**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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FORM 10-K

**ý**                                  ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe fiscal year ended December 31, 2004**

**OR**

**o**                                  TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from ______________ to ______________**

**CommissionFile Number 1-3427**

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HILTON HOTELS CORPORATION

(Exact Name of Registrantas Specified in its Charter)

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

 

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

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

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

 

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

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.   Yesx  No o

Indicate by check markwhether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Act).   Yes x  No o

Based upon the June 30,2004, New York Stock Exchange closing price of $18.66 per share, the aggregatemarket value of the Registrant’s outstanding Common Stock held bynon-affiliates of the Registrant was approximately $6.6 billion. There were384,527,003 and 384,714,412 sharesof Common Stock outstanding as of June 30, 2004 and February 28,2005, respectively.

**DOCUMENTSINCORPORATED BY REFERENCE**

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

 

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**TABLEOF CONTENTS**
|                                                                                                        | ** **                                                                                      | **Page No.** |
|--------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------|-------------------|
| **PART I**                                                                                        |                                                                                            | 1                 |
| **Item  1.**                                                                                           | **Business**                                                                                    |              | 1 |
| General Information                                                                                    |                                                                                            | 1                 |
| Operations                                                                                             |                                                                                            | 2                 |
| Additional Information                                                                                 |                                                                                            | 11                |
| **Item 2.**                                                                                            | **Properties**                                                                                  |              | 18 |
| **Item 3.**                                                                                            | **Legal Proceedings**                                                                           |              | 18 |
| **Item 4.**                                                                                            | **Submission of Matters to a  Vote of Security Holders**                                        |              | 18 |
| Executive Officers of the  Company                                                                     |                                                                                            | 19                |
| **PART II**                                                                                       |                                                                                            | 20                |
| **Item 5.**                                                                                            | **Market for Registrant’s  Common Equity and Related Stockholder Matters**                 |              | 20 |
| Rights Agreement                                                                                       |                                                                                            | 20                |
| Stock Repurchases                                                                                      |                                                                                            | 21                |
| **Item 6.**                                                                                            | **Selected Financial Data**                                                                     |              | 22 |
| **Item 7.**                                                                                            | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations** |              | 23 |
| Overview                                                                                               |                                                                                            | 23                |
| Critical  Accounting Policies and Estimates                                                            |                                                                                            | 24                |
| Development and  Capital Spending                                                                      |                                                                                            | 26                |
| Liquidity and Capital  Resources                                                                       |                                                                                            | 28                |
| Results of  Operations—Fiscal  2004 Compared with Fiscal 2003                                     |                                                                                            | 34                |
| Results of  Operations—Fiscal  2003 Compared with Fiscal 2002                                     |                                                                                            | 38                |
| Other  Matters                                                                                         |                                                                                            | 41                |
| **Item 7A.**                                                                                           | **Quantitative and Qualitative  Disclosures About Market Risk**                                 |              | 44 |
| **Item 8.**                                                                                            | **Financial Statements and  Supplementary Data**                                                |              | 46 |
| Consolidated  Statements of Income                                                                     |                                                                                            | 46                |
| Consolidated Balance Sheets                                                                            |                                                                                            | 47                |
| Consolidated  Statements of Cash Flow                                                                  |                                                                                            | 48                |
| Consolidated  Statements of Stockholders’ Equity                                                  |                                                                                            | 49                |
| Notes  to Consolidated Financial Statements                                                            |                                                                                            | 50                |
| Report  of Independent Registered Public Accounting Firm                                               |                                                                                            | 76                |
| Report  of Independent Registered Public Accounting Firm on Internal Control over  Financial Reporting |                                                                                            | 77                |
| Supplementary  Financial Information (Unaudited)                                                       |                                                                                            | 78                |
| Five Year Summary                                                                                      |                                                                                            | 79                |

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| **Item 9.**                                                            | **Changes in and Disagreements  with Accountants on Accounting and Financial Disclosure** |   | 80 |
|------------------------------------------------------------------------|-------------------------------------------------------------------------------------------|--------|----|
| **Item  9A.**                                                          | **Controls  and Procedures**                                                              |   | 80 |
| Evaluation  of Disclosure Controls and Procedures                      |                                                                                      | 80     |
| Management’s  Report on Internal Control over Financial Reporting |                                                                                      | 80     |
| **Item 9B.**                                                           | **Other Information**                                                                     |   | 81 |
| **PART III**                                                      |                                                                                      | 81     |
| **Item 10.**                                                           | **Directors and Executive  Officers of the Registrant**                                   |   | 81 |
| **Item 11.**                                                           | **Executive Compensation**                                                                |   | 81 |
| **Item 12.**                                                           | **Security Ownership of  Certain Beneficial Owners and Management**                       |   | 81 |
| Equity Compensation Plan  Information                                  |                                                                                      | 82     |
| **Item 13.**                                                           | **Certain Relationships and  Related Transactions**                                       |   | 83 |
| **Item 14.**                                                           | **Principal Accounting Fees  and Services**                                               |   | 83 |
| **PART IV**                                                       |                                                                                      | 83     |
| **Item 15.**                                                           | **Exhibits and Financial  Statement Schedules**                                           |   | 83 |
| (a) Index to Financial  Statements                                |                                                                                      | 83     |
| (b) Exhibits                                                      |                                                                                      | 83     |
| Signatures                                                             |                                                                                      | 84     |
| Index to Exhibits                                                      |                                                                                      | 85     |

 

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**PART I**

**Item 1.   Business**

**GENERAL INFORMATION**

**Current Operations**

Hilton Hotels Corporation is engaged, together withits subsidiaries, in the ownership, management and development of hotels,resorts and timeshare properties and the franchising of lodging properties. Asof December 31, 2004, our system contained 2,259 properties, totaling over358,000 rooms. Of such properties, we owned an interest in and operated 115hotels, leased seven hotels, managed 206 hotels owned by others and franchised1,900 hotels owned and operated by third parties. Also included in the numberof properties in our system are 31 timeshare properties which we managed orfranchised. All of these properties are located in the United States, with theexception of 16 hotels in which we own an interest and/or manage and 55 hotels thatwe franchise.

Our hotel brands include Hilton, Hilton Garden Inn,Doubletree, Embassy Suites, Hampton, Homewood Suites by Hilton and Conrad. Wedevelop and operate timeshare resorts through Hilton Grand Vacations Companyand its related entities, which we wholly own. We are also engaged in variousother activities related or incidental to the operation of hotels.

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

**Recent Developments**

*Hotel Properties*

·       In2004, we sold five Doubletree hotels located in Arizona, California and Oregon,for total consideration of approximately $100 million.

·       InApril 2004, we commenced management of the Hilton Omaha in Nebraska, whichis our third managed convention hotel opened since December 2003.

·       In 2004, pursuant to ajoint venture with Hilton International Co., we commenced management of newConrad hotels in Bali, Indonesia and Miami, Florida. We have also entered intoagreements to manage new Conrad hotels in Las Vegas, Nevada and Indianapolis,Indiana.

*TimeshareProperties*

·       Weare continuing to develop a 1,577-unit timeshare resort in Las Vegas,Nevada, with phase two of this project consisting of a 38-story, 431-unittower, scheduled to open in mid-2006.

·       In2004, we opened the first two phases, consisting of 96 units, of a 456-unittimeshare resort in Orlando, Florida.

·       We commenced development ofa new 120-unit timeshare resort in Waikoloa, Hawaii, which is scheduledfor completion in early 2006.

*AdditionalInformation*

For a description of ourplanned expansion activities, see “Operations—Development.” For additionalinformation, see “Development and Capital Spending” under Item 7.

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**Industry Segments**

We operate in threereportable business segments which are based on similar products or services:Hotel Ownership; Managing and Franchising; and Timeshare. For additionalinformation, see “Note 15: Segment Information” in the Notes toConsolidated Financial Statements under Item 8.

As of December 31,2004, we managed (and in some cases, partially owned) hotel properties inBelgium, Egypt, England, Hong Kong, Indonesia, Ireland, Mexico, Puerto Rico,Singapore, Thailand and Turkey. We also franchised hotel properties in Canada,Colombia, Costa Rica, Dominican Republic, Ecuador, Mexico, Peru, Puerto Ricoand Venezuela. To date, the amounts of revenue, operating profits and assetsattributable to geographic areas outside the United States have not beenmaterial.

**OPERATIONS**

**Hotel Properties**

*Owned Hotels*

As of December 31,2004, we owned a majority or controlling financial interest in and operated 50 hotels,representing 31,068 rooms. The owned hotels include some of our largest andmost profitable hotels, including:

·       the1,416-room Waldorf=Astoria;

·       the1,980-room Hilton New York;

·       the2,860-room Hilton Hawaiian Village;

·       the1,240-room Hilton Waikoloa Village;

·       the1,908-room Hilton San Francisco;

·       the1,544-room Hilton Chicago;

·  the 1,639-room Palmer House Hilton;

·       the1,119-room Hilton Washington; and

·       the1,616-room Hilton New Orleans Riverside.

We lease the land uponwhich 11 of our owned hotels are located. The expiration dates of the leasesrange up to 2091, with certain leases containing renewal options for 30 to 40years. Under these leases, we own the buildings and leasehold improvements andall furniture and equipment; we are responsible for repairs, maintenance,operating expenses and lease rentals; and we retain complete managerialdiscretion over operations. Lease terms generally require us to pay a fixedmonthly base rent and may require us to pay additional rent based on apercentage of revenue or income from the hotel. Upon the expiration of suchleases, the buildings and other leasehold improvements presently owned by us revertto the landlords. For additional information, see “Note 16: Leases” in theNotes to Consolidated Financial Statements under Item 8.

*Leased Hotels*

As of December 31,2004, we leased seven hotels, representing 2,643 rooms. Under these leases, welease the hotel from its owner, manage the hotel and are generally responsiblefor all aspects of the hotel’s operations and recognize all revenues andsubstantially all expenses associated with the hotel’s operations. Although, ingeneral, replacement of furniture, fixtures and equipment is the landlord’sresponsibility, we are obligated under certain leases to maintain and replacethese items. Lease terms typically require us to pay a fixed monthly base rentregardless of the performance of the hotel and a variable rent based on apercentage of revenue or income.

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*Joint Ventures*

As of December 31,2004, we had a minority or non-controlling financial interest in and operated65 hotels, representing 20,186 rooms. We have a right of first refusal topurchase additional equity interests in certain of these joint ventures. Wemanage each of the partially owned hotels for the entity owning the hotel. Foradditional information, see “Alliances” below.

*Managed Hotels*

As of December 31, 2004, we managed 206 hotels,representing 51,380 rooms, which are wholly owned by others. Under our standardmanagement agreement, we operate a hotel for the benefit of its owner, whicheither owns or leases the hotel and the associated personal property. Ourmanagement fee is generally based on a percentage of each hotel’s gross revenueplus, for the majority of properties, an incentive fee based on operatingperformance. The terms of our management agreements are for various periods andgenerally contain renewal options, subject to certain termination rights.

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

*Franchise Hotels*

As of December 31,2004, we franchised 1,900 hotels, representing 249,391 rooms, which are ownedand operated by third parties. In general, franchisees pay us an initial feebased on the number of rooms in a franchise hotel and a continuing fee based ona percentage of the hotel’s rooms revenue, which may be up to 5% of rooms revenuedepending on the brand. Although we do not directly participate in themanagement or operation of franchise hotels, we conduct periodic inspections toensure that our standards are maintained and render advice with respect tohotel operations. We generally approve the plans for, and the location of,franchise hotels and assist in their design.

**Hotel Brands**

We operate hotels throughthe brands described below, which target a wide variety of markets andgeographic areas. According to data from Smith Travel Research, in 2004, ourHilton, Hilton Garden Inn, Embassy Suites, Homewood Suites by Hilton andHampton brands all commanded significant market share premiums in thesystem-wide revenue per available room (RevPAR) index, which represents theshare of RevPAR these properties attain versus their respective competitivesets.

*Hilton*

Hilton hotels are ourupscale, full-service hotels that typically include swimming pools, gift shopsand retail facilities, meeting and banquet facilities, restaurants and lounges,room service, parking facilities and other services. The Hilton brand alsoincludes Hilton Suites hotels which are upscale, all-suite hotels. As of December 31,2004, there were 230 Hilton hotels, representing 89,256 rooms, located in 38states, the District of Columbia, Canada and Mexico. As of December 31,2004, there were 15 Hilton hotels under construction, of which 12 will befranchise hotels and three will be managed hotels.

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*Hilton Garden Inn*

Hilton Garden Inn hotels are our upper mid-market, focusedservice hotels that utilize a modular design constructed around a courtyardcontaining an indoor or outdoor swimming pool. In 2004, the Hilton Garden Innbrand earned the first place J.D. Power Award for “Highest CustomerSatisfaction” in its category for a third consecutive year. As of December 31,2004, there were 219 Hilton Garden Inn hotels, representing 29,841 rooms,located in 39 states, the District of Columbia, Canada and Mexico. As of December 31,2004, 43 Hilton Garden Inn hotels were under construction, all of which will befranchise hotels.

*Doubletree*

Doubletree hotels are ourfull-service hotels in the mid-market to upscale hotel category. The Doubletreebrand also includes the Doubletree Guest Suites all-suite hotels and themoderately priced Doubletree Club hotels. As of December 31, 2004, therewere 154 Doubletree hotels, representing 40,922 rooms, located in 36states, the District of Columbia, Canada and Latin America. As of December 31,2004, three Doubletree hotels were under construction, all of which will befranchise hotels.

*Embassy Suites*

Embassy Suites are ourupscale, all-suite hotels that feature two-room guest suites with a separateliving room and dining/work area and a complimentary cooked-to-order breakfast.Most Embassy Suites hotels are built around a landscaped atrium. As of December 31,2004, there were 175 Embassy Suites, representing 42,715 rooms, located in 38states, the District of Columbia, Canada, Dominican Republic, Puerto Rico andLatin America. As of December 31, 2004, 12 Embassy Suites hotels wereunder construction, of which 11 will be franchise hotels and one will be amanaged hotel.

*Homewood Suites byHilton*

Homewood Suites by Hiltonare our upscale, extended-stay hotels that feature residential styleaccommodations including business centers, swimming pools, convenience storesand limited meeting facilities. In 2004, the Homewood Suites by Hilton brandearned the first place J.D. Power Award for “Highest Customer Satisfaction” inits category for the second consecutive year. As of December 31, 2004,there were 143 Homewood Suites, representing 16,054 rooms, located in 37states, the District of Columbia and Canada. As of December 31, 2004, 24Homewood Suites hotels were under construction, of which 21 will be franchisehotels and three will be managed hotels.

*Hampton*

Hampton Inn hotels are ourmoderately priced hotels with limited food and beverage facilities. The Hamptonbrand also includes Hampton Inn & Suites hotels which offer bothtraditional hotel room accommodations and apartment style suites within oneproperty. During 2004, we introduced the “Make It Hampton” brand improvementprogram that will bring a wide range of new products and services to theHampton system. As of December 31, 2004, there were 1,290 Hampton hotels,representing 130,398 rooms, located in 49 states, Canada, Puerto Rico andLatin America. As of December 31, 2004, 71 Hampton hotels were underconstruction, of which 70 will be franchise hotels and one will be a managedhotel.

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*Other Brands*

In addition to the hotel brands described above, as ofDecember 31, 2004, there were 17 hotels, representing 5,482 rooms, operatedunder our Conrad brand or under third party brands pursuant to contractualarrangements. Conrad hotels are our upscale, full-service hotels locatedprimarily outside the United States. As of December 31, 2004, we managed,and in some cases partially owned, 13 Conrad hotels, representing 4,445 rooms,located in Miami, Florida and Belgium, Egypt, England, Hong Kong, Indonesia,Ireland, Singapore, Thailand and Turkey. Future development of Conrad hotels issubject to our agreements with Hilton Group plc. See “Alliances—Hilton Group”and “Territorial Restrictions” below.

**Timeshare Operations**

We conduct our timeshareoperations through Hilton Grand Vacations Company and its related entities (“HGVC”),which we wholly own. As of December 31, 2004, HGVC operated 19 timeshareresorts in Florida, three in each of Nevada and Hawaii, and one in each ofColorado and New York. We also manage one timeshare resort and franchise three timeshareresorts in the United States under the Embassy Vacation Resort name. Inaddition, HGVC operates the HGVClub, a points-based reservation and exchangesystem with 32 affiliated timeshare resorts.

**Development**

*Hotel Properties*

We intend to grow our hotel system primarily throughfranchising and the addition of management contracts, which require little orno capital investment. We will also continue to invest in capital improvementsand select projects at our owned hotels. In addition, we may seek to acquire ownershipinterests in hotel properties on a strategic and selective basis, eitherdirectly or through investments in joint ventures. See “Alliances” below.

During 2004, we added a total of 128 properties to oursystem, primarily franchises, with approximately 17,000 rooms. During 2004, ourfamily of brands opened hotels in 31 of the 50 United States. A total of 42properties, primarily franchises, with approximately 7,000 rooms, were removedfrom our system in 2004 primarily due to product quality issues. We expect to add130 to 150 hotels with 16,000 to 20,000 rooms to our system in 2005, withHampton and Hilton Garden Inn accounting for most of the new development. Weexpect virtually all of this growth to be through franchise and managementagreements.

Total property additions to our system in 2004included 122 franchise properties and five managed properties owned by thirdparties. These additions included 16 properties which, due in part to themarket share leadership of our brands, were converted to our family of brandsin 2004. The 16 conversions included six Doubletrees, five Hamptons, threeHiltons, one Embassy Suites and one Hilton Garden Inn.

In March 2004, we converted the former Adam’sMark hotel in Memphis to a 408-room Hilton following a major renovation.In April 2004, we opened the Hilton Omaha in Nebraska, which is our thirdHilton-managed convention hotel opened since December 2003. During 2004,an affiliate of USAA Real Estate Co. acquired six Doubletree properties from athird party and started renovation projects at these properties. Two of the sixproperties are located in Houston and the remaining four are located in KansasCity, Anaheim, St. Louis and Tulsa. In 2005, we plan to open the first EmbassySuites hotel in Mexico, located in Mexico City. For information regardingdevelopment of Conrad properties, see “Alliances—Hilton Group” below.

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Our ability to grow the number of managed andfranchised hotels is affected by the factors set forth under “AdditionalInformation—Business Risks” and “—Forward-Looking Statements,” including butnot limited to national and regional economic conditions; the effects of actualand threatened terrorist attacks and international conflicts; creditavailability; relationships with franchisees and property owners; andcompetition from other hotel brands.

*TimeshareProperties*

HGVC has recentlyopened or is currently developing the following projects:

·       HGVChas commenced development of a new vacation ownership resort in Waikoloa,Hawaii, adjacent to the Hilton Waikoloa Village. This project will have 120units and is scheduled for completion in early 2006.

·       HGVCis developing a new 1,577-unit timeshare resort located at the north end of theLas Vegas Strip in Las Vegas, Nevada. Phase one of this project, consisting of283 units, opened in October 2003, and phase two, consisting of a 38-story,431-unit tower, is scheduled to open in mid-2006.

·       HGVCis developing a new timeshare resort on International Drive in Orlando,Florida, with seven phases and a total of 456 units. The first two phases ofthis project, consisting of 96 units, opened in 2004. The third, fourth andfifth phases of this project, each consisting of 70 units, are scheduled to becompleted from spring 2005 to spring 2006. Also in Orlando, HGVC is adding 48units to its existing property adjacent to Sea World.

HGVC is actively seekingnew management, development and acquisition opportunities in other destinationresort locations. For additional information, see “Note 2: Summary ofSignificant Accounting Policies—Revenue Recognition” in the Notes toConsolidated Financial Statements under Item 8.

**Alliances**

*Hilton Group*

In 1997, we entered into agreements with Hilton Groupplc (“Hilton Group”), whose wholly owned subsidiary Hilton International Co. (“HI”),owns the rights to the Hilton name outside the United States. The agreementsprovide for the reunification of the Hilton brand worldwide through a strategicalliance between the companies, including cooperation on sales and marketing,loyalty programs and other operational matters. Pursuant to these agreements,both companies have integrated their reservation systems under HiltonReservations Worldwide, launched the Hilton HHonors Worldwide loyalty program,integrated worldwide sales offices, developed joint marketing initiatives andadopted a Hilton brand identity used by both companies. See “AdditionalInformation—Reservation System” and “—HHonors.” Stephen F. Bollenbach, our Co-Chairmanand Chief Executive Officer, is a non-executive director of Hilton Group andDavid Michels, Chief Executive of Hilton Group, is one of our non-executivedirectors.

In 2000, we announced the formation of a joint venturewith Hilton Group to expand the Conrad brand of luxury hotels on a worldwidebasis. The joint venture company is owned 50% by each of Hilton and HI. Hiltonand HI seek to develop the Conrad brand primarily through management contracts,the construction of new hotels requiring modest investment by us and HI andthrough the conversion of existing hotels to the Conrad brand. We renamed theTowers portion of the Waldorf=Astoria as the Waldorf Towers, a Conrad Hotel. In2004, we commenced management, on behalf of the joint venture, of the newlybuilt Conrad Bali Resort & Spa in Indonesia, and the Conrad Miami inFlorida, which is the first freestanding Conrad hotel in North America.

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Development of additional international hotels by usunder the “Hilton” and “Conrad” names is subject to our alliance agreementswith Hilton Group. See “Territorial Restrictions.” We have entered intomanagement agreements to operate a new 442-suite Conrad hotel on the LasVegas Strip and a new 243-room Conrad hotel in Indianapolis, Indiana,both of which are scheduled to open in 2006. We also continue to manage andretain our ownership interest, if any, in the Conrad hotels we operated priorto formation of the joint venture. See “Hotel Brands—Other Brands” above.

In February 2005, weand Hilton Group announced a major initiative to develop the Conrad brand on aglobal basis, with a target of having 50 Conrad hotels opened by 2010. Thegrowth of the Conrad brand will continue to be primarily through managementagreements. Dieter Huckestein, formerly our Executive Vice President andPresident, Hotel Operations Owned and Managed, will lead the initiative byserving as Chairman and Chief Executive Officer of Conrad Hotels and Presidentof the joint venture company.

*CNL Joint Ventures*

Since 2001, we have entered into three separate jointventure partnerships with CNL Hospitality Corp. (“CNL”). In December 2003,we formed a partnership with CNL that acquired the 544-room CapitalHilton in Washington, D.C. and the 394-room Hilton La Jolla Torrey Pinesoutside of San Diego, California, which properties we wholly owned at the time.We have a 25% interest in the partnership and manage both properties underlong-term agreements.

In February 2003, we completed a transaction inwhich we formed a partnership with CNL that acquired the following properties:the 500-room Doubletree at Lincoln Centre in Dallas, Texas; the 428-roomSheraton El Conquistador Resort and Country Club in Tucson, Arizona; the 437-roomHilton Rye Town in New York; the 630-room Doubletree Crystal City inVirginia; the 267-suite Embassy Suites Crystal City in Virginia; the 257-suiteEmbassy Suites Santa Clara in California; and the 174-suite EmbassySuites Orlando Airport in Florida. The Dallas and Tucson properties have beenconverted to the Hilton brand. We contributed the Hilton Rye Town to thepartnership, CNL contributed the Doubletree Crystal City and the partnershipacquired the remaining properties. We have a 25% interest in this partnershipand manage each of the seven hotel properties under long-term agreements.

In 2001, we formed apartnership with CNL that owns four hotel properties: the 500-room HiltonMiami Airport in Florida; the 276-suite Embassy Suites Portland inOregon; the 484-room Hilton Costa Mesa in California; and the 224-suiteHilton Suites Auburn Hills in Michigan. We contributed the Embassy SuitesPortland and the Hilton Suites Auburn Hills; CNL contributed the Hilton MiamiAirport and the Hilton Costa Mesa to the partnership. We have a 30% interest inthis partnership and manage each of the four hotel properties under long-termagreements.

*FelCor*

As of December 31,2004, FelCor Lodging Trust Inc. (“FelCor”) owned or had an interest in 73of our hotels and we owned approximately 1.5 million shares of FelCorcommon stock, representing approximately 2% of FelCor’s outstanding commonstock.

**DevelopmentFinancing**

We have establishedfranchise financing programs with third party lenders to support the growth ofour Hilton Garden Inn, Homewood Suites by Hilton, Hampton and Embassy Suiteshotels. As of December 31, 2004, we have provided guarantees of$38 million on loans outstanding under these programs. In addition, wehave guaranteed $37 million of debt and other obligations of unconsolidatedaffiliates and third parties, bringing our total guarantees to approximately $75 million.Our outstanding guarantees have terms of one to seven years. We also havecommitments under letters of credit totaling $64 million as of December 31,2004. We believe it is unlikely that material payments will be required underthese agreements. See “Liquidity and Capital Resources—Development Financing and OtherCommercial Commitments” under Item 7.

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**Territorial Restrictions**

We have entered into agreements which restrict ourright to operate hotels in various areas under the “Hilton” or “Conrad” names.Pursuant to an agreement entered into in 1964 at the time we distributed to ourstockholders all of the issued and outstanding capital stock of HI, we wereprohibited from operating facilities outside the United States identified as “Hilton”hotels and HI was prohibited from operating facilities within the United Statesidentified as “Hilton” hotels. We conduct certain of our international hoteloperations under the Conrad name. See “Hotel Brands—Other Brands” above.

We have entered into alliance agreements with theHilton Group, the parent company of HI, to reunite the Hilton name. Pursuant tothese agreements, HI has granted a license to us to develop franchiseproperties under the Hilton and Hilton Garden Inn names in Canada, Mexico andthe Island of St. John, U.S. Virgin Islands until 2017. Hilton and HI seek todevelop the Conrad brand on a worldwide basis. Subject to the foregoingrestrictions as to the use of the “Hilton” and “Conrad” names, Hilton and HIcan compete in all, and do compete in certain, markets. See “Alliances—HiltonGroup” above.

We have also entered intocertain management and franchise agreements that contain provisions which mayrestrict our right to own, manage or franchise additional hotels in specifiedgeographic areas.

**Potential Acquisitions**

We continue to evaluateacquisition opportunities and may, from time to time, negotiate to engage in abusiness combination transaction or other acquisition. However, there is noassurance that we will engage in any such transactions.

**Property Transactions**

We continue to evaluateour portfolio of owned assets and may seek to sell certain assets from time totime. See “General Information—Recent Developments—Hotel Properties” above fora description of certain properties we sold in 2004. In addition, we willcontinue to review our owned hotel portfolio for potential repositioning orrebranding opportunities.

**Seasonality**

The hospitality industry is seasonal in nature. However,the periods during which our properties experience higher or lower levels ofdemand vary from property to property and depend principally upon location.

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**Statistical Information**

Thefollowing table sets forth certain system-wide information for our propertieswith respect to the number of properties and rooms as of December 31, 2003and 2004:
| ** **                     | ** ** | **2003 Number of** | ** ** | **2004 Number of** | ** ** | **Change in Number of** | ** ** |
|--------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **Properties**               | ** ** | **Rooms**                    | ** ** | **Properties**                         | ** ** | **Rooms** | ** ** | **Properties** | ** ** | **Rooms** | ** ** |
| **Hilton**                     |       |                         |       | *** ***                 |       |                                   |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |   |   |   |   |   |   |
| Owned                          |       |                         | 36         | *** ***                 |       |                                   | 27,496     | *** *** |   |   | 36 | *** *** |   |   | 27,492 | *** *** |   |   | — |   |   |   | (4 | ) |   |   |
| Leased                         |       |                         | 1          | *** ***                 |       |                                   | 499        | *** *** |   |   | 1 | *** *** |   |   | 499 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Joint Venture                  |       |                         | 10         | *** ***                 |       |                                   | 4,177      | *** *** |   |   | 10 | *** *** |   |   | 4,177 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Managed                        |       |                         | 24         | *** ***                 |       |                                   | 14,103     | *** *** |   |   | 24 | *** *** |   |   | 13,822 | *** *** |   |   | — |   |   |   | (281 | ) |   |   |
| Franchised                     |       |                         | 159        | *** ***                 |       |                                   | 42,737     | *** *** |   |   | 159 | *** *** |   |   | 43,266 | *** *** |   |   | — |   |   |   | 529 |   |   |   |
| Total                          |       |                         | 230        | *** ***                 |       |                                   | 89,012     | *** *** |   |   | 230 | *** *** |   |   | 89,256 | *** *** |   |   | — |   |   |   | 244 |   |   |   |
| **Hilton  Garden Inn**         |       |                         |       | *** ***                 |       |                                   |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |   |   |   |   |   |   |
| Owned                          |       |                         | 1          | *** ***                 |       |                                   | 162        | *** *** |   |   | 1 | *** *** |   |   | 162 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Joint Venture                  |       |                         | 2          | *** ***                 |       |                                   | 280        | *** *** |   |   | 1 | *** *** |   |   | 128 | *** *** |   |   | (1 | ) |   |   | (152 | ) |   |   |
| Managed                        |       |                         | 3          | *** ***                 |       |                                   | 391        | *** *** |   |   | 6 | *** *** |   |   | 796 | *** *** |   |   | 3 |   |   |   | 405 |   |   |   |
| Franchised                     |       |                         | 177        | *** ***                 |       |                                   | 24,177     | *** *** |   |   | 211 | *** *** |   |   | 28,755 | *** *** |   |   | 34 |   |   |   | 4,578 |   |   |   |
| Total                          |       |                         | 183        | *** ***                 |       |                                   | 25,010     | *** *** |   |   | 219 | *** *** |   |   | 29,841 | *** *** |   |   | 36 |   |   |   | 4,831 |   |   |   |
| **Doubletree**                 |       |                         |       | *** ***                 |       |                                   |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |   |   |   |   |   |   |
| Owned                          |       |                         | 9          | *** ***                 |       |                                   | 3,156      | *** *** |   |   | 4 | *** *** |   |   | 1,702 | *** *** |   |   | (5 | ) |   |   | (1,454 | ) |   |   |
| Leased                         |       |                         | 6          | *** ***                 |       |                                   | 2,144      | *** *** |   |   | 6 | *** *** |   |   | 2,144 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Joint Venture                  |       |                         | 25         | *** ***                 |       |                                   | 7,427      | *** *** |   |   | 24 | *** *** |   |   | 7,208 | *** *** |   |   | (1 | ) |   |   | (219 | ) |   |   |
| Managed                        |       |                         | 44         | *** ***                 |       |                                   | 11,585     | *** *** |   |   | 38 | *** *** |   |   | 10,074 | *** *** |   |   | (6 | ) |   |   | (1,511 | ) |   |   |
| Franchised                     |       |                         | 71         | *** ***                 |       |                                   | 16,302     | *** *** |   |   | 82 | *** *** |   |   | 19,794 | *** *** |   |   | 11 |   |   |   | 3,492 |   |   |   |
| Total                          |       |                         | 155        | *** ***                 |       |                                   | 40,614     | *** *** |   |   | 154 | *** *** |   |   | 40,922 | *** *** |   |   | (1 | ) |   |   | 308 |   |   |   |
| **Embassy  Suites**            |       |                         |       | *** ***                 |       |                                   |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |   |   |   |   |   |   |
| Owned                          |       |                         | 4          | *** ***                 |       |                                   | 881        | *** *** |   |   | 4 | *** *** |   |   | 881 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Joint Venture                  |       |                         | 27         | *** ***                 |       |                                   | 7,279      | *** *** |   |   | 27 | *** *** |   |   | 7,279 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Managed                        |       |                         | 54         | *** ***                 |       |                                   | 14,136     | *** *** |   |   | 54 | *** *** |   |   | 14,134 | *** *** |   |   | — |   |   |   | (2 | ) |   |   |
| Franchised                     |       |                         | 89         | *** ***                 |       |                                   | 20,257     | *** *** |   |   | 90 | *** *** |   |   | 20,421 | *** *** |   |   | 1 |   |   |   | 164 |   |   |   |
| Total                          |       |                         | 174        | *** ***                 |       |                                   | 42,553     | *** *** |   |   | 175 | *** *** |   |   | 42,715 | *** *** |   |   | 1 |   |   |   | 162 |   |   |   |
| **Homewood  Suites by Hilton** |       |                         |       | *** ***                 |       |                                   |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |   |   |   |   |   |   |
| Owned                          |       |                         | 3          | *** ***                 |       |                                   | 398        | *** *** |   |   | 3 | *** *** |   |   | 398 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Managed                        |       |                         | 36         | *** ***                 |       |                                   | 4,304      | *** *** |   |   | 36 | *** *** |   |   | 4,304 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Franchised                     |       |                         | 91         | *** ***                 |       |                                   | 10,058     | *** *** |   |   | 104 | *** *** |   |   | 11,352 | *** *** |   |   | 13 |   |   |   | 1,294 |   |   |   |
| Total                          |       |                         | 130        | *** ***                 |       |                                   | 14,760     | *** *** |   |   | 143 | *** *** |   |   | 16,054 | *** *** |   |   | 13 |   |   |   | 1,294 |   |   |   |
| **Hampton**                    |       |                         |       | *** ***                 |       |                                   |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |   |   |   |   |   |   |
| Owned                          |       |                         | 1          | *** ***                 |       |                                   | 133        | *** *** |   |   | 1 | *** *** |   |   | 133 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Managed                        |       |                         | 34         | *** ***                 |       |                                   | 4,323      | *** *** |   |   | 35 | *** *** |   |   | 4,462 | *** *** |   |   | 1 |   |   |   | 139 |   |   |   |
| Franchised                     |       |                         | 1,220      | *** ***                 |       |                                   | 123,087    | *** *** |   |   | 1,254 | *** *** |   |   | 125,803 | *** *** |   |   | 34 |   |   |   | 2,716 |   |   |   |
| Total                          |       |                         | 1,255      | *** ***                 |       |                                   | 127,543    | *** *** |   |   | 1,290 | *** *** |   |   | 130,398 | *** *** |   |   | 35 |   |   |   | 2,855 |   |   |   |
| **Timeshare**                  |       |                         | 30         | *** ***                 |       |                                   | 3,644      | *** *** |   |   | 31 | *** *** |   |   | 3,740 | *** *** |   |   | 1 |   |   |   | 96 |   |   |   |
| **Other(1)**                   |       |                         |       | *** ***                 |       |                                   |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |   |   |   |   |   |   |
| Owned                          |       |                         | 1          | *** ***                 |       |                                   | 300        | *** *** |   |   | 1 | *** *** |   |   | 300 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Joint Venture                  |       |                         | 3          | *** ***                 |       |                                   | 1,393      | *** *** |   |   | 3 | *** *** |   |   | 1,394 | *** *** |   |   | — |   |   |   | 1 |   |   |   |
| Managed                        |       |                         | 11         | *** ***                 |       |                                   | 3,246      | *** *** |   |   | 13 | *** *** |   |   | 3,788 | *** *** |   |   | 2 |   |   |   | 542 |   |   |   |
| Franchised                     |       |                         | 1          | *** ***                 |       |                                   | 408        | *** *** |   |   | — | *** *** |   |   | — | *** *** |   |   | (1 | ) |   |   | (408 | ) |   |   |
| Total                          |       |                         | 16         | *** ***                 |       |                                   | 5,347      | *** *** |   |   | 17 | *** *** |   |   | 5,482 | *** *** |   |   | 1 |   |   |   | 135 |   |   |   |
| **Total**                      |       |                         |       | *** ***                 |       |                                   |       | *** *** |   |   |   | *** *** |   |   |   | *** *** |   |   |   |   |   |   |   |   |   |   |
| Owned                          |       |                         | 55         | *** ***                 |       |                                   | 32,526     | *** *** |   |   | 50 | *** *** |   |   | 31,068 | *** *** |   |   | (5 | ) |   |   | (1,458 | ) |   |   |
| Leased                         |       |                         | 7          | *** ***                 |       |                                   | 2,643      | *** *** |   |   | 7 | *** *** |   |   | 2,643 | *** *** |   |   | — |   |   |   | — |   |   |   |
| Joint Venture                  |       |                         | 67         | *** ***                 |       |                                   | 20,556     | *** *** |   |   | 65 | *** *** |   |   | 20,186 | *** *** |   |   | (2 | ) |   |   | (370 | ) |   |   |
| Managed                        |       |                         | 206        | *** ***                 |       |                                   | 52,088     | *** *** |   |   | 206 | *** *** |   |   | 51,380 | *** *** |   |   | — |   |   |   | (708 | ) |   |   |
| Timeshare                      |       |                         | 30         | *** ***                 |       |                                   | 3,644      | *** *** |   |   | 31 | *** *** |   |   | 3,740 | *** *** |   |   | 1 |   |   |   | 96 |   |   |   |
| Franchised                     |       |                         | 1,808      | *** ***                 |       |                                   | 237,026    | *** *** |   |   | 1,900 | *** *** |   |   | 249,391 | *** *** |   |   | 92 |   |   |   | 12,365 |   |   |   |
| **TOTAL  PROPERTIES**          |       |                         | 2,173      | *** ***                 |       |                                   | 348,483    | *** *** |   |   | 2,259 | *** *** |   |   | 358,408 | *** *** |   |   | 86 |   |   |   | 9,925 |   |   |   |

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(1)    Includes properties operated under our Conrad brand andproperties operated under third party brands pursuant to contractualarrangements.

