnings Per Share                         |                                                       | $                       | .74  
|                                                 |                                                       |                         |      
|Diluted Earnings Per Share                       |                                                       | $                       | .73  
|                                                 |                                                       |                         |      

See
notes to consolidated financial statements

33

---

CONSOLIDATED BALANCE SHEETS

|                                             |                                                                            | December 31,
2001 |       | December 31,
2002 |      
|-------------------------------------------- | -------------------------------------------------------------------------- | ----------------- | ----- | ----------------- | -----
|
|Assets                                       |                                                                            |                   |       |                   |      
|Current Assets                               |                                                                            |                   |       |                   |      
|                                             | Cash and equivalents                                                       |                   | $     | 35                |      
|                                             | Accounts receivable, net                                                   |                   |       | 291               |      
|                                             | Inventories                                                                |                   |       | 148               |      
|                                             | Deferred income taxes                                                      |                   |       | 61                |      
|                                             | Current portion of notes receivable, net                                   |                   |       | 40                |      
|                                             | Current portion of long-term receivable                                    |                   |       | 300               |      
|                                             | Other current assets                                                       |                   |       | 121               |      
|                                             |                                                                            |                   |       |                   |      
|Total current assets                         |                                                                            |                   | 996   |                   | 630  
|                                             |                                                                            |                   |       |                   |      
|Investments, Property and Other Assets       |                                                                            |                   |       |                   |      
|                                             | Investments and notes receivable, net                                      |                   |       | 580               |      
|                                             | Long-term receivable                                                       |                   |       | 325               |      
|                                             | Property and equipment, net                                                |                   |       | 3,911             |      
|                                             | Management and franchise contracts, net                                    |                   |       | 487               |      
|                                             | Leases, net                                                                |                   |       | 122               |      
|                                             | Brands                                                                     |                   |       | 971               |      
|                                             | Goodwill                                                                   |                   |       | 1,273             |      
|                                             | Other assets                                                               |                   |       | 120               |      
|                                             |                                                                            |                   |       |                   |      
|Total investments, property and other assets |                                                                            |                   | 7,789 |                   | 7,718
|                                             |                                                                            |                   |       |                   |      
|Total Assets                                 |                                                                            | $                 | 8,785 |                   | 8,348
|                                             |                                                                            |                   |       |                   |      
|Liabilities and Stockholders' Equity         |                                                                            |                   |       |                   |      
|Current Liabilities                          |                                                                            |                   |       |                   |      
|                                             | Accounts payable and accrued expenses                                      |                   | $     | 533               |      
|                                             | Current maturities of long-term debt                                       |                   |       | 365               |      
|                                             | Income taxes payable                                                       |                   |       | 4                 |      
|                                             |                                                                            |                   |       |                   |      
|Total current liabilities                    |                                                                            |                   | 902   |                   | 575  
|                                             |                                                                            |                   |       |                   |      
|                                             | Long-term debt                                                             |                   |       | 4,950             |      
|                                             | Deferred income taxes                                                      |                   |       | 871               |      
|                                             | Insurance reserves and other                                               |                   |       | 279               |      
|                                             |                                                                            |                   |       |                   |      
|Total liabilities                            |                                                                            |                   | 7,002 |                   | 6,295
|                                             |                                                                            |                   |       |                   |      
|Commitments and Contingencies                |                                                                            |                   |       |                   |      
|Stockholders' Equity                         |                                                                            |                   |       |                   |      
|                                             | Common Stock, 369 million and 376 million shares outstanding, respectively |                   |       | 948               |      
|                                             | Additional paid-in capital                                                 |                   |       | 873               |      
|                                             | Retained earnings                                                          |                   |       | 168               |      
|                                             | Accumulated other comprehensive loss                                       |                   |       | (5                | )    
|                                             |                                                                            |                   |       |                   |      
|                                             |                                                                            |                   | 1,984 |                   | 2,223
|                                             | Less treasury stock, at cost                                               |                   |       | (201              | )    
|                                             |                                                                            |                   |       |                   |      
|Total stockholders' equity                   |                                                                            |                   | 1,783 |                   | 2,053
|                                             |                                                                            |                   |       |                   |      
|Total Liabilities and Stockholders' Equity   |                                                                            | $                 | 8,785 |                   | 8,348
|                                             |                                                                            |                   |       |                   |      

See
notes to consolidated financial statements

34

---

CONSOLIDATED STATEMENTS OF CASH FLOW

|                                            |                                                                                   | Year ended December 31,                                        |                                      
|------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------------------------- | -------------------------------------
|
|
|Operating Activities                        |                                                                                   |                                                                |                                      
|                                            | Net income                                                                        |                                                                | $                                    
|                                            | Adjustments to reconcile net income to net cash provided by operating activities: |                                                                |                                      
|                                            |                                                                                   | Depreciation and amortization                                  |                                      
|                                            |                                                                                   | Amortization of loan costs                                     |                                      
|                                            |                                                                                   | Net (gain) loss on asset dispositions                          |                                      
|                                            |                                                                                   | Impairment loss and related costs                              |                                      
|                                            |                                                                                   | 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 in excess of earnings |                                      
|                                            |                                                                                   | Other                                                          |                                      
|                                            |                                                                                   |                                                                |                                      
|Net cash provided by operating activities   |                                                                                   |                                                                | 589                                  
|                                            |                                                                                   |                                                                |                                      
|Investing Activities                        |                                                                                   |                                                                |                                      
|                                            | Capital expenditures                                                              |                                                                |                                      
|                                            | Additional investments                                                            |                                                                |                                      
|                                            | Proceeds from asset dispositions                                                  |                                                                |                                      
|                                            | Payments on notes and other                                                       |                                                                |                                      
|                                            | Acquisitions, net of cash acquired                                                |                                                                |                                      
|                                            |                                                                                   |                                                                |                                      
|Net cash used in investing activities       |                                                                                   |                                                                | (243                                 
|                                            |                                                                                   |                                                                |                                      
|Financing Activities                        |                                                                                   |                                                                |                                      
|                                            | Change in commercial paper borrowings and revolving loans                         |                                                                |                                      
|                                            | Long-term borrowings                                                              |                                                                |                                      
|                                            | Reduction of long-term debt                                                       |                                                                |                                      
|                                            | Issuance of common stock                                                          |                                                                |                                      
|                                            | Cash dividends                                                                    |                                                                |                                      
|                                            |                                                                                   |                                                                |                                      
|Net cash used in financing activities       |                                                                                   |                                                                | (403                                 
|                                            |                                                                                   |                                                                |                                      
|(Decrease) Increase in Cash and Equivalents |                                                                                   |                                                                | (57                                  
|Cash and Equivalents at Beginning of Year   |                                                                                   |                                                                | 104                                  
|                                            |                                                                                   |                                                                |                                      
|Cash and Equivalents at End of Year         |                                                                                   | $                                                              | 47                                   
|                                            |                                                                                   |                                                                |                                      

