13 4. DISTRIBUTION OF PROFITS Set out below is the distribution of 2004 profit proposed by the Board of Directors of the Controlling Company: Thousand Euros RESERVES OF THE CONTROLLING COMPANY Legal Reserve 2,085.61 Voluntary Reserve 840.55 Dividends 17,929.93 Profit of the Controlling Company 20,856.09 CONSOLIDATION RESERVES Of fully consolidated companies 21,825.93 Of companies consolidated using the equity method (549.76) Profit of Consolidated Group 42,132.26 The distribution of 2003 profit is shown, together with an analysis of movements in Equity, in note 16. 5. ACCOUNTING POLICIES The main valuation rules used by the consolidated Group when drawing up its Consolidated Annual Accounts for 2004 and 2003, in accordance with the General Accounting Plan, were as follows: a) CONSOLIDATION CRITERIA AND TRANSLATION METHOD The foreign companies included in the consolidated group have been included after their financial statements were brought into line with Spanish criteria in accordance with the accounting policies set out below. The translation of the financial statements of the foreign companies into euros was made using the year-end exchange rate, except for: - Capital and Reserves, which has been translated at the historical exchange rates - Profit and Loss Accounts, which have been translated at the average exchange rate for the year. The  difference  on  exchange  arising  as  a  result  of  using  this  method  is  included  in  the  caption  "Translation  differences"  under "Shareholders' equity" on the accompanying Consolidated Balance Sheet. b) START-UP EXPENSES In  general,  the  formation  and  capital  increase  expenses  represent  essentially  lawyers'  fees,  the  cost  of  executing  deeds  and registration fees, and are capitalised at cost and are amortised on a straight-line basis over a period of five years. The start-up expenses are essentially all the expenses incurred before opening each hotel that do not relate to tangible fixed assets, and are amortised at a rate of 20% per year (see note 6). c) INTANGIBLE ASSETS “Intangible assets" essentially records five items: i)   The item "Rights of beneficial use" records the cost of the right to operate the Hotel NH Plaza de Armas in Seville, acquired in 1994, which is being written off against the Consolidated Profit and Loss Account over the 30 years of the term of the contract at a rate that is increasing by 4% a year. ii)  "Premiums for leases" record the amounts paid as a condition for obtaining certain lease contracts for hotels. These premiums are not rent on the lease and are written off on a straight-line basis over the duration of the lease agreement. CONSOLIDATED FINANCIAL STATEMENTS 2004

14 iii) "Concession, patents and licences" record, basically, the disbursements made by Gran Círculo de Madrid, S.A. on the construction work to renovate and remodel the building which houses the Casino of Madrid. The amortisation of this work is calculated taking into account the term on which the concession contract for operating and managing the services provided in the building where the Casino de Madrid is housed expires (1^st January 2037). iv)  "Computer  applications"  includes  various  different  computer  applications  acquired  by  the  different  consolidated  companies. These programs are stated at cost and are amortised on a straight-line basis at an annual rate of 25%. v)  The "Rights stemming from finance lease agreements" are recorded as intangible assets at the cash value of the asset, and the total  debt  for  outstanding  instalments  plus  the  amount  of  the  purchase  option  are  recorded  under  liabilities.  The  difference between the two figures, which represents the financial expense of the operation, is accounted for as deferred expense and is charged to profit and loss every year on a pay-back basis. The rights on assets under finance leases are written off using exactly the same criteria as used for tangible fixed assets. d) TANGIBLE FIXED ASSETS Tangible fixed assets are stated at cost. However, some of the dependent companies have tangible fixed assets acquired prior to 31^st December  1983,  stated  at  their  cost  revalued  in  accordance  with  various  legal  provisions.  Later  additions  have  been  stated at cost. The costs of extensions, modernisations or improvements which represent an increase in productivity, capacity or efficiency, or extend the life of existing assets are recorded as an increase in the cost of the related assets. Expenditure for maintenance and repairs is charged to the Consolidated Profit and Loss Accounts for the year they are incurred. The Group charges depreciation for its tangible fixed assets on a straight-line basis. The cost of the assets is spread over the years of their useful lives as shown in the following table: Estimated useful life years Constructions 33-50 Plant and machinery 10-12 Other plant, tools and furniture 5-10 Other investments 4-5 e) INVESTMENTS i)   Holdings consolidated using the equity method are stated at their respective cost values, which are not higher than market rates (book value of the holding plus any latent gains existing at the time of the purchase which continue to exist at the time of the subsequent valuation which are for the most part assigned to tangible assets and which remain when the subsequent valuation is made), plus or minus the Controlling Company's share in the profits or losses in each of the consolidated companies, and after deducting any dividends collected by the Controlling Company. ii)  Holdings in other companies are stated at cost, which is not higher than market rates (book value of the holding plus  any  latent gains existing at the time of the purchase which continue to exist at the time of the subsequent valuation, which are for the most part assigned to tangible assets, and which remain when the subsequent valuation is made). An appropriate provision is set up when clear signs that circumstance of sufficient importance have occurred which involve a decline in value. f) GOODWILL ON CONSOLIDATION The figure recorded under goodwill on consolidation is the positive difference between the cost of each holding and the book value of the holding acquired, less any latent capital gains existing when the shareholding was acquired, assigned to assets of the acquired company and which still exist at the year end. The differences on consolidation that arose as a result of the acquisitions of companies have been assigned, whenever this has been possible, based on independent valuations, to the land and buildings contributed by the companies acquired. In general, goodwill on consolidation has been written off on a straight-line basis, taking into account the time needed to recoup the investment as estimated by the Directors and, in any case, over a period not exceeding twenty years as from the month after each holding is acquired. CONSOLIDATED FINANCIAL STATEMENTS 2004