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For purposes of thetable above, “owned” properties are those in which we have a majority orcontrolling financial interest and “joint venture” properties are those inwhich we have a minority or non-controlling financial interest. Foradditional information, see “Hotel Properties” above.

Thefollowing table sets forth certain system-wide information for our hotels withrespect to occupancy rates, average room rates and revenue per available room (RevPAR)for the fiscal years ended December 31, 2003 and 2004:
| ** **                    | ** ** | **2003(1)** | ** ** | **2004(1)** | ** ** | **%/pt  Change** | ** ** |
|-------------------------------|------------|-------------|------------|-------------|------------|------------------|------------|
| **Hilton**                    |       |        |       |        |       |             |       |
| Occupancy                     |       | 66.7        | %          | 69.5        | %          | 2.8              | pts        |
| Average rate                  |       | $           | 125.57     |        | $          | 130.15           |       | 3.6 | % |
| RevPAR(2)                     |       | $           | 83.82      |        | $          | 90.39            |       | 7.8 | % |
| **Hilton Garden Inn**         |       |        |       |        |       |             |       |
| Occupancy                     |       | 65.5        | %          | 69.0        | %          | 3.5              | pts        |
| Average rate                  |       | $           | 95.05      |        | $          | 98.11            |       | 3.2 | % |
| RevPAR(2)                     |       | $           | 62.30      |        | $          | 67.70            |       | 8.7 | % |
| **Doubletree**                |       |        |       |        |       |             |       |
| Occupancy                     |       | 65.2        | %          | 68.4        | %          | 3.2              | pts        |
| Average rate                  |       | $           | 100.37     |        | $          | 103.11           |       | 2.7 | % |
| RevPAR(2)                     |       | $           | 65.40      |        | $          | 70.50            |       | 7.8 | % |
| **Embassy Suites**            |       |        |       |        |       |             |       |
| Occupancy                     |       | 69.2        | %          | 71.3        | %          | 2.1              | pts        |
| Average rate                  |       | $           | 119.94     |        | $          | 122.72           |       | 2.3 | % |
| RevPAR(2)                     |       | $           | 83.05      |        | $          | 87.52            |       | 5.4 | % |
| **Homewood Suites by Hilton** |       |        |       |        |       |             |       |
| Occupancy                     |       | 70.7        | %          | 73.4        | %          | 2.7              | pts        |
| Average rate                  |       | $           | 94.36      |        | $          | 96.78            |       | 2.6 | % |
| RevPAR(2)                     |       | $           | 66.76      |        | $          | 71.03            |       | 6.4 | % |
| **Hampton**                   |       |        |       |        |       |             |       |
| Occupancy                     |       | 66.0        | %          | 68.3        | %          | 2.3              | pts        |
| Average rate                  |       | $           | 78.73      |        | $          | 81.64            |       | 3.7 | % |
| RevPAR(2)                     |       | $           | 51.93      |        | $          | 55.73            |       | 7.3 | % |
| **Other(3)**                  |       |        |       |        |       |             |       |
| Occupancy                     |       | 57.5        | %          | 69.4        | %          | 11.9             | pts        |
| Average rate                  |       | $           | 123.33     |        | $          | 131.31           |       | 6.5 | % |
| RevPAR(2)                     |       | $           | 70.94      |        | $          | 91.14            |       | 28.5 | % |

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(1)          Statistics are forcomparable hotels, and include only those hotels in our system as of December 31,2004 and owned, operated or franchised by us since January 1, 2003.

(2)          RevPAR is equal to roomsrevenue divided by the number of available rooms.

(3)          Includes propertiesoperated under our Conrad brand and properties operated under third partybrands pursuant to contractual arrangements.

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

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Thefollowing table sets forth certain system-wide statistical information for ourhotels by geographic region as of and for the year ended December 31,2004:
| **Regions**                        | ** ** | ** ** | ** ** | **Properties** | ** ** | **Rooms** | ** ** | **Occupancy** | ** ** | **Average  Rate** | ** ** | **RevPAR** | ** ** |
|------------------------------------|------------|------------|------------|----------------|------------|-----------|------------|---------------|------------|-------------------|------------|------------|------------|
| Owned, Leased and  Managed Hotels: |       |       |       |           |       |      |       |          |       |              |       |       |       |   |   |   |   |   |   |
| Pacific/Mountain                   |       | 93         |       |           | 34,648     |      |       | 71.5          | %          |              |       | $          | 126.22     |   |   |   | $ | 90.30 |   |   |
| North Central                      |       | 42         |       |           | 13,408     |      |       | 68.1          |       |              |       | 120.34     |       |   |   | 82.01 |   |   |
| South Central                      |       | 65         |       |           | 16,780     |      |       | 65.5          |       |              |       | 109.18     |       |   |   | 71.48 |   |   |
| New England/Middle Atlantic        |       | 36         |       |           | 13,669     |      |       | 77.4          |       |              |       | 178.06     |       |   |   | 137.82 |   |   |
| South Atlantic                     |       | 75         |       |           | 21,179     |      |       | 73.4          |       |              |       | 124.46     |       |   |   | 91.31 |   |   |
| International                      |       | 17         |       |           | 5,593      |      |       | 70.7          |       |              |       | 137.89     |       |   |   | 97.43 |   |   |
| Total                              |       | 328        |       |           | 105,277    |      |       | 71.3          |       |              |       | 130.66     |       |   |   | 93.16 |   |   |
| Franchise Hotels                   |       | 1,900      |       |           | 249,391    |      |       | 68.4          |       |              |       | 92.51      |       |   |   | 63.30 |   |   |
|                                    |            |            |            |                |            |           |            |               |            |                   |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

In the table above,statistics are for comparable hotels, and include only those hotels in oursystem as of December 31, 2004 and owned, operated or franchised by ussince January 1, 2003. For additional information regarding our number ofproperties, number of available rooms and statistical information, see “SupplementaryFinancial Information” and “Five Year Summary” under Item 8.

**ADDITIONAL INFORMATION**

**Casino Windsor**

We own a 50% equityinterest in Windsor Casino Limited, which operates the 400-room Casino Windsorin Windsor, Ontario, Canada for the Ontario provincial government under amanagement contract. This hotel casino features a 75,000 square foot casino andentertainment and meeting facilities. See “Additional Information—Regulationand Licensing—Ontario Gaming Laws” below.

**Design and Furnishing Services**

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

**Reservation System**

Hilton ReservationsWorldwide, LLC (“HRW”) oversees and operates a computerized, worldwidereservation system for hotels owned, operated or franchised by Hilton, HiltonGroup, our respective affiliates and others. Hilton and Hilton Group each own a50% interest in HRW. The domestic HRW reservation agents utilize an automatedsystem that enables them to automatically cross-sell among all of our hotelbrands which has benefited, and which we expect will continue to benefit, allof our hotel brands.

11

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**HHonors**

Under the allianceagreements we entered into with Hilton Group, Hilton and Hilton Group each owna 50% interest in the Hilton HHonors Worldwide, LLC guest loyalty program (“HHonors”).HHonors includes the Hilton, Hilton Garden Inn, Doubletree, Embassy Suites,Homewood Suites by Hilton, Hampton and Conrad brands, as well as brandsoperated by Hilton Group. Members of the HHonors program earn points based ontheir spending at most of the hotel properties operated and franchised by usand Hilton Group. HHonors accumulates and tracks points on the member’s behalfand fulfills the awards upon request. Points can be redeemed for hotel stays atparticipating properties, and for a variety of other awards such as airlinetickets, cruises and car rentals. We expect HHonors to continue to have apositive impact on our brands. See “Note 2: Summary of SignificantAccounting Policies—Hilton HHonors” in the Notes to Consolidated FinancialStatements under Item 8.

**Technology and Distribution**

We operate the Hilton worldwide internet website(www.hiltonworldwide.com) and our various hotel brand websites which providecost effective customer service, including online hotel reservations andHHonors enrollment. We also provide various business, technology and informationservices for our hotel guests, including high speed internet access atvirtually all of our hotels system-wide. We have also installed self-servicecheck-in kiosks at 47 of our owned or managed hotels as of December 31,2004.

We operate our proprietary OnQ system, which is asingle technology platform that links our brands and hotels to enhance customerservice and loyalty, as well as maximize operational efficiencies. The OnQsystem has been installed at virtually all of the hotels in our system. We alsoutilize an integrated strategy related to electronic and online distribution ofrooms in our systems. The strategy provides for brand standards that permiteach hotel to establish its own room rates, but requires the hotel to offersuch rates consistently across all designated distribution channels, includingour proprietary websites, HRW call centers, Global Distribution Systems/travelagents, and through hotels directly. In addition, we have implementedenhancements to our major brand websites as part of the strategy.

“Our Best Rates. Guaranteed.”is our program which offers a price-matching guarantee that is designed toencourage customers to book their reservations through the above referenceddistribution channels. We believe that this program, along with enhancements toour branded websites, has contributed to significantly increased numbers oftransactions on our proprietary websites. For 2004, gross reservations throughHRW, GDS and our internet sites increased 13% over 2003, and online bookingsthrough our branded websites increased 28% over 2003.

**Trademarks**

The following trademarksused herein are owned by us and are registered as trademarks in the UnitedStates and in certain foreign countries: Doubletree®, Doubletree Club Hotel®,Doubletree Guest Suites®, Embassy Suites Hotels®, Embassy Vacation Resort®,Hampton®, Hampton Inn®, Hampton Inn & Suites®, HGVClub®, Hilton®,Hilton Garden Inn®, Hilton Grand Vacations Club®, Hilton Hawaiian Village®,Homewood Suites by Hilton®, Palmer House® and Waldorf=Astoria®. The Conrad®trademark is owned by Conrad Hospitality, LLC, of which Hilton and Hilton Groupeach own a 50% interest. The HHonors®, Senior HHonors®, Double Dip®, DoubleDipping®, and Points & Miles® trademarks are owned by Hilton HHonorsWorldwide, LLC. We consider all of these marks, and the associated namerecognition, to be valuable to our business. See “Note 2: Summary ofSignificant Accounting Policies—Brands” in the Notes to Consolidated FinancialStatements under Item 8.

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**Marketing**

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

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

We believe that our alliance with Hilton Group (whichcurrently owns the rights to the Hilton name outside the U.S.) has improved theperformance of our operations as our properties have benefited from theworldwide integration of the Hilton brand, reservation systems, marketingprograms and sales organizations. See “Operations—Alliances—Hilton Group”above.

In 2005, we announced oursponsorship of the U.S. Olympic Team through 2008, which entitles our family ofbrands to use the official hotel sponsor designation and Olympic logo inadvertising and marketing materials.

**Business Risks**

*We are subject to all of the operating risks commonin the lodging and timeshare industries*.   Our resultsare significantly affected by occupancy and room rates achieved by hotels, ourability to manage costs, the relative mix of owned, leased, managed andfranchised hotels, the quantity and pricing of timeshare interval sales and thechange in the number of available hotel rooms and timeshare intervals throughacquisition, development and disposition. Our results are also impacted by,among other things, the factors identified below and under “Forward-LookingStatements.” Unfavorable changes in these factors could negatively impact hotelroom demand and pricing which, in turn, could limit our ability to pass throughoperating cost increases in the form of higher room rates. Our ability tomanage costs could be adversely impacted by significant increases in energy,healthcare, insurance and other operating expenses, resulting in loweroperating margins. Increases in transportation and fuel costs or sustainedrecessionary periods in the U.S. (affecting domestic travel) andinternationally (affecting inbound travel from abroad) could also unfavorablyimpact future results. Additionally, labor disputes in markets in which we haveemployees covered by collective bargaining agreements could adversely impactour results.

*Economicconditions may negatively impact our results.**  *Economic factors beyond our control may createchallenges for the lodging industry and us in 2005 and beyond. A downturn inthe U.S. economy could impact the demand for hotel rooms and put pressure onroom rates. Cost increases in healthcare, insurance and property taxes are alsoexpected to put pressure on margins.

*Wemay have disputes with the owners of hotels we manage.**  *For our managed hotels, we have the responsibility tomanage each hotel at a level consistent with the standard set forth in therelevant management agreement. Such provisions vary in scope and may be subjectto differing interpretations. In the ordinary course of business, we encounterdisagreements with the owners of our managed hotels as to whether the duties inour management agreements have been satisfied. To the extent that suchconflicts arise, we seek to resolve them by negotiation with the relevantparties. In the event that such resolution cannot be achieved, litigation mayresult in damages or other remedies against us. Such remedies could includetermination of the right to manage the relevant property. No assurance can begiven that we will be able to negotiate successfully or otherwise resolve suchconflicts in each instance.

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*We must compete for management,franchise and timeshare agreements, which may require loans or guarantees.  *Theterms of our management, franchise and timeshare agreements are influenced bycontract terms offered by our competitors at the time such agreements areentered into. Accordingly, we cannot provide assurance that contracts we enterinto or renew in the future will be on terms that are as favorable to us asthose under existing agreements. In connection with entering into thesecontracts, we may become obligated to make loans or guarantee the obligationsof third parties. Weak performance, in particular as a result of a softeconomy, could give rise to losses under these loans and guarantees.

*Internet reservation channels couldimpact our results*.   Some of our hotel rooms are bookedthrough internet travel intermediaries. If these bookings increase, theseintermediaries may be able to obtain higher commissions or other significantcontract concessions from us. We believe that the aim of such intermediaries isto have consumers develop loyalties to their reservation systems rather than toour lodging brands. Although we expect most of our business to continue to bederived from traditional channels and our proprietary branded internetwebsites, if the amount of sales made through internet intermediaries increasessignificantly, our profitability may be harmed.

*We derive a significant portion ofour earnings from certain owned hotels.  *We derivedapproximately half of our revenue in 2004 from the operations of our ownedhotels. A significant portion of these revenues were derived from our largeconvention hotels located in major U.S. cities. See “Operations—HotelProperties—Owned Hotels” above. Soft economic conditions in any of themarkets where these properties are located and reduced business travel couldadversely affect our results from these properties and, therefore, our overallfinancial results. Our owned properties are also subject to risks thatgenerally relate to investments in real estate, including changes in zoning andtax laws and the relative illiquidity of real estate compared to otherinvestments. If our owned properties do not generate sufficient revenue to meetoperating expenses, including debt service and capital expenditures, our incomewill be adversely affected.

*Investing through joint venturesdecreases our ability to manage risk.  *We have from timeto time invested, and expect to continue to invest, as a co-venturer. Thesejoint ventures include three partnerships we have formed with CNL HospitalityCorp., as described under “Operations—Alliances—CNL Joint Ventures” above.Joint venturers often have shared control over the operation of the jointventure assets. Therefore, joint venture investments may involve risks such asthe possibility that the co-venturer in an investment might become bankrupt, orhave economic or business interests or goals that are inconsistent with ourbusiness interests or goals, or be in a position to take action contrary to ourinstructions or requests or contrary to our policies or objectives. Consequently,actions by a co-venturer might subject hotels owned by the joint venture toadditional risk. Additionally, we may be unable to take action without theapproval of our joint venture partners, or our joint venture partners couldtake actions binding on the joint venture without our consent.

*Our timeshare business is subject toextensive regulation.  *We develop, manage, market andsell timeshare intervals, which generally entitle the buyer to occupy afully-furnished unit for a one-week period on either an annual or analternative-year basis. We also provide financing to purchasers of timeshareintervals. Certain of these activities are subject to extensive stateregulation in both the state in which the property is located and the states inwhich property is marketed and sold, as well as Federal regulation of certainmarketing practices. In addition, the laws of most states in which we selltimeshare intervals grant the purchaser a unilateral right to rescind thepurchase contract within a statutory rescission period. Although we believethat we are in material compliance with all applicable Federal, state, andlocal laws and regulations to which timeshare properties, marketing, sales andoperations are currently subject, changes in these requirements such as changesin Federal telemarketing regulations, or a determination by a regulatoryauthority that we were not in compliance, could adversely affect us.

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*Weare subject to risks relating to acts of God, terrorist activity and war.  *Ourfinancial and operating performance may be adversely affected by acts of God,such as natural disasters, particularly in locations where we own and/oroperate significant properties. Some types of losses, such as from earthquake,hurricane, terrorism and environmental hazards may be either uninsurable or tooexpensive to justify insuring against. Should an uninsured loss or a loss inexcess of insured limits occur, we could lose all or a portion of the capitalwe have invested in a property, as well as the anticipated future revenue fromthe property. In that event, we might nevertheless remain obligated for anymortgage debt or other financial obligations related to the property. Similarly,war (including the potential for war) and terrorist activity (including threatsof terrorist activity), as well as geopolitical uncertainty and internationalconflict, which impact domestic and international travel, have caused in thepast, and may cause in the future, our results to differ materially from anticipatedresults.

In addition, see thecautionary factors set forth under “Competition” and “Environmental Matters”below.

**Forward-Looking Statements**

Forward-looking statements inthis report, including without limitation, those set forth under the captions “Operations—Development,”“—Territorial Restrictions,”“—PotentialAcquisitions” and “—Property Transactions” and “AdditionalInformation—Reservation System,” “—HHonors,” “—Competition,” “—EnvironmentalMatters” and “—Regulation and Licensing,” “Properties,” “Legal Proceedings” and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations,” and statements relating to our plans, strategies, objectives,expectations, intentions and adequacy of resources, are made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act of 1995.

The words “believes,”“anticipates,” “expects,” “intends,” “plans,” “estimates,” “projects,” “will,”“should,” “continues” and similar expressions are intended to identify forward-lookingstatements. These forward-looking statements reflect our current views withrespect to future events and financial performance and are subject to risks anduncertainties, including those identified under “Operations—Development” and “—TerritorialRestrictions,” “Additional Information—Marketing,” “—Business Risks,” “—Competition,”“—Environmental Matters” and “—Regulation and Licensing,” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations,” aswell as:

·       supplyand demand changes for hotel rooms and timeshare intervals in our markets;

·       thefinancial condition of the airline industry and its impact on air travel;

·       theeffect of any rating agency downgrades on the cost and availability of new debtfinancing;

·       theimpact of labor disputes involving the hotel industry;

·       theimpact of infectious disease outbreaks on travel and the demand for hotel roomsand timeshare intervals;

·       theimpact of government regulations, including land use, health, safety and environmentallaws;

·       thecosts of litigation;

·       capitalmarket volatility and the availability of capital to finance growth; and

·       risksdescribed in the reports we file with the Securities and Exchange Commission.

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Any of these risks anduncertainties could cause actual results to differ materially from historicalresults or those anticipated. Although we believe the expectations reflected inthese forward-looking statements are based upon reasonable assumptions, we cangive no assurance that our expectations will be attained and caution you not toplace undue reliance on such statements. We undertake no obligation to publiclyupdate or revise any forward-looking statements to reflect current or futureevents or circumstances.

**Competition**

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

Our position as a multi-brandedowner, operator, manager and franchisor of hotels makes us one of the largesthotel companies in the United States. Competition in the industry is basedprimarily on the level of service, quality of accommodations, convenience oflocations and room rates. Competition from other hotels, motels and inns,including facilities owned by local interests and facilities owned by nationaland international chains, is vigorous in all areas in which we operate orfranchise our facilities. Our hotels also generally compete with facilitiesoffering similar services in cities and other locations where our hotels arenot present. If hotel capacity is expanded by others in a city where ourbranded hotels are located, competition will increase. Competition in thetimeshare business is based primarily on the quality and location of timeshareresorts, the pricing of timeshare intervals and the availability of programbenefits, such as exchange programs. We believe that our focus on core businessstrategies, combined with our financial strength, diverse market presence,strong brands and strategically located properties, will enable us to remaincompetitive. For additional information, see “Business Risks” above.

**Environmental Matters**

We, like others inour industry, are subject to various Federal, state, local and, in some cases,foreign laws, ordinances and regulations that:

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

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

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

(i)            uncertaintywhether our facilities in fact shipped any waste to such sites;

(ii)        thenumber of potentially responsible parties at such sites; and

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

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

**Regulation and Licensing**

*OntarioGaming Laws.*   Ontario, Canada has laws andregulations governing the conduct of casino gaming. Ontario law requires thatthe operator of a casino must be found suitable and be registered. Aregistration once issued remains in force until revoked. Ontario law defines thegrounds for registration, as well as revocation or suspension of suchregistration. The Ontario authorities have conducted an investigation of, andhave found suitable, Hilton and the other shareholder of Windsor Casino Limitedin connection with the Ontario registration of Windsor Casino Limited. See “AdditionalInformation—Casino Windsor” above.

*Other Laws and Regulations.*   Eachof the hotels and timeshare resorts we operate is subject to extensive stateand local regulations and, on a periodic basis, must obtain various licensesand permits, including those required to sell alcoholic beverages. Federal andstate laws and regulations also require certain registration, disclosurestatements and other practices with respect to the franchising of hotels. Webelieve that we have obtained all required licenses and permits and ourbusinesses are conducted in substantial compliance with applicable laws.

**Employees**

At December 31, 2004,we employed approximately 70,000 persons, of whom approximately 19,000 werecovered by various collective bargaining agreements providing, generally, forbasic pay rates, working hours, other conditions of employment and orderlysettlement of labor disputes. We believe that the aggregate compensationbenefits and working conditions afforded our employees compare favorably withthose received by employees in the hotel industry generally. Although labor disputesof short duration have occurred at certain of our properties, we believe ouremployee relations are satisfactory.

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**Available Information**

Our internet website is located atwww.hiltonworldwide.com. We make available free of charge through this websiteour annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as soon as reasonably practicable after we electronicallyfile such material with, or furnish it to, the Securities and ExchangeCommission. Our internet website also contains our Code of Business Conduct andEthics for officers, employees and directors, including our Chief ExecutiveOfficer and senior finance officers (the “Code of Ethics”), our CorporateGovernance Guidelines, Charters for our Audit, Compensation and CorporateGovernance and Nominating Committees and information regarding stockholdercommunications with our Board of Directors. See “hiltonworldwide.com,” click on“Investor Relations,” then “Corporate Governance.” See also “Item 10. Directorsand Executive Officers of the Registrant.” The information made availablethrough our website is not incorporated by reference in this Form 10-K.

We will provide withoutcharge to any person, on the written or oral request of such person, a copy ofour Code of Ethics, Corporate Governance Guidelines and Charters for our Audit,Compensation and Corporate Governance and Nominating Committees. Requestsshould be directed to our Corporate Secretary, Hilton Hotels Corporation, 9336Civic Center Drive, Beverly Hills, California 90210 (telephone number (310)278-4321).

**Item 2.**   Properties

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

Hotels and timeshareproperties owned, leased, managed and franchised by us are briefly describedunder Item 1 and, in particular, under the caption “Operations.” Inaddition, new properties presently under construction that we will operate arebriefly described under “Operations—Development” under Item 1.

**Item 3.**   LegalProceedings

We are subject tolitigation in the ordinary course of our business. Management believes thatresolution of pending litigation against us will not have a material adverseeffect on our financial position or results of operations.

**Item4.**   Submission of Matters to a Vote ofSecurity Holders

Not applicable.

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**Executive Officers of the Company**

Thefollowing table sets forth certain information with respect to our executiveofficers.
| **Name**              | ** ** | **Positions with the Company**                                                                                                                                                                     | ** ** | **Age** | ** ** |
|-----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------|------------|
| Stephen F. Bollenbach |       | Co-Chairman of the Board and Chief Executive Officer  since May 2004, and prior thereto, President and Chief Executive Officer                                                                |       | 62      |       |
| Matthew J. Hart       |       | President and  Chief Operating Officer since May 2004, and prior thereto, Executive  Vice President and Chief Financial Officer                                                               |       | 52      |       |
| Thomas L. Keltner     |       | Executive Vice  President and President—Brand Performance and Development Group since  March 2001, and prior thereto, Executive Vice President and  President—Franchise Hotel Group |       | 58      |       |
| Madeleine A.  Kleiner |       | Executive Vice  President and General Counsel since January 2001 and Corporate Secretary  since March 2001                                                                               |       | 53      |       |
| Robert M. La  Forgia  |       | Senior Vice  President and Chief Financial Officer since May 2004, and prior thereto,  Senior Vice President and Controller                                                                   |       | 46      |       |

 

Unless otherwise noted in the table, all positions andoffices with Hilton indicated have been continuously held since January 2000.The executive officers are responsible for all major policy making functionsand all other corporate and divisional officers are responsible to, and areunder the supervision of, the executive officers. None of the above namedexecutive officers are related.

Mr. Bollenbach also serves as a director ofHilton. Prior to joining Hilton, Ms. Kleiner served as Senior ExecutiveVice President, Chief Administrative Officer and General Counsel of H.F.Ahmanson & Company from May 1995 until October 1998, and wasa partner with the law firm of Gibson, Dunn & Crutcher prior thereto.

Additional information forour directors will be included under “Election of Directors” in our definitiveproxy statement to be used in connection with our annual meeting ofstockholders scheduled to be held on May 26, 2005 (the “Proxy Statement”),and this information is incorporated in this Form 10-K. See CoverPage—“Documents Incorporated by Reference.”

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**PART II**

**Item5.   Market for Registrant’s Common Equity and Related Stockholder Matters**

OurCommon Stock is listed on the New York and Pacific Stock Exchanges and istraded under the symbol “HLT.” We have made quarterly dividend payments of $.02per share for each of the periods indicated in the table below. As of December 31,2004, we had approximately 13,200 stockholders of record. The high and lowreported sales prices per share of our Common Stock are set forth in thefollowing table for the periods indicated:
| ** **                                | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------------------------|------------|----------|------------|---------|------------|
| 2003                                      |       |     |       |    |       |
| 1st Quarter                               |       | 13.48    |       | 10.38   |       |
| 2nd Quarter                               |       | 14.41    |       | 11.43   |       |
| 3rd Quarter                               |       | 16.56    |       | 12.64   |       |
| 4th Quarter                               |       | 17.50    |       | 15.62   |       |
| 2004                                      |       |     |       |    |       |
| 1st Quarter                               |       | 17.29    |       | 15.10   |       |
| 2nd Quarter                               |       | 18.70    |       | 16.29   |       |
| 3rd Quarter                               |       | 19.21    |       | 16.32   |       |
| 4th Quarter                               |       | 22.96    |       | 18.70   |       |
| 2005                                      |       |     |       |    |       |
| 1st Quarter (through  March 8, 2005) |       | 23.36    |       | 20.93   |       |

 

**Rights Agreement**

On November 29, 1999, we adopted a preferredshare purchase rights plan (the “Rights Plan”) and declared a dividenddistribution of one preferred share purchase right (a “Right”) on eachoutstanding share of our Common Stock. The Rights Plan replaced our priorrights plan which had been originally adopted in 1988 and readopted in 1998prior to its expiration. We have entered into a rights agreement, dated as of November 29,1999, which was amended as of February 15, 2001 to provide for thesubstitution of The Bank of New York as Rights Agent (as amended, the “RightsAgreement”). The Rights are transferred only with the Common Stock, unless anduntil they become exercisable. The Rights will expire on November 29,2009, subject to our right to extend, unless earlier redeemed or exchanged byus or terminated.

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

                                 (i)  acquires beneficial ownership of 20% or moreof the Common Stock (such person or group, an “Acquiring Person”), or

                             (ii)  announces a tender offer, the consummation ofwhich would result in ownership by a person or group of 20% or more of theCommon Stock.

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

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

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

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

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

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

**Stock Repurchases**

Thefollowing table sets forth information with respect to repurchases by Hilton ofshares of our Common Stock for the year ended December 31, 2004:
| **Period**                | ** ** | **Total number of  shares  re**purchased(1)(a) | ** ** | **Average price  paid per share  (b)** | ** ** | **Total number of  shares repurchased  as part of publicly  announced plans or  programs(2)  (c)** | ** ** | **Maximum number of  shares that may yet be  repurchased under  the plans  or programs(2)  (d)** | ** ** |
|---------------------------|------------|----------------------------------------------------------|------------|-------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|
| November 1-30, 2004  |       |                                                     | 1,364,900  |                                                  |       |                                                                                                                                       | $          | 20.78                                                                                                                                         |       |   |   | 1,364,900 |   |   |   | 7,918,900 |   |   |
| December 1-31,  2004 |       |                                                     | 934,200    |                                                  |       |                                                                                                                                       | 20.89      |                                                                                                                                          |       |   | 934,200 |   |   |   | 6,984,700 |   |   |
| Total                     |       |                                                     | 2,299,100  |                                                  |       |                                                                                                                                       | 20.82      |                                                                                                                                          |       |   | 2,299,100 |   |   |   | 6,984,700 |   |   |

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(1)          All repurchases ofshares of Common Stock were made in open market transactions.

(2)          The repurchases weremade pursuant to a repurchase program that was authorized by our Board ofDirectors in September 1996 for the repurchase of up to 20 million sharesof Common Stock. An aggregate of 10,716,200 shares had been repurchased underthis program prior to 2004. In March 2005, we announced that our Board ofDirectors authorized the repurchase of up to an additional 50 million shares ofCommon Stock under the repurchase program. The repurchase program does not havean expiration date.