See
notes to consolidated financial statements

35

---

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                               |                                                                                | Common
Stock |     | Additional
Paid-In
Capital |     | Accumulated
Retained
Earnings
(Deficit) |      | Other
Comprehensive
Income (Loss) |     | Treasury
Stock |      | Total |      
|-------------------------------------------------------------- | ------------------------------------------------------------------------------ | ------------ | --- | -------------------------- | --- | --------------------------------------- | ---- | --------------------------------- | --- | -------------- | ---- | ----- | -----
|
|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 (loss) 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
|                                                               |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      
|Net Income                                                     |                                                                                |              |    |                            |    |                                         | 166  |                                   |    |                |     |       | 166  
|Other comprehensive income:                                    |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      
|                                                               | Cash flow hedge adjustment, net of deferred tax                                |              |     |                           |     |                                        |      |                                  |     | (2             | )    |      |      
|                                                               | Change in unrealized gain / loss on marketable securities, net of deferred tax |              |     |                           |     |                                        |      |                                  |     | (9             | )    |      |      
|                                                               |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      
|Comprehensive income (loss) for 2001                           |                                                                                |              |    |                            |    |                                         | 166  |                                   | (11 | )              |     |       | 155  
|Issuance of common stock                                       |                                                                                |              | 1   |                            | 2   |                                         |     |                                   |    |                |     |       | 3    
|Exercise of stock options                                      |                                                                                |              |    |                            |    |                                         | (3   | )                                 |    |                | 6    |       | 3    
|Deferred compensation                                          |                                                                                |              |    |                            | 10  |                                         |     |                                   |    |                |     |       | 10   
|Common dividends ($.08 per share)                              |                                                                                |              |    |                            |    |                                         | (30  | )                                 |    |                |     |       | (30  
|                                                               |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      
|Balance at December 31, 2001                                   |                                                                                |              | 948 |                            | 873 |                                         | 168  |                                   | (5  | )              | (201 | )     | 1,783
|                                                               |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      
|Net Income                                                     |                                                                                |              |    |                            |    |                                         | 198  |                                   |    |                |     |       | 198  
|Other comprehensive income:                                    |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      
|                                                               | Cash flow hedge adjustment, net of deferred tax                                |              |     |                           |     |                                        |      |                                  |     | (3             | )    |      |      
|                                                               | Cumulative translation adjustment, net of deferred tax                         |              |     |                           |     |                                        |      |                                  |     | 1              |      |      |      
|                                                               | Change in unrealized gain / loss on marketable securities, net of deferred tax |              |     |                           |     |                                        |      |                                  |     | (4             | )    |      |      
|                                                               |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      
|Comprehensive income (loss) for 2002                           |                                                                                |              |    |                            |    |                                         | 198  |                                   | (6  | )              |     |       | 192  
|Issuance of common stock                                       |                                                                                |              | 14  |                            | 70  |                                         |     |                                   |    |                | 1    |       | 85   
|Exercise of stock options                                      |                                                                                |              |    |                            |    |                                         | (14  | )                                 |    |                | 30   |       | 16   
|Deferred compensation                                          |                                                                                |              |    |                            | 7   |                                         |     |                                   |    |                |     |       | 7    
|Common dividends ($.08 per share)                              |                                                                                |              |    |                            |    |                                         | (30  | )                                 |    |                |     |       | (30  
|                                                               |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      
|Balance at December 31, 2002                                   |                                                                                | $            | 962 |                            | 950 |                                         | 322  |                                   | (11 | )              | (170 | )     | 2,053
|                                                               |                                                                                |              |     |                            |     |                                         |      |                                   |     |                |      |       |      

See
notes to consolidated financial statements

36

---

Notes to Consolidated Financial Statements
December 31, 2002

BASIS OF PRESENTATION AND ORGANIZATION

Hilton Hotels Corporation is engaged in the ownership, management and development of hotels, resorts and timeshare properties and the franchising of lodging
properties. We operate in select markets throughout the world, predominately in the United States. Revenue and income are derived from three reportable segments: Hotel Ownership, Managing and
Franchising, and Timeshare.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Hilton Hotels Corporation, our wholly owned subsidiaries and entities in which we have a controlling
financial interest. The determination of controlling financial interest is based upon the terms of individual joint venture agreements, including evaluation of rights held by other ownership
interests. Entities in which we have a controlling financial interest are generally comprised of majority owned joint ventures. All material intercompany transactions are eliminated and net earnings
are reduced by the portion of earnings of affiliates applicable to other ownership interests.

Cash and Equivalents

Cash and equivalents include investments with initial maturities of three months or less. Cash and equivalents includes cash related to certain consolidated
hotels, the use of which is restricted for hotel purposes under the terms of collateralized borrowings, totaling approximately $19 million and $34 million at December 31, 2001 and
2002, respectively.

Accounts Receivable

Accounts receivable are reflected net of allowance for uncollectable accounts of $16 million and $17 million as of December 31, 2001 and
2002, respectively.

Investments

We maintain investments in unconsolidated affiliates, including hotel joint ventures as well as other entities that support the operations of our hotel
properties. Investments are accounted for using the equity method when we exercise significant influence over the venture but lack a controlling financial interest, which is determined based upon the
terms of individual joint venture agreements, including evaluation of rights held by other ownership interests. Generally, we account for investments using the equity method when we own more than a
minimal investment but have no more than a 50% ownership interest. When we have a controlling financial interest in the venture, which is generally when our ownership exceeds 50%, the balance sheet
and results of operations are consolidated, with net earnings reduced by the portion of earnings applicable to other ownership interests. All other investments in unconsolidated affiliates are
generally accounted for under the cost method.

Currency Translation

Assets 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 Assets

The carrying value of our 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 the lowest level of identifiable expected future cash flow, then a loss is recognized in the income statement using a fair value based model.

37

---

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Interest incurred during construction of facilities is capitalized and depreciated over
the life of the asset. Costs of improvements are capitalized. These capitalized costs may include structural costs, equipment, fixtures and floor and wall coverings. Costs of normal repairs and
maintenance are charged to expense as incurred.

Depreciation
is provided using the straight-line method over the estimated useful life of the assets. Leasehold improvements are depreciated over the shorter of the asset
life or lease term. The service lives of assets are generally 40 years for buildings and three to eight years for building improvements and furniture and equipment.

Management and Franchise Contracts

Management and franchise contracts acquired in acquisitions that were accounted for as purchases are recorded at the estimated present value of net cash flow
expected to be received over the lives of the contracts. This value is amortized using the straight-line method over the remaining contract lives. 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 $105 million and $143 million at December 31, 2001 and 2002, respectively.

Leases

Leases acquired in acquisitions that were accounted for as purchases are recorded at the estimated present value of net cash flow expected to be received over the
lives of the lease agreements. This value is amortized using the straight-line method over the remaining lease terms. Accumulated amortization of leases totaled $7 million and
$11 million at December 31, 2001 and 2002, respectively.

Brands

The 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. Effective January 1, 2002, we account for brands in accordance with Statement of Financial Accounting Standard (FAS) 142, which requires that
intangible assets with indefinite lives are not amortized, but are reviewed annually for impairment. Prior to January 1, 2002, brand values were amortized using the straight-line
method over 40 years.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net assets of businesses acquired. We account for goodwill in accordance with
FAS 142, which requires that goodwill is not amortized, but is reviewed annually for impairment. Prior to January 1, 2002, goodwill was amortized using the straight-line
method over 40 years.

Derivative Instruments

We have an outstanding swap agreement which qualifies for hedge accounting as a cash flow hedge of a foreign currency denominated liability. The gain or loss on
the change in fair value of the derivative is included in earnings to the extent it offsets the earnings impact of changes in fair value of the hedged obligation. Any difference is deferred in
accumulated other comprehensive income, a component of stockholders' equity.

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

38

---

We
also have an interest rate swap on the floating rate mortgage of a consolidated joint venture which qualifies as a cash flow hedge. This derivative impacts earnings to the extent of
increasing or decreasing actual interest expense on the hedged mortgage to simulate a fixed interest rate, with any incremental fair value change deferred in accumulated other comprehensive income.

There
were no amounts recognized or reclassified into earnings for the years ended December 31, 2000, 2001 or 2002 due to hedge ineffectiveness or due to excluding from the
assessment of effectiveness any component of the derivatives. We assess on a quarterly basis the effectiveness of our hedges in offsetting the variability in the cash flow or fair values of the hedged
obligations.

Unamortized Loan Costs

Debt 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. These balances are included in other assets in our consolidated balance sheets.

Self-Insurance

We are self-insured for various levels of general liability, workers' compensation and employee medical and dental insurance coverage. Insurance
reserves include the present values of projected settlements for known and incurred, but not reported claims.

Revenue Recognition

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

Management
fees represent fees earned from hotels managed by us, usually under long-term contracts with the hotel owner. Management fees include a base fee, which is
generally a percentage of hotel revenue, and an incentive fee, which is generally based on the hotel's profitability. We recognize base fees as revenue when earned in accordance with the terms of the
contract. In interim periods we recognize incentive fees that would be due if the contract were terminated at the end of the interim period.