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**Item 6.   Selected Financial Data**

The following selectedfinancial data as of and for the years ended December 31, 2000 through2004 has been derived from our consolidated financial statements. The followingdata should be read in conjunction with our consolidated financial statements,the related notes thereto contained under Item 8 and “Management’s Discussionand Analysis of Financial Condition and Results of Operations” under Item 7. 
| ** **                        | ** ** | **Year Ended December 31,**                           | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2000**                                                             | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(in millions, except per share amounts)** | ** ** |
| **Results of Operations:**        |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Revenue                           |       | $                                                                    | 4,335      |   | 3,952 |   | 3,816 |   | 3,819 |   | 4,146 |   |
| Net income                        |       | 272                                                                  |       | 166 |   | 198 |   | 164 |   | 238 |   |
| Net income per  share—Basic  |       | .74                                                                  |       | .45 |   | .53 |   | .43 |   | .62 |   |
| Net income per share—Diluted |       | .73                                                                  |       | .45 |   | .53 |   | .43 |   | .60 |   |
| **Other  Financial Data:**        |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Dividends per  common share       |       | $                                                                    | .08        |   | .08 |   | .08 |   | .08 |   | .08 |   |
| **Balance  Sheet Data:**          |       |                                                                 |       |   |   |   |   |   |   |   |   |
| Total assets                      |       | $                                                                    | 9,140      |   | 8,785 |   | 8,348 |   | 8,183 |   | 8,242 |   |
| Long-term debt                    |       | 5,693                                                                |       | 4,950 |   | 4,554 |   | 3,801 |   | 3,633 |   |

 

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**Item7.   Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

**OVERVIEW**

We are engaged in the ownership, management anddevelopment of hotels, resorts and timeshare properties and the franchising oflodging properties. At December 31, 2004, our system contained 2,259properties totaling over 358,000 rooms worldwide. Our brands include Hilton,Hilton Garden Inn, Doubletree, Embassy Suites, Hampton, Homewood Suites byHilton and Conrad. In addition, we develop and operate timeshare resortsthrough Hilton Grand Vacations Company and its related entities. We are alsoengaged in various other activities related or incidental to the operation ofhotels.

Thenumber of properties and rooms at December 31, 2004 by brand and by typeare as follows:
| **Brand**                  | ** ** | ** ** | ** ** | **Properties** | ** ** | **Rooms**     | ** ** | **Type** | ** **                                                                                 | ** ** | ** ** | **Properties** | ** ** | **Rooms** | ** ** |
|----------------------------|------------|------------|------------|----------------|------------|---------------|------------|----------|--------------------------------------------------------------------------------------------|------------|------------|----------------|------------|-----------|------------|
| Hilton                     |       | 230        |       | 89,256         |       | Owned(1)      |       | 50       |                                                                                       | 31,068     |       |
| Hilton Garden Inn          |       | 219        |       | 29,841         |       | Leased        |       | 7        |                                                                                       | 2,643      |       |
| Doubletree                 |       | 154        |       | 40,922         |       | Joint Venture |       | 65       |                                                                                       | 20,186     |       |
| Embassy Suites             |       | 175        |       | 42,715         |       |          |       | 122      |                                                                                       | 53,897     |       |
| Homewood Suites by  Hilton |       | 143        |       | 16,054         |       | Managed       |       | 206      |                                                                                       | 51,380     |       |
| Hampton                    |       | 1,290      |       | 130,398        |       | Franchised    |       | 1,900    |                                                                                       | 249,391    |       |
| Other                      |       | 17         |       | 5,482          |       |          |       | 2,106    |                 | 300,771    |       |
| Timeshare                  |       | 31         |       | 3,740          |       | Timeshare     |       | 31       |                                                                                       | 3,740      |       |
| Total                      |       | 2,259      |       | 358,408        |       | Total         |       | 2,259    |                                                                                       | 358,408    |       |

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(1)          Includes majority ownedand controlled hotels.

Our operations consist of three reportable segmentswhich are based on similar products or services: Hotel Ownership, Managing andFranchising, and Timeshare. The Hotel Ownership segment derives earnings fromowned, majority owned and leased hotel properties and equity earnings fromunconsolidated affiliates (primarily hotel and other real estate jointventures). The Managing and Franchising segment provides services includinghotel management and licensing of our family of brands to franchisees. Thissegment generates its revenue from fees charged to hotel owners. As a managerof hotels, we are typically responsible for supervising or operating the hotelin exchange for fees based on a percentage of the hotel’s gross revenue,operating profits, cash flow, or a combination thereof. We charge franchisefees, depending on the brand, of up to five percent of rooms revenue inexchange for the use of one of our brand names. The Timeshare segment consistsof multi-unit timeshare resorts. This segment sells and finances timeshareintervals and operates timeshare resorts. The hospitality industry is seasonalin nature. However, the periods during which our properties experience higheror lower levels of demand vary from property to property and depend principallyupon location.

Our results are significantly affected by occupancyand room rates achieved by hotels, our ability to manage costs, the relativemix of owned, leased, managed and franchised hotels, the quantity and pricingof timeshare interval sales and the change in the number of available hotelrooms and timeshare intervals through acquisition, development and disposition.Results are also impacted by economic conditions and capacity. Unfavorablechanges in these factors could negatively impact hotel room demand and pricingwhich, in turn, could limit our ability to pass through operating costincreases in the form of higher room rates. Additionally, our ability to managecosts could be adversely impacted by significant increases in operatingexpenses, resulting in lower operating margins. See “Additional Information—BusinessRisks” and “—Forward-LookingStatements” under Item 1 for a description of these and other conditionsthat could adversely affect our results of operations.

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We anticipate that afavorable economic environment will continue to benefit the lodging industryand our company in 2005. A continuation of strong hotel demand among business,group and leisure travelers, combined with limited full service hotel supplygrowth, should enable us to charge higher room rates. We also anticipate growthin our management and franchise fee business as the number of hotels in oursystem continues to increase, as well as another strong year from our timesharebusiness. Challenges in 2005 are expected to include continued shortreservation lead times for our group business and increasing costs. Increasesin energy, healthcare and insurance costs combined with higher property taxesare expected to put pressure on margins. We will continue to focus on managingour costs, achieving revenue per available room (RevPAR) premiums in themarkets where we operate, increasing occupancy, adding new units to our familyof brands, leveraging technology and delivering outstanding customer service. Webelieve that our focus on these core strategies, combined with our financialstrength, diverse market presence, strong brands and strategically locatedproperties will enable us to remain competitive.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requires usto make estimates and assumptions that affect the reported amounts of assetsand liabilities and the disclosure of contingent assets and liabilities at thedate of the financial statements and the reported amounts of revenue andexpenses during the reporting period. We evaluate our estimates and assumptionson an ongoing basis. We base our estimates and judgments on historicalexperience and other factors we believe to be reasonable under thecircumstances, which form the basis for making judgments about the carryingvalue of assets and liabilities that are not readily apparent from othersources.

We believe the following critical accounting policies,among others, affect our more significant estimates and assumptions used inpreparing our consolidated financial statements. Actual results could differfrom our estimates and assumptions.

Notes receivable are reflected net of an estimatedallowance for uncollectible amounts. For timeshare notes receivable, thisestimate is based primarily on historical experience and assumptions withrespect to future payment trends. Allowances for uncollectible amounts of othernotes receivable, which includes notes from managed, franchised and unconsolidatedjoint venture properties, are estimated based primarily on historical trendsand analysis of underlying real estate collateral. Assessment of collateral mayinclude estimates of future cash flow from the underlying real estate. Totalnotes receivable, including timeshare, totaled $236 million and $350 million,net of allowances for uncollectible amounts of $11 million and $18 million asof December 31, 2003 and 2004, respectively.

Property and equipment are stated at cost lessaccumulated depreciation. We also maintain cost and equity method investmentsin entities that own and operate hotel properties and entities that performother activities related or incidental to the operation of hotels. Theassessment of long-lived assets for possible impairment requires us to makecertain judgments, including estimates of real estate values and future cashflow from the respective properties and investments. We review therecoverability of our long-lived assets when events or changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable. Results in 2003 and 2004 include pre-tax impairment charges of $4million and $5 million, respectively, to reduce the value of property andequipment to estimated fair value.

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We account for the sale of real estate in accordancewith Statement of Financial Accounting Standards (FAS) 66, “Accounting forSales of Real Estate.” To the extent we realize gains from the sale of realestate and maintain significant continuing involvement in the form of along-term management contract, the gain is deferred and recognized in earningsover the term of the contract. The deferral of pre-tax gains on suchsales totaled $92 million and $5 million in 2003 and 2004, respectively. Resultsin 2002, 2003 and 2004 include the recognition of pre-tax deferred gainstotaling $6 million, $10 million and $15 million, respectively. The deferral ofgain recognition is dependent on the structure of individual sale transactions.

Our intangible assets include management and franchisecontracts, leases, brands and goodwill. The values of our management andfranchise contracts and leases are amortized using the straight-line methodover the life of the agreements. The assessment of management and franchisecontracts and leases requires us to make certain judgments, including estimatesof future cash flow from the respective properties. Results in 2003 include a$1 million pre-tax impairment charge to reduce the carrying value of amanagement contract to fair value. Management and franchise contracts, net,totaled $383 million and $336 million at December 31, 2003 and 2004,respectively. We account for brands and goodwill in accordance with FAS 142,“Goodwill and Other Intangible Assets,” which requires that intangible assetswith indefinite lives are not amortized, but are reviewed annually forimpairment. The annual impairment review requires estimates of future cash flowwith respect to the brands and estimates of the fair value of our company andits components with respect to goodwill.

We are self-insured for various levels of generalliability, workers’ compensation and employee medical and dental insurancecoverage at our owned locations. We purchase insurance coverage for claimamounts which exceed our self-insured retentions. Depending on the type ofinsurance, these self-insured retention amounts range from $250,000 to $500,000per claim. The undiscounted amount of our self-insurance reserves totaled $141million and $148 million at December 31, 2003 and 2004, respectively.

Our insurance reserves are accrued based on estimatesof the present value of claims expected to occur during the covered period. Theseestimates are prepared with the assistance of outside actuaries andconsultants. Our actuaries periodically review the volume and amount of claimsactivity, and based upon their findings, we adjust our insurance reservesaccordingly. The ultimate cost of claims for a covered period may differ fromour original estimates. General liability and workers compensation claimestimates are discounted to determine the present value of projectedsettlements; the discount rates used in the 2002 through 2004 program yearswere approximately 3.0% to 4.25%, which we considered reasonable based onclaims settlement patterns. Since medical and dental claims are generally paidwithin several months, we do not discount the related insurance reserves.

We have issued letters of credit and guaranteedcertain debt and obligations of unconsolidated affiliates and third partiestotaling $139 million at December 31, 2004. Under certain circumstances,we may be obligated to provide additional guarantees or letters of credittotaling $5 million. Assessment of the probability that we will be required tofund under these commitments requires us to make estimates of the ability ofothers to meet their obligations.

The estimates andassumptions related to notes receivable, long-lived assets, intangible assets,commitments and self-insurance reserves are subject to change based on thefactors identified above. We believe our estimates and assumptions arereasonable and have resulted in accurate measurement of the related accounts inour historical financial statements in conformity with accounting principlesgenerally accepted in the United States. Because estimates are used, it isreasonably likely that there will be some variability between projected resultsand actual results over time. In addition, given the significance of theseaccounts to our consolidated financial position, the variability betweenprojected and actual results could be material to our financial position orresults of operations.

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**DEVELOPMENT AND CAPITAL SPENDING**

***Overview***

We intend to grow our hotel system primarily throughfranchising and the addition of management contracts, which require little orno capital investment. We will also continue to invest in capital improvementsand select projects at our owned hotels and the development of timeshareproperties. In addition, we may seek to acquire ownership interests in hotelproperties on a strategic and selective basis, either directly or throughinvestments in joint ventures. See “Joint Ventures / Alliances” below.

During 2004, we added a total of 128 properties to oursystem, primarily franchises, with approximately 17,000 rooms. A total of 42properties, mostly franchises, with approximately 7,000 rooms were removed fromour system in 2004 primarily due to product quality issues. We expect to add130 to 150 hotels with 16,000 to 20,000 rooms to our system in 2005, withHampton and Hilton Garden Inn accounting for most of the new development. Weexpect virtually all of this growth to be through franchise and managementagreements.

We believe our brand growth strategy continues tobenefit from the significant market share premiums most of our brands commandover their respective competitive sets. With 100 representing a brand’s fairshare of the market, our brands (according to Smith Travel Research) postedrevenue per available room (RevPAR) index numbers as follows for 2004: EmbassySuites, 122.3; Hampton Inn, 117.9; Homewood Suites by Hilton, 117.2; HiltonGarden Inn, 115.3; Hilton, 108.3; and Doubletree, 96.1.

In addition, we were ranked number one in the hotelindustry for customer satisfaction according to statistics from the AmericanCustomer Satisfaction Index released in June 2004, representing our thirdfirst-place ranking in five years. In July, it was announced that both HiltonGarden Inn and Homewood Suites by Hilton earned first-place rankings forcustomer satisfaction in their respective categories from J. D. Power &Associates, while Embassy Suites and Hampton Inn each garnered top threerankings in their categories.

We believe the continued strong performance of ourbrands has enabled us to significantly enhance our development pipeline versusour industry competitors. We had approximately 450 hotels, primarilyfranchises, with 58,000 rooms in our development pipeline at December 31,2004. The consummation of transactions in our development pipeline is subjectto various conditions and uncertainties.

Our ability to grow the number of hotels in our systemis affected by the factors set forth under “Additional Information—BusinessRisks” and “—Forward-Looking Statements,” under Item 1, such as national andregional economic conditions; the effects of actual and threatened terroristattacks and international conflicts; credit availability; relationships withfranchisees and property owners; and competition from other hotel brands.

In total, we anticipate spending approximately $430million on capital expenditures in 2005, which includes $140 million on routineimprovements, $190 million for timeshare projects and $100 million in hotelrenovation, ROI and special projects. Routine improvements include expendituresfor equipment, hotel fixtures, and wall and floor coverings. Expendituresrequired to complete our capital spending programs will be financed throughavailable cash flow and general corporate borrowings. Anticipated capitalexpenditures are subject to change due to, among other things, changes inbusiness operations and economic conditions.

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We will continue to review our owned hotel portfoliofor potential repositioning or rebranding opportunities and may seek to sellcertain assets (see “Liquidity and Capital Resources—Acquisitions andDispositions” and “—Joint Ventures/Alliances”). It is our intention to beopportunistic when evaluating potential asset sales and we may look to sellparticular hotel properties to the extent we can obtain premium prices. When wesell a hotel property, it is generally our preference to retain a management orfranchise agreement, however, we may sell hotels without maintaining our brandon the property sold.

***Hotel Ownership***

Capital expendituresduring 2004 excluding timeshare projects totaled $178 million, consistingprimarily of routine improvements and technology capital expenditures. Wecontinue to place a priority on making appropriate capital expenditures tomaintain our owned assets and improve technology at our properties. In responseto enthusiastic customer response regarding ease of use and time savings, weare installing self-service check-in kiosks at our larger hotels. We haveinstalled these kiosks at 47 of our owned and managed hotels as of December 31,2004. In addition, we spent approximately $22 million in 2004 to upgrade thebedding and televisions at our owned and leased hotels.

***Managing andFranchising***

Total property additionsto our system in 2004 included 122 franchise properties and five managedproperties owned by third parties. These additions included 16 propertieswhich, due in part to the market share leadership of our brands, were convertedto our family of brands in 2004. The 16 conversions included six Doubletrees,five Hamptons, three Hiltons, one Embassy Suites and one Hilton Garden Inn.

During 2004, we announcedthe development of the first Embassy Suites hotel in Mexico, scheduled to openin 2005 in Mexico City. Pursuant to a joint venture with Hilton International,new managed Conrad hotels opened in Bali, Indonesia in the first quarter of2004 and in Miami, Florida in the third quarter of 2004. During 2004, we signedagreements to manage a new 442-suite Conrad hotel on the Las Vegas Strip and anew 243-room Conrad hotel in downtown Indianapolis, both of which are expectedto open in 2006. The growth in the Conrad brand will continue to be primarilythrough management contracts.

In March 2004, weconverted the former Adam’s Mark hotel in Memphis to a 408-room Hilton followinga major renovation. In April 2004, we opened the Hilton Omaha in Nebraska,which is our third Hilton-managed convention hotel opened since December 2003. During2004, an affiliate of USAA Real Estate Co. acquired six Doubletree propertiesfrom a third party and started renovation projects at these properties. Two ofthe six properties are located in Houston and the remaining four are located inKansas City, Anaheim, St. Louis and Tulsa. Also in 2004, we introduced “Make ItHampton,” a brand improvement program that will bring a wide range of newproducts and services to the Hampton system.

***Timeshare***

We are currently developing new timeshare projects inLas Vegas, Nevada and Orlando, Florida and, in 2004, we began development of anew timeshare project in Waikoloa, Hawaii. This project will have 120 units andis scheduled for completion in early 2006. At our International Drive propertyin Orlando, the project has 96 units in its first two phases, with phase onecompleted in February 2004 and phase two completed in April 2004. Constructionis continuing on the next 140 units, with 70 units scheduled to open in spring2005 and 70 units scheduled to open in mid-2005. We broke ground in February 2005on another 70 units at this property, with completion scheduled for spring 2006.Also in Orlando, we are adding 48 units to our existing property adjacent toSea World. In the third quarter of 2004, we began development of the secondphase of the property on the Las Vegas Strip, a 38-story, 431-unit towerscheduled to open in mid-2006. Upon the opening of phase two, approximatelyhalf of the planned four-tower, 1,577-unit project will have been completed.

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Capital expendituresassociated with our timeshare operations during 2004 totaled $46 million. Timesharecapital expenditures are expected to increase to approximately $190 million in2005 as we continue to invest in the development of new product in Las Vegas,Orlando and Hawaii. The capital expenditures associated with our non-leasetimeshare products are reflected as inventory until the timeshare intervals aresold. We also provide financing to the buyers of our timeshare intervals. During2004, we issued approximately $247 million of loans related to timesharefinancings. Principal collections on timeshare notes during the same periodwere approximately $142 million.

**LIQUIDITY ANDCAPITAL RESOURCES**

***Overview***

Net cash provided byoperating activities totaled $624 million, $380 million and $548 million forthe years ended December 31, 2002, 2003 and 2004, respectively. The netincrease in 2004 relates primarily to improved operating results and net cashprovided by timeshare sales in excess of new timeshare construction during theyear. The increase in cash from operating activities also reflects timingdifferences resulting in an increased minimum pension liability and thedeferral of revenue on timeshare sales. These increases were partially offsetby increases in restricted cash and an increase in the net balance of timesharenotes receivable. The decrease in 2003 compared to 2002 was due primarily tolower operating results, an increase in inventories related to additionaltimeshare spending, an increase in restricted cash and an increase in the netbalance of timeshare notes receivable.

Net cash provided byoperating activities in 2002, 2003 and 2004 each benefited from a reduction inthe valuation allowance for capital loss tax carryforwards and other itemswhich reduced the provision for income taxes (See “Liquidity and CapitalResources—Asset Dispositions,” “—Joint Ventures / Alliances” below and “Note 11:Income Taxes” in the Notes to Consolidated Financial Statements underItem 8). Our ability to utilize capital loss tax carryforwards to reduceour provision for income taxes is dependent on the availability of capital losstax carryforwards and the existence of transactions that enable these capitalloss carryforwards to be utilized. Therefore, it should not be assumed thatsuch benefits will be available to us in the future.

Net cash used in investingactivities totaled $132 million in 2004 and net cash provided by investingactivities totaled $60 million in 2003. The increase of $192 millionin net cash used in investing activities was primarily due to reduced proceedsfrom asset dispositions in 2004 compared to the prior year, as well as anincrease in additional investments in 2004. This increase in cash used waspartially offset by higher payments received on non-timeshare notes receivablein 2004. Net cash used in investing activities totaled $153 million in 2002compared to net cash provided by investing activities of $60 million in 2003. Theincrease in cash provided by investing activities in 2003 was primarily due toincreased proceeds from asset dispositions in 2003 compared to 2002, as well asthe absence of acquisition activity in 2003 in comparison to 2002, whichincluded the acquisition of the Hilton Waikoloa Village. In addition, capitalexpenditures in 2003 were lower than 2002, as significant construction projectsat the Hilton Portland, Hilton New Orleans Riverside and the Hilton SanFrancisco were completed in 2002.

Net cash used in financing activities totaled $467million, $451 million and $122 million in 2002, 2003 and 2004, respectively. Thedecrease in 2004 reflects a lower level of debt repayment in the 2004 period asall amounts outstanding under our revolving credit facility were repaid in thesecond quarter of 2004. The 2004 period also includes higher proceeds from theissuance of common stock, reflecting a higher volume of stock option exercises.This combined decrease in the net cash used in financing activities waspartially offset by share repurchases in 2004. Net cash used in investingactivities in 2002 and 2003 primarily represents the repayment of long-termdebt in excess of additional long-term borrowings. The decrease in cash used infinancing activities in 2003 compared to 2002 reflects higher proceeds fromincreased stock option exercises in the 2003 period. For the three years ended December 31,2004, total debt has been reduced by approximately $1.1 billion.

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Our ratio of earnings to fixed charges for the yearsended December 31, 2002, 2003 and 2004 was 1.8x, 1.6x and 2.2x,respectively.

Cash and equivalentstotaled $303 million at December 31, 2004, an increase of $294 millionfrom December 31, 2003. Restricted cash totaled $163 million, an increaseof $90 million from the prior year. Restricted cash includes cash related tocertain consolidated hotels, the use of which is restricted for hotel purposesunder the terms of collateralized borrowings; refundable deposits on the saleof timeshare intervals; and cash balances held by a consolidated non-controlledentity. We believe that our operating cash flow, available borrowings under ourrevolving credit facility, and our ability to obtain additional financingthrough various financial markets are sufficient to meet our liquidity needs. However,any projections of future financial needs and sources of working capital aresubject to uncertainty. See “Results of Operations” below and “AdditionalInformation—BusinessRisks” and “—Forward-LookingStatements” under Item 1 for further discussion of conditions that couldadversely affect our estimates of future financial needs and sources of workingcapital.

***Financing***

In August 2003, we established a $1 billionfive-year revolving credit facility, with an option to increase the size of thefacility by an additional $250 million. Borrowings under this facility werecompletely repaid during the 2004 second quarter. The capacity under ourrevolver is also used to support certain outstanding letters of credit. Totalrevolving debt capacity of approximately $850 million was available to us at December 31,2004.

In October 1997, we filed a shelf registrationstatement with the Securities and Exchange Commission registering up to $2.5billion in debt or equity securities. At December 31, 2004, availablefinancing under the shelf totaled $825 million. The terms of any additionalsecurities offered under the shelf will be determined by market conditions atthe time of issuance.

In connection with the spin-off in 1998 of our gamingbusiness to a new corporation named Park Place Entertainment Corporation(subsequently renamed Caesars Entertainment Inc.), Caesars assumed and agreedto pay 100% of the amount of each payment required to be made by us under theterms of the indentures governing our $325 million 7% Senior Notes due 2004. Caesarsrepaid these notes, as scheduled, in July 2004. Because these notes wereour legal obligation, they are reported in our 2003 consolidated balance sheetas current maturities of long-term debt with the offsetting receivableclassified in current assets.

Provisions under various loan agreements require us tocomply with certain covenants which include limiting the amount of ouroutstanding indebtedness. Our revolving credit facility contains twosignificant financial covenants: a leverage ratio and a debt service coverageratio. We are in compliance with our loan covenants as of December 31,2004.

Provisions of the financing agreement related to our7.95% collateralized borrowings due 2010 require that certain cash reserves bemaintained and also restrict the transfer of excess cash generated by therelated properties to Hilton if net cash flow falls below a specified level(the cash trap). The cash trap became effective in 2003 due to reduced cashflow from the collateralized properties, primarily the Hilton San Francisco. Asof December 31, 2004, cash restricted under the terms of thecollateralized borrowings, including required reserves and the cash trap,totaled $97 million. The impact of the cash trap, which is expected to remainin effect throughout 2005, is not expected to have a material impact on ourliquidity.

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The following tablesummarizes our significant contractual obligations as of December 31,2004, including long-term debt and operating lease commitments:
| ** **                                      | ** ** | ** ** | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| **Contractual Obligations  (in millions)** | ** ** | ** ** | ** ** | **Total**                                 | ** ** | **Less than  1 year** | ** ** | **1 - 3  years** | ** ** | **4 - 5  years** | ** ** | **After  5 years** | ** ** |
| Long-term debt                                  |       |       | $          | 3,647                                     |       |   |   | 14 |   |   |   | 497 |   |   |   | 806 |   |   |   | 2,330 |   |   |
| Operating leases                                |       |       | 709        |                                      |       |   | 38 |   |   |   | 69 |   |   |   | 61 |   |   |   | 541 |   |   |
| Total contractual obligations                   |       |       | $          | 4,356                                     |       |   |   | 52 |   |   |   | 566 |   |   |   | 867 |   |   |   | 2,871 |   |   |
|                                                 |            |            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As a result ofimplementing Financial Accounting Standards Board (FASB) Interpretation No. 46,“Consolidation of Variable Interest Entities (revised December   2003)”(FIN 46R) in 2004, our consolidated balance sheet as of December 31,2004 includes the assets and liabilities of a non-controlled managed hotel,including $100 million of debt that is non-recourse to us. This amount isreflected on our consolidated balance sheet as non-recourse debt of non-controlledentity and is excluded from the contractual obligations table.

***Development Financing and Other Commercial Commitments***

To assist prospective franchisees in obtainingfinancing for hotel projects, we have programs to provide alternative capitalsources to qualified franchisees. We have provided secondary financing tofranchisees under a mezzanine financing program. Loans outstanding under thisprogram at December 31, 2004 totaled approximately $36 million.

We have established franchise financing programs withthird party lenders to support the growth of our Hilton Garden Inn, HomewoodSuites by Hilton, Hampton and Embassy Suites hotels. As of December 31,2004 we have provided guarantees of $38 million on loans outstanding under theprograms.

As of December 31, 2004, in addition to theguarantees issued in connection with our development financing programs, wehave guaranteed $37 million of debt and other obligations of unconsolidatedaffiliates and third parties, bringing our total guarantees to approximately$75 million. We also have commitments under letters of credit totaling $64million as of December 31, 2004. In April 2004, we funded a loan guaranteeof approximately $9 million and recorded a corresponding receivable from theparty for which we funded the guarantee. Based on remedies available to us uponan event of default by the borrower, we believe that the receivable related tothis funding should be fully realized. We believe it is unlikely that othermaterial payments will be required under these agreements.

Thefollowing table summarizes our development financing and other commercialcommitments as of December 31, 2004:
| ** **                                | ** ** | ** ** | ** ** | **Amount of Commitment Expiration Per Period** | ** ** |
|-------------------------------------------|------------|------------|------------|------------------------------------------------|------------|
| **Commercial Commitments (in  millions)** | ** ** | ** ** | ** ** | **Total**                                      | ** ** | **Less than  1 year** | ** ** | **1 - 3  years** | ** ** | **4 - 5  years** | ** ** | **After  5 years** | ** ** |
| Letters of credit                         |       |       | $          | 64                                             |       |   |   | 64 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Guarantees                                |       |       | 75         |                                           |       |   | 29 |   |   |   | 41 |   |   |   | 3 |   |   |   | 2 |   |   |
| Total commercial  commitments             |       |       | $          | 139                                            |       |   |   | 93 |   |   |   | 41 |   |   |   | 3 |   |   |   | 2 |   |   |
|                                           |            |            |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

In addition, we remain a guarantor on 12 operatingleases sold to WestCoast Hospitality Corporation as part of the sale of the RedLion hotel chain in 2001. However, we have entered into an indemnification andreimbursement agreement with WestCoast, which requires WestCoast to reimburseus for any costs and expenses incurred in connection with the guarantee. As of December 31,2004, the minimum lease commitment under these 12 operating leases totaledapproximately $5 million annually through 2020.

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We have also provided performance guarantees tocertain owners of hotels we operate under management contracts. Most of theseguarantees allow us to terminate the contract rather than fund shortfalls ifspecified performance levels are not achieved. In limited cases, we areobligated to fund performance shortfalls. At December 31, 2004, we havetwo contracts containing performance guarantees with possible cash outlaystotaling approximately $178 million through 2012. Funding under theseperformance guarantees totaled approximately $4 million in 2004, and isexpected to total approximately $5 million in 2005. Funding under theseguarantees in future periods is dependent on the operating performance levelsof these hotels over the remaining term of the performance guarantee. Althoughwe anticipate that the future operating performance levels of these hotels willbe largely achieved, there can be no assurance that this will be the case. Inaddition, we do not anticipate losing a significant number of managementcontracts in 2005 pursuant to these guarantees.

Under limitedcircumstances, we may be obligated to provide additional guarantees or lettersof credit totaling $5 million.

***Acquisition of the Hilton Waikoloa Village***

In May 2002, wepurchased our partner’s interest in the 1,240-room Hilton Waikoloa Village onHawaii’s Big Island, a property we manage and in which we previously had anownership interest of approximately 13 percent. We acquired the remaining 87percent interest for approximately $155 million, consisting of $75 million incash and 5.2 million shares of our common stock.

***Synthetic Fuel Investment***

In August 2004, we acquired a 24 percent minorityinterest in a coal-based synthetic fuel facility for approximately $32 million.Our investment is accounted for using the equity method as we lack acontrolling financial interest. The facility produced pre-tax operating losses,our proportionate share of which totaled $6 million in 2004. This loss isreflected as loss from non-operating affiliates in the accompanyingconsolidated statements of income.

The synthetic fuelproduced at this facility qualifies for tax credits based on Section 29 ofthe Internal Revenue Code, which reduce our provision for income taxes. The Section 29credits are expected to continue to be available for fuel produced at thefacility through 2007. The tax credits, combined with the tax benefitassociated with the operating losses, totaled approximately $9 million in 2004.As a result, the benefit to our net income of the investment totaledapproximately $3 million for the year ended December 31, 2004.

***Asset Dispositions***

In the 2004 first quarter, we sold the Doubletree LaPosada Resort - Scottsdale in Arizona for total consideration of approximately$30 million, including approximately $6 million in cash and a notereceivable for approximately $24 million. The note receivable is due to berepaid in the first quarter of 2005 and has been classified as a current asseton the December 31, 2004 consolidated balance sheet. No book gain or losswas realized on the sale; however, the transaction generated a capital gain fortax purposes, which enabled us to utilize existing capital loss taxcarryforwards that had been fully reserved in prior periods. The transactionresulted in a net benefit to our income tax provision of approximately$2 million. We will continue to operate the hotel under a short-termmanagement agreement that expires when the outstanding note is due.

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In the second quarter of 2004, we sold the DoubletreeModesto and Doubletree Bakersfield, both in California. Total considerationfrom the sale of both hotels was approximately $40 million in cash. Gainsof approximately $3 million on Modesto and approximately $2 millionon Bakersfield were deferred due to our continuing involvement with each hoteland will be recognized over the life of the long-term management contractretained on each hotel. Both management contracts are for a term of ten years. Thetransaction also generated a capital gain for tax purposes, which enabled us toutilize existing capital loss tax carryforwards that had been fully reserved inprior periods. The transaction resulted in a net benefit to our income taxprovision of approximately $4 million.

In the fourth quarter of 2004, we sold the DoubletreeJantzen Beach and the Doubletree Columbia River, both near Portland Oregon, fortotal consideration of approximately $29 million in cash. The sale resulted ina pre-tax loss of approximately $3 million. The $5 million pre-tax loss onasset dispositions and other in 2004 includes the $3 million loss on the saleof the two Doubletrees and a $5 million loss related to the write-off of valuesassigned to certain long-term management and franchise agreements that wereterminated in 2004. These losses were partially offset by a $3 million gainfrom the sale of our investment in Travelweb.

In the 2003 firstquarter, we sold four Homewood Suites by Hilton hotel properties in twoseparate transactions for approximately $40 million. We continue to operatethree of the hotels under long-term management agreements and we have retaineda long-term franchise agreement on the fourth hotel. In the fourth quarter of2003, an Embassy Suites hotel in which we held a 65% interest was sold,resulting in a pre-tax loss of approximately $4 million. We retained a long-termfranchise contract on this hotel. Also in the 2003 fourth quarter, we soldcertain marketable securities, which resulted in a pre-tax gain ofapproximately $2 million. In addition, we wrote off the value assigned tocertain long-term management and franchise agreements that were terminated in2003 totaling approximately $4 million. In the aggregate, these transactionsresulted in a net $6 million pre-tax loss on asset dispositions and other in2003.

In 2002, we entered into a $125 million facilitywith a wholly owned subsidiary of GE Capital for the sale of notes receivableoriginated by our timeshare business. During 2002, we completed two sales ofnotes receivable under the facility, totaling approximately $119 million. Thesetransactions resulted in a gain of approximately $5 million. Also in 2002,we completed the sale of two owned, two leased and seven managed propertiesoperating as Harrison Conference Centers for approximately $49 million. Undertransition management and continuing services agreements, we provide certain servicesto the sold properties for terms ranging up to six years from the date of sale.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 utilizeexisting capital loss tax carryforwards that had been fully reserved in priorperiods. The transaction, including the impact of the reduction of thevaluation allowance associated with the capital loss tax carryforwards,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 assetdispositions and other of $14 million in 2002 represents the$11 million net pre-tax loss on the aforementioned asset sales and a lossof approximately $3 million primarily as a result of writing off the valueassigned to several long-term management and franchise agreements which wereterminated during the year.

We will continue to reviewour portfolio of owned assets and may seek to sell certain assets from time totime.

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***Joint Ventures / Alliances***

We maintain investments in unconsolidated affiliates,including hotel joint ventures as well as other entities that support theoperations of our hotel properties. Our investment in unconsolidated jointventures accounted for under the equity method totaled $302 million and $325million at December 31, 2003 and 2004, respectively, representing fourpercent of total assets at the end of 2003 and 2004. At December 31, 2004,our unconsolidated joint ventures accounted for under the equity method hadtotal assets of approximately $2.52 billion and total debt of approximately $1.34billion. Of the $1.34 billion of total debt, $1.31 billion is secured solely bythe affiliate’s assets or is guaranteed by other partners without recourse tous. We are the creditor on $50 million of the $1.34 billion of debt.

Our joint venture investments at December 31, 2004include 50% interests in Hilton HHonors Worldwide, which operates the HiltonHHonors guest loyalty program, and Hilton Reservations Worldwide, whichprovides reservation services. Pricing on these programs is determined on anannual basis and is designed so that the fees charged or allocated to eachhotel will be sufficient to cover program costs with no element of profit. Bothcompanies are joint ventures with Hilton Group plc, whose wholly ownedsubsidiary, Hilton International Co., owns the rights to the Hilton brand nameoutside the United States. These companies were formed as part of a 1997agreement to reunify the Hilton brand worldwide through a strategic alliancebetween Hilton and Hilton Group plc, which included cooperation on loyaltyprograms, reservations and other operational matters.

In the fourth quarter of 2002, we entered into apartnership with CNL Hospitality Corp. to acquire seven hotel properties. Thepartnership acquired the 500-room Doubletree at Lincoln Centre in Dallas, Texasand the 428-room Sheraton El Conquistador Resort and Country Club in Tucson,Arizona in December 2002. Both properties were converted to the Hiltonbrand. In connection with the formation of the joint venture, we contributed$11 million to the partnership in December 2002.

In the first quarter of 2003, we contributed the 437-roomHilton Rye Town in Rye Brook, New York and CNL contributed the 630-roomDoubletree Crystal City in Arlington, Virginia to the partnership. The gainresulting from our contribution of the Hilton Rye Town totaling approximately$35 million has been deferred and will be recognized over the ten-year life ofthe long-term management contract retained on the property. Also in the firstquarter of 2003, the partnership acquired the 257-suite Embassy Suites SantaClara in Santa Clara, California, the 267-suite Embassy Suites Crystal City inArlington, Virginia, and the 174-suite Embassy Suites Orlando Airport inOrlando, Florida. We operate all seven hotels under long-term managementcontracts and have a 25% ownership interest in the partnership.

In connection with the structuring of the CNLpartnership, including our contribution of the Hilton Rye Town, we received acash distribution totaling approximately $46 million in the 2003 first quarter.This distribution is reflected as proceeds from asset dispositions in theaccompanying consolidated statements of cash flow. In addition, the tax gainresulting from the contribution of the Hilton Rye Town enabled us to utilizecapital loss tax carryforwards, resulting in a reduction in our provision forincome taxes totaling approximately $4 million.

In the fourth quarter of 2003, we entered into anotherpartnership with CNL to own two hotel properties. We contributed the 544-roomCapital Hilton in Washington, D.C. and the 394-room Hilton La Jolla TorreyPines outside of San Diego, California to the partnership. The gain resultingfrom our contribution of the two hotels totaling approximately $57 million hasbeen deferred and will be recognized over the ten-year life of the long-termmanagement contracts retained on the properties. We have a 25% ownershipinterest in the partnership. In connection with this transaction, we received adistribution from the partnership of approximately $190 million. Thisdistribution is reflected as proceeds from asset dispositions in the accompanyingconsolidated statements of cash flow. This transaction also resulted in taxgains that enabled us to utilize capital loss tax carryforwards, resulting in areduction in our provision for income taxes totaling approximately $22 million.

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As of December 31,2004, we owned approximately 1.5 million shares of FelCor Lodging TrustInc. common stock, representing approximately two percent of FelCor’soutstanding shares. FelCor owned or had an interest in 73of our hotels as of December 31, 2004.

***Stockholders’ Equity***

Dividends paid on common shares were $.08 per share in2002, 2003 and 2004.

Our Board of Directors hasapproved the repurchase of up to 20 million shares of our common stockpursuant to a stock repurchase program. The timing of stock purchases is madeat the discretion of management. An aggregate of 10.7 million shares had beenrepurchased under this program prior to 2004. There were no shares repurchasedduring 2002 or 2003 as we sought to improve our credit position by using excesscash flow to repay outstanding debt balances. During 2004 we repurchasedapproximately 2.3 million shares of our common stock at a total cost ofapproximately $48 million. As of December 31, 2004, approximately 7.0million shares remained authorized for repurchase under this authority. InMarch 2005, we announced that our Board of Directors authorized the repurchaseof up to an additional 50 million shares of common stock under the repurchaseprogram.

**OFF-BALANCE SHEET ARRANGEMENTS**

We have outstanding guarantees issued in connectionwith our development financing programs and other guarantees of debt and otherobligations of unconsolidated affiliates and third parties, as well ascommitments under letters of credit. See “Liquidity and Capital Resources—DevelopmentFinancing and Other Commercial Commitments” for further information. Wemaintain investments in unconsolidated affiliates, including hotel jointventures as well as other entities that support the operations of our hotelproperties. We do not have investments in or obligations with respect tounconsolidated special purpose entities and we have not entered into syntheticleasing arrangements. See “Liquidity and Capital Resources—Joint Ventures /Alliances” for further information.

**RESULTS OF OPERATIONS**

The following discussionpresents an analysis of our results of operations for the three years ended December 31,2004. Our operations consist of three reportable segments which are based onsimilar products or services: Hotel Ownership, Managing and Franchising, andTimeshare.

***FISCAL2004 COMPARED WITH FISCAL 2003***

***Overview***

Asummary of our consolidated results for the years ended December 31, 2003and 2004 is as follows:
| ** **       | ** ** | **2003**                                                             | ** ** | **2004** | ** ** | ** % Change ** | ** ** |
|------------------|------------|----------------------------------------------------------------------|------------|----------|------------|-------------------------------|------------|
| ** **       | ** ** | **(in millions, except per share amounts)** | ** ** |
| Revenue          |       |                                                                 | $          | 3,819    |       |                          |       | 4,146 |   |   |   | 9 | % |   |
| Operating income |       |                                                                 | 515        |     |       |                          | 658        |   |   |   | 28 |   |   |
| Net income       |       |                                                                 | 164        |     |       |                          | 238        |   |   |   | 45 |   |   |
| Basic EPS        |       |                                                                 | .43        |     |       |                          | .62        |   |   |   | 44 |   |   |
| Diluted EPS      |       |                                                                 | .43        |     |       |                          | .60        |   |   |   | 40 |   |   |

 

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Results in 2004 benefited from RevPAR growth at ourcomparable owned hotels due to increased demand from both business travelersand group business, combined with continued strong demand from leisuretravelers. This shift in the mix of business to more higher rated room nightsfrom business travelers and groups resulted in increased pricing power in 2004.Fee income increased in 2004 as a result of RevPAR growth at managed andfranchised hotels and the addition of new units. Results in 2004 also benefitedfrom strong results at our timeshare business and lower interest expense. Overallresults in 2003 were adversely impacted by business declines related to theconflict in Iraq and a soft U.S. economy. In addition, 2003 was negativelyimpacted by a pre-tax impairment charge totaling $22 million and cost increasesat our owned hotels.

Results in 2004 also reflect the implementation of FIN46R, which resulted in the consolidation of a previously unconsolidated managedhotel, effective January 1, 2004. The implementation of FIN 46R resultedin an increase in other revenue and expenses from managed and franchisedproperties and certain other expenses in 2004. However, it had no impact onreported net income or net income per share.

Revenue from owned hotels totaled $2.062 billion in2004, a two percent increase from $2.031 billion in 2003, and total expenses in2004 were flat with 2003 at $1.501 billion. Strong results at our comparableowned hotels were partially offset by the impact of asset sales. Excluding theimpact of assets sales, owned hotel revenue increased seven percent from $1.893billion in 2003 to $2.026 billion in 2004, while owned hotel expenses increasedfive percent from $1.398 billion in 2003 to $1.473 billion in 2004.

Results at ourcomparable owned properties improved versus 2003 due to business and grouptravel gains, combined with strong leisure demand. The more favorable mix ofbusiness helped drive an increase in average rate, particularly in the latterhalf of the year. The strong group business also led to an increase in food andbeverage profits in 2004. Results at our owned hotels in 2004 also benefitedfrom our continued focus on costs. Cost-per-occupied-room increased less thanone percent in 2004. Profitability at our owned hotels in 2003 was negativelyimpacted by the aforementioned soft U.S. economy and reduced travel as a resultof the conflict in Iraq, along with increased healthcare, insurance andproperty tax costs. Margins at our comparable owned hotels (revenue lessexpenses as a percentage of revenue for comparable owned hotels) improved 110basis points compared to the prior year.

RevPAR forcomparable owned properties increased 6.8 percent for the year, with occupancyrising 2.6 points to 73.3 percent and average daily rate up 3.1 percent to$153.72. Our owned properties in Boston, New York and Hawaii achieved particularlystrong results in 2004. As anticipated, our owned properties in downtownChicago posted weaker results compared to 2003 due to a reduction in the numberof citywide conventions in this market. Excluding the impact of Chicago fromboth periods, RevPAR for comparable owned properties increased 8.2 percent in2004.

Although we anticipate a continuation of shortreservation lead times for our group business in 2005, we expect to seeimprovement in the Chicago market. In addition, we expect that a favorableeconomic environment will continue to benefit our owned hotels. A continuationof the strong demand trends combined with limited full-service hotel supplygrowth should result in a continuation of the pricing power we achieved in2004, particularly in many of our important markets, including New York,Washington, Boston and Hawaii.

Leased hotel revenue totaled $111 million in 2004, aneight percent increase compared to 2003, while leased hotel expenses increasedfive percent to $101 million. Due to the relatively large size of the leasepayments required in a hotel operating lease, the leased properties operate atmargins significantly lower than our owned hotels. Leased hotel revenue andexpenses are included with our owned hotels in our Hotel Ownership segmentresults.

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Operating income from unconsolidated affiliatesincreased $15 million in 2004 to $49 million. The increase is primarily theresult of $10 million in pre-tax earnings from a joint venture that developed a251-unit condominium project in Myrtle Beach, South Carolina. The projectclosed on the sale of all units in the third quarter of 2004. Operating incomefrom unconsolidated affiliates also benefited from improved results at ourjoint venture hotel properties. Operating income from unconsolidated affiliatesis included in our Hotel Ownership segment results.

Management and franchise fee revenue in 2004 increased$47 million or 14 percent to $384 million. Fee revenue is based primarily onrooms revenue at franchise properties and total operating revenue (and to alesser extent gross operating profits or cash flow) at managed properties. Thestrong demand among business, groups and leisure travelers that benefited ourowned hotels also resulted in strong RevPAR gains for each of our brands on asystem-wide basis (including managed and franchised properties). The increasein management and franchise fees in 2004 also reflects the addition of newunits to our system of hotels. We expect management and franchise fees willcontinue to increase in 2005 due to favorable economic trends and continuedgrowth in our system of managed and franchised hotels.

Revenue from ourtimeshare operations (included in timeshare and other income) totaled $421million in 2004, an increase of $76 million from $345 million in 2003, whiletimeshare expenses (included in other operating expenses) in 2004 totaled $316million, an increase of $57 million from $259 million in the prior year. Timesharerevenue and earnings are generated through developing timeshare resorts andselling the related intervals, financing the sale of timeshare intervals andthrough management of timeshare resorts. Overall timeshare unit sales were up35 percent in 2004, with robust sales at our projects in Hawaii, Las Vegas andOrlando. The average unit price increased five percent across the system. Timesharerevenue and profitability also benefited from higher resort fees and higherfinancing income due to increased sales. The growth from increased sales volumeand price were partially offset by unfavorable deferrals of sales revenue netof related expenses compared to the 2003 period, due to the required percentage-of-completionaccounting. Results in 2004 were negatively impacted by the deferral of revenueand expenses at our Waikoloa project, as construction was not beyond apreliminary stage. In contrast, results in 2003 benefited from the recognitionof previously deferred revenue and expenses as phases of our developments inOrlando and Las Vegas were substantially completed or opened during 2003.

Depreciation andamortization expense decreased by $4 million in 2004 to $330 million. The 2003period includes a $5 million one-time depreciation expense reduction at certainproperties. The adjusted decrease of $9 million in 2004 reflects asset salesand retirements combined with lower amortization expense related primarily tocertain long-term management and franchise agreements that were eitherterminated or expired.

Results in 2004 includeimpairment loss and related costs totaling $5 million. This pre-tax charge isto reduce the value of an owned hotel to its estimated fair value and isincluded in Hotel Ownership segment results. Results in 2003 include impairmentloss and related costs totaling $22 million. These costs include a $17 millionpre-tax charge related to the decline in value of certain equity securitiesheld by us. The decline in value of the securities was deemed to be other-than-temporaryin the 2003 first quarter, thus requiring an earnings charge, primarily basedon the length of time the securities had traded below cost. The 2003 chargealso includes a $5 million pre-tax charge to reduce the value of an owned hoteland a management contract to their respective fair values. The write-down ofthe hotel and management contract are included in Hotel Ownership and Managingand Franchising segment results, respectively, while the charge related to themarketable securities is included in corporate and other unallocated expensesin our reported segment results.

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***Corporate Activity***

Corporate expense totaled $85 million in 2004, anincrease of $4 million from 2003. The increase is primarily the result ofexpense associated with stock-based compensation in 2004 and increased legalfees compared to 2003. Corporate expense is not allocated among our reportablebusiness segments.

Interest and dividend income decreased $3 millioncompared to the prior year. The net decrease reflects the repayments by Caesarsof the $325 million 7% Senior Notes in July 2004 (see “Liquidity andCapital Resources—Financing”). As these notes were assumed by Caesars butremained our legal obligation prior to repayment, interest on the notes is reflectedboth in interest income and interest expense in the consolidated statements ofincome. This decrease in interest income was partially offset by interestreceived in 2004 on a favorable tax settlement of a prior year Federal incometax matter and interest received on certain notes receivable that had beenpreviously reserved. Interest expense, net of amounts capitalized, decreased$21 million reflecting lower outstanding debt balances, as well as theaforementioned repayment by Caesars.

The $5 million pre-tax loss on asset dispositions andother in 2004 represents the sale of two Doubletree properties and the writeoff of the value assigned to several long-term management and franchiseagreements which were terminated during the year, partially offset by the gainfrom the sale of our investment in Travelweb (see “Liquidity and CapitalResources—Asset Dispositions”). The $6 million pre-tax loss on assetdispositions and other in 2003 represents the sale of four Homewood Suites byHilton hotel properties, one Embassy Suites property and the write off of thevalue assigned to several long-term management and franchise contracts whichwere terminated during the year, partially offset by the gain on the sale ofcertain marketable securities.

The loss from non-operating affiliates totaling $6million in 2004 represents equity losses associated with our 24 percent minorityinterest in a coal-based synthetic fuel facility. The synthetic fuel producedat this facility qualifies for tax credits based on Section 29 of theInternal Revenue Code; these credits reduce our provision for income taxes.

The effective income taxrate for 2004 increased to 34% from 24% in 2003. The effective tax rate in 2004benefited from a reduction in the valuation allowance for capital loss taxcarryforwards resulting from the sale of three Doubletree properties (La Posadain Arizona, as well as Bakersfield and Modesto in California) and the sale ofour interest in Travelweb. The 2004 effective tax rate also reflects theutilization of Section 29 synthetic fuel production credits. The effectivetax rate in 2003 benefited from a reduction in the valuation allowance forcapital loss tax carryforwards, primarily as a result of the transactions withCNL. In addition, the 2003 effective tax rate benefited from a reduction in thevaluation allowance for capital loss tax carryforwards due to higher thanexpected utilization on our 2002 Federal tax return filed in 2003. The 2003effective tax rate also benefited from a settlement related to a tax liabilityassociated with a prior year tax return. These benefits were partially offsetby the write-off of an unutilized deferred tax asset resulting from a stockoption exercise. Excluding the aforementioned items, our effective tax rate was38% in 2004 and 35% in 2003. Our effective tax rate is determined by the leveland composition of pre-tax income and the mix of income subject to varyingforeign, state and local taxes.

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***Hotel Statistics***

RevPARfor our U.S. owned hotels and system-wide for the years ended December 31,2003 and 2004 is as follows:
| ** ** | ** ** | **U.S. owned(1)** | ** ** |
|------------|------------|------------------------|------------|
| ** ** | ** ** | **2003**               | ** ** | **2004** | ** ** | ** % Change ** | ** ** |
| Hilton     |       |                   | $          | 109.31 |   |   |   | 117.21 |   |   |   | 7.2 | % |   |
| All other  |       |                   | 76.20      |   |   |   | 77.30 |   |   |   | 1.4 |   |   |
| Total      |       |                   | 105.47     |   |   |   | 112.62 |   |   |   | 6.8 |   |   |

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(1)   Statistics are for comparable U.S. hotels,and include only hotels in the system as of December 31, 2004 and owned byus since January 1, 2003.
| ** **                 | ** ** | **System-wide(2)** | ** ** |
|----------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2003**           | ** ** | **2004** | ** ** | **% Change** | ** ** |
| Hilton                     |       |               | $          | 83.82 |   |   |   | 90.39 |   |   |   | 7.8 | % |   |
| Hilton Garden Inn          |       |               | 62.30      |   |   |   | 67.70 |   |   |   | 8.7 |   |   |
| Doubletree                 |       |               | 65.40      |   |   |   | 70.50 |   |   |   | 7.8 |   |   |
| Embassy Suites             |       |               | 83.05      |   |   |   | 87.52 |   |   |   | 5.4 |   |   |
| Homewood Suites  by Hilton |       |               | 66.76      |   |   |   | 71.03 |   |   |   | 6.4 |   |   |
| Hampton                    |       |               | 51.93      |   |   |   | 55.73 |   |   |   | 7.3 |   |   |
| Other                      |       |               | 70.94      |   |   |   | 91.14 |   |   |   | 28.5 |   |   |

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(2)   Statistics are for comparable hotels, and include only hotels inthe system as of December 31, 2004 and owned, operated or franchised by ussince January 1, 2003.

***FISCAL2003 COMPARED WITH FISCAL 2002***

***Overview***

Asummary of our consolidated results for the years ended December 31, 2002and 2003 is as follows:
| ** **       | ** ** | **2002**                                                             | ** ** | **2003** | ** ** | **% Change** | ** ** |
|------------------|------------|----------------------------------------------------------------------|------------|----------|------------|-------------------|------------|
| ** **       | ** ** | **(in millions, except per share amounts)** | ** ** |
| Revenue          |       |                                                                 | $          | 3,816    |       |              |       | 3,819 |   |   |   | — | % |   |
| Operating income |       |                                                                 | 603        |     |       |              | 515        |   |   |   | (15 | ) |   |
| Net income       |       |                                                                 | 198        |     |       |              | 164        |   |   |   | (17 | ) |   |
| Basic EPS        |       |                                                                 | .53        |     |       |              | .43        |   |   |   | (19 | ) |   |
| Diluted EPS      |       |                                                                 | .53        |     |       |              | .43        |   |   |   | (19 | ) |   |

 

Overall results in 2003 were adversely impacted by asoft U.S. economy and reduced travel as a result of the conflict in Iraq. Althoughdemand from leisure travelers remained solid, soft demand from businesstravelers and higher-rated groups resulted in overall average daily ratedeclines in 2003. Furthermore, 2003 results were also negatively impacted byincreased healthcare, insurance and property tax costs. The impact to operatingresults of property dispositions in 2002 and 2003 was partially offset by the May 2002acquisition of the Hilton Waikoloa Village. Results benefited from increasedfee income as the result of unit growth, strong results from our timeshareoperations, lower interest expense and a reduction in the provision for incometaxes.

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Revenue from owned hotels totaled $2.031 billionin 2003, a decrease of three percent from $2.100 billion in 2002. Resultsat our owned hotels were adversely impacted by the economic downturn in theUnited States and reduced travel as a result of the conflict in Iraq. At ourowned hotels, we experienced downward pressure on room rates owing primarily toa shift in our customer mix from the higher-rated group and business transientsegments to the more price sensitive leisure customer. Owing to these rate declines,our comparable owned hotelsreported a three percent revenue decline during 2003. RevPAR for comparable owned properties declined2.9 percent for the year, with occupancy down from 71.0 percent to 70.4 percentand average daily rate down 2.1 percent to $145.52. However, comparativelysolid occupancy levels were achieved at many of our owned hotels, includingthose in New York, Boston and Hawaii, primarily through increased business fromleisure customers and lower-rated groups.

Total expenses from owned hotels increased threepercent in 2003 to $1.500 billion. Expenses for our comparable owned hotelsalso increased three percent, or $39 million, during 2003, of which $21 millionwas due to increased healthcare, insurance and property tax costs.

Leased hotel revenue totaled $103 million in 2003, an$8 million decrease compared to 2002, while leased hotel expenses declined$5 million to $96 million in 2003. The 2002 Winter Olympics benefitedthe prior year results at our leased property in Salt Lake City, Utah.

Management and franchise fee revenue in 2003 increased$8 million or two percent to $337 million. New hotel openingsresulted in increased fees during the year, partially offset by lowercomparable base and incentive fees primarily due to RevPAR declines. Strongleisure demand, along with less impact from the Iraq conflict in our “drive-to”markets, enabled our focused-service, midscale brands to post generally smallerRevPAR declines (or in the case of Hilton Garden Inn, post a RevPAR gain forthe year) when compared to our full-service, urban properties.

The increase in timeshare and other income in 2003 isprimarily the result of increased timeshare revenue. Revenue from our timeshareoperations totaled $345 million, an increase of $49 million from 2002, whiletimeshare expenses in 2003 totaled $259 million, a $43 million increase from2002. Overall timeshare intervalsales increased five percent in 2003, while the average sales price increasednine percent. Results in 2003 also benefited from the recognition of revenuepreviously deferred under the required percentage-of-completionaccounting, as the first phases of our new developments in Orlando and LasVegas were substantially completed or opened during 2003. In addition, resultsin 2003 benefited from increased resort management earnings, including rentaland other service income. Financing income decreased in 2003 due to the sale ofreceivables in 2002 and decreased interest rates. Timeshare results in 2002were negatively impacted by a $4 million charge for remediation effortsrelated to mold found in certain areas of the Lagoon Tower timesharedevelopment, the sale of timeshare receivables, revisions to final constructioncosts in Hawaii (also related to the mold situation), and start-up costs in NewYork.

Depreciation and amortization expense decreased$14 million in 2003 to $334 million, primarily due to property salesand one-time depreciation expense adjustments totaling approximately$5 million made at certain properties in the 2003 second quarter.

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Results in 2003 includeimpairment loss and related costs totaling $22 million. These costs include a$17 million pre-tax charge related to the decline in value of certainequity securities held by us. The decline in value of the securities was deemedto be other-than-temporary in the 2003 first quarter, thus requiring anearnings charge, primarily based on the length of time the securities hadtraded below cost. The 2003 charge also includes a $5 million pre-tax impairmentcharge to reduce the value of an owned hotel and a management contract to theirrespective fair values. A $21 million pre-tax charge was recorded in 2002related to mold remediation efforts in certain areas of the Hilton HawaiianVillage. This charge consisted of approximately $17 million for remediationefforts at the property’s Kalia Tower, and the aforementioned $4 million for remediation efforts at theLagoon Tower timeshare development.

***Corporate Activity***

Corporate expense increased $15 million in 2003to $81 million. Our 2003 corporate expense includes a $3 million baddebt expense in the 2003 first quarter related to a note receivable that, as aresult of certain events in the quarter, was deemed uncollectible.Corporate expense in 2002 includes a benefit of approximately $4 millionrelated to the reversal of bad debt expense for a partially reserved notereceivable that was repaid during the second quarter of 2002. Excluding thesebad debt expense items, corporate expense increased $8 million, primarilydue to higher legal costs compared to 2002.

Interest anddividend income decreased $14 million compared with the prior year. Thedecrease reflects the repayment in June 2002 by Caesars of the$300 million 7.375% Senior Notes assumed by Caesars at the time of thespin-off of our gaming business. As these notes were assumed by Caesars butremained our legal obligation prior to repayment, interest on the notes isreflected as both interest income and interest expense in our consolidated statements ofincome. The decrease in interest income also reflects lowernotes receivable balances in 2003. Interest expense, net of amountscapitalized, decreased $33 million reflecting lower outstanding debtbalances, as well as the aforementioned repayment by Caesars.

The $6 million pre-tax loss onasset dispositions and other in 2003 represents thesale of four Homewood Suites by Hilton hotel properties, one Embassy Suitesproperty and the write off of the value assigned to several long-termmanagement and franchise agreements which were terminated during the year,partially offset by the gain on the sale of certain marketable securities (see “Liquidityand Capital Resources—AssetDispositions”  above). The $14 million pre-tax loss on assetdispositions and other in 2002 represents an$11 million net loss on asset sales and a loss of approximately $3 millionprimarily as a result of writing off the value assigned to several long-termmanagement and franchise contracts which were terminated during the year.

The effective income taxrate for 2003 decreased to 24% from 28% in 2002. The effective tax rate in 2003 benefited from a reduction in the valuationallowance for capital loss tax carryforwards, primarily as a result of thetransactions with CNL. In addition, the 2003 effective tax rate benefited from areduction in the valuation allowance for capital loss tax carryforwards due tohigher than expected utilization on our 2002 Federal tax return filed in 2003. The2003 effective tax ratealso benefited from a settlement relating to a tax liability associated with aprior year tax return. These benefits were partially offset by the write-off ofan unutilized deferred tax asset resulting from a stock optionexercise. The 2002 tax rate reflects a reduction in the valuation allowanceassociated with capital loss tax carryforwardsresulting from asset sales. The 2002 rate also reflects a reduction in ourvaluation allowance for capital loss tax carryforwardsdue to higher than expected utilization of these carryforwards on our 2001Federal tax return filed in 2002. Excluding the aforementioned items, oureffective tax rate was 35% in 2003 and 37% in 2002.

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***Hotel Statistics***

RevPARfor our U.S. ownedhotels and system-wide for the years ended December 31, 2002 and 2003 isas follows:
| ** ** | ** ** | **U.S. owned(1)** | ** ** |
|------------|------------|------------------------|------------|
| ** ** | ** ** | **2002**               | ** ** | **2003** | ** ** | ** % Change ** | ** ** |
| Hilton     |       |                   | $          | 112.13 |   |   |   | 108.49 |   |   |   | (3.2 | )% |   |   |
| All other  |       |                   | 71.63      |   |   |   | 71.17 |   |   |   | (0.6 | ) |   |   |
| Total      |       |                   | 105.55     |   |   |   | 102.45 |   |   |   | (2.9 | ) |   |   |

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(1)          Statisticsare for comparable U.S. hotels, and include only hotels in the system as of December 31,2003 and owned by us since January 1, 2002.
| ** **                 | ** ** | **System-wide(2)** | ** ** |
|----------------------------|------------|--------------------|------------|
| ** **                 | ** ** | **2002**           | ** ** | **2003** | ** ** | ** % Change ** | ** ** |
| Hilton                     |       |               | $          | 86.64 |   |   |   | 84.36 |   |   |   | (2.6 | )% |   |
| Hilton Garden Inn          |       |               | 62.34      |   |   |   | 63.02 |   |   |   | 1.1 |   |   |
| Doubletree                 |       |               | 67.73      |   |   |   | 65.32 |   |   |   | (3.6 | ) |   |
| Embassy Suites             |       |               | 83.32      |   |   |   | 82.24 |   |   |   | (1.3 | ) |   |
| Homewood Suites  by Hilton |       |               | 68.75      |   |   |   | 68.14 |   |   |   | (0.9 | ) |   |
| Hampton                    |       |               | 51.85      |   |   |   | 51.75 |   |   |   | (0.2 | ) |   |
| Other                      |       |               | 76.49      |   |   |   | 73.00 |   |   |   | (4.6 | ) |   |

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(2)          Statisticsare for comparable hotels, and include only hotels in the system as of December 31,2003 and owned, operated or franchised by us since January 1, 2002.

**OTHER MATTERS**

***New Accounting Standards***

In January 2003, the  FASB issued FIN 46 to expand upon existingaccounting guidance that addresses when a company should include in itsfinancial statements the assets, liabilities and results of operations of anotherentity. Under previous accounting guidance, we generally have included anotherentity in our consolidated financial statements only if we have a controllingfinancial interest in the entity through voting or other interests. FIN 46changed that guidance by requiring a variable interest entity (VIE), asdefined, to be consolidated by the company that is subject to a majority of therisk of loss from the VIE’s activities, or is entitled to receive a majority ofthe entity’s residual returns, or both. The losses and residual returns arebased on the potential variability from the anticipated cash flow of the VIEattributable to the holders of variable interests. FIN 46 also requiresdisclosure about VIEs that a company is not required to consolidate, but inwhich it has a significant variable interest.

Our evaluation of the provisions of FIN 46 as itrelates to our various forms of arrangements has focused primarily on reviewingthe key terms of our joint venture agreements, management contracts andfranchise agreements against the criteria in FIN 46 to determine if any ofthese arrangements qualify as VIEs. In general, a VIE represents a structureused for business purposes that either does not have equity investors withvoting rights or that has equity investors that do not provide sufficientfinancial resources for the entity to support its activities. However, other contractual arrangements couldqualify an entity as a VIE and designate which party to the contract is the primarybeneficiary.

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In the first quarter of 2003, we adopted FIN 46for VIEs created after January 31, 2003, which resulted in no impact toour consolidated financial statements. In December 2003, the FASB issued arevision to FIN 46 (FIN 46R) that replaced the originalinterpretation and codified proposed modifications and other decisionspreviously issued through certain FASB Staff Positions, including the deferralof the effective date of applying FIN 46R to certain variable interestscreated before February 1, 2003. We adopted FIN 46R in the firstquarter of 2004. Except as described in the following paragraphs, our jointventure agreements, management contracts and franchise agreements are not variableinterests, and therefore are not subject to the consolidation and disclosureprovisions of FIN 46R.

Our evaluation of our joint venture agreements,management contracts and franchise agreements has identified two managed hotelsin which we have variable interests, due to the terms of performance guarantees.The performance guarantee associated with one of the hotel managementagreements does not expose us to the majority of expected cash flow variabilityand therefore this hotel is not consolidated. Our maximum exposure to loss onthis contract consists of future management fees and our potential obligationto fund the performance guarantee which, as of December31, 2004, totaled an aggregate amount of approximately $45million through 2012.

The second of the two contracts contains provisionsthat expose us to the majority of expected cash flow variability. As a result,we are considered to be the primary beneficiary under FIN 46R and arerequired to consolidate the balance sheet and results of operations of thehotel. Therefore, this previously unconsolidated managed hotel has beenconsolidated as of January 1, 2004. Our consolidated balance sheet as of December 31,2004 includes the assets and liabilities of this non-controlled hotel,including $9 million of cash and equivalents (reflected as restricted cash) and$100 million of debt which is non-recourse to us. The debt issecured by the fixed assets of the hotel with a historical cost of $84 million.The net equity of the hotel is a retained deficit of approximately $61 millionas of December 31, 2004 and is reflected on our consolidated balance sheetin other assets. The revenue and operating expenses of this property areincluded in other revenue and expenses from managed and franchised propertiesin the consolidated statements of income. Our financial exposure to thisproperty consists of the fees we earn under the management agreement and costswe may incur under the performance guarantee. The net effect of the otherearnings of this property, which belong to the hotel owners, are reversed fromour consolidated results through minority and non-controlled interests expensein the consolidated statements of income. As a result, the implementation ofFIN 46R had no impact on reported net income or net income per share.

In September 2004, the Emerging Issues Task Force(EITF) of the FASB reached a consensus regarding accounting issues related tocertain features of contingently convertible debt and the effect on dilutedearnings per share (EITF Issue No. 04-8, “The Effect of ContingentlyConvertible Instruments on Diluted EarningsPer Share”). In November 2004, the EITF changed the transition provisionsof the consensus to require that the guidance be applied to reporting periodsending after December 15, 2004. Under current interpretations of FAS 128, “Earningsper Share”, issuers of contingently convertible debt exclude the potentialcommon shares underlying the debt instrument from the calculation of dilutedearnings per share until the contingency is met. The EITF consensus requiresthat potential shares underlying the debt instrument should be included indiluted earnings per share computations (if dilutive) regardless of whether thecontingency has been met.