Franchise
fees represent fees received in connection with the franchise of our brand names, usually under long-term contracts with the hotel owner. Depending on the brand, we
charge franchise royalty fees of up to five percent of rooms revenue. We recognize fee revenue as earned, in accordance with FAS 45, "Accounting for Franchise Fee Revenue."

Other
fees and income primarily consist of earnings from timeshare operations and equity income from unconsolidated affiliates. Timeshare revenue is generated primarily from the sale and
financing of timeshare intervals and operating timeshare resorts. We recognize revenue from deeded timeshare sales in accordance with FAS 66, "Accounting for Real Estate Sales." Sales are included in
revenue when a minimum of a 10 percent down payment has been received and certain minimum sales thresholds have been attained. During periods of construction, profits from timeshare sales are
recognized under the percentage-of-completion method. Our Hilton Club timeshare product is accounted for as a long-term lease with a reversionary interest rather
than the sale of a deeded interest in real estate. Hilton Club sales revenue is recognized over the term of the lease.

We
incur certain reimbursable costs on behalf of managed hotel properties and franchisees. We report reimbursements received from managed properties and franchisees as revenue and the
costs incurred on their behalf as expenses. These costs, which relate primarily to payroll costs at managed properties where we are the employer, are reflected in other revenue and expenses from
managed and franchised properties in the consolidated statements of income. Since the reimbursements are made based upon the costs incurred with no added margin, the presentation of these reimbursable
costs has no effect on our operating income, total or per share net income, cash flow or financial position.

39

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Hilton HHonors

Hilton HHonors is a guest loyalty program operated by Hilton HHonors Worldwide (HHW), a joint venture 50% owned by us and 50% owned by Hilton Group plc. Hilton
Group's wholly owned subsidiary, Hilton International Co., owns the rights to the Hilton brand name outside the United States. The HHonors program is operated for the benefit of the Hilton family of
brands worldwide.

Members
of the HHonors program earn points based on their spending at most of the hotel properties operated and franchised by us and Hilton Group. HHW accumulates and tracks points on
the member's behalf and fulfills the awards upon request. Points can be redeemed for hotel stays at participating properties, and for a variety of other awards such as airline tickets, cruises and car
rentals. As we exercise significant influence over the operation of HHW but lack a controlling financial interest, our investment in HHW is accounted for under the equity method.

HHonors
is provided as a guest loyalty program to participating hotels. HHW charges the cost of operating the program, including the estimated fair value of award redemption, to
participating hotels based on members' qualifying expenditures. The charges do not include a markup or profit element. We record our share of program costs, which we expense and pay to HHW based upon
contractual amounts when qualified members stay at our hotels. When members redeem awards at our hotels, we receive contractual amounts from HHW.

Earnings Per Share (EPS)

Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. The
weighted average number of common shares outstanding for 2000, 2001 and 2002 were 368 million, 369 million and 374 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 24 million, 25 million and 27 million in 2000, 2001 and 2002, respectively. In addition, the increase to net income
resulting from interest on convertible securities assumed to have not been paid was approximately $15 million per year in 2000 and 2001, and $16 million in 2002.

Stock-Based Compensation

We apply Accounting Principles Board Opinion 25 and related interpretations in accounting for our stock-based compensation plans. No compensation cost is
reflected in net income related to our stock option plans for the periods presented, as all options had an exercise price greater than or equal to the market value of the underlying common stock on
the date of grant. Had the expense for our stock-based compensation plans been determined using the fair value based method defined in FAS 123, "Accounting for Stock-Based Compensation," our
net income and net income per share would have been reduced to the pro forma amounts indicated below:

|                           |                                  | 2000 |   | 2001 |  | 2002
|-------------------------- | -------------------------------- | ---- | - | ---- |  | ----
|
|Net income                 |                                  |      |   |      |  |     
|                           | As reported                      |      | $ | 272  |  | 166 
|                           | Incremental compensation expense |      |   | 17   |  | 16  
|                           |                                  |      |   |      |  |     
|                           | As adjusted                      |      | $ | 255  |  | 150 
|                           |                                  |      |   |      |  |     
|Basic earnings per share   |                                  |      |   |      |  |     
|                           | As reported                      |      | $ | .74  |  | .45 
|                           |                                  |      |   |      |  |     
|                           | As adjusted                      |      | $ | .69  |  | .41 
|                           |                                  |      |   |      |  |     
|Diluted earnings per share |                                  |      |   |      |  |     
|                           | As reported                      |      | $ | .73  |  | .45 
|                           |                                  |      |   |      |  |     
|                           | As adjusted                      |      | $ | .69  |  | .41 
|                           |                                  |      |   |      |  |     

40

---

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
2000, 2001 and 2002, respectively: dividend yield of one percent for each of the three years; expected volatility of 40, 48 and 34 percent; risk-free interest rates of 6.0, 5.2 and
4.6 percent and expected lives of seven years for 2000, six years for 2001 and five years for 2002.

We
also provide supplemental retirement benefits to eligible senior officers in the form of fixed stock units that settle for shares of our common stock on a
one-for-one basis. The compensation expense associated with the benefits is expensed over a four year vesting period. The aggregate expense under these plans totaled
$6 million, $8 million and $7 million in 2000, 2001 and 2002, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us 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 our estimates and assumptions.

New Accounting Standards

Effective January 1, 2002 we adopted FAS 142, "Goodwill and Other Intangible Assets." The rules require that goodwill and other intangible assets
with indefinite lives are not amortized, but are reviewed annually for impairment. We expect to receive future benefits from previously acquired goodwill and brands over an indefinite period of time
and therefore no longer amortize them. Our impairment reviews of goodwill and brands did not result in an impairment charge in 2002. As required by FAS 142, the results for the periods prior to
its adoption have not been restated. The reconciliations of previously reported net income and earnings per share to the amounts adjusted for the exclusion of goodwill and brand amortization net of
the related tax effect for the three years ended December 31 are as follows:

|                           |                                             | 2000 |   | 2001 |  | 2002
|-------------------------- | ------------------------------------------- | ---- | - | ---- |  | ----
|
|Net income                 |                                             |      |   |      |  |     
|                           | As reported                                 |      | $ | 272  |  | 166 
|                           | Goodwill and brand amortization, net of tax |      |   | 49   |  | 49  
|                           |                                             |      |   |      |  |     
|                           | As adjusted                                 |      | $ | 321  |  | 215 
|                           |                                             |      |   |      |  |     
|Basic earnings per share   |                                             |      |   |      |  |     
|                           | As reported                                 |      | $ | .74  |  | .45 
|                           |                                             |      |   |      |  |     
|                           | As adjusted                                 |      | $ | .87  |  | .58 
|                           |                                             |      |   |      |  |     
|Diluted earnings per share |                                             |      |   |      |  |     
|                           | As reported                                 |      | $ | .73  |  | .45 
|                           |                                             |      |   |      |  |     
|                           | As adjusted                                 |      | $ | .86  |  | .57 
|                           |                                             |      |   |      |  |     

In
response to a Financial Accounting Standards Board staff annoucement, and in accordance with the FASB's Emerging Issues Task Force Issue 01-14, "Income Statement
Characterization of Reimbursements Received for 'Out-of-Pocket' Expenses Incurred," effective January 1, 2002 we changed our method of reporting reimbursable costs
incurred on behalf of managed hotel properties and franchisees. Under the new method, we report reimbursements received from managed properties and franchisees as revenue and the costs incurred on
their behalf as expenses. These costs, which relate primarily to payroll costs at managed properties where we are the employer, are reflected in other revenue and expenses from managed and franchised
properties in the consolidated statements of income. Revenue and expenses for the 2000 and 2001 periods have been reclassified to conform with the presentation in the 2002 financial statements. These
reimbursements totaled $945 million, $943 million and $952 million in 2000, 2001 and 2002, respectively. Since the reimbursements are made based upon the costs incurred with no
added margin, the adoption of this guidance has no effect on our operating income, total or per share net income, cash flow or financial position.