Our consolidated debt balance includes $575 million ofcontingently convertible debt, which was issued in the second quarter of 2003. Our calculation of diluted earnings per sharefor 2004 reflects the impact of the required implementation of EITF 04-8.As required, the consensus has been retroactively applied to all periods duringwhich the instrument was outstanding. The retroactive application to 2003 didnot result in a change to previously reported earnings per share for theyear ended December 31, 2003.

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In December 2004, the FASB issued FAS 123R, “Share-BasedPayment,” which eliminates the ability to account for share-based compensationtransactions using APB Opinion No. 25, “Accounting for Stock Issued toEmployees,” and generally requires instead that such transactions be accountedfor using a fair-value-based method. Pro forma disclosure is no longer analternative. FAS 123R also requires that the tax benefit associated with theseshare-based payments be classified as financing activities in the statement ofcash flow rather than operating activities as currently permitted. FAS 123Rmust be adopted no later than July 1, 2005. Early adoption is permitted inperiods in which financial statements have not yet been issued. FAS 123R offersalternative adoption methods. We have not yet determined which alternativemethod we will use.

As permitted by FAS 123, we currently account forshare-based payments to employees using APB 25’s intrinsic value methodand, as such, generally recognize no compensation expense for employee stock options.The adoption of FAS 123R will result in increased compensation expense in ourreported results. Had we adopted FAS 123R in prior periods, the impact of thestandard would have approximated the impact of FAS 123 as described in thedisclosure of pro forma net income and earnings per share in the Notes toConsolidated Financial Statements (see “Note 2:  Summaryof Significant Accounting Policies—Stock-Based Compensation”) under Item 8.

In December 2004, the FASB issued FAS 152, “Accountingfor Real Estate Time-Sharing Transactions.” FAS 152 amends existing accountingguidance to reference the financial accounting and reporting guidance for realestate time-sharing transactions provided in AICPA Statement of Position 04-02,“Accounting for Real Estate Time-Sharing Transactions.” FAS 152 is effectivefor our financial statements issued after January 1, 2006. The newaccounting guidance requires, among other things, that costs incurred to selltimeshare units generally be charged to expense as incurred, includingmarketing expenses. This is consistent with our existing accounting treatmentand is not expected to impact our reported results. The new standard will alsorequire a change in the classification of certain items currently reported asexpenses, requiring these items to be reflected as reductions of revenue. Theimpact to reported revenue is not expected to be significant, and timeshareoperating income will not be affected.

FAS 152 will also impactthe timing of expenserecognition when pre-sales of projects under construction occur and we use thepercentage-of-completion method of accounting. We are currently allowed todefer sales and marketing expenses in the same proportion as the deferredrevenue during construction. FAS 152 allows only the deferral of “direct”sales and marketing expenses. This will result in earlier recognition of salesand marketing expenses during the construction period, but will not impact thetotal sales and marketing expenses recognized. The impact of this change isdependent on the timing and duration of construction and the extent ofpre-sales; however, it is not expected toaffect reported results in 2006.

***Other***

We are subject tolitigation in the ordinary course of our business. Management believes that resolution of pending litigation against us will nothave a material adverse effect on our financial position or results ofoperations.

****

43

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**Item7A.**   Quantitative and QualitativeDisclosures About Market Risk

We are exposed to market risk in the form of changesin interest rates and the potential impact such changes may have on the cashflow from our floating rate debt and the fair values of our fixed rate debt. Weattempt to limit the impact of changes in interest rates to our debt portfolioby attaining an appropriate mix of floating rate borrowings relative to ourlong-term fixed rate debt. We are also exposed to interest rate risk on our floatingrate notes receivable and the fair values of our fixed rate notes receivable.

We utilize, on a selective basis, interest rate swapsto manage our relative levels of fixed and floating rate debt. As of December 31,2004, we had a derivative contract which swaps the fixed interest payments onour $375 million 7.95% Senior Notes due 2007 to a floating interest rateequal to the six month LIBOR rate plus 415 basis points. We also have aderivative contract which swaps the floating rate mortgage of one of ourmajority owned hotels, which had a principal balance of $34 million at December 31,2004, to a fixed interest rate.

We are also exposed to market risk in the form ofchanges in foreign currency exchange rates and the potential impact suchchanges may have on the cash flow related to our foreign currency denominateddebt. In August 2001, we issued $100 million of 7.43% bonds due 2009denominated in Chilean Pesos. Payments of principal and interest on the bondsare adjusted for movements of the Unidad de Fomento (the Chilean inflationindex) published monthly by the Central Bank of Chile. We have swapped out theChilean currency exchange rate and inflation risk by entering into a derivativecontract 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. Webelieve it is unlikely that the counterparty will be unable to perform underthe terms of the derivative instrument.

Concurrent with our investment in a synthetic fuelfacility in August 2004, we entered into a derivative contract covering2.5 million barrels of oil, which is effective for the calendar year ending December 31,2005. The derivative contract involves two call options that provide for netcash settlement at expiration based on the full year 2005 average trading priceof oil in relation to the strike price of each option. If the average price ofoil in 2005 is less than $55, the derivative will yield no payment. If theaverage price of oil exceeds $55, the derivative will yield a payment equal tothe excess of the average price over $55 per barrel, multiplied by the numberof barrels covered, up to a maximum price per barrel of $68. The purpose of thetransaction is to provide economic protection against an increase in oil pricesthat could limit the amount of tax credits available under Section 29 ofthe Internal Revenue Code. The strike prices of the two call options are intendedto approximate the price ranges under which the tax credit could be reduced oreliminated by an increase in oil prices. 

44

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Thefollowing table sets forth the scheduled maturities and the total fair value ofour derivative and other financial instruments as of December 31, 2004:
| ** **                                                                                                             | ** ** | **Maturities by Period** | ** ** | **Total**        | ** ** | ** **       | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                                                             | ** ** | **Within**                         | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | **After 5** | ** ** | **Carrying** | ** ** | **Total Fair** | ** ** |
| ** **                                                                                                             | ** ** | **1 year**                    | ** ** | **2 years** | ** ** | **3 years** | ** ** | **4 years** | ** ** | **5 years** | ** ** | **years** | ** ** | **Amount** | ** ** | **Value** | ** ** |
| ** **                                                                                                             | ** ** | **($ in millions)**      | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| ***ASSETS****—Maturities represent principal  receipts, fair values represent assets*                             |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |
| Timeshare notes  receivable                                                                                            |       |                               | $          | 29               |       |             |       | 33 |   |   |   | 36 |   |   |   | 39 |   |   |   | 40 |   |   |   | 85 |   |   |   | 262 |   |   |   | 265 |   |   |
| Average interest  rate                                                                                                 |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 12.9 | % |   |   |   |   |   |
| Other notes  receivable                                                                                                |       |                               | $          | 39               |       |             |       | — |   |   |   | — |   |   |   | — |   |   |   | 4 |   |   |   | 45 |   |   |   | 88 |   |   |   | 89 |   |   |
| Average interest  rate                                                                                                 |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 6.3 | % |   |   |   |   |   |
| ***LIABILITIES****—Maturities represent principal payments,  fair values represent liabilities*              |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fixed rate debt                                                                                                        |       |                               | $          | (13              | )          |             |       | (47 | ) |   |   | (395 | ) |   |   | (460 | ) |   |   | (346 | ) |   |   | (2,248 | ) |   |   | (3,509 | ) |   |   | (3,950 | ) |   |
| Average interest  rate                                                                                                 |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 7.1 | % |   |   |   |   |   |
| Floating rate debt                                                                                                     |       |                               | $          | (1               | )          |             |       | (1 | ) |   |   | (54 | ) |   |   | — |   |   |   | — |   |   |   | (82 | ) |   |   | (138 | ) |   |   | (138 | ) |   |
| Average interest  rate                                                                                                 |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 2.3 | % |   |   |   |   |   |
| ***INTEREST RATE  SWAPS****—**Maturities represent notional amounts, fair  values represent assets (liabilities)* |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Variable to fixed                                                                                                      |       |                               | $          | 1                |       |             |       | 1 |   |   |   | 32 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 34 |   |   |   | (1 | ) |   |
| Average pay rate                                                                                                       |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 6.1 | % |   |   |   |   |   |
| Average receive  rate                                                                                                  |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3.8 | % |   |   |   |   |   |
| Fixed to variable                                                                                                      |       |                               | $          | —           |       |             |       | — |   |   |   | 375 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 375 |   |   |   | — |   |   |
| Average pay rate                                                                                                       |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 6.9 | % |   |   |   |   |   |
| Average receive  rate                                                                                                  |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 8.0 | % |   |   |   |   |   |
| Fixed (CLP) to  Fixed ($US)                                                                                            |       |                               | $          | —           |       |             |       | — |   |   |   | — |   |   |   | — |   |   |   | 100 |   |   |   | — |   |   |   | 100 |   |   |   | 43 |   |   |
| Average pay rate                                                                                                       |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 7.7 | % |   |   |   |   |   |
| Average receive  rate                                                                                                  |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 7.4 | % |   |   |   |   |   |
| ***OTHER  DERIVATIVE CONTRACTS***                                                                                      |       |                               |       |             |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Call options on  oil prices                                                                                            |       |                               | $          | 1                |       |             |       | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | 1 |   |   |   | 1 |   |   |

 

As of December 31, 2004, approximately 13% of ourlong-term debt, including the impact of interest rate swaps, was floating ratedebt.

45

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**Item8.**   Financial Statements and SupplementaryData

**HiltonHotels Corporation and SubsidiariesConsolidated Statements of Income(in millions, except per share amounts)**
| ** **                                                                | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2004** | ** ** |
| Revenue                                                                   |       |                                       |       |   |   |   |   |
| Owned hotels                                                              |       | $                                          | 2,100      |   | 2,031 |   | 2,062 |   |
| Leased hotels                                                             |       | 111                                        |       | 103 |   | 111 |   |
| Management and franchise fees                                             |       | 329                                        |       | 337 |   | 384 |   |
| Timeshare and other income                                                |       | 324                                        |       | 378 |   | 463 |   |
|                                                                      |       | 2,864                                      |       | 2,849 |   | 3,020 |   |
| Other revenue from managed and franchised properties                      |       | 952                                        |       | 970 |   | 1,126 |   |
|                                                                      |       | 3,816                                      |       | 3,819 |   | 4,146 |   |
| Expenses                                                                  |       |                                       |       |   |   |   |   |
| Owned hotels                                                              |       | 1,462                                      |       | 1,500 |   | 1,501 |   |
| Leased hotels                                                             |       | 101                                        |       | 96 |   | 101 |   |
| Depreciation and amortization                                             |       | 348                                        |       | 334 |   | 330 |   |
| Impairment loss and related costs                                         |       | 21                                         |       | 22 |   | 5 |   |
| Other operating expenses                                                  |       | 294                                        |       | 335 |   | 395 |   |
| Corporate expense                                                         |       | 66                                         |       | 81 |   | 85 |   |
|                                                                      |       | 2,292                                      |       | 2,368 |   | 2,417 |   |
| Other expenses from managed and franchised  properties                    |       | 952                                        |       | 970 |   | 1,120 |   |
|                                                                      |       | 3,244                                      |       | 3,338 |   | 3,537 |   |
| Operating income from unconsolidated affiliates                           |       | 31                                         |       | 34 |   | 49 |   |
| Operating Income                                                          |       | 603                                        |       | 515 |   | 658 |   |
| Interest and dividend income                                              |       | 43                                         |       | 29 |   | 26 |   |
| Interest expense                                                          |       | (328                                       | )          | (295 | ) | (274 | ) |
| Net interest from unconsolidated affiliates and  non-controlled interests |       | (19                                        | )          | (20 | ) | (26 | ) |
| Net loss on asset dispositions and other                                  |       | (14                                        | )          | (6 | ) | (5 | ) |
| Loss from non-operating affiliates                                        |       | —                                     |       | — |   | (6 | ) |
| Income Before Taxes and Minority and Non-Controlled  Interests            |       | 285                                        |       | 223 |   | 373 |   |
| Provision for income taxes                                                |       | (81                                        | )          | (53 | ) | (127 | ) |
| Minority and non-controlled interests, net                                |       | (6                                         | )          | (6 | ) | (8 | ) |
| Net Income                                                                |       | $                                          | 198        |   | 164 |   | 238 |   |
| Basic Earnings Per Share                                                  |       | $                                          | .53        |   | .43 |   | .62 |   |
| Diluted Earnings  Per Share                                               |       | $                                          | .53        |   | .43 |   | .60 |   |

 

See notes to consolidated financial statements

46

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**Hilton Hotels Corporationand SubsidiariesConsolidated Balance Sheets(in millions)**
| ** **                                                                  | ** ** | **December 31,  2003** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                  |       |                        |       |                        |       |   |   |   |   |
| **Current Assets**                                                          |       |                        |       |                        |       |   |   |   |   |
| Cash and equivalents                                                        |       |                        | $          | 9                           |       |   |   | 303 |   |   |
| Restricted cash                                                             |       |                        | 73         |                        |       |   | 163 |   |   |
| Accounts receivable, net                                                    |       |                        | 246        |                        |       |   | 269 |   |   |
| Inventories                                                                 |       |                        | 193        |                        |       |   | 144 |   |   |
| Deferred income taxes                                                       |       |                        | 78         |                        |       |   | 85 |   |   |
| Current portion of notes  receivable, net                                   |       |                        | 32         |                        |       |   | 68 |   |   |
| Receivable from Caesars  Entertainment, Inc.                           |       |                        | 325        |                        |       |   | — |   |   |
| Other current assets                                                        |       |                        | 64         |                        |       |   | 74 |   |   |
| Total current assets                                                        |       |                        | 1,020      |                        |       |   | 1,106 |   |   |
| **Investments, Property and Other Assets**                                  |       |                        |       |                        |       |   |   |   |   |
| Investments and notes  receivable, net                                      |       |                        | 558        |                        |       |   | 635 |   |   |
| Property and equipment,  net                                                |       |                        | 3,641      |                        |       |   | 3,510 |   |   |
| Management and franchise  contracts, net                                    |       |                        | 383        |                        |       |   | 336 |   |   |
| Leases, net                                                                 |       |                        | 115        |                        |       |   | 111 |   |   |
| Brands                                                                      |       |                        | 970        |                        |       |   | 970 |   |   |
| Goodwill                                                                    |       |                        | 1,240      |                        |       |   | 1,240 |   |   |
| Other assets                                                                |       |                        | 256        |                        |       |   | 334 |   |   |
| Total investments,  property and other assets                               |       |                        | 7,163      |                        |       |   | 7,136 |   |   |
| **Total Assets**                                                            |       |                        | $          | 8,183                       |       |   |   | 8,242 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                               |       |                        |       |                        |       |   |   |   |   |
| **Current Liabilities**                                                     |       |                        |       |                        |       |   |   |   |   |
| Accounts payable and  accrued expenses                                      |       |                        | $          | 553                         |       |   |   | 611 |   |   |
| Current maturities of  long-term debt                                       |       |                        | 338        |                        |       |   | 14 |   |   |
| Income taxes payable                                                        |       |                        | 4          |                        |       |   | 4 |   |   |
| Total current liabilities                                                   |       |                        | 895        |                        |       |   | 629 |   |   |
| Long-term debt                                                              |       |                        | 3,801      |                        |       |   | 3,633 |   |   |
| Non-recourse debt of  non-controlled entity                                 |       |                        | —     |                        |       |   | 100 |   |   |
| Deferred income taxes                                                       |       |                        | 775        |                        |       |   | 781 |   |   |
| Insurance reserves and  other                                               |       |                        | 473        |                        |       |   | 531 |   |   |
| Total liabilities                                                           |       |                        | 5,944      |                        |       |   | 5,674 |   |   |
| **Commitments and Contingencies**                                           |       |                        |       |                        |       |   |   |   |   |
| **Stockholders’ Equity**                                               |       |                        |       |                        |       |   |   |   |   |
| Common Stock, 381  million and 389 million shares outstanding, respectively |       |                        | 971        |                        |       |   | 997 |   |   |
| Additional paid-in  capital                                                 |       |                        | 970        |                        |       |   | 1,086 |   |   |
| Retained earnings                                                           |       |                        | 456        |                        |       |   | 689 |   |   |
| Accumulated other  comprehensive loss                                       |       |                        | (1         | )                           |       |   | (3 | ) |   |
|                                                                        |       |                        | 2,396      |                        |       |   | 2,769 |   |   |
| Less treasury stock, at  cost                                               |       |                        | (157       | )                           |       |   | (201 | ) |   |
| Total stockholders’  equity                                            |       |                        | 2,239      |                        |       |   | 2,568 |   |   |
| **Total Liabilities and Stockholders’ Equity**                         |       |                        | $          | 8,183                       |       |   |   | 8,242 |   |   |

 

See notes to consolidated financial statements

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**Hilton Hotels Corporationand SubsidiariesConsolidated Statements ofCash Flow(in millions)**
| ** **                                                                         | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2004** | ** ** |
| **Operating Activities**                                                           |       |                                       |       |   |   |   |   |
| Net income                                                                         |       | $                                          | 198        |   | 164 |   | 238 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and amortization                                                      |       | 348                                        |       | 334 |   | 330 |   |
| Amortization of loan costs                                                         |       | 9                                          |       | 13 |   | 9 |   |
| Net loss on asset dispositions and other                                           |       | 14                                         |       | 6 |   | 5 |   |
| Loss of non-operating affilates                                                    |       | —                                     |       | — |   | 6 |   |
| Impairment loss and related costs                                                  |       | 21                                         |       | 22 |   | 5 |   |
| Change in working  capital components:                                             |       |                                       |       |   |   |   |   |
| Inventories                                                                        |       | 13                                         |       | (34 | ) | 45 |   |
| Accounts receivable                                                                |       | 12                                         |       | 37 |   | (24 | ) |
| Other current assets                                                               |       | 55                                         |       | 2 |   | (9 | ) |
| Accounts payable and accrued expenses                                              |       | 26                                         |       | (26 | ) | 59 |   |
| Restricted  cash                                                                   |       | (15                                        | )          | (39 | ) | (90 | ) |
| Change in deferred income taxes                                                    |       | (39                                        | )          | (48 | ) | 27 |   |
| Change in other liabilities                                                        |       | (22                                        | )          | 35 |   | 49 |   |
| Unconsolidated affiliates’ distributions in excess  of earnings               |       | 19                                         |       | 17 |   | 20 |   |
| Change in timeshare notes receivable                                               |       | (36                                        | )          | (73 | ) | (105 | ) |
| Other                                                                              |       | 21                                         |       | (30 | ) | (17 | ) |
| Net cash provided by operating activities                                          |       | 624                                        |       | 380 |   | 548 |   |
| **Investing  Activities**                                                          |       |                                       |       |   |   |   |   |
| Capital expenditures                                                               |       | (245                                       | )          | (202 | ) | (178 | ) |
| Additional investments                                                             |       | (32                                        | )          | (25 | ) | (72 | ) |
| Proceeds from asset dispositions                                                   |       | 174                                        |       | 279 |   | 80 |   |
| Payments received on notes and other                                               |       | 21                                         |       | 8 |   | 38 |   |
| Acquisitions, net of cash acquired                                                 |       | (71                                        | )          | — |   | — |   |
| Net cash (used in) provided by investing activities                                |       | (153                                       | )          | 60 |   | (132 | ) |
| **Financing  Activities**                                                          |       |                                       |       |   |   |   |   |
| Change in revolving loans                                                          |       | (550                                       | )          | (510 | ) | (160 | ) |
| Long-term borrowings                                                               |       | 373                                        |       | 562 |   | — |   |
| Reduction of long-term debt                                                        |       | (278                                       | )          | (513 | ) | (14 | ) |
| Issuance of common stock                                                           |       | 18                                         |       | 40 |   | 131 |   |
| Repurchase of common stock                                                         |       | —                                     |       | — |   | (48 | ) |
| Cash dividends                                                                     |       | (30                                        | )          | (30 | ) | (31 | ) |
| Net cash used in financing activities                                              |       | (467                                       | )          | (451 | ) | (122 | ) |
| Increase (Decrease) in Cash and Equivalents                                        |       | 4                                          |       | (11 | ) | 294 |   |
| Cash and  Equivalents at Beginning of Year                                         |       | 16                                         |       | 20 |   | 9 |   |
| **Cash and Equivalents at End of  Year**                                           |       | $                                          | 20         |   | 9 |   | 303 |   |

 

See notes to consolidated financial statements

48

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**Hilton Hotels Corporationand SubsidiariesConsolidated Statements ofStockholders’ Equity(in millions, except per share amounts)**
| ** **                                                                      | ** ** | **Year ended December 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                      | ** ** | **2002**                                   | ** ** | **2003** | ** ** | **2004** | ** ** |
| **COMMON STOCK**                                                                |       |                                       |       |   |   |   |   |
| Balance at beginning of  year                                                   |       | $                                          | 948        |   | 962 |   | 971 |   |
| Issuance of common stock                                                        |       | 14                                         |       | — |   | — |   |
| Exercise of stock options                                                       |       | —                                     |       | 9 |   | 26 |   |
| **Balance  at end of year**                                                     |       | $                                          | 962        |   | 971 |   | 997 |   |
| **ADDITIONAL PAID-IN CAPITAL**                                                  |       |                                       |       |   |   |   |   |
| Balance at beginning of  year                                                   |       | $                                          | 873        |   | 950 |   | 970 |   |
| Issuance of common stock                                                        |       | 70                                         |       | 1 |   | (4 | ) |
| Exercise of stock options                                                       |       | —                                     |       | 13 |   | 105 |   |
| Deferred compensation                                                           |       | 7                                          |       | 6 |   | 15 |   |
| **Balance  at end of year**                                                     |       | $                                          | 950        |   | 970 |   | 1,086 |   |
| **RETAINED EARNINGS**                                                           |       |                                       |       |   |   |   |   |
| Balance at beginning of  year                                                   |       | $                                          | 168        |   | 322 |   | 456 |   |
| Net Income                                                                      |       | 198                                        |       | 164 |   | 238 |   |
| Exercise of stock options                                                       |       | (14                                        | )          | — |   | 26 |   |
| Common dividends ($.08  per share)                                              |       | (30                                        | )          | (30 | ) | (31 | ) |
| **Balance  at end of year**                                                     |       | $                                          | 322        |   | 456 |   | 689 |   |
| **ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)**                               |       |                                       |       |   |   |   |   |
| Balance at beginning of  year                                                   |       | $                                          | (5         | ) | (11 | ) | (1 | ) |
| Cash flow hedge  adjustment, net of deferred tax                                |       | (3                                         | )          | 5 |   | 7 |   |
| Cumulative translation  adjustment, net of deferred tax                         |       | 1                                          |       | 1 |   | — |   |
| Change in unrealized gain  / loss on marketable securities, net of deferred tax |       | (4                                         | )          | 11 |   | 3 |   |
| Minimum pension  obligation adjustment, net of deferred tax                     |       | —                                     |       | (7 | ) | (12 | ) |
| **Balance  at end of year**                                                     |       | $                                          | (11        | ) | (1 | ) | (3 | ) |
| **TREASURY STOCK, AT COST**                                                     |       |                                       |       |   |   |   |   |
| Balance at beginning of  year                                                   |       | $                                          | (201       | ) | (170 | ) | (157 | ) |
| Issuance of common stock                                                        |       | 1                                          |       | 1 |   | 4 |   |
| Exercise of stock options                                                       |       | 30                                         |       | 12 |   | — |   |
| Repurchase of common  stock                                                     |       | —                                     |       | — |   | (48 | ) |
| **Balance  at end of year**                                                     |       | $                                          | (170       | ) | (157 | ) | (201 | ) |
| **TOTAL  STOCKHOLDERS’ EQUITY**                                            |       |                                       |       |   |   |   |   |
| Balance at beginning of  year                                                   |       | $                                          | 1,783      |   | 2,053 |   | 2,239 |   |
| Net income                                                                      |       | 198                                        |       | 164 |   | 238 |   |
| Cash flow hedge  adjustment, net of deferred tax                                |       | (3                                         | )          | 5 |   | 7 |   |
| Cumulative translation  adjustment, net of deferred tax                         |       | 1                                          |       | 1 |   | — |   |
| Change in unrealized gain  / loss on marketable securities, net of deferred tax |       | (4                                         | )          | 11 |   | 3 |   |
| Minimum pension  obligation adjustment, net of deferred tax                     |       | —                                     |       | (7 | ) | (12 | ) |
| Comprehensive income                                                            |       | 192                                        |       | 174 |   | 236 |   |
| Issuance of common stock                                                        |       | 85                                         |       | 2 |   | — |   |
| Exercise of stock options                                                       |       | 16                                         |       | 34 |   | 157 |   |
| Repurchase of common  stock                                                     |       | —                                     |       | — |   | (48 | ) |
| Deferred compensation                                                           |       | 7                                          |       | 6 |   | 15 |   |
| Common dividends ($.08  per share)                                              |       | (30                                        | )          | (30 | ) | (31 | ) |
| **Balance at end of year**                                                      |       | $                                          | 2,053      |   | 2,239 |   | 2,568 |   |

 

See notes to consolidated financial statements

49

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**Notes To Consolidated Financial Statements December 31, 2004**

**NOTE1:  BASIS OF PRESENTATION ANDORGANIZATION**

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

**NOTE2:  SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

**Principles of Consolidation**

The consolidated financialstatements include the accounts of Hilton Hotels Corporation, our wholly ownedsubsidiaries, variable interest entities where we are the primary beneficiaryand entities in which we have a controlling financial interest. The determinationof controlling financial interest is based upon the terms of individual jointventure agreements, including evaluation of rights held by other ownershipinterests. Entities in which we have a controlling financial interest aregenerally comprised of majority owned joint ventures. All material intercompanytransactions are eliminated and net earnings are reduced by the portion ofearnings of affiliates applicable to other ownership interests.

**Cash and Equivalents**

Cash and equivalentsinclude investments with initial maturities of three months or less.

**Restricted Cash**

Restricted cash includes cash related to certainconsolidated hotels, the use of which is restricted for hotel purposes underthe terms of collateralized borrowings; refundable deposits on the sale oftimeshare intervals; and cash balances held by a consolidated non-controlledentity. 

**Accounts Receivable**

Accounts receivable arereflected net of allowance for uncollectible accounts of $20 million and$27 million as of December 31, 2003 and 2004, respectively.

**Investments**

We maintain investments inunconsolidated affiliates, including hotel joint ventures as well as otherentities that support the operations of our hotel properties. Investments areaccounted for using the equity method when we exercise significant influenceover the venture but lack a controlling financial interest, which is determinedbased upon the terms of individual joint venture agreements, includingevaluation of rights held by other ownership interests. Generally, we accountfor investments using the equity method when we own more than a minimalinvestment but have no more than a 50% ownership interest. When we have acontrolling financial interest in the venture, which is generally when ourownership exceeds 50%, the balance sheet and results of operations areconsolidated, with net earnings reduced by the portion of earnings applicableto other ownership interests. All other investments in unconsolidatedaffiliates are generally accounted for under the cost method. The hotels inwhich we own a non-controlling financial interest are an integral component ofour hotel ownership segment and are strategically and operationally importantto that segment’s results. Therefore, our operating income from unconsolidatedaffiliates is included as a component of consolidated operating income in theaccompanying consolidated statements of income.

50

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**Currency Translation**

Assets and liabilitiesdenominated in most foreign currencies are translated into U.S. dollars at year-endexchange rates and related gains and losses, net of applicable deferred incometaxes, are reflected in stockholders’ equity. Gains and losses from foreigncurrency transactions are included in earnings.

**Valuation of Long-Lived Assets**

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

**Property and Equipment**

Property and equipment are stated at cost lessaccumulated depreciation. Interest incurred during construction of facilitiesis capitalized and depreciated over the life of the asset. Costs ofimprovements are capitalized. These capitalized costs may include structuralcosts, equipment, fixtures and floor and wall coverings. Costs of normalrepairs and maintenance are charged to expense as incurred.

Depreciation is providedusing the straight-line method over the estimated useful life of the assets. Leaseholdimprovements are depreciated over the shorter of the asset life or lease term. Theestimated useful lives of assets are generally 40 years for buildings and threeto eight years for building improvements and furniture and equipment. Depreciationexpense for 2002, 2003 and 2004 was $283 million, $270 million and $271million, respectively.

**Management and Franchise Contracts**

Management and franchisecontracts acquired in acquisitions that were accounted for as purchases arerecorded at the estimated present value of net cash flow expected to bereceived over the lives of the contracts. This value is amortized using thestraight-line method over the remaining contract lives. Costs incurred toacquire individual management and franchise contracts are amortized using thestraight-line method over the life of the respective contract. Accumulatedamortization of management and franchise contracts totaled $185 millionand $211 million at December 31, 2003 and 2004, respectively.

**Leases**

Leases acquired inacquisitions that were accounted for as purchases are recorded at the estimatedpresent value of net cash flow expected to be received over the lives of thelease agreements. This value is amortized using the straight-line method overthe remaining lease terms. Accumulated amortization of leases totaled$15 million and $19 million at December 31, 2003 and 2004,respectively.

**Brands**

The brand names of hotelsacquired in acquisitions are assigned a fair market value. To arrive at a valuefor each brand name, an estimation is made of the amount of royalty income thatcould be generated from the brand name if it was licensed to an independentthird-party owner. The resulting cash flow is discounted using the estimatedweighted average cost of capital for each respective brand name. We account forbrands 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.

51

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**Goodwill**

Goodwill represents theexcess of the purchase price over the fair value of net assets of businessesacquired. We account for goodwill in accordance with FAS 142, which requiresthat goodwill is not amortized, but is reviewed annually for impairment.

**Derivative Instruments**

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

We have an interest rate swap on certain fixed ratesenior notes which qualifies as a fair value hedge. This derivative impactsearnings to the extent of increasing or decreasing actual interest expense onthe hedged notes to simulate a floating interest rate. Changes in the fairvalue of the derivative are offset by an adjustment to the value of the hedgednotes. We also have an interest rate swap on the floating rate mortgage of aconsolidated joint venture which qualifies as a cash flow hedge. Thisderivative impacts earnings to the extent of increasing or decreasing actualinterest expense on the hedged mortgage to simulate a fixed interest rate, withany incremental fair value change deferred in accumulated other comprehensiveincome.

We assess on a quarterly basis the effectiveness ofour hedges in offsetting the variability in the cash flow or fair values of thehedged obligations. There were no amounts recognized or reclassified intoearnings for the years ended December 31, 2002, 2003 or 2004 due to hedgeineffectiveness or due to excluding from the assessment of effectiveness anycomponent of the derivatives.

Concurrent with our investmentin a synthetic fuel facility in August 2004, we entered into a derivativecontract covering 2.5 million barrels of oil, which is effective for thecalendar year ending December 31, 2005. The derivative contract involvestwo call options that provide for net cash settlement at expiration based onthe full year 2005 average trading price of oil in relation to the strike priceof each option. If the average price of oil in 2005 is less than $55, thederivative will yield no payment. If the average price of oil exceeds $55, thederivative will yield a payment equal to the excess of the average price over$55 per barrel, multiplied by the number of barrels covered, up to a maximumprice per barrel of $68. The purpose of the transaction is to provide economicprotection against an increase in oil prices that could limit the amount of taxcredits available under Section 29 of the Internal Revenue Code. Thestrike prices of the two call options are intended to approximate the priceranges under which the tax credit could be reduced or eliminated by an increasein oil prices. The cost of the derivative agreement totaled approximately $2.5million. This agreement does not qualify for hedge accounting and, as a result,changes in the fair value of the derivative agreement are reflected inearnings.

**Unamortized Loan Costs**

Debt discount and issuancecosts incurred in connection with the placement of long-term debt arecapitalized and amortized to interest expense over the lives of the relateddebt. These balances are included in other assets in our consolidated balancesheets.

52

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**Self-Insurance**

We are self-insuredfor various levels of general liability, workers’ compensation and employeemedical and dental insurance coverage at our owned locations. Managedproperties may be required to participate in certain of the programs where weare the employer of the employees at the hotel. Managed properties may alsoelect to participate in our self-insured liability insurance program. Wepurchase insurance coverage for claim amounts which exceed our self-insuredretentions. Depending on the type of insurance, these self-insured retention amountsrange from $250,000 to $500,000 per claim. Our self-insurance reserves areincluded in accounts payable and accrued expenses (current portion) andinsurance reserves and other (long-term portion) in the accompanyingconsolidated balance sheets. The undiscounted amount of our self-insurancereserves totaled $141 million and $148 million at December 31, 2003 and2004, respectively.