41

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Effective
January 1, 2002, we adopted FAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The adoption of FAS 144 had no impact on
our financial statements.

In
November 2002, the FASB issued FASB Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN 45 requires that guarantees issued after December 31, 2002 are recorded as liabilities at fair value, with the offsetting entry recorded based on the circumstances
in which the guarantee was issued. Adoption of FIN 45 will have no impact on our historical financial statements as existing guarantees are not subject to the measurement provisions of FIN 45. The
impact on future financial statements will depend on the nature and extent of guarantees issued, but is not expected to have a material impact on us.

In
December 2002, the FASB issued FAS 148, "Accounting for Stock-Based CompensationTransition and Disclosurean amendment of FAS 123." This
statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. This statement also amends the disclosure
requirements of FAS 123 and Accounting Principles Board Opinion 28, "Interim Financial Reporting," to require prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based compensation and the effect of the method used on reported results. We have adopted the disclosure provisions of FAS 148, which require expanded disclosure
regarding stock-based compensation in the Summary of Significant Accounting Policies footnote to the consolidated financial statements. The expanded disclosure will be required in our quarterly
financial reports beginning in the first quarter of 2003.

ACQUISITIONS AND DISPOSITIONS

Acquisition of the Hilton Waikoloa Village

In May 2002, we purchased our partner's interest in the 1,240-room Hilton Waikoloa Village on Hawaii's Big Island, a property we manage and in
which we previously had an ownership interest of approximately 13%. We acquired the remaining 87% interest for approximately $155 million, consisting of $75 million in cash and
5.2 million shares of our common stock. The shares have been registered for resale with the Securities and Exchange Commission.

Asset Dispositions

During 2002, we entered into a $125 million facility with a wholly owned subsidiary of GE Capital for the sale of notes receivable originated by our
timeshare business. The sale of notes under the facility is non-recourse to us; however, we have provided a limited deficiency guarantee (which would be triggered as a result of certain
termination events) with a maximum liability equal to the greater of 5% of the purchaser's unamortized investment basis in the outstanding portfolio or 1.5% of the aggregate principal amount of notes
sold. We also have an option, but not the obligation, to repurchase defaulted notes from the purchaser. The facility allows for our participation in the future cash flow of sold notes receivable once
the purchaser has received 100% of the principal amount of the notes and a preferred return. Under a separate agreement, we will continue to service the notes for a market-based fee calculated on the
outstanding balance of the notes receivable sold. In 2002, we completed two sales of notes receivable under the facility, totaling approximately $119 million. These transactions resulted in a
gain of approximately $5 million, which is included in the net gain (loss) on asset dispositions in our consolidated statements of income. Our retained interest in notes receivable sold as of
December 31, 2002 is approximately $4 million.

Also
in 2002, we completed the sale of two owned, two leased and seven managed properties operating as Harrison Conference Centers for approximately $49 million. We recorded a
$16 million pre-tax book loss on the sale. However, the sale generated a capital gain for tax purposes, which enabled us to utilize capital loss tax carryforwards generated by the
sale of the Red Lion hotel chain in 2001. These carryforwards were fully reserved through a valuation allowance in

42

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prior
periods. The valuation allowance was reduced when evidence indicated it was more likely than not that the benefit would be realized, as was the case with the sale of these assets. The
transaction, including the impact of the reduction of the valuation allowance associated with the capital loss tax carryforwards and the reversal of book deferred tax balances no longer required,
resulted in a $16 million book tax benefit. Thus, on an after-tax basis, the sale had no impact on reported net income.

The
total pre-tax loss on asset dispositions of $14 million in 2002 represents the $11 million net loss on the aforementioned asset sales and a loss of
approximately $3 million primarily as a result of writing off the value assigned to several long-term management and franchise agreements which were terminated during the year.
Proceeds from asset sales in 2002 were used to reduce outstanding debt.

On
December 31, 2001, we sold the Red Lion hotel chain to WestCoast Hospitality Corporation through a sale of the capital stock of Red Lion Hotels, Inc. The Red Lion
portfolio consisted of 41 Red Lion hotels (eight owned, 11 leased and 22 franchised) and two Doubletree hotels (one owned and one leased) with a total of approximately 6,500 rooms. Total consideration
of approximately $51 million included approximately $21 million of cash and approximately $30 million in redeemable preferred stock of WestCoast. The preferred stock is in two
$15 million series, which pay preferred dividends of 7% and 10% annually. The preferred stock is accounted for as a cost basis investment in our consolidated financial statements.

Our
total pre-tax loss on asset dispositions was $44 million in 2001, $42 million of which was attributable to the Red Lion sale. As the Red Lion sale also
resulted in a large capital loss for tax purposes, we were able to carry back a portion of this loss to offset capital gains recorded in prior years. The transaction, including the impact of the tax
loss carrybacks, resulted in a $47 million book tax benefit. Thus, on an after-tax basis, the sale of Red Lion Hotels, Inc. capital stock resulted in a gain of approximately
$5 million.

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

IMPAIRMENT LOSS AND RELATED COSTS

Results in 2002 include a charge of $21 million for mold remediation in certain areas of the Hilton Hawaiian Village. The charge includes approximately
$17 million for remediation efforts at the property's Kalia Tower, which is included in our Hotel Ownership segment, and approximately $4 million for remediation efforts at the Lagoon
Tower timeshare development. The charge includes an estimated impairment loss for certain fixed assets as well as estimates of investigatory and remediation costs based upon an evaluation of currently
available facts. These costs do not include the capital expenditures required to refurnish the Kalia Tower guest rooms and make improvements to the Kalia and Lagoon Towers, which will be capitalized
and depreciated over the useful life of the assets. Actual costs incurred in future periods may vary from our estimates.

The
Lagoon Tower remains in operation. The Kalia Tower guest rooms, which were closed in July 2002, are expected to re-open in the third quarter of 2003.

We
are pursuing coverage under our property insurance policy, including coverage for any remediation costs and for business interruption. To date, the insurance carriers have not taken a
position as to whether insurance coverage is available. The charge incurred does not include the impact of such potential recoveries.

INVENTORIES

Included in inventories at December 31, 2001 and 2002 are unsold intervals at our vacation ownership properties of $132 million and
$124 million, respectively. Inventories are valued at the lower of cost or estimated net realizable value.

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INVESTMENTS AND NOTES RECEIVABLE

Investments and notes receivable at December 31, 2001 and 2002 are as follows:

|                                                                            |        | 2001 |     | 2002 |    
|--------------------------------------------------------------------------- | ------ | ---- | --- | ---- | ---
|
|Equity investments                                                          |        |      |     |      |    
|                                                                            | Hotels |      | $   | 259  |    
|                                                                            | Other  |      |     | 32   |    
|Timeshare notes receivable, with an average rate of 15.0%, due 2003 to 2012 |        |      | 177 |      | 96 
|Other notes receivable, with an average rate of 7.8%, due 2003 to 2015      |        |      | 88  |      | 73 
|Marketable securities                                                       |        |      | 29  |      | 21 
|Other investments                                                           |        |      | 35  |      | 31 
|                                                                            |        |      |     |      |    
|                                                                            |        |      | 620 |      | 506
|Less current portion of notes receivable                                    |        |      | (40 | )    | (16
|                                                                            |        |      |     |      |    
|Total                                                                       |        | $    | 580 |      | 490
|                                                                            |        |      |     |      |    

Notes
receivable are reflected net of allowances for uncollectable amounts of $17 million and $8 million as of December 31, 2001 and 2002, respectively.

Our
investments in unconsolidated affiliates accounted for under the equity method totaled $291 million and $285 million at December 31, 2001 and 2002, respectively,
representing approximately three percent of total assets at the end of each period. At December 31, 2002, our unconsolidated affiliates accounted for under the equity method had total assets of
approximately $1.91 billion and total debt of approximately $1.01 billion. Of the $1.01 billion of total debt, $971 million is secured solely by the affiliate's assets or
is guaranteed by other partners without recourse to us.

PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2001 and 2002 are as follows:

|                                      |  | 2001 |        | 2002 |       
|------------------------------------- |  | ---- | ------ | ---- | ------
|
|Land                                  |  | $    | 568    |      | 561   
|Buildings and leasehold improvements  |  |      | 3,474  |      | 3,698 
|Furniture and equipment               |  |      | 876    |      | 929   
|Property held for sale or development |  |      | 43     |      | 40    
|Construction in progress              |  |      | 104    |      | 61    
|                                      |  |      |        |      |       
|                                      |  |      | 5,065  |      | 5,289 
|Less accumulated depreciation         |  |      | (1,154 | )    | (1,318
|                                      |  |      |        |      |       
|Total                                 |  | $    | 3,911  |      | 3,971 
|                                      |  |      |        |      |       

ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses at December 31, 2001 and 2002 are as follows:

|                                  |  | 2001 |     | 2002
|--------------------------------- |  | ---- | --- | ----
|
|Accounts and notes payable        |  | $    | 129 |     
|Accrued compensation and benefits |  |      | 125 |     
|Deposits                          |  |      | 19  |     
|Accrued property tax              |  |      | 33  |     
|Accrued interest                  |  |      | 49  |     
|Other accrued expenses            |  |      | 178 |     
|                                  |  |      |     |     
|Total                             |  | $    | 533 |     
|                                  |  |      |     |     

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LONG-TERM DEBT

Long-term debt at December 31, 2001 and 2002 is as follows:

|                                                                     |  | 2001 |       | 2002 |      
|-------------------------------------------------------------------- |  | ---- | ----- | ---- | -----
|
|Industrial development revenue bonds at adjustable rates, due 2015   |  | $    | 82    |      | 82   
|Senior notes, with an average rate of 7.3%, due 2007 to 2031(1)      |  |      | 1,935 |      | 2,050
|7% Senior notes, due 2004(2)                                         |  |      | 625   |      | 325  
|Mortgage notes, 6.0% to 8.6%, due 2006 to 2022(1)                    |  |      | 357   |      | 353  
|7.95% Collateralized borrowings, due 2010                            |  |      | 493   |      | 486  
|Chilean inflation-indexed note, effective rate of 7.65%, due 2009(1) |  |      | 105   |      | 100  
|5% Convertible subordinated notes due 2006                           |  |      | 496   |      | 497  
|Revolving loans                                                      |  |      | 1,220 |      | 670  
|Other                                                                |  |      | 2     |      | 2    
|                                                                     |  |      |       |      |      
|                                                                     |  |      | 5,315 |      | 4,565
|Less current maturities                                              |  |      | (365  | )    | (11  
|                                                                     |  |      |       |      |      
|Net long-term debt                                                   |  | $    | 4,950 |      | 4,554
|                                                                     |  |      |       |      |      

---

Interest
paid, net of amounts capitalized, was $402 million, $324 million and $291 million in 2000, 2001 and 2002, respectively. Capitalized interest totaled
$9 million, $10 million and $5 million in 2000, 2001 and 2002, respectively.

Debt
maturities are as follows (in millions):

|2003       |  | $ | 11   
|---------- |  | - | -----
|2004       |  |   | 1,007
|2005       |  |   | 13   
|2006       |  |   | 547  
|2007       |  |   | 456  
|Thereafter |  |   | 2,531
|           |  |  
|Total      |  | $ | 4,565
|           |  |  

We
currently have two revolving credit facilities. In June 1998, we entered into a five-year $500 million revolving credit facility to acquire the remaining 50%
interest in the Hilton Hawaiian Village. In 2001, we reduced the commitment under the $500 million revolver to $425 million. As of December 31, 2002, approximately
$375 million of borrowings were outstanding under the $425 million revolver, which bears interest at the London Interbank Offered Rate (LIBOR) plus a spread based on our public debt
rating or a leverage ratio. The all-in borrowing cost under this facility was approximately LIBOR plus 87.5 basis points as of December 31, 2002. Although the $425 million
revolver expires in June 2003, we continue to classify the outstanding borrowings as long-term debt based on our ability and intent to refinance the obligation. In
November 1999, we 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. The 364-day revolver has been extended through November 2003 and the commitment has been reduced to $150 million. In December 2002, we reduced the commitment
under the $1.4 billion revolver to $1.2 billion. As of December 31, 2002, $295 million of borrowings were outstanding under the $1.2 billion revolver. The
364-day revolver was undrawn at December 31, 2002.

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Borrowings
under this facility bear interest at LIBOR plus a spread based on our public debt rating or leverage ratio. The all-in borrowing cost under this facility was approximately LIBOR
plus 135 basis points at December 31, 2002. Total revolving debt capacity of approximately $960 million was available to us at December 31, 2002.

In
October 1997, we filed a shelf registration statement with the Securities and Exchange Commission registering up to $2.5 billion in debt or equity securities. In
November 2002, we issued $375 million of 7.625% Senior Notes due 2012. The net proceeds from the issuance were used to pay down outstanding amounts under the 1999 revolving credit
facility. At December 31, 2002, available financing under the shelf totaled $825 million. The terms of any additional securities offered under the shelf will be determined by market
conditions at the time of issuance.

In
connection with the spin-off in 1998 of our gaming business to a new corporation named Park Place Entertainment Corporation, Park Place assumed and agreed to pay 100% of
the amount of each payment required to be made by us under the terms of the indentures governing our $300 million 7.375% Senior Notes due 2002 and our $325 million 7% Senior Notes due
2004. Because these notes remain our legal obligation, they are included in our 2001 debt balance and a receivable from Park Place in an equal amount is included in our 2001 consolidated balance
sheet. The $300 million 7.375% Senior Notes, which were classified as current maturities of long-term debt with the offsetting receivable classified in other current assets at
December 31, 2001, were repaid as scheduled by Park Place in June 2002. The $325 million 7% Senior Notes due 2004 remain in our 2002 debt balance and a receivable from Park Place
in an equal amount is included in our 2002 consolidated balance sheet. We remain obligated to make any payment Park Place fails to make under these notes.

Our
5% convertible subordinated notes due 2006 are convertible at any time into our common stock at a conversion price of $22.17 per share. However, the market price of our common stock
was substantially below the conversion price as of December 31, 2002.

In
November 2002, we entered into a derivative contract which swaps the fixed interest payments on our $375 million 7.95% Senior Notes due 2007 to a floating interest rate
equal to six-month LIBOR plus 415 basis points.In connection with our $100 million 7.43% bonds due 2009 denominated in Chilean pesos, we have a derivative contract which swaps the
principal payment to a fixed U.S. dollar amount of $100 million with fixed interest payments at 7.65% of that amount. We also have a derivative contract which swaps the floating rate mortgage
of one of our majority owned hotels, which had a principal balance of $36 million at December 31, 2002, to a fixed interest rate. As of December 31, 2002, approximately 27% of our
long-term debt (excluding the Park Place allocated debt and including the impact of interest rate swaps) was floating rate debt.

Provisions
under various loan agreements require us to comply with certain covenants which include limiting the amount of outstanding indebtedness. Our revolving credit facilities
contain two significant financial covenants: a leverage ratio and a debt service coverage ratio. We are in compliance with our loan covenants as of December 31, 2002.

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FINANCIAL INSTRUMENTS

The estimated fair values of our financial instruments at December 31, 2001 and 2002 are as follows:

|                                                         |  | 2001 |        | 2002 |       
|-------------------------------------------------------- |  | ---- | ------ | ---- | ------
|
|
|Cash and equivalents and long-term marketable securities |  | $    | 64     |      | 64    
|Timeshare notes receivable (including current portion)   |  |      | 177    |      | 184   
|Other notes receivable (including current portion)       |  |      | 88     |      | 89    
|Long-term debt (including current maturities)            |  |      | (5,315 | )    | (5,196
|Derivative instruments                                   |  |      | (2     | )    | (2    

Cash Equivalents and Long-Term Marketable Securities

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

Timeshare and Other Notes Receivable

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

Long-Term Debt

The 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 us
for debt of the same remaining maturities.