Our insurance reserves areaccrued based on estimates of the present value of claims expected to occurduring the covered period. These estimates are prepared with the assistance ofoutside actuaries and consultants. Our actuaries periodically review the volumeand amount of claims activity, and based upon their findings, we adjust ourinsurance reserves accordingly. The ultimate cost of claims for a coveredperiod may differ from our original estimates. General liability and workerscompensation claim estimates are discounted to determine the present value ofprojected settlements; the discount rates used in the 2002 through 2004 programyears were approximately 3.0% to 4.25%, which we considered reasonable based onclaims settlement patterns. Since medical and dental claims are generally paidwithin several months, we do not discount the related insurance reserves.

**Revenue Recognition**

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

Management fees represent fees earned from hotelsmanaged by us, usually under long-term contracts with the hotel owner. Managementfees include a base fee, which is generally a percentage of hotel revenue, andan incentive fee, which is generally based on the hotel’s profitability. Werecognize base fees as revenue when earned in accordance with the terms of thecontract. In interim periods we recognize incentive fees that would be due ifthe contract were terminated at the end of the interim period.

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

Timeshare and otherincome primarily consists of earnings from our timeshare operations. Timesharerevenue is generated primarily from the sale and financing of timeshareintervals and operating timeshare resorts. We recognize revenue from deededtimeshare sales in accordance with FAS 66, “Accounting for Real Estate Sales.”Sales are included in revenue when a minimum of a ten percent down payment hasbeen received, certain minimum sales thresholds have been attained, thepurchaser’s period to cancel for a refund has expired and the relatedreceivable is deemed to be collectable. We defer revenue recognition for salesthat do not meet these criteria. During periods of construction, profits fromtimeshare sales are recognized under the percentage-of-completion method. OurHilton City Club timeshare product is accounted for as a long-term lease with areversionary interest rather than the sale of a deeded interest in real estate.Hilton City Club sales revenue is recognized over the term of the lease.

53

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

Timeshare and other income also includes revenuegenerated by the incidental support of hotel operations and the recognition ofdeferred gains on asset sales. We account for the sale of real estate inaccordance with FAS 66. To the extent we realize gains from the sale of realestate and maintain significant continuing involvement in the form of along-term management contract, the gain is deferred and recognized in earningsover the term of the contract. Results in 2002, 2003 and 2004 include therecognition of pre-tax deferred gains totaling $6 million, $10 million and $15million, respectively. The deferral of gain recognition is dependent on thestructure of individual sale transactions.

We incur certainreimbursable costs on behalf of managed hotel properties and franchisees. Wereport reimbursements from managed properties and franchisees as revenue andthe related costs as expenses. These costs, which relate primarily to payrollcosts at managed properties where we are the employer, are reflected in otherrevenue and expenses from managed and franchised properties in the consolidatedstatements of income. Since the reimbursements are made based upon the costsincurred with no added margin, the presentation of these reimbursable costs hasno effect on our operating income, total or per share net income, cash flow orfinancial position.

**Hilton HHonors**

Hilton HHonors is a guest loyalty program operated byHilton HHonors Worldwide (HHW), a joint venture 50% owned by us and 50% ownedby Hilton Group plc. Hilton Group’s wholly owned subsidiary, HiltonInternational Co., owns the rights to the Hilton brand name outside the UnitedStates. The HHonors program is operated for the benefit of the Hilton family ofbrands worldwide.

Members of the HHonors program earn points based ontheir spending at most of the hotel properties operated and franchised by usand Hilton Group. HHW accumulates and tracks points on the member’s behalf andfulfills the awards upon request. Points can be redeemed for hotel stays atparticipating properties, and for a variety of other awards such as airlinetickets, cruises and car rentals. As we exercise significant influence over theoperation of HHW but lack a controlling financial interest, our investment inHHW is accounted for under the equity method.

HHonors is provided as aguest loyalty program to participating hotels. HHW charges the cost ofoperating the program, including the estimated fair value of award redemption,to participating hotels based on member’s qualifying expenditures. The chargesdo not include a markup or profit element. We record our share of programcosts, which we expense and pay to HHW based upon contractual amounts whenqualified 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 bydividing net income available to common stockholders by the weighted averagenumber of common shares outstanding for the period. The weighted average numberof common shares outstanding for 2002, 2003 and 2004 were 374 million,378 million and 384 million, respectively. Diluted EPS reflects thepotential dilution that could occur if securities or other contracts to issuecommon stock were exercised or converted. The dilutive effect of the assumedexercise of stock options and convertible securities increased the weightedaverage number of common shares by 27 million, 32 million and34 million in 2002, 2003 and 2004, respectively. In addition, the increaseto net income resulting from interest on convertible securities assumed to havenot been paid was approximately $16 million in 2002, $14 million in2003, and $12 million in 2004.

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**Stock-Based Compensation**

We apply Accounting Principles Board (APB) Opinion 25and related interpretations in accounting for our stock-based compensationplans. Prior to 2004, our stock-based compensation consisted primarily of stockoptions. No compensation cost is reflected in our net income related to ourstock option awards for the periods presented, as all options had an exerciseprice greater than or equal to the market value of the underlying common stockon the date of grant.

We granted 7,469,400 options with a grant date fairvalue of approximately $4.37 per share in 2002 and we granted 7,144,775 optionswith a grant date fair value of approximately $4.00 per share in 2003. Nooptions were granted in 2004. For disclosure purposes, we estimated the fairvalue of each option grant on the date of grant using the Black-Scholesoption-pricing model with the following weighted average assumptions used forgrants in 2002 and 2003 respectively: dividend yield of one percent for bothyears; expected volatility of 34 and 35 percent, respectively; risk-freeinterest rates of 4.6 and 3.0 percent, respectively, and expected lives of fiveyears for both 2002 and 2003.

In the second quarter of 2004, we awarded restrictedstock under the new 2004 Omnibus Equity Compensation Plan which includes twoforms of restricted stock: time-based and performance-based. The time-basedrestricted stock awards vest annually in a straight-line manner generally overfour years. The performance-based restricted stock awards vest in full at theend of a three-year period, with the shares to be issued subject to upward ordownward revision based on the extent a pre-determined performance measure isachieved. In accordance with APB 25, compensation expense for the time-basedawards is measured at the fair value of the underlying stock at the date ofgrant. Compensation expense associated with the performance-based awards is subjectto adjustment for changes in the underlying stock price over the vestingperiod, as well as changes in estimates relating to whether the performanceobjective will be achieved. We granted 1,560,670 time-based units and 765,309performance-based units in 2004, both with a grant date fair value ofapproximately $17.37 per share. No restricted stock units were awarded in 2002or 2003. Compensation expense for both the time-based and performance-basedawards is amortized over the respective vesting periods. Consolidatedcompensation expense under the 2004 plan was approximately $6 million in 2004.

We also providesupplemental retirement benefits to eligible senior officers in the form offixed stock units that settle for shares of our common stock on a one-for-onebasis. We granted 62,440 units with a grant date fair value of $11.85 per sharein 2002 and we granted 8,425 units with a grant date fair value of $12.65 pershare in 2003. No units were granted in 2004. The compensation expenseassociated with the benefits is expensed over a four year vesting period. The aggregateexpense under these plans totaled $7 million, $6 million and$4 million in 2002, 2003 and 2004, respectively.

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

Hadthe expense for all forms of our stock-based compensation been determined usingthe fair value based method defined in FAS 123, “Accounting for Stock-BasedCompensation,” our net income and net income per share would have been reducedto the pro forma amounts indicated below. These pro forma results may not beindicative of the future results for the full fiscal year due to potentialgrants, vesting and other factors:
| ** **                                                                  | ** ** | **2002**                                                         | ** ** | **2003** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                                                  | ** ** | **(in millions, except per  share amounts)** | ** ** |
| Net income:                                                                 |       |                                                             |       |     |       |     |       |
| As reported                                                                 |       | $                                                                | 198        |     | 164        |     | 238        |   |
| Add back: Compensation expense included in reported  net income, net of tax |       | 4                                                                |       | 4        |       | 6        |       |
| Deduct: Fair-value compensation expense for all  awards, net of tax         |       | (24                                                              | )          | (21      | )          | (18      | )          |
| As adjusted                                                                 |       | $                                                                | 178        |     | 147        |     | 226        |   |
| Basic earnings per share:                                                   |       |                                                             |       |     |       |     |       |
| As reported                                                                 |       | $                                                                | .53        |     | .43        |     | .62        |   |
| As adjusted                                                                 |       | $                                                                | .48        |     | .39        |     | .59        |   |
| Diluted earnings per share:                                                 |       |                                                             |       |     |       |     |       |
| As reported                                                                 |       | $                                                                | .53        |     | .43        |     | .60        |   |
| As adjusted                                                                 |       | $                                                                | .48        |     | .39        |     | .57        |   |

 

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States requires us to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenue and expenses during the reporting period. Actual resultscould differ from our estimates and assumptions.

**Reclassifications**

Our consolidatedstatements of cash flow in 2002 and 2003 have been reclassified to present thenet change in timeshare notes receivable in cash provided by operatingactivities. We previously reflected the issuance of timeshare notes and therelated payments received within investing activities. This reclassificationresulted in a decrease in cash provided by operating activities totaling $36million and $73 million in 2002 and 2003, respectively, with a correspondingreduction in net cash used in investing activities. The reclassification has noimpact on our previously reported consolidated statements of income orconsolidated balance sheets. Certain other prior period amounts have beenreclassified to conform with the current year presentation, primarily relatedto our separate presentation of restricted cash in the consolidated balance sheetsand consolidated statements of cash flow.

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**New Accounting Standards**

In January 2003, the Financial AccountingStandards Board (FASB) issued FASB Interpretation No. 46, “Consolidationof Variable Interest Entities” (FIN 46) to expand upon existing accountingguidance that addresses when a company should include in its financialstatements the assets, liabilities and results of operations of another entity.Under previous accounting guidance, we generally have included another entityin our consolidated financial statements only if we have a controllingfinancial interest in the entity through voting or other interests. FIN 46changed that guidance by requiring a variable interest entity (VIE), asdefined, to be consolidated by the company that is subject to a majority of therisk of loss from the VIE’s activities, or is entitled to receive a majority ofthe entity’s residual returns, or both. The losses and residual returns arebased on the potential variability from the anticipated cash flow of the VIEattributable to the holders of variable interests. FIN 46 also requiresdisclosure about VIEs that a company is not required to consolidate, but inwhich it has a significant variable interest.

Our evaluation of the provisions of FIN 46 as itrelates to our various forms of arrangements has focused primarily on reviewingthe key terms of our joint venture agreements, management contracts andfranchise agreements against the criteria in FIN 46 to determine if any ofthese arrangements qualify as VIEs. In general, a VIE represents a structureused for business purposes that either does not have equity investors withvoting rights or that has equity investors that do not provide sufficientfinancial resources for the entity to support its activities. However, other contractual arrangements couldqualify an entity as a VIE and designate which party to the contract is the primarybeneficiary.

In the first quarter of 2003, we adopted FIN 46for VIEs created after January 31, 2003, which resulted in no impact toour consolidated financial statements. In December 2003, the FASB issued arevision to FIN 46 (FIN 46R) that replaced the originalinterpretation and codified proposed modifications and other decisionspreviously issued through certain FASB Staff Positions, including the deferralof the effective date of applying FIN 46R to certain variable interestscreated before February 1, 2003. We adopted FIN 46R in the firstquarter of 2004. Except as described in the following paragraphs, our jointventure agreements, management contracts and franchise agreements are notvariable interests, and therefore are not subject to the consolidation anddisclosure provisions of FIN 46R.

Our evaluation of our joint venture agreements,management contracts and franchise agreements has identified two managed hotelsin which we have variable interests, due to the terms of performance guarantees.The performance guarantee associated with one of the hotel managementagreements does not expose us to the majority of expected cash flow variabilityand therefore this hotel is not consolidated. Our maximum exposure to loss onthis contract consists of future management fees and our potential obligationto fund the performance guarantee which, as of December 31, 2004, totaled anaggregate amount of approximately $45 million through 2012.

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

The second of thetwo contracts contains provisions that expose us to the majority of expectedcash flow variability. As a result, we are considered to be the primarybeneficiary under FIN 46R and are required to consolidate the balancesheet and results of operations of the hotel. Therefore, this previouslyunconsolidated managed hotel has been consolidated as of January 1, 2004. Ourconsolidated balance sheet as of December 31, 2004 includes the assets andliabilities of this non-controlled hotel, including $9 million of cashand equivalents (reflected as restricted cash) and $100 million of debtwhich is non-recourse to us. The debt is secured by the fixed assets ofthe hotel with a historical cost of $84 million. The net equity of the hotel isa retained deficit of approximately $61 million as of December 31, 2004and is reflected on our consolidated balance sheet in other assets. The revenueand operating expenses of this property are included in other revenue andexpenses from managed and franchised properties in the consolidated statementsof income. Our financial exposure to this property consists of the fees we earnunder the management agreement and costs we may incur under the performanceguarantee. The net effect of the other earnings of this property, which belongto the hotel owners, are reversed from our consolidated results throughminority and non-controlled interests expense in the consolidatedstatements of income. As a result, the implementation of FIN 46R had noimpact on reported net income or net income per share.

In September 2004, the Emerging Issues Task Force(EITF) of the FASB reached a consensus regarding accounting issues related tocertain features of contingently convertible debt and the effect on dilutedearnings per share (EITF Issue No. 04-8, “The Effect of ContingentlyConvertible Instruments on Diluted Earnings Per Share”). In November 2004,the EITF changed the transition provisions of the consensus to require that theguidance be applied to reporting periods ending after December 15, 2004. Undercurrent interpretations of FAS 128, “Earnings per Share”, issuers ofcontingently convertible debt exclude the potential common shares underlyingthe debt instrument from the calculation of diluted earnings per share untilthe contingency is met. The EITF consensus requires that potential sharesunderlying the debt instrument should be included in diluted earnings per sharecomputations (if dilutive) regardless of whether the contingency has been met.

Our consolidated debt balance includes $575 million ofcontingently convertible debt, which was issued in the second quarter of 2003.Our calculation of diluted earnings per share for 2004 reflects the impact ofthe required implementation of EITF 04-8. As required, the consensus hasbeen retroactively applied to all periods during which the instrument wasoutstanding. The retroactive application to 2003 did not result in a change topreviously reported earnings per share for the year ended December 31, 2003.

In December 2004, the FASB issued FAS 123R, “Share-BasedPayment,” which eliminates the ability to account for share-basedcompensation transactions using APB Opinion No. 25, “Accounting for StockIssued to Employees,” and generally requires instead that such transactions beaccounted for using a fair-value-based method. Pro forma disclosureis no longer an alternative. FAS 123R also requires that the tax benefitassociated with these share-based payments be classified as financingactivities in the statement of cash flow rather than operating activities ascurrently permitted. FAS 123R must be adopted no later than July 1, 2005. Earlyadoption is permitted in periods in which financial statements have not yetbeen issued. FAS 123R offers alternative adoption methods. We have not yetdetermined which alternative method we will use.

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

As permitted by FAS123, we currently account for share-based payments to employees using APB 25’sintrinsic value method and, as such, generally recognize no compensation expensefor employee stock options. The adoption of FAS 123R will result in increasedcompensation expense in our reported results. Had we adopted FAS 123R in priorperiods, the impact of the standard would have approximated the impact of FAS123 as described in the disclosure of pro forma net income and earnings pershare in “Stock-Based Compensation” above.

In December 2004, the FASB issued FAS 152, “Accountingfor Real Estate Time-Sharing Transactions.” FAS 152 amends existingaccounting guidance to reference the financial accounting and reportingguidance for real estate time-sharing transactions provided in AICPAStatement of Position 04-02, “Accounting for Real Estate Time-SharingTransactions.” FAS 152 is effective for our financial statements issued after January 1,2006. The new accounting guidance requires, among other things, that costsincurred to sell timeshare units generally be charged to expense as incurred,including marketing expenses. This is consistent with our existing accountingtreatment and is not expected to impact our reported results. The new standardwill also require a change in the classification of certain items currentlyreported as expenses, requiring these items to be reflected as reductions ofrevenue. The impact to reported revenue is not expected to be significant, and timeshareoperating income will not be affected.

FAS 152 will also impactthe timing of expense recognition when pre-sales of projects underconstruction occur and we use the percentage-of-completion methodof accounting. We are currently allowed to defer sales and marketing expensesin the same proportion as the deferred revenue during construction. FAS 152allows only the deferral of “direct” sales and marketing expenses. This willresult in earlier recognition of sales and marketing expenses during theconstruction period, but will not impact the total sales and marketing expensesrecognized. The impact of this change is dependent on the timing and durationof construction and the extent of pre-sales; however, it is not expectedto affect reported results in 2006.

**NOTE3:  ACQUISITIONS AND DISPOSITIONS**

**Acquisitionof the Hilton Waikoloa Village**

In May 2002, wepurchased our partner’s interest in the 1,240-room Hilton WaikoloaVillage on Hawaii’s Big Island, a property we manage and in which we previouslyhad an ownership interest of approximately 13 percent. We acquired theremaining 87 percent interest for approximately $155 million, consistingof $75 million in cash and 5.2 million shares of our common stock. 

**Synthetic Fuel Investment**

In August 2004, we acquired a 24 percent minorityinterest in a coal-based synthetic fuel facility for approximately $32million. Our investment is accounted for using the equity method as we lack acontrolling financial interest. The facility produced pre-tax operating losses,our proportionate share of which totaled approximately $6 million in 2004. Thisloss is reflected as loss from non-operating affiliates in theaccompanying consolidated statements of income.

The synthetic fuel produced at this facility qualifiesfor tax credits based on Section 29 of the Internal Revenue Code, whichreduce our provision for income taxes. The Section 29 credits are expectedto continue to be available for fuel produced at the facility through 2007. Thetax credits, combined with the tax benefit associated with the operatinglosses, totaled approximately $9 million in 2004. As a result, the benefit toour net income of the investment totaled approximately $3 million for the yearended December 31, 2004.

59

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**Asset Dispositions**

In the 2004 first quarter, we sold the Doubletree LaPosada Resort - Scottsdale in Arizona for total consideration ofapproximately $30 million, including approximately $6 million in cash and anote receivable for approximately $24 million. The note receivable is due to berepaid in the first quarter of 2005 and has been classified as a current asseton the December 31, 2004 consolidated balance sheet. No book gain or losswas realized on the sale; however, the transaction generated a capital gain fortax purposes, which enabled us to utilize existing capital loss taxcarryforwards that had been fully reserved in prior periods. The transactionresulted in a net benefit to our income tax provision of approximately $2million. We will continue to operate the hotel under a short-termmanagement agreement that expires when the outstanding note is due.

In the second quarter of 2004, we sold the DoubletreeModesto and Doubletree Bakersfield, both in California. Total considerationfrom the sale of both hotels was approximately $40 million in cash. Gains ofapproximately $3 million on Modesto and approximately $2 million on Bakersfieldwere deferred due to our continuing involvement with each hotel and will berecognized over the life of the long-term management contract retained oneach hotel. Both management contracts are for a term of ten years. Thetransaction also generated a capital gain for tax purposes, which enabled us toutilize existing capital loss tax carryforwards that had been fully reserved inprior periods. The transaction resulted in a net benefit to our income taxprovision of approximately $4 million.

In the fourth quarter of 2004, we sold the DoubletreeJantzen Beach and the Doubletree Columbia River, both near Portland Oregon, fortotal consideration of approximately $29 million in cash. The sale resulted ina pre-tax loss of approximately $3 million. The $5 million pre-taxloss on asset dispositions and other in 2004 includes the $3 million loss onthe sale of the two Doubletrees and a $5 million loss related to the write-offof values assigned to certain long-term management and franchiseagreements that were terminated in 2004. These losses were partially offset bya $3 million gain from the sale of our investment in Travelweb.

In the 2003 first quarter, we sold four HomewoodSuites by Hilton hotel properties in two separate transactions forapproximately $40 million. We continue to operate three of the hotels underlong-term management agreements and we have retained a long-termfranchise contract on the fourth hotel. In the fourth quarter of 2003, anEmbassy Suites hotel in which we held a 65% interest was sold, resulting in apre-tax loss of approximately $4 million. We retained a long-termfranchise contract on this hotel. Also in the 2003 fourth quarter, we soldcertain marketable securities, which resulted in a pre-tax gain ofapproximately $2 million. In addition, we wrote off the value assigned tocertain long-term management and franchise agreements that wereterminated in 2003 totaling approximately $4 million. In the aggregate, thesetransactions resulted in a net $6 million pre-tax loss on assetdispositions and other in 2003.

60

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

In 2002, we enteredinto a $125 million facility with a wholly owned subsidiary of GE Capital forthe sale of notes receivable originated by our timeshare business. During 2002,we completed two sales of notes receivable under the facility, totalingapproximately $119 million. These transactions resulted in a gain ofapproximately $5 million. Also in 2002, we completed the sale of two owned, twoleased and seven managed properties operating as Harrison Conference Centersfor approximately $49 million. Under transition management and continuingservices agreements, we provide certain services to the sold properties forterms ranging up to six years from the date of sale. We recorded a $16 millionpre-tax book loss on the sale. However, the sale generated a capital gainfor tax purposes, which enabled us to utilize existing capital loss taxcarryforwards that had been fully reserved in prior periods. The transaction,including the impact of the reduction of the valuation allowance associatedwith the capital loss tax carryforwards, resulted in a $16 million book taxbenefit. Thus, on an after-tax basis, the sale had no impact on reportednet income. The total pre-tax loss on asset dispositions and other of $14million in 2002 represents the $11 million net pre-tax loss on theaforementioned asset sales and a loss of approximately $3 millionprimarily as a result of writing off the value assigned to several long-termmanagement and franchise agreements which were terminated during the year.

**CNL Transactions**

In the fourth quarter of 2002, we entered into apartnership with CNL Hospitality Corp. to acquire seven hotel properties. Thepartnership acquired the 500-room Doubletree at Lincoln Centre in Dallas,Texas and the 428-room Sheraton El Conquistador Resort and Country Clubin Tucson, Arizona in December 2002. Both properties were converted to theHilton brand. In connection with the formation of the joint venture, wecontributed $11 million to the partnership in December 2002.

In the first quarter of 2003, we contributed the 437-roomHilton Rye Town in Rye Brook, New York and CNL contributed the 630-roomDoubletree Crystal City in Arlington, Virginia to the partnership. The gainresulting from our contribution of the Hilton Rye Town totaling approximately$35 million has been deferred and will be recognized over the ten-year life ofthe long-term management contract retained on the property. Also in thefirst quarter of 2003, the partnership acquired the 257-suite EmbassySuites Santa Clara in Santa Clara, California, the 267-suite EmbassySuites Crystal City in Arlington, Virginia, and the 174-suite EmbassySuites Orlando Airport in Orlando, Florida. We operate all seven hotels underlong-term management contracts and have a 25% ownership interest in thepartnership.

In connection with the structuring of the CNLpartnership, including our contribution of the Hilton Rye Town, we received acash distribution totaling approximately $46 million in the 2003 first quarter.This distribution is reflected as proceeds from asset dispositions in theaccompanying consolidated statements of cash flow. In addition, the tax gainresulting from the contribution of the Hilton Rye Town enabled us to utilizecapital loss tax carryforwards, resulting in a reduction in our provision forincome taxes totaling approximately $4 million.

61

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

In the fourth quarter of 2003, we entered into anotherpartnership with CNL to own two hotel properties. We contributed the 544-roomCapital Hilton in Washington, D.C. and the 394-room Hilton La JollaTorrey Pines outside of San Diego, California to the partnership. The gainresulting from our contribution of the two hotels totaling approximately $57 millionhas been deferred and will be recognized over the ten-year life of the long-termmanagement contracts retained on the properties. We have a 25% ownershipinterest in the partnership. In connection with this transaction, we received adistribution from the partnership of approximately $190 million. Thisdistribution is reflected as proceeds from asset dispositions in theaccompanying consolidated statements of cash flow. This transaction alsoresulted in tax gains that enabled us to utilize capital loss taxcarryforwards, resulting in a reduction in our provision for income taxestotaling approximately $22 million.

**NOTE4:  IMPAIRMENT LOSS AND RELATED COSTS**

Results in 2004 include impairment loss and relatedcosts totaling $5 million. This pre-tax charge is to reduce the value ofan owned hotel to its estimated fair value and is included in Hotel Ownershipsegment results.

Results in 2003 include impairment loss and relatedcosts totaling $22 million. These costs include a $17 million pre-taxcharge related to the decline in value of certain equity securities held by us.The decline in value of the securities was deemed to be other-than-temporaryin the 2003 first quarter, thus requiring an earnings charge, primarily basedon the length of time the securities had traded below cost. The 2003 chargealso includes a $5 million pre-tax charge to reduce the value of an ownedhotel and a management contract to their respective fair values. The write-downof the hotel and management contract are included in Hotel Ownership andManaging and Franchising segment results, respectively, while the chargerelated to the marketable securities is included in corporate and otherunallocated expenses in our reported segment results.

Results in 2002 include acharge of $21 million for mold remediation in certain areas of the HiltonHawaiian Village. The charge includes approximately $17 million forremediation efforts at the property’s Kalia Tower, which is included in ourHotel Ownership segment, and approximately $4 million for remediationefforts at the Lagoon Tower timeshare development.

**NOTE 5:  INVENTORIES**

Included in inventories atDecember 31, 2003 and 2004 are unsold intervals at our vacation ownershipproperties of $180 million and $132 million, respectively. Inventoriesare valued at the lower of cost or estimated net realizable value.

62

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**NOTE6:  INVESTMENTS AND NOTES RECEIVABLE**

Investmentsand notes receivable at December 31, 2003 and 2004 are as follows:
| ** **                                                                         | ** ** | **2003**               | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                                         | ** ** | **(in millions)** | ** ** |
| Equity investments                                                                 |       |                   |       |     |       |
| Hotels                                                                             |       | $                      | 274        |     | 276        |   |
| Other                                                                              |       | 28                     |       | 49       |       |
| Timeshare notes  receivable, with an average rate of 12.9%, due 2005 to 2014  |       | 165                    |       | 262      |       |
| Other notes  receivable, with an average rate of 6.3%, due 2005 to 2015            |       | 71                     |       | 88       |       |
| Marketable  securities                                                             |       | 21                     |       | 27       |       |
| Other investments                                                                  |       | 31                     |       | 1        |       |
|                                                                               |       | 590                    |       | 703      |       |
| Less current  portion of notes receivable                                          |       | (32                    | )          | (68      | )          |
| Total                                                                              |       | $                      | 558        |     | 635        |   |

 

Notes receivable are reflected net of allowances foruncollectible amounts of $11 million and $18 million as of December 31,2003 and 2004, respectively.

Our investments inunconsolidated affiliates accounted for under the equity method totaled$302 million and $325 million at December 31, 2003 and 2004,respectively, representing approximately four percent of total assets at theend of 2003 and 2004. At December 31, 2004, our unconsolidated affiliatesaccounted for under the equity method had total assets of approximately $2.52 billionand total debt of approximately $1.34 billion. Of the $1.34 billionof total debt, $1.31 billion is secured solely by the affiliate’s assetsor is guaranteed by other partners without recourse to us. We are the creditoron $50 million of the $1.34 billion of debt.

**NOTE 7:  PROPERTY AND EQUIPMENT**

Propertyand equipment at December 31, 2003 and 2004 are as follows:
| ** **                             | ** ** | **2003**               | ** ** | **2004** | ** ** |
|----------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                             | ** ** | **(in millions)** | ** ** |
| Land                                   |       | $                      | 535        |     | 513        |   |
| Buildings and  leasehold improvements  |       | 3,587                  |       | 3,650    |       |
| Furniture and  equipment               |       | 846                    |       | 829      |       |
| Property held for  sale or development |       | 40                     |       | 46       |       |
| Construction in  progress              |       | 14                     |       | 20       |       |
|                                   |       | 5,022                  |       | 5,058    |       |
| Less accumulated  depreciation         |       | (1,381                 | )          | (1,548   | )          |
| Total                                  |       | $                      | 3,641      |     | 3,510      |   |

 

63

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**NOTE8:  ACCOUNTS PAYABLE AND ACCRUED EXPENSES**

Accountspayable and accrued expenses at December 31, 2003 and 2004 are as follows:
| ** **                         | ** ** | **2003**               | ** ** | **2004** | ** ** |
|------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                         | ** ** | **(in millions)** | ** ** |
| Accounts and  notes payable        |       | $                      | 84         |     | 95         |   |
| Accrued  compensation and benefits |       | 147                    |       | 150      |       |
| Deposits                           |       | 21                     |       | 42       |       |
| Accrued property  tax              |       | 29                     |       | 28       |       |
| Accrued interest                   |       | 35                     |       | 35       |       |
| Insurance  reserves                |       | 37                     |       | 45       |       |
| Other accrued  expenses            |       | 200                    |       | 216      |       |
| Total                              |       | $                      | 553        |     | 611        |   |

 

**NOTE 9:  LONG-TERM DEBT**

Long-termdebt at December 31, 2003 and 2004 is as follows:
| ** **                                                            | ** ** | **2003**               | ** ** | **2004** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                            | ** ** | **(in millions)** | ** ** |
| Industrial  development revenue bonds at adjustable rates, due 2015   |       | $                      | 82         |     | 82         |   |
| Senior notes,  with an average rate of 7.6%, due 2007 to 2031(1)      |       | 2,049                  |       | 2,045    |       |
| 7% Senior notes,  due 2004(2)                                         |       | 325                    |       | —   |       |
| Mortgage notes, 4.8%  to 8.6%, due 2006 to 2022(1)                    |       | 348                    |       | 341      |       |
| 7.95%  Collateralized borrowings, due 2010                            |       | 479                    |       | 471      |       |
| Chilean  inflation-indexed note, effective rate of 7.65%, due 2009(1) |       | 119                    |       | 131      |       |
| 3.375%  Contingently convertible senior notes due 2023                |       | 575                    |       | 575      |       |
| Revolving loans                                                       |       | 160                    |       | —   |       |
| Other                                                                 |       | 2                      |       | 2        |       |
|                                                                  |       | 4,139                  |       | 3,647    |       |
| Less current  maturities of long-term debt                            |       | (338                   | )          | (14      | )          |
| Net long-term debt                                                    |       | $                      | 3,801      |     | 3,633      |   |

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(1)          Interestrates include the impact of interest rate swaps.

(2)          Representsbalance assumed by Caesars Entertainment (formerly Park Place) in connectionwith the December 31, 1998 spin-off of our gaming business.

Interest paid, net of amounts capitalized, was$291 million, $261 million and $246 million in 2002, 2003 and 2004,respectively. Capitalized interest totaled $5 million, $7 million and$3 million in 2002, 2003 and 2004, respectively.

64

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

Debtmaturities are as follows:
| ** ** | ** ** | **(in millions)** | ** ** |
|------------|------------|------------------------|------------|
| 2005       |       |                   | $          | 14 |   |   |
| 2006       |       |                   | 48         |   |   |
| 2007       |       |                   | 449        |   |   |
| 2008       |       |                   | 460        |   |   |
| 2009       |       |                   | 346        |   |   |
| Thereafter |       |                   | 2,330      |   |   |
| Total      |       |                   | $          | 3,647 |   |   |

 

In August 2003, we established a $1 billionfive-year revolving credit facility, with an option to increase the size of thefacility by an additional $250 million. Borrowings under this facilitywere completely repaid during the 2004 second quarter. The capacity under ourrevolver is also used to support certain outstanding letters of credit. Totalrevolving debt capacity of approximately $850 million was available to usat December 31, 2004.

In October 1997, we filed a shelf registrationstatement with the Securities and Exchange Commission registering up to$2.5 billion in debt or equity securities. At December 31, 2004,available financing under the shelf totaled $825 million. The terms of anyadditional securities offered under the shelf will be determined by marketconditions at the time of issuance.

In connection with the spin-off in 1998 of our gamingbusiness to a new corporation named Park Place Entertainment Corporation(subsequently renamed Caesars Entertainment, Inc.), Caesars assumed andagreed to pay 100% of the amount of each payment required to be made by usunder the terms of the indentures governing our $325 million 7% SeniorNotes due 2004. Caesars repaid these notes, as scheduled, in July 2004. Becausethese notes were our legal obligation, they are reported in our 2003consolidated balance sheet as current maturities of long-term debt with theoffsetting receivable classified in current assets.

In November 2002, we entered into a derivativecontract which swaps the fixed interest payments on our $375 million 7.95%Senior Notes due 2007 to a floating interest rate equal to the six-month LondonInterbank Offered Rate plus 415 basis points. In connection with our$100 million 7.43% bonds due 2009 denominated in Chilean pesos, we have aderivative contract which swaps the principal payment to a fixed U.S. dollaramount of $100 million and fixed interest payments at 7.65% of that amount.We also have a derivative contract which swaps the floating rate mortgage of amajority owned hotel, with a principal balance of $34 million at December 31,2004, to a fixed interest rate. As of December 31, 2004, approximately 13%of our long-term debt (including the impact of interest rate swaps) wasfloating rate debt.

Provisions undervarious loan agreements require us to comply with certain covenants whichinclude limiting the amount of our outstanding indebtedness. Our revolvingcredit facilities contain two significant financial covenants: a leverage ratioand a debt service coverage ratio. We are in compliance with our loan covenantsas of December 31, 2004.