Derivative Instruments

The fair value of derivative instruments is based on the present value of estimated future cash flow, including the use of foreign currency forward exchange
rates, as appropriate.

INCOME TAXES

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

|         |                          | 2000 |     | 2001 |     | 2002 |    
|-------- | ------------------------ | ---- | --- | ---- | --- | ---- | ---
|
|Current  |                          |      |     |      |     |      |    
|         | Federal                  |      | $   | 169  |     | 83   |    
|         | State, foreign and local |      |     | 33   |     | 34   |    
|         |                          |      |     |      |     |      |    
|         |                          |      | 202 |      | 117 |      | 149
|Deferred |                          |      | (2  | )    | (40 | )    | (68
|         |                          |      |     |      |     |      |    
|Total    |                          | $    | 200 |      | 77  |      | 81 
|         |                          |      |     |      |     |      |    

During
2000, 2001 and 2002, we paid income taxes of $138 million, $150 million and $58 million, respectively, net of refunds received.

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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, 2001 and
2002 are as follows:

|                           |                                          | 2001 |      | 2002 |     
|-------------------------- | ---------------------------------------- | ---- | ---- | ---- | ----
|
|Deferred tax assets        |                                          |      |      |      |     
|                           | Compensation                             |      | $    | 88   |     
|                           | Deferred income                          |      |      | 30   |     
|                           | Insurance                                |      |      | 34   |     
|                           | Business combination expense             |      |      | 5    |     
|                           | Foreign taxes                            |      |      | 2    |     
|                           | Franchise system funds                   |      |      | 4    |     
|                           | Reserves                                 |      |      | 7    |     
|                           | NOL carryforwards, expiring 2005 to 2008 |      |      | 2    |     
|                           | Capital loss carryforward, expiring 2006 |      |      | 47   |     
|                           |                                          |      |      |      |     
|                           |                                          |      | 219  |      | 202 
|Valuation allowance        |                                          |      | (51  | )    | (52 
|                           |                                          |      |      |      |     
|                           |                                          |      | 168  |      | 150 
|                           |                                          |      |      |      |     
|Deferred tax liabilities   |                                          |      |      |      |     
|                           | Basis difference                         |      |      | (243 | )   
|                           | Property                                 |      |      | (213 | )   
|                           | Investments                              |      |      | (123 | )   
|                           | Brand value                              |      |      | (390 | )   
|                           | Other                                    |      |      | (9   | )   
|                           |                                          |      |      |      |     
|                           |                                          |      | (978 | )    | (914
|                           |                                          |      |      |      |     
|Net deferred tax liability |                                          | $    | (810 | )    | (764
|                           |                                          |      |      |      |     

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

|                              |                                                           | 2000 |      | 2001 |       | 2002 |     
|----------------------------- | --------------------------------------------------------- | ---- | ---- | ---- | ----- | ---- | ----
|Federal income tax rate       |                                                           | 35.0 | %    | 35.0 |       | 35.0 |     
|Increase (reduction) in taxes |                                                           |      |      |      |       |      |     
|                              | State and local income taxes, net of Federal tax benefits |      | 4.2  |      | 3.9   |      | 1.5 
|                              | Foreign taxes, net                                        |      | 2.3  |      | 3.1   |      | 2.0 
|                              | Goodwill                                                  |      | 2.4  |      | 4.7   |      |    
|                              | Federal income tax credits                                |      | (2.7 | )    | (4.4  | )    | (2.9
|                              | Disposition of Red Lion Hotels, Inc. stock                |      |     |      | (13.4 | )    |    
|                              | Change in deferred tax asset valuation allowance          |      |     |      |      |      | (8.4
|                              | Other                                                     |      | .6   |      | 1.9   |      | 1.2 
|                              |                                                           |      |      |      |       |      |     
|Effective tax rate            |                                                           | 41.8 | %    | 30.8 |       | 28.4 |     
|                              |                                                           |      |      |      |       |      |     

48

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Our
tax provision, deferred taxes and effective rate in 2002 were impacted by asset sales, which generated capital gains for tax purposes, enabling us to utilize capital loss tax
carryforwards generated by the Red Lion sale in 2001. The reduction of the valuation allowance for capital loss tax carryforwards and the reversal of book deferred tax balances no longer required
resulted in a reduction of the tax provision and effective rate in 2002. Also in 2002, our tax provision, deferred taxes and effective rate were impacted by higher than expected utilization of capital
loss tax carryforwards on our 2001 Federal tax return. This reduction in the valuation allowance for capital loss tax carryforwards also resulted in a reduction of the tax provision and effective rate
for 2002. Excluding the impact of asset sales and the impact of the higher utilization of capital loss tax carryforwards on our 2002 Federal tax return, our effective rate in 2002 was 37.3%.

Capital
loss tax carryforwards available to offset future capital gains are recorded as deferred tax assets and are fully reserved until evidence indicates it is more likely than not
that the benefit will be realized. The deferred tax assets related to capital loss tax carryforwards are fully reserved at December 31, 2002.

Our
tax provision, deferred taxes and effective rate in 2001 were impacted by the sale of the Red Lion Hotels, Inc. capital stock on December 31, 2001. The sale resulted in
a large capital loss for tax purposes. A portion of the capital loss was carried back to offset capital gains recorded in prior years, resulting in a reduction of the tax provision and effective tax
rate in 2001. Excluding the impact of the Red Lion sale, our effective tax rate in 2001 was 42.5%.

STOCKHOLDERS' EQUITY

Five hundred million shares of common stock with a par value of $2.50 per share are authorized, of which 379 million and 384 million were issued at
December 31, 2001 and 2002, respectively, including treasury shares of ten million in 2001 and eight million in 2002. We have 25 million shares of preferred stock with a par value of
$1.00 per share authorized for issuance. No preferred shares were issued or outstanding at December 31, 2001 and 2002.

To
reflect the spin-off of Park Place, the book value of net assets of our discontinued gaming operations as of December 31, 1998 was charged against our retained
earnings and additional paid-in capital. During 2000, spin-off adjustments totaling $8 million were recorded through retained earnings.

Our
Board of Directors has approved our repurchase of up to 20 million shares of our common stock pursuant to a stock repurchase program. The timing of stock purchases are made at
the discretion of management. There were no shares repurchased during 2000, 2001 or 2002. As of December 31, 2002, 9.3 million shares remained authorized for repurchase under this
authority.

We
have a Preferred Share Purchase Rights Plan under which a right is attached to each share of our common stock. The rights may only become exercisable under certain circumstances
involving actual or potential acquisitions of 20% or more of our common stock by certain people or groups. Depending on the circumstances, if the rights become exercisable, the holder may be entitled
to purchase units of our junior participating preferred stock, shares of our 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, 2002, 55 million shares of common stock were reserved for the exercise of options under our stock incentive plans. Options may be
granted to salaried officers, directors and other key employees to purchase our 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,
2002.

49

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A
summary of the status of our stock option plans as of December 31, 2000, 2001 and 2002, 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, 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          |           
|                             |            |                                 |            |                                    |   |                     |       |                     |           
|                             | Granted    |                                 |            | 10.64-12.22                        |   |                     | 12.20 |                     | 5,986,300 
|                             | Exercised  |                                 |            | 4.68-11.08                         |   |                     | 9.52  |                     | (335,206  
|                             | Cancelled  |                                 |            | 6.66-20.56                         |   |                     | 13.66 |                     | (1,402,975
|                             |            |                                 |            |                                    |   |                     |       |                     |           
|Balance at December 31, 2001 |            |                                 | 6.66-27.53 |                                    |   | 13.44               |       | 32,531,136          |           
|                             |            |                                 |            |                                    |   |                     |       |                     |           
|                             | Granted    |                                 |            | 11.85-13.95                        |   |                     | 11.86 |                     | 7,469,400 
|                             | Exercised  |                                 |            | 6.66-14.84                         |   |                     | 9.86  |                     | (1,455,096
|                             | Cancelled  |                                 |            | 6.66-20.66                         |   |                     | 12.40 |                     | (1,654,675
|                             |            |                                 |            |                                    |   |                     |       |                     |           
|Balance at December 31, 2002 |            | $                               | 6.66-27.53 |                                    | $ | 13.33               |       | 36,890,765          |           
|                             |            |                                 |            |                                    |   |                     |       |                     |           

The
following table summarizes information about stock options outstanding at December 31, 2002:

|                |  | Options Outstanding |  | Options Exercisable
|--------------- |  | ------------------- |  | -------------------
|
|$  6.66 - 10.00 |  | 5,352,800           |  | 6.8                
|10.48 - 11.85   |  | 8,162,068           |  | 8.3                
|11.88 - 13.14   |  | 10,930,425          |  | 5.0                
|13.63 - 27.53   |  | 12,445,472          |  | 5.4                
|                |  |                     |  |                    
|$  6.66 - 27.53 |  | 36,890,765          |  | 6.1                
|                |  |                     |  |                    

We
also have an Employee Stock Purchase Plan by which we are authorized to issue up to two million shares of common stock to our full-time employees. Under the terms of the
Plan, employees can elect to have a percentage of their earnings withheld to purchase our common stock. Effective January 1, 2003, the Employee Stock Purchase Plan has been suspended
indefinitely.