65

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

Provisions of the financing agreement related to our7.95% collateralized borrowings due 2010 require that certain cash reserves bemaintained and also restrict the transfer of excess cash generated by therelated properties to Hilton if net cash flow falls below a specified level(the cash trap). The cash trap became effective in 2003 due to reduced cashflow from the collateralized properties, primarily the Hilton San Francisco. Asof December 31, 2004, cash restricted under the terms of thecollateralized borrowings, including required reserves and the cash trap,totaled $97 million. The impact of the cash trap, which is expected toremain in effect throughout 2005, is not expected to have a material impact onour liquidity.

**NOTE 10:  FINANCIALINSTRUMENTS**

Theestimated fair values of our financial instruments at December 31, 2003and 2004 are as follows:
| ** **                                                    | ** ** | **2003**               | ** ** | **2004**        | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-----------------|------------|
| ** **                                                    | ** ** | **Carrying  Amount**   | ** ** | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| ** **                                                    | ** ** | **(in millions)** | ** ** |
| Cash and  equivalents and long-term marketable securities     |       | $                      | 30         |            |       | 30 |   |   |   | 330 |   |   |   | 330 |   |   |
| Restricted cash                                               |       | 73                     |       |            | 73         |   |   |   | 163 |   |   |   | 163 |   |   |
| Timeshare notes  receivable (including current portion)  |       | 165                    |       |            | 169        |   |   |   | 262 |   |   |   | 265 |   |   |
| Other notes  receivable (including current portion)           |       | 71                     |       |            | 70         |   |   |   | 88 |   |   |   | 89 |   |   |
| Derivative assets                                             |       | 26                     |       |            | 26         |   |   |   | 44 |   |   |   | 44 |   |   |
| Long-term debt  (including current maturities)                |       | (4,139                 | )          |            | (4,464     | ) |   |   | (3,647 | ) |   |   | (4,088 | ) |   |
| Derivative liabilities                                        |       | (2                     | )          |            | (2         | ) |   |   | (1 | ) |   |   | (1 | ) |   |
|                                                               |            |                        |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |

 

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

The fair value of cashequivalents, long-term marketable securities and restricted cash is estimatedbased on the quoted market price of the investments.

**Timeshareand Other Notes Receivable**

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

**Long-Term Debt**

The estimated fair valueof long-term debt is based on the quoted market prices for the same or similarissues or on the current rates offered to us for debt of the same remainingmaturities.

**Derivative Instruments**

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

66

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**NOTE 11:  INCOMETAXES**

Theprovision for income taxes for the three years ended December 31 are asfollows:
| ** **               | ** ** | **2002**               | ** ** | **2003** | ** ** | **2004** | ** ** |
|--------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **               | ** ** | **(in millions)** | ** ** |
| Current                  |       |                   |       |     |       |     |       |
| Federal                  |       | $                      | 129        |     | 77         |     | 114        |   |
| State, foreign and local |       | 20                     |       | 16       |       | 25       |       |
|                     |       | 149                    |       | 93       |       | 139      |       |
| Deferred                 |       | (68                    | )          | (40      | )          | (12      | )          |
| Total                    |       | $                      | 81         |     | 53         |     | 127        |   |

 

During 2002, 2003 and 2004, we paid income taxes of$58 million, $44 million and $99 million, respectively, net ofrefunds received.

Theincome tax effects of temporary differences between financial and income taxreporting that gave rise to deferred income tax assets and liabilities at December 31,2003 and 2004 are as follows:
| ** **                               | ** ** | **2003**               | ** ** | **2004** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                               | ** ** | **(in millions)** | ** ** |
| Deferred tax assets                      |       |                   |       |     |       |
| Compensation                             |       | $                      | 75         |     | 96         |   |
| Insurance                                |       | 49                     |       | 49       |       |
| Franchise system funds                   |       | 17                     |       | 13       |       |
| Reserves                                 |       | 20                     |       | 23       |       |
| NOL carryforwards, expiring 2005 to 2008 |       | 1                      |       | 1        |       |
| Capital loss carryforward, expiring 2006 |       | 14                     |       | 6        |       |
| Other                                    |       | —                 |       | 3        |       |
|                                     |       | 176                    |       | 191      |       |
| Valuation allowance                      |       | (19                    | )          | (10      | )          |
|                                     |       | 157                    |       | 181      |       |
| Deferred tax liabilities                 |       |                   |       |     |       |
| Basis difference                         |       | (187                   | )          | (168     | )          |
| Property                                 |       | (181                   | )          | (194     | )          |
| Investments                              |       | (86                    | )          | (107     | )          |
| Brand value                              |       | (378                   | )          | (378     | )          |
| Deferred income                          |       | (4                     | )          | (1       | )          |
| Accrued interest expense                 |       | (9                     | )          | (20      | )          |
| Other                                    |       | (9                     | )          | (9       | )          |
|                                     |       | (854                   | )          | (877     | )          |
| Net deferred tax  liability              |       | $                      | (697       | )        | (696       | ) |

 

67

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

Thereconciliations of the Federal income tax rate to our effective tax rate forthe three years ended December 31 are as follows:
| ** **                                                 | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal income  tax rate                                   |       | 35.0     | %          | 35.0     |       | 35.0     |       |
| Increase (reduction) in  taxes                             |       |     |       |     |       |     |       |
| State and local income taxes, net of Federal tax  benefits |       | 1.5      |       | .8       |       | 4.7      |       |
| Foreign taxes, net                                         |       | 2.0      |       | 2.3      |       | 1.3      |       |
| Federal income tax credits                                 |       | (2.9     | )          | (3.8     | )          | (4.3     | )          |
| Change in deferred tax asset valuation allowance           |       | (8.4     | )          | (13.3    | )          | (2.3     | )          |
| Option exercises                                           |       | —   |       | 4.4      |       | —   |       |
| Refund claim                                               |       | —   |       | (2.8     | )          | —   |       |
| Other                                                      |       | 1.2      |       | 1.2      |       | (.4      | )          |
| Effective tax rate                                         |       | 28.4     | %          | 23.8     |       | 34.0     |       |

 

Capital loss tax carryforwards available to offsetfuture capital gains are recorded as deferred tax assets and are fully reserveduntil evidence indicates it is more likely than not that the benefit will berealized. The deferred tax assets related to capital loss tax carryforwards arefully reserved at December 31, 2004.

Our tax provision, deferred taxes and effective ratein 2004 were impacted by a reduction in the valuation allowance for capitalloss tax carryforwards, primarily as a result of the sale of three Doubletreeproperties and the sale of our interest in Travelweb. The 2004 effective ratealso reflects the utilization of Section 29 synthetic fuel productioncredits. Excluding the impact of these items, our effective rate in 2004 was38%.

Our tax provision, deferred taxes and effective ratein 2003 were impacted by a reduction in the valuation allowance for capitalloss tax carryforwards, primarily as a result of the transactions with CNL. Inaddition, our tax provision, deferred taxes and effective rate were impacted bya reduction in the valuation allowance for capital loss tax carryforwards dueto higher than expected utilization on our 2002 Federal tax return filed in2003, as well as a settlement relating to a tax liability associated with aprior year tax return. These items resulted in a reduction of the tax provisionand effective rate in 2003. These benefits were partially offset by thewrite-off of an unutilized deferred tax asset resulting from a stock optionexercise. Excluding the impact of these items, our effective rate in 2003 was35%.

Deferred taxes were also impacted in 2003 by thesettlement and closure of certain tax audits and the adjustment of certaindeferred tax balances, each related to our acquisition of Promus HotelCorporation in 1999. In accordance with the provisions of FAS 109, thesechanges in estimates were reflected as an adjustment of goodwill related to thePromus acquisition and did not impact the tax provision in 2003. Theseadjustments resulted in a reduction of both goodwill and deferred income taxesand other liabilities totaling approximately $48 million.

68

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

Our tax provision, deferred taxes and effective ratein 2002 were impacted by asset sales, which generated capital gains for taxpurposes, enabling us to utilize capital loss tax carryforwards generated bythe Red Lion sale in 2001. The reduction of the valuation allowance for capitalloss tax carryforwards resulted in a reduction of the tax provision andeffective rate in 2002. Also in 2002, our tax provision, deferred taxes andeffective rate were impacted by higher than expected utilization of capitalloss tax carryforwards on our 2001 Federal tax return filed in 2002. Thisreduction in the valuation allowance for capital loss tax carryforwards alsoresulted in a reduction of the tax provision and effective rate for 2002. Excludingthe impact of asset sales and the impact of the higher utilization of capitalloss tax carryforwards on our 2001 Federal tax return, our effective rate in2002 was 37%.

**NOTE 12:  STOCKHOLDERS’EQUITY**

Five hundred million shares of common stock with a parvalue of $2.50 per share are authorized, of which 389 million and399 million were issued at December 31, 2003 and 2004, respectively,including treasury shares of eight million in 2003 and ten million in 2004.We have 25 million shares of preferred stock with a par value of $1.00 pershare authorized for issuance. No preferred shares were issued or outstandingat December 31, 2003 and 2004.

Our Board of Directors has approved our repurchase ofup to 20 million shares of our common stock pursuant to a stock repurchaseprogram. The timing of stock purchases are made at the discretion of management.An aggregate of 10.7 million shares had been repurchased under thisprogram prior to 2004. During 2004, we repurchased approximately 2.3 million sharesof our common stock for a total cost of approximately $48 million. No shareswere repurchased during 2002 and 2003. As of December 31, 2004, approximately7.0 million shares remained authorized for repurchase under thisauthority. In March 2005, we announced that our Board of Directors authorizedthe repurchase of up to an additional 50 million shares of common stock underthe repurchase program.

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

**NOTE 13:  STOCKPLANS**

At December 31, 2004, 49 million shares ofcommon stock were reserved for issuance under our stock incentive plans. Wehave three active stock plans with substantially identical terms that allow thegrant of options plus the 2004 Omnibus Equity Compensation Plan, which wasapproved in 2004 and allows the grant of options, stock units, performanceunits, and other stock-based awards. No stock options were granted in 2004. See“Note 2: Summary of Significant Accounting Policies—Stock-Based Compensation”for discussion of restricted stock awards in 2004.

Options may be granted to salaried officers, directorsand other key employees to purchase our common stock at not less than the fairmarket value at the date of grant. Generally, options vest over a four yearperiod, contingent upon continued employment, and remain outstanding for tenyears from the date of grant. Options may generally be exercised ininstallments commencing one year after the date of grant. At December 31, 2004,there were 28 million shares authorized for issuance under the 2004 planand no authorized shares remaining available for grant under the other threestock plans.

69

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

Asummary of the status of our stock option plans as of December 31, 2002,2003 and 2004, and changes during the years ending on those dates, is presentedbelow:
| ** **                         | ** ** | **Options Price  Range  (per share)** | ** ** | **Weighted  Average Price  (per share)** | ** ** | **Options  Outstanding** | ** ** | **Available for  Grant** | ** ** |
|------------------------------------|------------|-------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------|------------|-------------------------------|------------|
| Balance at  December 31, 2001 |       | $   6.66  - 27.53                |       |                                               |       | $                        | 13.44      |                          |       |   |   | 32,531,136 |   |   |   | 24,287,594 |   |   |
| Granted                            |       | 11.85 - 13.95                                   |       |                                               |       | 11.86                    |       |                          |       |   | 7,469,400 |   |   |   | (7,469,400 | ) |   |
| Exercised                          |       | 6.66 - 14.84                                    |       |                                               |       | 9.86                     |       |                          |       |   | (1,455,096 | ) |   |   | — |   |   |
| Cancelled                          |       | 6.66 - 20.66                                    |       |                                               |       | 12.40                    |       |                          |       |   | (1,654,675 | ) |   |   | 1,624,900 |   |   |
| Balance at December 31,  2002 |       | 6.66 - 27.53                                    |       |                                               |       | 13.33                    |       |                          |       |   | 36,890,765 |   |   |   | 18,443,094 |   |   |
| Granted                            |       | 11.87 - 13.40                                   |       |                                               |       | 11.88                    |       |                          |       |   | 7,144,775 |   |   |   | (7,144,775 | ) |   |
| Exercised                          |       | 6.66 - 16.23                                    |       |                                               |       | 11.46                    |       |                          |       |   | (9,542,341 | ) |   |   | — |   |   |
| Cancelled                          |       | 6.66 - 19.65                                    |       |                                               |       | 13.27                    |       |                          |       |   | (1,248,825 | ) |   |   | 1,209,025 |   |   |
| Balance at  December 31, 2003 |       | 6.66 - 27.53                                    |       |                                               |       | 13.56                    |       |                          |       |   | 33,244,374 |   |   |   | 12,507,344 |   |   |
| Authorized                         |       |                                            |       |                                               |       |                     |       |                          |       |   | — |   |   |   | 30,000,000 |   |   |
| Granted                            |       |                                            |       |                                               |       |                     |       |                          |       |   | — |   |   |   | (2,325,979 | ) |   |
| Exercised                          |       | 6.66 - 19.65                                    |       |                                               |       | 12.68                    |       |                          |       |   | (10,337,449 | ) |   |   | — |   |   |
| Cancelled                          |       | 6.66 - 20.66                                    |       |                                               |       | 12.12                    |       |                          |       |   | (1,292,425 | ) |   |   | (12,496,515 | ) |   |
| Balance at  December 31, 2004 |       | 6.66 - 27.53                                    |       |                                               |       | 14.06                    |       |                          |       |   | 21,614,500 |   |   |   | 27,684,850 |   |   |

 

Thefollowing table summarizes information about stock options outstanding at December 31,2004:
| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | **Weighted**                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Average**                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Remaining**                | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                                  | ** ** | **Number**                   | ** ** | **Contractual**              | ** ** | **Average** | ** ** | **Number** | ** ** | **Average** | ** ** |
| **Exercise Price**                     | ** ** | **Outstanding**              | ** ** | **Life**                     | ** ** | **Exercise Price** | ** ** | **Exercisable** | ** ** | **Exercise Price** | ** ** |
| $   6.66  -   9.81 |       |                         | 1,717,614  |                         |       | 4.8 |   |   | $ | 9.16 |   |   |   | 1,717,614 |   |   |   | $ | 9.16 |   |   |
| 10.48 - 11.87                               |       |                         | 10,776,728 |                         |       | 7.6 |   |   | 11.85 |   |   |   | 2,981,892 |   |   |   | 11.84 |   |   |
| 12.22 - 18.30                               |       |                         | 5,934,308  |                         |       | 4.4 |   |   | 13.84 |   |   |   | 4,880,082 |   |   |   | 14.19 |   |   |
| 18.38 - 27.53                               |       |                         | 3,185,850  |                         |       | 3.7 |   |   | 24.59 |   |   |   | 1,185,850 |   |   |   | 19.63 |   |   |
| 6.66 - 27.53                                |       |                         | 21,614,500 |                         |       | 5.9 |   |   | 14.06 |   |   |   | 10,765,438 |   |   |   | 13.33 |   |   |

 

70

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**NOTE 14:  EMPLOYEE BENEFIT PLANS**

Wehave a noncontributory retirement plan (Basic Plan) which covers many of ournon-union employees. Benefits are based upon years of service and compensation,as defined. The annual measurement date for the Basic Plan is December 31.Since December 31, 1996, employees have not accrued additional benefitsunder the Basic Plan. Therefore, the projected benefit obligation is equal tothe accumulated benefit obligation, and both are referred to simply as the “benefitobligation” below. Plan assets will be used to pay benefits due employees forservice through December 31, 1996. As employees have not accruedadditional benefits since 1996, we do not utilize a rate of compensationincrease assumption in calculating our benefit obligation. The assumptions usedto determine our benefit obligations at December 31, 2003 and 2004 are asfollows:
| ** **    | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------|------------|----------|------------|----------|------------|
| Discount Rate |       | 6.00     | %          | 5.50     |       |

 

Therollforwards of our benefit obligations and fair value of plan assets for theyears ended December 31, 2003 and 2004 are as follows:
| ** **                               | ** ** | **2003**               | ** ** | **2004** | ** ** |
|------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                               | ** ** | **(in millions)** | ** ** |
| Benefit  obligation at beginning of year |       | $                      | 257        |     | 297        |   |
| Interest cost                            |       | 18                     |       | 18       |       |
| Actuarial loss                           |       | 39                     |       | 27       |       |
| Benefits paid                            |       | (17                    | )          | (18      | )          |
| Benefit  obligation at end of year       |       | $                      | 297        |     | 324        |   |

 
| ** **                                      | ** ** | **2003**          | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|----------|------------|
| ** **                                      | ** ** | **(in millions)** | ** ** |
| Fair value of  plan assets at beginning of year |       | $                 | 262        |     | 278        |   |
| Actual return on plan assets                    |       | 33                |       | 28       |       |
| Benefits paid                                   |       | (17               | )          | (18      | )          |
| Fair value of plan  assets at end of year       |       | $                 | 278        |     | 288        |   |

 

Theinvestment objectives for the Basic Plan are preservation of capital, currentincome and long-term growth of capital. Substantially all plan assets aremanaged by outside investment managers. Asset allocations are reviewedquarterly. Equity securities are primarily S&P 500 and S&P 400 indexfunds. Equity securities include Hilton common stock in the amounts of$14 million and $10 million at December 31, 2003 and 2004,respectively, representing approximately 5% and 3% of total plan assets in eachperiod. Debt securities are primarily U.S. Treasury and government agency debtsecurities. The expected long-term return on plan assets is based on thefollowing assumed rates of return for the assets held: 4% to 7% for governmentdebt securities and 8% to 10% for U.S. common stocks. The asset allocations forthe Basic Plan, as a percentage of total plan assets at December 31, 2003and 2004, are as follows:
| ** **        | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------|------------|----------|------------|----------|------------|
| Equity securities |       | 50       | %          | 56       |       |
| Debt securities   |       | 50       |       | 44       |       |
| Total             |       | 100      | %          | 100      |       |

 

71

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

The following tableprovides a reconciliation between the funded status of the Basic Plan and theaccrued benefit cost liability on the balance sheet for the years ended December 31,2003 and 2004, as well as the other components recognized in our consolidatedbalance sheets:
| ** **                                                  | ** ** | **2003**               | ** ** | **2004** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|----------|------------|
| ** **                                                  | ** ** | **(in millions)** | ** ** |
| Funded status                                               |       | $                      | (19        | )        | (36        | ) |
| Unrecognized actuarial loss                                 |       | 12                     |       | 32       |       |
| Unamortized prior service cost                              |       | 5                      |       | 4        |       |
| Accrued benefit  cost                                       |       | (2                     | )          | —   |       |
| Intangible assets                                           |       | 5                      |       | 4        |       |
| Additional  minimum liability                               |       | (16                    | )          | (36      | )          |
| Accumulated other  comprehensive loss, excluding tax impact |       | 11                     |       | 32       |       |
| Net amount  recognized                                      |       | $                      | (2         | )        | —     |   |

 

Comprehensive income includes net adjustments of$7 million and $13 million, reflecting increases of $11 million and $21million related to the minimum pension liability, net of the deferred taximpact, for 2003 and 2004, respectively. There was no such adjustment in 2002.

Asdescribed above, employees have not accrued additional benefits under the BasicPlan since 1996. Therefore, we do not utilize a rate of compensation increaseassumption in calculating the net periodic benefit cost. The key actuarialassumptions used to determine the annual benefit cost for the years ended December 31,2002, 2003 and 2004 are as follows:
| ** **                                | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Discount Rate                             |       | 7.00     | %          | 6.75     |       | 6.00     |       |
| Expected long-term  return on plan assets |       | 7.25     |       | 7.25     |       | 7.25     |       |

 

Ourannual benefit cost (income) for the years ended December 31, 2002, 2003and 2004 consisted of the following:
| ** **                          | ** ** | **2002**               | ** ** | **2003** | ** ** | **2004** | ** ** |
|-------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                          | ** ** | **(in millions)** | ** ** |
| Expected return  on plan assets     |       | $                      | 19         |     | 20         |     | 20         |   |
| Interest cost                       |       | (16                    | )          | (18      | )          | (18      | )          |
| Amortization of  prior service cost |       | (1                     | )          | (1       | )          | (1       | )          |
| Amortization of  net gain           |       | 3                      |       | —   |       | —   |       |
| Net annual  benefit income          |       | $                      | 5          |     | 1          |     | 1          |   |

 

72

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

We do not expect to makeany contribution to the Basic Plan in 2005. As of December 31, 2004, thebenefits expected to be paid in the next five fiscal years and in the aggregatefor the five fiscal years thereafter are as follows:
| ** **  | ** ** | **(in millions)** | ** ** |
|-------------|------------|------------------------|------------|
| 2005        |       |                   | $          | 17 |   |   |
| 2006        |       |                   | 17         |   |   |
| 2007        |       |                   | 18         |   |   |
| 2008        |       |                   | 18         |   |   |
| 2009        |       |                   | 18         |   |   |
| 2010 - 2014 |       |                   | 96         |   |   |

 

We also have plans covering qualifying employees andnon-officer directors (Supplemental Plans). Benefits for the Supplemental Plansare based upon years of service and compensation, as defined. Since December 31,1996, employees and non-officer directors have not accrued additional benefitsunder the Supplemental Plans. These plans are self-funded by us and thereforehave no plan assets isolated to pay benefits due employees. As of December 31,2003 and 2004, these plans have benefit obligations of $9 million for bothyears, which are fully accrued in our consolidated balance sheets. Pensionexpense under the Supplemental Plans for the years ended December 31,2002, 2003 and 2004 was not significant.

Certain employees are covered by union sponsored,collectively bargained multi-employer pension plans. We contributed and chargedto expense $18 million per year for the years ended December 31, 2002and 2003 and $19 million in 2004 for such plans. Information from the plans’administrators is not sufficient to permit us to determine our share, if any,of unfunded vested benefits.

We have various employeeinvestment plans whereby we contribute certain percentages of employeecontributions. The aggregate expense under these plans totaled $11 millionin 2002 and $12 million in both 2003 and 2004.

**NOTE 15:  SEGMENTINFORMATION**

Our operations consist of three reportable segmentswhich are based on similar products or services: Hotel Ownership, Managing andFranchising, and Timeshare. The Hotel Ownership segment derives revenueprimarily from owned, majority owned and leased hotel properties. The Managingand Franchising segment provides services including hotel management andlicensing of our family of brands to franchisees. This segment generates itsrevenue from fees charged to hotel owners. The Timeshare segment consists ofmulti-unit timeshare resorts. This segment produces its results from the saleand financing of timeshare intervals and operating timeshare resorts. Segmentresults are presented net of consolidating eliminations for fee based servicesat the operating income level, without allocating corporate expenses, which isthe basis used by management to evaluate segment performance.

Segmentassets as of December 31 are as follows:
| ** **               | ** ** | **2003**               | ** ** | **2004** | ** ** |
|--------------------------|------------|------------------------|------------|----------|------------|
| ** **               | ** ** | **(in millions)** | ** ** |
| Assets                   |       |                   |       |     |       |
| Hotel Ownership          |       | $                      | 5,001      |     | 4,825      |   |
| Managing and Franchising |       | 2,048                  |       | 2,112    |       |
| Timeshare                |       | 425                    |       | 507      |       |
| Corporate and other      |       | 709                    |       | 798      |       |
| Total assets             |       | $                      | 8,183      |     | 8,242      |   |

 

73

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

 

Segment results for thethree years ended December 31 are as follows:
| ** **                                                                | ** ** | **2002**               | ** ** | **2003** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------|------------|------------------------|------------|----------|------------|----------|------------|
| ** **                                                                | ** ** | **(in millions)** | ** ** |
| Revenue                                                                   |       |                   |       |     |       |     |       |
| Hotel Ownership                                                           |       | $                      | 2,239      |     | 2,167      |     | 2,215      |   |
| Managing and  Franchising                                                 |       | 1,281                  |       | 1,307    |       | 1,510    |       |
| Timeshare                                                                 |       | 296                    |       | 345      |       | 421      |       |
|                                                                      |       | $                      | 3,816      |     | 3,819      |     | 4,146      |   |
| Operating income                                                          |       |                   |       |     |       |     |       |
| Hotel Ownership                                                           |       | $                      | 412        |     | 343        |     | 394        |   |
| Managing and  Franchising                                                 |       | 278                    |       | 284      |       | 343      |       |
| Timeshare                                                                 |       | 73                     |       | 82       |       | 99       |       |
| Corporate and  other unallocated expenses                                 |       | (160                   | )          | (194     | )          | (178     | )          |
| Total operating  income                                                   |       | 603                    |       | 515      |       | 658      |       |
| Interest and  dividend income                                             |       | 43                     |       | 29       |       | 26       |       |
| Interest expense                                                          |       | (328                   | )          | (295     | )          | (274     | )          |
| Net interest from  unconsolidated affiliates and non-controlled interests |       | (19                    | )          | (20      | )          | (26      | )          |
| Net loss on asset  dispositions and other                                 |       | (14                    | )          | (6       | )          | (5       | )          |
| Loss from  non-operating affiliates                                       |       | —                 |       | —   |       | (6       | )          |
| Income before  taxes and minority and non-controlled interests            |       | 285                    |       | 223      |       | 373      |       |
| Provision for  income taxes                                               |       | (81                    | )          | (53      | )          | (127     | )          |
| Minority and  non-controlled interests, net                               |       | (6                     | )          | (6       | )          | (8       | )          |
| Net Income                                                                |       | $                      | 198        |     | 164        |     | 238        |   |

 

At December 31, 2004,the Hotel Ownership segment includes goodwill and brand values totaling$609 million and $98 million, respectively, and the Managing andFranchising segment includes goodwill and brand values totaling$631 million and $872 million, respectively.

**NOTE 16:  LEASES**

We lease hotel propertiesand land under operating leases. As of December 31, 2004, we leased sevenhotels. Our hotel leases require the payment of rent equal to the greater of aminimum rent or percentage rent based on a percentage of revenue or income, andexpire through December 2020, with varying renewal options. Our landleases represent ground leases for certain owned hotels and, in addition tominimum rental payments, may require the payment of additional rents based onvarying percentages of revenue or income. Total rent expense incurred under ourleases was $55 million, $54 million and $57 million in 2002,2003 and 2004, respectively, which included minimum rent payments of$37 million, $39 million and $41 million in 2002, 2003 and 2004,respectively.

Minimum lease commitmentsunder non-cancelable operating leases are as follows:
| ** ** | ** ** | **(in millions)** | ** ** |
|------------|------------|------------------------|------------|
| 2005       |       |                   | $          | 38 |   |   |
| 2006       |       |                   | 35         |   |   |
| 2007       |       |                   | 34         |   |   |
| 2008       |       |                   | 31         |   |   |
| 2009       |       |                   | 30         |   |   |
| Thereafter |       |                   | 541        |   |   |
|       |       |                   | $          | 709 |   |   |

 

74

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**Notes To Consolidated Financial Statements December 31, 2004 (Continued)**

**NOTE17:  COMMITMENTS AND CONTINGENCIES**

We have established franchise financing programs withthird party lenders to support the growth of our Hilton Garden Inn, HomewoodSuites by Hilton, Hampton and Embassy Suites hotels. As of December 31,2004, we have provided guarantees of $38 million on loans outstandingunder the programs. In addition, we have guaranteed $37 million of debtand other obligations of unconsolidated affiliates and third parties, bringing ourtotal guarantees to approximately $75 million. Our outstanding guaranteeshave terms of one to seven years. We also have commitments under letters ofcredit totaling $64 million as of December 31, 2004. In April 2004,we funded a loan guarantee of approximately $9 million and recorded acorresponding receivable from the party for which we funded the guarantee. Basedon remedies available to us upon an event of default by the borrower, webelieve that the receivable related to this funding should be fully realized. Webelieve it is unlikely that other material payments will be required underthese agreements.

In addition, we remain a guarantor on 12 operatingleases sold to WestCoast Hospitality Corporation as part of the sale of the RedLion hotel chain in 2001. However, we have entered into an indemnification andreimbursement agreement with WestCoast, which requires WestCoast to reimburseus for any costs and expenses incurred in connection with the guarantee. Theminimum lease commitment under these 12 operating leases totals approximately$5 million annually through 2020.

We have also provided performance guarantees tocertain owners of hotels we operate under management contracts. Most of theseguarantees allow us to terminate the contract rather than fund shortfalls ifspecified performance levels are not achieved. In limited cases, we areobligated to fund performance shortfalls. At December 31, 2004, we havetwo contracts containing performance guarantees with possible cash outlaystotaling approximately $178 million through 2012. Funding under theseperformance guarantees totaled approximately $4 million in 2004, and isexpected to total approximately $5 million in 2005. Funding under theseguarantees in future periods is dependent on the operating performance levelsof these hotels over the remaining term of the performance guarantee. Althoughwe anticipate that the future operating performance levels of these hotels willbe largely achieved, there can be no assurance that this will be the case. Inaddition, we do not anticipate losing a significant number of managementcontracts in 2005 pursuant to these guarantees.

Our consolidated financial statements at December 31,2004 include liabilities of approximately $6 million for potentialobligations under our outstanding guarantees. Under certain circumstances, wemay be obligated to provide additional guarantees or letters of credit totaling$5 million at December 31, 2004.

At December 31, 2004, we had contractualcommitments of approximately $76 million for construction and renovationprojects at certain owned and majority owned properties, including timeshare.

We are subject tolitigation in the ordinary course of our business. Management believes thatresolution of pending litigation against us will not have a material adverseeffect on our financial position or results of operations.

75

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**Reportof Independent Registered Public Accounting Firm**

The Board of Directors and Stockholders of HiltonHotels Corporation

We have audited the accompanying consolidated balancesheets of Hilton Hotels Corporation, a Delaware corporation, and subsidiaries(the Company) as of December 31, 2003 and 2004, and the relatedconsolidated statements of income, stockholders’ equity, and cash flow for eachof the three years in the period ended December 31, 2004. These financialstatements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Hilton Hotels Corporation and subsidiaries as of December 31,2003 and 2004, and the consolidated results of their operations and their cashflow for each of the three years in the period ended December 31, 2004, inconformity with accounting principles generally accepted in the United States.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Hilton Hotels Corporation’s internalcontrol over financial reporting as of December 31, 2004, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our reportdated March 8, 2005 expressed an unqualified opinion thereon.
|                             |
|-----------------------------|
| Ernst & Young  LLP |
| Los Angeles, California     |
| March 8, 2005               |

 

76

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**Reportof Independent Registered Public Accounting Firm**on Internal Control over Financial Reporting

The Board of Directors andStockholders of Hilton Hotels Corporation

We have audited management’sassessment, included in the accompanying Annual Report on Form 10-K,that Hilton Hotels Corporation, a Delaware corporation, and subsidiaries (theCompany) maintained effective internal control over financial reporting as of December 31,2004, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Hilton Hotels Corporation’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherent limitations,internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to futureperiods are subject to the risk that controls may become inadequate because ofchanges in conditions, or that the degree of compliance with the policies orprocedures may deteriorate.

In our opinion, management’sassessment that Hilton Hotels Corporation maintained effective internal controlover financial reporting as of December 31, 2004, is fairly stated, in allmaterial respects, based on the COSO criteria. Also, in our opinion, HiltonHotels Corporation maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2004, based on theCOSO criteria.

We alsohave audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of HiltonHotels Corporation as of December 31, 2003 and 2004, and the relatedconsolidated statements of income, stockholders’ equity, and cash flow for eachof the three years in the period ended December 31, 2004 and our reportdated March 8, 2005 expressed an unqualified opinion thereon.
|                            |
|----------------------------|
| Ernst & Young LLP |
| Los Angeles, California    |
| March 8, 2005              |

 

77

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**SUPPLEMENTARYFINANCIAL INFORMATION (UNAUDITED)**

**Quarterly FinancialData**
| ** **       | ** ** | **1st**                                                              | ** ** | **2nd**     | ** ** | **3rd**     | ** ** | **4th**     | ** ** | ** ** | ** ** |
|------------------|------------|----------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| ** **       | ** ** | **Quarter**                                                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Total**  | ** ** |
| ** **       | ** ** | **(in millions, except per share amounts)** | ** ** |
| **2004**         |       |                                                                 |       |        |       |        |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Revenue          |       |                                                                 | $          | 994         |       |        |       | 1,065       |       |       |       | 1,033 |   |   |   | 1,054 |   |   |   | 4,146 |   |   |
| Operating income |       |                                                                 | 131        |        |       |        | 188        |        |       |       | 171        |   |   |   | 168 |   |   |   | 658 |   |   |
| Net income       |       |                                                                 | 37         |        |       |        | 75         |        |       |       | 61         |   |   |   | 65 |   |   |   | 238 |   |   |
| Basic EPS(1)     |       |                                                                 | $          | .10         |       |        |       | .20         |       |       |       | .16 |   |   |   | .17 |   |   |   | .62 |   |   |
| Diluted EPS      |       |                                                                 | $          | .10         |       |        |       | .19         |       |       |       | .15 |   |   |   | .16 |   |   |   | .60 |   |   |
| **2003**         |       |                                                                 |       |        |       |        |       |        |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Revenue          |       |                                                                 | $          | 909         |       |        |       | 976         |       |       |       | 952 |   |   |   | 982 |   |   |   | 3,819 |   |   |
| Operating income |       |                                                                 | 86         |        |       |        | 164        |        |       |       | 126        |   |   |   | 139 |   |   |   | 515 |   |   |
| Net income       |       |                                                                 | 9          |        |       |        | 54         |        |       |       | 34         |   |   |   | 67 |   |   |   | 164 |   |   |
| Basic EPS        |       |                                                                 | $          | .02         |       |        |       | .14         |       |       |       | .09 |   |   |   | .18 |   |   |   | .43 |   |   |
| Diluted EPS(1)   |       |                                                                 | $          | .02         |       |        |       | .14         |       |       |       | .09 |   |   |   | .17 |   |   |   | .43 |   |   |

----

(1)          EPSfor the full year differs from the sum of quarterly EPS amounts due to therequired method of computing EPS in the respective periods.

**Comparable System-Wide Statistical Information(2)**
| **Year ended December 31, 2004** | ** ** | ** ** | ** ** | **Occupancy** | ** ** | **Average Rate** | ** ** | **RevPAR** | ** ** |
|------------------------------------------------------|------------|------------|------------|---------------|------------|------------------|------------|------------|------------|
| Hilton                                               |       |       | 69.5       | %             |       |             | $          | 130.15     |       |   |   | $ | 90.39 |   |   |
| Change from prior year                               |       |       | 2.8        | pts           |       |             | 3.6        | %          |       |   | 7.8 | % |   |
| Hilton Garden Inn                                    |       |       | 69.0       | %             |       |             | $          | 98.11      |       |   |   | $ | 67.70 |   |   |
| Change from prior year                               |       |       | 3.5        | pts           |       |             | 3.2        | %          |       |   | 8.7 | % |   |
| Doubletree                                           |       |       | 68.4       | %             |       |             | $          | 103.11     |       |   |   | $ | 70.50 |   |   |
| Change from prior year                               |       |       | 3.2        | pts           |       |             | 2.7        | %          |       |   | 7.8 | % |   |
| Embassy Suites                                       |       |       | 71.3       | %             |       |             | $          | 122.72     |       |   |   | $ | 87.52 |   |   |
| Change from prior year                               |       |       | 2.1        | pts           |       |             | 2.3        | %          |       |   | 5.4 | % |   |
| Homewood Suites by Hilton                            |       |       | 73.4       | %             |       |             | $          | 96.78      |       |   |   | $ | 71.03 |   |   |
| Change from prior year                               |       |       | 2.7        | pts           |       |             | 2.6        | %          |       |   | 6.4 | % |   |
| Hampton                                              |       |       | 68.3       | %             |       |             | $          | 81.64      |       |   |   | $ | 55.73 |   |   |
| Change from prior year                               |       |       | 2.3        | pts           |       |             | 3.7        | %          |       |   | 7.3 | % |   |
| Other                                                |       |       | 69.4       | %             |       |             | $          | 131.31     |       |   |   | $ | 91.14 |   |   |
| Change from prior  year                              |       |       | 11.9       | pts           |       |             | 6.5        | %          |       |   | 28.5 | % |   |

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(2)          Statistics are forcomparable hotels, and include only those hotels in the system as of December 31,2004 and owned, operated or franchised by us since January 1, 2003.

As of December 31, 2004 there were approximately13,200 stockholders of record.

78

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**FIVE YEAR SUMMARY**
| ** **                        | ** ** | **Year ended December 31,**                                        | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **2000**                                                                          | ** ** | **2001** | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(dollars in millions, except per share amounts)** | ** ** |
| **OPERATING DATA**                |       |                                                                              |       |   |   |   |   |   |   |   |   |
| REVENUE                           |       | $                                                                                 | 4,335      |   | 3,952 |   | 3,816 |   | 3,819 |   | 4,146 |   |
| NET INCOME                        |       | $                                                                                 | 272        |   | 166 |   | 198 |   | 164 |   | 238 |   |
| BASIC EARNINGS PER SHARE          |       | $                                                                                 | .74        |   | .45 |   | .53 |   | .43 |   | .62 |   |
| DILUTED EARNINGS PER SHARE        |       | $                                                                                 | .73        |   | .45 |   | .53 |   | .43 |   | .60 |   |
| CASH DIVIDENDS PER COMMON SHARE   |       | $                                                                                 | .08        |   | .08 |   | .08 |   | .08 |   | .08 |   |
| **OTHER  INFORMATION**            |       |                                                                              |       |   |   |   |   |   |   |   |   |
| NUMBER OF PROPERTIES AT  YEAR END |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Owned(1)                          |       | 78                                                                                |       | 65 |   | 63 |   | 55 |   | 50 |   |
| Leased                            |       | 73                                                                                |       | 9 |   | 7 |   | 7 |   | 7 |   |
| Joint venture                     |       | 61                                                                                |       | 65 |   | 65 |   | 67 |   | 65 |   |
| Managed                           |       | 191                                                                               |       | 210 |   | 201 |   | 206 |   | 206 |   |
| Franchised                        |       | 1,492                                                                             |       | 1,612 |   | 1,721 |   | 1,808 |   | 1,900 |   |
| Timeshare                         |       | 25                                                                                |       | 25 |   | 27 |   | 30 |   | 31 |   |
| Total                             |       | 1,920                                                                             |       | 1,986 |   | 2,084 |   | 2,173 |   | 2,259 |   |
| AVAILABLE ROOMS  AT YEAR END      |       |                                                                              |       |   |   |   |   |   |   |   |   |
| Owned(1)                          |       | 35,234                                                                            |       | 33,536 |   | 34,664 |   | 32,526 |   | 31,068 |   |
| Leased                            |       | 12,602                                                                            |       | 2,836 |   | 2,650 |   | 2,643 |   | 2,643 |   |
| Joint venture                     |       | 18,148                                                                            |       | 19,604 |   | 19,093 |   | 20,556 |   | 20,186 |   |
| Managed                           |       | 51,122                                                                            |       | 53,776 |   | 52,004 |   | 52,088 |   | 51,380 |   |
| Franchised                        |       | 200,717                                                                           |       | 214,824 |   | 225,588 |   | 237,026 |   | 249,391 |   |
| Timeshare                         |       | 2,815                                                                             |       | 2,911 |   | 3,117 |   | 3,644 |   | 3,740 |   |
| Total                             |       | 320,638                                                                           |       | 327,487 |   | 337,116 |   | 348,483 |   | 358,408 |   |

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(1)          Includes majority ownedand controlled hotels.

79

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**Item9.   Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure**

None.

**Item 9A.   Controls and Procedures**

**Evaluationof Disclosure Controls and Procedures**

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in our reportsfiled under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to ourmanagement, including the Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated can provide only reasonable assurance of achieving the desired controlobjectives, and management is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Also, we haveinvestments in certain unconsolidated entities. As we do not control theseentities, our disclosure controls and procedures with respect to such entitiesare necessarily substantially more limited than those we maintain with respectto our consolidated subsidiaries.

As required by Rule 13a-15(b) underthe Exchange Act, we carried out an evaluation, under the supervision and withthe participation of our management, including the Chief Executive Officer andthe Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures as of December 31, 2004, the endof the period covered by this report. Based on the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective at the reasonable assurance level.

**Management’sReport on Internal Control over Financial Reporting**

Management is responsible for establishing andmaintaining adequate internal control over financial reporting, as such term isdefined in Exchange Act Rules 13a-15(f). Our internal control over financialreporting is a process designed under the supervision of our Chief ExecutiveOfficer and Chief Financial Officer to provide reasonable assurance regardingthe reliability of financial reporting and the preparation of our financialstatements for external reporting purposes in accordance with United Statesgenerally accepted accounting principles.

As of December 31, 2004, management assessed theeffectiveness of our internal control over financial reporting based on theframework established in the report entitled “Internal Control—IntegratedFramework” published by the Committee of Sponsoring Organizations of the TreadwayCommission (COSO). Based on this assessment, management has concluded that our internalcontrol over financial reporting as of December 31, 2004 was effective.

Ernst & Young LLP, the independent registeredpublic accounting firm that audited our consolidated financial statementsincluded in this Form 10-K, has issued an attestation report on management’sassessment of the effectiveness of our internal control over financialreporting as of December 31, 2004. The report, which expresses unqualifiedopinions on management’s assessment and on the effectiveness of our internalcontrol over financial reporting as of December 31, 2004, is included in Item 8under the heading “Report of Independent Registered Public Accounting Firm onInternal Control over Financial Reporting.”

There have been no changes in our internal controlover financial reporting during our most recent fiscal quarter that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

80

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**Item 9B.   Other Information**

None.

**PART III**

**Item10.   Directors and Executive Officers of the Registrant**

Certain of the information respecting executiveofficers required by this Item is set forth under the caption “ExecutiveOfficers of the Company” in Part I. Other information respecting executiveofficers, as well as the required information for directors, will be set forthunder “Election of Directors” and “Section 16(a) Beneficial OwnershipReporting Compliance” in our Proxy Statement, and reference is expressly madeto the Proxy Statement for the specific information incorporated in this Form 10-K.

The Company has adopted aCode of Business Conduct and Ethics (the “Code of Ethics”) that applies to ourofficers, employees and directors, including the Company’s principal executiveofficer, principal financial officer, principal accounting officer andcontroller or persons performing similar functions. This Code of Ethics is alsoposted on our internet website located at www.hiltonworldwide.com (click on “InvestorRelations,” then “Corporate Governance”). See “Additional Information—AvailableInformation” under Item 1.

**Item 11.   Executive Compensation**

The information requiredby this Item will be set forth under “Executive Compensation,” “CompensationCommittee Report on Executive Compensation—Chief Executive OfficerCompensation,” “Retirement Plans” and “Change of Control Agreements” in ourProxy Statement, and reference is expressly made to the Proxy Statement for thespecific information incorporated in this Form 10-K.

**Item12.   Security Ownership of Certain Beneficial Owners and Management**

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

81

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**EquityCompensation Plan Information**

Thefollowing table provides information as of December 31, 2004 with respectto shares of our Common Stock that may be issued under our existing equitycompensation plans.
| **Plan category**                                         | ** ** | ** ** | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights**(a) | ** ** | **Weighted average exercise  price of outstanding  options, warrants and  rights**(b) | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))**(c) | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders(1)     |       |       | 23,929,650 |                                                                                                                                                |       |                                                                                                                | $          | 14.06                                                                                                                                                                                                               | (4)        |   |   | 27,684,850 | (6) |   |
| Equity compensation plans not approved by security  holders(2) |       |       | 2,577,777  | (3)                                                                                                                                                 |       |                                                                                                                | N/A        | (5)                                                                                                                                                                                                                 |       |   | 666,042 | (7) |   |
| Total                                                          |       |       | 26,507,427 |                                                                                                                                                |       |                                                                                                                | $          | 14.06                                                                                                                                                                                                               | (4)        |   |   | 28,350,892 |   |   |

----

(1)   Consistsof our 1990 Stock Option and Stock Appreciation Rights Plan, 1996 StockIncentive Plan, 1997 Independent Director Stock Option Plan and 2004 OmnibusEquity Compensation Plan. Of such plans, the 2004 Omnibus Equity CompensationPlan is the only plan with shares remaining available for grant as of December 31,2004.

(2)   Consists of our Supplemental Retirement and RetentionPlan and Directors’ Stock and Deferred Retainer Plan.

(3)   Consists of 2,550,836 units under the SupplementalRetirement and Retention Plan and 26,941 units under the Directors’ Stock andDeferred Retainer Plan that entitle the recipients to receive an equivalentnumber of shares of Common Stock, subject to satisfaction of the conditions setforth in the respective plans.

(4)   Represents the weighted average exercise price ofoutstanding stock options. There are no exercise prices associated with grantsof restricted stock units and performance stock units under the 2004 OmnibusEquity Compensation Plan.

(5)   There are no exercise prices associated with unitsincluded in the referenced plans.

(6)   Consists of 27,684,850 shares available for futureissuance under the 2004 Omnibus Equity Compensation Plan.

(7)   Consists of 666,042 shares available for futureissuance under the Supplemental Retirement and Retention Plan. The Directors’Stock and Deferred Retainer Plan does not limit the number of shares that maybe issued thereunder.

*SupplementalRetirement and Retention Plan*

The SupplementalRetirement and Retention Plan (the “SRRP”) was approved by our Board ofDirectors as of June 9, 2000. The SRRP is not a stockholder approved plan.Under the SRRP, a total of up to 3,500,000 supplemental retirement benefitunits (“Units”) may be granted to our senior officers. Each grant of Unitsvests 25% per year over a four-year period and entitles the grantee to receiveshares of Common Stock on a one-for-one basis upon retirement, with limiteddistribution available during employment. The SRRP also provides for an upwardadjustment in the number of Units in a participant’s account based upondividends and distributions paid by us with respect to the underlying shares ofCommon Stock, until distribution of such shares. The Units will becomeimmediately vested in the event of a change of control of Hilton, as defined inthe SRRP. Shares of Common Stock issued under the SRRP consist of treasuryshares of Hilton. As of December 31, 2004, 2,550,836 Units wereoutstanding under the SRRP and 666,042 Units remained available for grant.

82

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*Directors’ Stock andDeferred Retainer Plan*

The Directors’ Stock andDeferred Retainer Plan (“Director Retainer Plan”) was approved by our Board ofDirectors on September 11, 2001, effective as of January 1, 2002. TheDirector Retainer Plan is not a stockholder approved plan. The DirectorRetainer Plan provides non-employee directors the right to elect to receivetheir annual retainer fees in the form of (i) cash; (ii) Common Stockpayable on a quarterly basis; or (iii) deferred units that vestimmediately and are payable in shares of Common Stock on a one-for-one basissubsequent to a director’s retirement from the Board. The number of shares of CommonStock or deferred units received by a participant each quarter is based uponthe closing price of our Common Stock on the NYSE on the last trading date ofsuch quarter. Shares of Common Stock issued under the Director Retainer Planconsist of treasury shares of Hilton. As of December 31, 2004, ninenon-employee directors were eligible to defer all or a portion of their annualretainer fees into Common Stock or deferred units under the Director RetainerPlan. As of December 31, 2004, 21,542 shares of Common Stock had beenissued under the Director Retainer Plan and 26,941 deferred units wereallocated to the accounts of non-employee directors.

**Item13.   Certain Relationships and Related Transactions**

The information requiredby this Item will be set forth under “Certain Relationships and RelatedTransactions” in our Proxy Statement, and reference is expressly made to theProxy Statement for the specific information incorporated in this Form 10-K.

**Item14.   Principal Accounting Fees and Services**

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

**PART IV**

**Item15.   Exhibits and Financial Statement Schedules**

**(a)   Indexto Financial Statements**

1.      FinancialStatements:

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

2.      FinancialStatement Schedules:

All schedules are inapplicable or the requiredinformation is included elsewhere herein.

**(b)   Exhibits**

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

83

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized, as of March 9, 2005.
|        |   | HILTON  HOTELS CORPORATION                         |
|--------|--------|----------------------------------------------------|
|   |   | (Registrant)                                       |
|   | By:    | /s/ ROBERT M. LA FORGIA                            |
|   |   | Robert M. La  Forgia                               |
|   |   | Senior Vice President and  Chief Financial Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities indicated as of March 9, 2005.
| /s/ STEPHEN F. BOLLENBACH                                                     |   | /s/ BENJAMIN V. LAMBERT |
|-------------------------------------------------------------------------------|--------|-------------------------|
| Stephen F. Bollenbach                                                         |   | Benjamin V. Lambert     |
| Co-Chairman of the Board and  Chief Executive Officer                         |   | Director                |
| /s/ A. STEVEN CROWN                                                           |   | /s/ DAVID MICHELS       |
| A. Steven Crown                                                               |   | David Michels           |
| Director                                                                      |   | Director                |
| /s/ PETER M. GEORGE                                                           |   | /s/ JOHN H. MYERS       |
| Peter M. George                                                               |   | John H. Myers           |
| Director                                                                      |   | Director                |
| /s/ BARRON HILTON                                                             |   | /s/ JOHN L. NOTTER      |
| Barron Hilton                                                                 |   | John L. Notter          |
| Co-Chairman of the Board                                                      |   | Director                |
| /s/ DIETER HUCKESTEIN                                                         |   | **/s/**DONNA F. TUTTLE  |
| Dieter Huckestein                                                             |   | Donna F. Tuttle         |
| Director                                                                      |   | Director                |
| /s/ ROBERT L. JOHNSON                                                         |   | /s/ PETER V. UEBERROTH  |
| Robert L. Johnson                                                             |   | Peter V. Ueberroth      |
| Director                                                                      |   | Director                |
| /s/ ROBERT M. LA FORGIA                                                       |   | /s/ SAM D. YOUNG        |
| Robert M. La Forgia                                                           |   | Sam D. Young            |
| Senior Vice President and Chief Financial Officer  (Chief Accounting Officer) |   | Director                |

 

84

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**INDEXTO EXHIBITS**
| Exhibit   Number | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                        | **Description** | ** ** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|------------|
| 3.1              |       | Restated  Certificate of Incorporation of Registrant, as amended (incorporated herein  by reference from Exhibit 4.1 to Registrant’s Registration Statement on  Form S-3 (File No. 333-18523))                                                                                                                                                                           |
| 3.2              |       | Amendment to  Restated Certificate of Incorporation of Registrant, relating to  Exhibit 3.1 hereto (incorporated herein by reference from  Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q for  the period ended June 30, 1997)                                                                                                                                |
| 3.3              |       | Amendment to  Restated Certificate of Incorporation of Registrant, relating to Exhibits 3.1  and 3.2 hereto (incorporated herein by reference from Appendix F to  Registrant’s Registration Statement on Form S-4 (File No. 333-89437))                                                                                                                                            |
| 3.4              |       | By Laws of  Registrant, as amended (incorporated herein by reference from  Exhibit 4.2 to Registrant’s Registration Statement on Form S-3  (File No. 333-18523))                                                                                                                                                                                                              |
| 3.5              |       | Amendment to By  Laws of Registrant, relating to Exhibit 3.4 hereto (incorporated herein  by reference from Exhibit 3.4 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1998)                                                                                                                                                                |
| 3.6              |       | Amendment to By  Laws of Registrant, relating to Exhibits 3.4 and 3.5 hereto (incorporated  herein by reference from Appendix G to Registrant’s Registration Statement on  Form S-4 (File No. 333-89437))                                                                                                                                                                          |
| 3.7              |       | Amendment to By  Laws of Registrant, relating to Exhibits 3.4, 3.5 and 3.6 hereto  (incorporated herein by reference from Exhibit 3.7 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2002)                                                                                                                                                      |
| 4.1              |       | Indenture, dated  as of July 1, 1988, between Registrant and Morgan Guaranty Trust Company  of New York, as Trustee, regarding Registrant’s Senior Debt Securities  (incorporated herein by reference from Exhibit 4.1 to Post Effective Amendment  No. 1 to Registrant’s Registration Statement on Form S-3  (File No. 2-99967))                              |
| 4.2              |       | First  Supplemental Indenture, dated as of June 30, 1992, between Registrant  and Morgan Guaranty Trust Company of New York, as Trustee, regarding  Registrant’s Senior Debt Securities, relating to Exhibit 4.1 hereto  (incorporated herein by reference from Exhibit 4.3 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  1992) |
| 4.3              |       | Indenture, dated  as of April 22, 2003, between Registrant and BNY Western Trust Company,  as Trustee, regarding Registrant’s 3.375% Convertible Senior Notes due 2023,  including the form of Note thereof (incorporated herein by reference from  Exhibit 4.1 to Registrant’s Registration Statement on Form S-3  (File No. 333-107159))                          |
| 4.4.1            |       | Indenture, dated  as of April 15, 1997, between Registrant and BNY Western Trust Company,  as Trustee, regarding Registrant’s Debt Securities (incorporated herein by  reference from Exhibit 4.3 to Registrant’s Current Report on Form 8-K,  dated April 15, 1997)                                                                                                |
| 4.4.2            |       | Officers’  Certificate containing terms of 7.95% Senior Notes due 2007 (incorporated  herein by reference from Exhibit 99 to Registrant’s Current Report on  Form 8-K, dated April 15, 1997)                                                                                                                                                                             |
| 4.4.3            |       | Officers’  Certificate containing terms of 7.20% Senior Notes due 2009 and 7.5% Senior  Notes due 2017 (incorporated herein by reference from Exhibit 4.1 to  Registrant’s Current Report on Form 8-K, dated December 17,  1997)                                                                                                                                         |

85

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| 4.4.4 |   | Officers’  Certificate containing terms of 8.25% Senior Notes due 2011 (incorporated  herein by reference from Exhibit 99.01 to Registrant’s Current Report on  Form 8-K, dated February 12, 2001)                                                                                                                                                                                                                                                                |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.4.5 |   | Officers’  Certificate containing terms of 7.625% Senior Notes due 2008 (incorporated  herein by reference from Exhibit 99.01 to Registrant’s Current Report on  Form 8-K, dated May 10, 2001)                                                                                                                                                                                                                                                                    |
| 4.4.6 |   | Officers’  Certificate containing terms of 8% Quarterly Interest Bonds due 2031  (incorporated herein by reference from Exhibit 99.01 to Registrant’s  Current Report on Form 8-K, dated August 16, 2001)                                                                                                                                                                                                                                                         |
| 4.4.7 |   | Officers’  Certificate containing terms of 7.43% Chilean Inflation Indexed (UF) Notes  due 2009 (incorporated herein by reference from Exhibit 99.01 to  Registrant’s Current Report on Form 8-K, dated August 29,  2001)                                                                                                                                                                                                                                         |
| 4.4.8 |   | Officers’  Certificate containing terms of 7.625% Senior Notes due 2012 (incorporated  herein by reference from Exhibit 99.01 to Registrant’s Current Report on  Form 8-K, dated November 21, 2002)                                                                                                                                                                                                                                                               |
| 4.5   |   | Five Year Credit  Agreement, dated as of August 29, 2003, among Registrant, Bank of  America, N.A., as Administrative Agent, and the financial institutions  signatory thereto (incorporated herein by reference from Exhibit 4.1 to  Registrant’s Quarterly Report on Form 10-Q for the period ended  September 30, 2003)                                                                                                                                        |
| 4.6   |   | Loan Agreement,  dated as of September 27, 2000, among Phoenix SP Hilton LLC, S.F. Hilton, Inc.,  Chicago Hilton LLC, Short Hills Hilton LLC and McLean Hilton LLC, as  Borrowers, and Secore Financial Corporation, as Lender (incorporated herein  by reference from Exhibit 99.01 to Registrant’s Quarterly Report on  Form 10-Q for the period ended September 30, 2000)                                                                            |
| 4.7   |   | First Amendment  to Loan Agreement, dated as of October 30, 2000, among Phoenix SP Hilton  LLC, S.F. Hilton, Inc., Chicago Hilton LLC, Short Hills Hilton LLC  and McLean Hilton LLC, as Borrowers, and Morgan Stanley Dean Witter Mortgage  Capital Inc., as Lender, relating to Exhibit 4.6 hereto (incorporated  herein by reference from Exhibit 99.02 to Registrant’s Quarterly Report  on Form 10-Q for the period ended September 30, 2000) |
| 4.8   |   | Rights Agreement,  dated as of November 29, 1999, between Registrant and ChaseMellon  Shareholder Services, L.L.C., as Rights Agent (incorporated herein by  reference from Exhibit 1 to Registrant’s Registration Statement on Form 8-A,  dated December 1, 1999)                                                                                                                                                                                                |
| 4.9   |   | Amendment to  Rights Agreement Changing Rights Agent, dated as of February 15, 2001,  between Registrant and The Bank of New York, as Rights Agent, relating to  Exhibit 4.8 hereto (incorporated herein by reference from Exhibit 4.22  to Registrant’s Annual Report on Form 10-K for the year ended  December 31, 2000)                                                                                                                                   |
| 10.1  |   | 1990 Stock Option and Stock Appreciation Rights Plan  of Registrant, together with the Stock Option Agreement relating thereto,  both as amended (incorporated herein by reference from Exhibit 10.4 to  Registrant’s Annual Report on Form 10-K for the year ended  December 31, 1990)*                                                                                                                                                                               |
| 10.2  |   | Amendment, dated January 20, 1994, to the 1990  Stock Option and Stock Appreciation Rights Plan of Registrant, relating to  Exhibit 10.1 hereto (incorporated herein by reference from  Exhibit 10.5 to Registrant’s Annual Report on Form 10-K for  the year ended December 31, 1993)*                                                                                                                                                                      |

86

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| 10.3    |   | Amendment, dated January 19, 1995, to the 1990  Stock Option and Stock Appreciation Rights Plan of Registrant, relating to  Exhibits 10.1 and 10.2 hereto (incorporated herein by reference from  Exhibit 10.5 to Registrant’s Annual Report on Form 10-K for  the year ended December 31, 1994)*              |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4    |   | Amendment, dated  November 14, 1996, to the 1990 Stock Option and Stock Appreciation  Rights Plan of Registrant, relating to Exhibits 10.1, 10.2 and 10.3 hereto  (incorporated herein by reference from Exhibit 10.7 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  1996)*      |
| 10.5    |   | Fourth Amendment,  dated as of December 31, 1998, to the 1990 Stock Option and Stock  Appreciation Rights Plan of Registrant, relating to Exhibits 10.1 through  10.4 hereto (incorporated herein by reference from Exhibit 99.9 to  Registrant’s Current Report on Form 8-K, dated January 8,  1999)*         |
| 10.6    |   | Amended and  Restated 1996 Stock Incentive Plan of Registrant (incorporated herein by  reference from Exhibit 4.1 to Registrant’s Post Effective Amendment  No. 1 to Registration Statement on Form S-8 (File  No. 333-04273))*                                                                                |
| 10.7    |   | Amendment, dated  as of November 14, 2001, to the Amended and Restated 1996 Stock  Incentive Plan of Registrant, relating to Exhibit 10.6 hereto  (incorporated herein by reference from Exhibit 10.11 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2001)*                |
| 10.8    |   | 1997 Independent  Director Stock Option Plan of Registrant (incorporated herein by reference  from Exhibit 10.10 to Registrant’s Annual Report on Form 10-K  for the year ended December 31, 1997)*                                                                                                                 |
| 10.9    |   | First Amendment,  dated as of December 31, 1998, to the 1997 Independent Director Stock  Option Plan of Registrant, relating to Exhibit 10.8 hereto (incorporated  herein by reference from Exhibit 99.11 to Registrant’s Current Report on  Form 8-K, dated January 8, 1999)*                            |
| 10.10   |   | Second Amendment,  dated as of November 11, 1999, to the 1997 Independent Director Stock  Option Plan of Registrant, relating to Exhibits 10.8 and 10.9 hereto  (incorporated herein by reference from Exhibit 10.15 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  1999)*       |
| 10.11   |   | Third Amendment,  dated as of November 14, 2001, to the 1997 Independent Director Stock  Option Plan of Registrant, relating to Exhibits 10.8, 10.9 and 10.10 hereto  (incorporated herein by reference from Exhibit 10.17 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2001)* |
| 10.12   |   | 2004 Omnibus  Equity Compensation Plan of Registrant (incorporated herein by reference from  Exhibit B Registrant’s Proxy Statement, dated as of April 8, 2004)*                                                                                                                                                         |
| 10.12.1 |   | Form of stock unit grant agreement under 2004  Omnibus Equity Compensation Plan of Registrant*                                                                                                                                                                                                                                          |
| 10.12.2 |   | Form of performance unit grant agreement under 2004  Omnibus Equity Compensation Plan of Registrant*                                                                                                                                                                                                                                    |
| 10.13   |   | Directors’ Stock  and Deferred Retainer Plan of Registrant (incorporated herein by reference  from Exhibit 99.1 to Registrant’s Registration Statement on Form S-8  (File No. 333-72906))*                                                                                                                     |
| 10.14   |   | Annual Incentive  Plan of Registrant (incorporated herein by reference from Exhibit C to  Registrant’s Proxy Statement, dated as of April 8, 2004)*                                                                                                                                                                      |

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| 10.15 |   | Supplemental Executive Retirement Plan of  Registrant, as amended (incorporated herein by reference from  Exhibit 10.6 to Registrant’s Annual Report on Form 10-K for  the year ended December 31, 1991)*                                                                                                         |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16 |   | Amendment,  effective April 1, 1994, to the Supplemental Executive Retirement Plan  of Registrant, relating to Exhibit 10.15 hereto (incorporated herein by  reference from Exhibit 10.10 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1994)*                            |
| 10.17 |   | Amendment,  effective December 31, 1996, to the Supplemental Executive Retirement  Plan of Registrant, relating to Exhibits 10.15 and 10.16 hereto (incorporated  herein by reference from Exhibit 10.19 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1996)*                  |
| 10.18 |   | Doubletree Hotels  Corporation Supplemental Executive Retirement Plan, dated as of  February 15, 1997, as amended by letter dated December 9, 1997  (incorporated herein by reference from Exhibit 10.29 to the Promus Hotel  Corporation Annual Report on Form 10-K for the year ended  December 31, 1998)* |
| 10.19 |   | Directors’  Retirement Benefit Plan of Registrant, as amended (incorporated herein by  reference from Exhibit 10.7 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1991)*                                                                                                        |
| 10.20 |   | First Amendment,  dated July 31, 1997, to the Directors’ Retirement Benefit Plan of  Registrant, relating to Exhibit 10.19 hereto (incorporated herein by  reference from Exhibit 10.22 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1997)*                         |
| 10.21 |   | Retirement  Benefit Replacement Plan of Registrant, as amended (incorporated herein by  reference from Exhibit 10.9 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1992)*                                                                                                            |
| 10.22 |   | Amendment, dated  as of January 1, 1994, to the Retirement Benefit Replacement Plan of  Registrant, relating to Exhibit 10.21 hereto (incorporated herein by  reference from Exhibit 10.12 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1993)*                           |
| 10.23 |   | Amendment,  effective April 1, 1994, to the Retirement Benefit Replacement Plan of  Registrant, relating to Exhibits 10.21 and 10.22 hereto (incorporated herein  by reference from Exhibit 10.14 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1994)*                         |
| 10.24 |   | Amendment,  effective December 31, 1996, to the Retirement Benefit Replacement Plan  of Registrant, relating to Exhibits 10.21, 10.22 and 10.23 hereto  (incorporated herein by reference from Exhibit 10.24 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  1996)*             |
| 10.25 |   | 2005 Executive  Deferred Compensation Plan of Registrant (incorporated herein by reference  from Exhibit 4.1 to Registrant’s Registration Statement on Form S-8  (File No. 333-122019))*                                                                                                                          |
| 10.26 |   | Supplemental  Retirement and Retention Plan of Registrant, dated as of June 1, 2000  (incorporated herein by reference from Exhibit 10.42 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2000)*                                                                                |

88

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| 10.27 |   | First Amendment  to the Supplemental Retirement and Retention Plan of Registrant, relating to  Exhibit 10.26 hereto (incorporated herein by reference from  Exhibit 10.46 to Registrant’s Annual Report on Form 10-K for  the year ended December 31, 2001)*                                 |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.28 |   | Form of Change of  Control Agreement between Registrant and each of Matthew J. Hart, Dieter  Huckestein, Thomas L. Keltner and Madeleine A. Kleiner (incorporated herein  by reference from Exhibit 10.43 to Registrant’s Annual Report on  Form 10-K for the year ended December 31, 1999)* |
| 10.29 |   | First Amendment to form  of Change of Control Agreement, relating to Exhibit 10.28 hereto  (incorporated herein by reference from Exhibit 10.48 to Registrant’s  Annual Report on Form 10-K for the year ended December 31,  2001)*                                                          |
| 10.30 |   | Amended and Restated  Employment Agreement, dated as of November 11, 2004 and amended as of  January 27, 2005, between Registrant and Stephen F. Bollenbach*                                                                                                                                                |
| 11    |   | Computation of Earnings  Per Share                                                                                                                                                                                                                                                                                    |
| 12    |   | Computation of Ratios of  Earnings to Fixed Charges                                                                                                                                                                                                                                                                   |
| 21    |   | List of Registrant’s  Subsidiaries                                                                                                                                                                                                                                                                               |
| 23    |   | Consent of Independent Registered  Public Accounting Firm                                                                                                                                                                                                                                                             |
| 31.1  |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                        |
| 31.2  |   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                        |
| 32.1  |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                         |
| 32.2  |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                         |
| 99    |   | Undertakings                                                                                                                                                                                                                                                                                                          |

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

Pursuant to Regulation §229.601, Item 601(b)(4)(iii) ofRegulation S-K, upon request of the Securities and Exchange Commission, theRegistrant hereby undertakes to furnish a copy of any unfiled instrument whichdefines the rights of holders of long-term debt of the Registrant and itsconsolidated subsidiaries (and for any of its unconsolidated subsidiaries forwhich financial statements are required to be filed) wherein the total amountof securities authorized thereunder does not exceed 10% of the totalconsolidated assets of the Registrant.

89

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