EMPLOYEE BENEFIT PLANS

We have various employee investment plans whereby we contribute certain percentages of employee contributions. The aggregate expense under these plans totaled
$10 million per year in 2000 and 2001 and $11 million in 2002.

Certain
employees are covered by union sponsored, collectively bargained multi-employer pension plans. We contributed and charged to expense $14 million in 2000 and
$18 million per year in both 2001 and 2002 for such plans. Information from the plans' administrators is not sufficient to permit us to determine our share, if any, of unfunded vested benefits.

In
addition, many of our non-union employees are covered by a noncontributory retirement plan (Basic Plan). We also have 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, 2001 and 2002, these plans have assets of $249 million and $253 million, respectively, and a projected benefit obligation of $248 million and

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$257 million,
respectively. Accrued pension cost totaled $14 million and $11 million at December 31, 2001 and 2002, respectively. Pension expense under the Basic and
Supplemental Plans for the years ended December 31, 2000, 2001 and 2002 was not significant.

POST-RETIREMENT BENEFITS OTHER THAN PENSIONS

We terminated our post-retirement life insurance programs effective December 31, 2000. As a result, we recorded an $8 million benefit in
the fourth quarter of 2000. The annual cost of these benefits provided prior to termination of the programs was not significant.

SEGMENT INFORMATION

Our operations consist of three reportable segments which are based on similar products or services: Hotel Ownership, Managing and Franchising, and Timeshare. The
Hotel Ownership segment derives revenue primarily from owned, majority owned and leased hotel properties and equity earnings from unconsolidated affiliates (primarily hotel joint ventures). The
Managing and Franchising segment provides services including hotel management and licensing of our family of brands to franchisees. This segment generates its revenue from fees charged to hotel
owners. The Timeshare segment consists of multi-unit timeshare resorts. This segment produces its results from the sale and financing of timeshare intervals and operating timeshare
resorts. Segment results are presented net of consolidating eliminations for fee based services at the operating income level, without allocating corporate expenses, which is the basis used by
management to evaluate segment performance.

Segment
results for the three years ended December 31 are as follows:

|                       |                                          | 2000 |       | 2001  |       | 2002  |      
|---------------------- | ---------------------------------------- | ---- | ----- | ----- | ----- | ----- | -----
|
|Revenue                |                                          |      |       |       |       |       |      
|                       | Hotel Ownership                          |      | $     | 2,930 |       | 2,388 |      
|                       | Managing and Franchising                 |      |       | 1,295 |       | 1,285 |      
|                       | Timeshare                                |      |       | 171   |       | 320   |      
|                       |                                          |      |       |       |       |       |      
|Total revenue          |                                          | $    | 4,396 |       | 3,993 |       | 3,847
|                       |                                          |      |       |       |       |       |      
|Operating Income       |                                          |      |       |       |       |       |      
|                       | Hotel Ownership                          |      | $     | 716   |       | 470   |      
|                       | Managing and Franchising                 |      |       | 302   |       | 290   |      
|                       | Timeshare                                |      |       | 30    |       | 86    |      
|                       | Corporate and other unallocated expenses |      |       | (218  | )     | (214  | )    
|                       |                                          |      |       |       |       |       |      
|Total operating income |                                          | $    | 830   |       | 632   |       | 603  
|                       |                                          |      |       |       |       |       |      

Segment
assets as of December 31 are as follows:

|             |                          | 2001 |       | 2002 
|------------ | ------------------------ | ---- | ----- | -----
|
|Assets       |                          |      |       |      
|             | Hotel Ownership          |      | $     | 4,542
|             | Managing and Franchising |      |       | 668  
|             | Timeshare                |      |       | 333  
|             | Corporate and other      |      |       | 3,242
|             |                          |      |       |      
|Total assets |                          | $    | 8,785 |      
|             |                          |      |       |      

At
December 31, 2002, the Hotel Ownership segment includes goodwill and brand values totaling $617 million and $98 million, respectively, and the Managing and
Franchising segment includes goodwill and brand values totaling $656 million and $872 million, respectively. Prior to the adoption of FAS 142 in 2002, goodwill and brands were not
allocated among the segments.

51

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LEASES

We lease hotel properties and land under operating leases. As of December 31, 2002, we leased seven hotels. Our hotel leases require the payment of rent
equal to the greater of a minimum rent or percentage rent based on a percentage of revenue or income, and expire through December 2020, with varying renewal options. Our land leases represent
ground leases for certain owned hotels and, in addition to minimum rental payments, may require the payment of additional rents based on varying percentages of revenue or income. Total rent expense
incurred under our leases was $144 million, $57 million and $55 million in 2000, 2001 and 2002, respectively, which included minimum rent payments
of $67 million, $36 million and $37 million in 2000, 2001 and 2002, respectively. Minimum lease commitments under noncancelable operating leases total approximately
$34 million in 2003, $35 million in 2004, $34 million in 2005, $32 million in 2006 and $30 million in 2007, with an aggregate commitment of $722 million
through 2065.

COMMITMENTS AND CONTINGENCIES

We have established franchise financing programs with third party lenders to support the growth of our Hilton Garden Inn, Homewood Suites by Hilton, Hampton and
Embassy Suites hotels. As of December 31, 2002, we have provided guarantees of $53 million on loans outstanding under the programs. In addition, we have guaranteed $60 million of
debt and other obligations of unconsolidated affiliates and third parties, bringing our total guarantees to approximately $113 million. Our outstanding guarantees have terms of one to ten
years. We also have commitments under letters of credit totaling $61 million as of December 31, 2002. We believe it is unlikely that material payments will be required under these
agreements.

In
addition, we remain a guarantor on 12 operating leases sold to WestCoast Hospitality Corporation as part of the Red Lion sale on December 31, 2001. However, we have entered
into an indemnification and reimbursement agreement with WestCoast, which requires WestCoast to reimburse us for any costs and expenses incurred in connection with the guarantee. The minimum lease
commitment under these 12 operating leases totals approximately $5 million annually through 2020.

We
have also provided performance guarantees to certain owners of hotels we operate under management contracts. Most of these guarantees allow us to terminate the contract rather than
fund shortfalls if specified performance levels are not achieved. In limited cases, we are obligated to fund performance shortfalls. At December 31, 2002, we have two contracts containing
performance guarantees with possible cash outlays totaling approximately $215 million through 2012. Funding under these performance guarantees was not significant in 2002. We anticipate that
the future operating performance levels of these hotels will be substantially achieved, therefore funding under these guarantees is expected to be limited. In addition, we do not anticipate losing any
significant management contracts in 2003.

Our
consolidated financial statements at December 31, 2002 do not include any liabilities for potential obligations under our outstanding guarantees. Under certain circumstances,
we may be obligated to provide additional guarantees or letters of credit totaling $76 million, including future construction loan guarantees of an unconsolidated joint venture totaling
$43 million at December 31, 2002.

At
December 31, 2002, we had contractual commitments of approximately $51 million for construction and renovation projects at certain owned and majority owned properties.

We
are subject to litigation in the ordinary course of our business. Management believes the resolution of pending lawsuits will not have a material adverse effect on our financial
position or results of operations.

52

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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 sheet of Hilton Hotels Corporation, a Delaware corporation, and subsidiaries (the Company) as of
December 31, 2002, and the related consolidated statements of income, stockholders' equity, and cash flow for the year then ended. 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 audit. The consolidated financial statements of the Company as of December 31, 2001
and for the two years then ended were audited by other auditors who have ceased operations and whose report dated January 29, 2002 expressed an unqualified opinion on those statements before
the revisions described in the "Summary of Significant Accounting PoliciesNew Accounting Standards" note to the consolidated financial statements.

We
conducted our audit 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 audit provides a reasonable basis for our opinion.

In
our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Hilton Hotels Corporation and subsidiaries as
of December 31, 2002, and the consolidated results of their operations and their cash flow for the year then ended, in conformity with accounting principles generally accepted in the United
States.

As
discussed above, the consolidated financial statements of the Company as of December 31, 2001, and for the two-year period then ended were audited by other auditors
who have ceased operations. These financial statements have been revised to include the following:



However,
we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 financial statements of the Company other than with respect to such revisions and disclosures
and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 financial statements taken as a whole.

/s/
Ernst & Young LLP
Ernst & Young LLP
Los Angeles, California
January 27, 2003

53

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PREDECESSOR AUDITOR'S REPORT

THIS REPORT IS A COPY OF THE REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP. THIS REPORT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP,
NOR HAS ARTHUR ANDERSEN LLP PROVIDED ITS CONSENT TO THE INCLUSION OF THEIR REPORT IN OUR FORM 10-K.

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, 2000
and 2001, and the related consolidated statements of income, stockholders' equity and cash flow for each of the three years in the period ended December 31, 2001. 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, 2000 and 2001 and the results of their operations and their cash flow for each of the three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.

/s/
Arthur Andersen LLP
Arthur Andersen LLP
Los Angeles, California
January 29, 2002

54

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SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)

Quarterly Financial Data

|                 |  | 1st
Quarter |       | 2nd
Quarter |       | 3rd
Quarter |      | 4th
Quarter |      | Total
|---------------- |  | ----------- | ----- | ----------- | ----- | ----------- | ---- | ----------- | ---- | -----
|
|2002             |  |             |       |             |       |             |      |             |      |      
|Revenue          |  | $           | 921   |             | 1,035 |             | 934  |             | 957  |      
|Operating income |  |             | 137   |             | 203   |             | 127  |             | 136  |      
|Net income       |  |             | 34    |             | 76    |             | 48   |             | 40   |      
|Basic EPS        |  | $           | ..09  |             | ..20  |             | ..13 |             | ..11 |      
|                 |  |             |       |             |       |             |      |             |      |      
|Diluted EPS      |  | $           | .09   |             | .20   |             | .13  |             | .11  |      
|                 |  |             |       |             |       |             |      |             |      |      
|2001             |  |             |       |             |       |             |      |             |      |      
|Revenue          |  | $           | 1,070 |             | 1,094 |             | 942  |             | 887  |      
|Operating income |  |             | 188   |             | 238   |             | 127  |             | 79   |      
|Net income       |  |             | 55    |             | 86    |             | 21   |             | 4    |      
|Basic EPS        |  | $           | ..15  |             | ..23  |             | ..06 |             | ..01 |      
|                 |  |             |       |             |       |             |      |             |      |      
|Diluted EPS      |  | $           | .15   |             | .23   |             | .06  |             | .01  |      
|                 |  |             |       |             |       |             |      |             |      |      

As
of December 31, 2002 there were approximately 16,000 stockholders of record.

55

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SUPPLEMENTARY FINANCIAL INFORMATION (unaudited)

General Information

|                                                            |                                        | Year ended December 31, |      
|----------------------------------------------------------- | -------------------------------------- | ----------------------- | -----
|
|Reconciliation of EBITDA to operating income (in millions): |                                        |                         |      
|EBITDA(1)                                                   |                                        | $                       | 1,271
|                                                            | Depreciation and amortization(2)       |                         |      
|                                                            | Pre-opening expense                    |                         |      
|                                                            | Non-cash items                         |                         |      
|                                                            | Operating interest and dividend income |                         |      
|                                                            |                                        |                         |      
|Operating income                                            |                                        | $                       | 830  
|                                                            |                                        |                         |      

|Year ended December 31, 2002                      |                        | Occupancy |          | Average Rate |        | RevPAR |   
|------------------------------------------------- | ---------------------- | --------- | -------- | ------------ | ------ | ------ | --
|Comparable System-Wide Statistical Information(3) |                        |           |          |              |        |        |   
|Hilton                                            |                        | 68.1      | %        | $            | 127.16 |        | $ 
|                                                  | Change from prior year |           | .7 pts   |              |        | (3.5   | )%
|Hilton Garden Inn                                 |                        | 66.1      | %        | $            | 96.87  |        | $ 
|                                                  | Change from prior year |           | 2.1 pts  |              |        | (4.3   | )%
|Doubletree                                        |                        | 66.1      | %        | $            | 101.01 |        | $ 
|                                                  | Change from prior year |           | (.5) pts |              |        | (4.8   | )%
|Embassy Suites                                    |                        | 69.3      | %        | $            | 120.00 |        | $ 
|                                                  | Change from prior year |           | 1.3 pts  |              |        | (4.9   | )%
|Homewood Suites by Hilton                         |                        | 72.7      | %        | $            | 94.30  |        | $ 
|                                                  | Change from prior year |           | 1.8 pts  |              |        | (4.6   | )%
|Hampton                                           |                        | 67.1      | %        | $            | 77.01  |        | $ 
|                                                  | Change from prior year |           | .4 pts   |              |        | (.3    | )%
|Other                                             |                        | 61.3      | %        | $            | 124.87 |        | $ 
|                                                  | Change from prior year |           | 1.6 pts  |              |        | (10.0  | )%

---



56

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FIVE YEAR SUMMARY

|                            |                                  | Year ended December 31,               
|--------------------------- | -------------------------------- | --------------------------------------
|
|
|Operating Data              |                                  |                                       
|                            | Revenue                          |                                       
|                            | Income                           |                                       
|                            |                                  | Income from continuing operations     
|                            |                                  | Discontinued gaming operations        
|                            |                                  | Cumulative effect of accounting change
|                            |                                  |                                       
|                            |                                  |                                       
|                            |                                  |                                       
|                            | Basic Earnings Per Share         |                                       
|                            |                                  | Income from continuing operations     
|                            |                                  | Discontinued gaming operations        
|                            |                                  | Cumulative effect of accounting change
|                            |                                  |                                       
|                            |                                  |                                       
|                            |                                  |                                       
|                            | Diluted Earnings Per Share       |                                       
|                            |                                  | Income from continuing operations     
|                            |                                  | Discontinued gaming operations        
|                            |                                  | Cumulative effect of accounting change
|                            |                                  |                                       
|                            |                                  |                                       
|                            |                                  |                                       
|                            | Cash Dividends Per Common Share  |                                       
|Other Information           |                                  |                                       
|                            | Number of Properties at Year End |                                       
|                            | Owned(1)                         |                                       
|                            | Leased                           |                                       
|                            | Joint venture                    |                                       
|                            | Managed                          |                                       
|                            | Franchised                       |                                       
|                            | Timeshare                        |                                       
|                            |                                  |                                       
|Total                       |                                  |                                       
|                            |                                  |                                       
|Available Rooms at Year End |                                  |                                       
|                            | Owned(1)                         |                                       
|                            | Leased                           |                                       
|                            | Joint venture                    |                                       
|                            | Managed                          |                                       
|                            | Franchised                       |                                       
|                            | Timeshare                        |                                       
|                            |                                  |                                       
|Total                       |                                  |                                       
|                            |                                  |                                       

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