15 g) DEFERRED EXPENSE Deferred expenses record, essentially, the amounts paid by Casino Club de Golf, S.L., for acquiring assets under finance leases and building the Club House of Retamares Golf Course and other improvements made to it, and which correspond to the percentage share of Land in the Community of Assets "Los Retamares", at the time each fixed asset is acquired. This caption also includes the deferred interest expense stemming from other assets under finance leases (see note 5c) and the expenses incurred in arranging debt. h) STOCKS The various different categories of stocks have been stated using the following criteria: Property business - Sotogrande (see note 12) All the costs incurred are identified for each area and product in order to determine the cost of each item when it is sold. This method enables a proportional part of the total value of the land and the development costs to be assigned to the cost of the sale, based on the percentage that the metres sold represent in proportion to the total metres available for sale in each area. In accordance with the Chart of Accounts adapted for property companies, all the land and sites are classified under current assets even though it may take more than one year to build and sell them. i)   Undeveloped land: Stated at cost, which includes the legal costs of executing deeds, registration and taxes that cannot be directly recovered from the Tax Authorities. ii)  Developed land: Stated at the lowest of cost or market value. The cost mentioned above includes the cost of the land, the external cost of urban development and the technical projects. Bearing in mind the special features of the Group's property business (developing and selling a property of approximately 16 million square metres over a period of approximately 50 years, located in the municipal area of San Roque - Cadiz), the value of the developed land includes the personnel and general expenses of the technical department incurred in connection with developing and designing the different projects. The personnel expenses and overheads relating directly to such projects in 2004 totalled approximately 0.33 million euros (0.49 million euros in 2003). iii) Buildings under construction and completed buildings: Are stated at cost, which includes the proportional part of the costs of land and infrastructure of the ”Puerto Deportivo de la Marina Interior” and the costs that are directly incurred in connection with the different  developments  (projects,  building  permits,  works  certificates,  legal  expenses  relating  to  the  declaration  of  new construction work, registration, etc.). The Group takes into account the market value and the time it takes for its finished products to be sold, making the necessary adjustments in values whenever they are required. Given the special features of the construction work on the Marina Interior, as from 1991 the staff and general costs of the technical department incurred in connection with developing and designing this project have been included as an increased value of said construction work. Hotel Business iv)  The food in the catering services is stated at the lower of cost or realisable value. i) DEBTORS The Group follows the criteria of setting up provisions for bad debts that are sufficient to cover the balances that have reached a certain age or which can reasonably be considered to be doubtful debts. Trade debtors with debts that are deferred on sales relating to the property business usually earn appropriate interest, and the total of  the  account  receivable  is  recorded  under  assets  on  the  Consolidated  Balance  Sheet  and  unearned  interest  under  "Deferred income" on the liabilities side of the Consolidated Balance Sheet, to be taken to the Consolidated Profit and Loss Account when paid on a pay-back basis (see note 5m). j) CURRENT-ASSET INVESTMENTS Treasury Bills, Government Debt and other investments in fixed interest securities are stated at cost plus accrued interest receivable at the year end. Equities are stated at cost corrected by the appropriate provision for decline in value whenever their market value (listed price) falls below cost. CONSOLIDATED FINANCIAL STATEMENTS 2004

16 k) TRANSACTIONS AND BALANCES DENOMINATED IN FOREIGN CURRENCIES Transactions denominated in foreign currencies are translated into euros in the accounts, using rates that are close to the yearly average exchange rates. Any gains or losses on exchange arising when balances for transactions denominated in foreign currency are cancelled are taken to the Consolidated Profit and Loss Account when they occur. Debtors and creditors denominated in foreign currency are stated in euros at exchange rates that are close to the rates prevailing as at 31^st December. Unrealised net losses, calculated for groups of foreign currencies with similar due dates and market performance, are taken to profit and loss. Unrealised net gains, calculated in the same way, are deferred until they fall due, except in the case of liquid assets, which are stated at the lower of the year-end rate and the average rate for the fourth quarter, and the difference is taken to Consolidated Profit and Loss. l) SHORT/LONG TERM Credits  and  debts  which  fall  due  on  or  within  twelve  months  are  classified  as  short-term  on  the  Consolidated  Balance  Sheets. Otherwise they are classified as long-term. m) DEFERRED INCOME This  caption  records  non-refundable  capital  grants  which  are  stated  for  the  amount  granted.  They  are  released  to  income  in proportion to the depreciation recorded during the year by the assets that are being financed by these grants. Furthermore, as a general rule, the relevant interest accrues on trade debts where payment has been deferred. The total account receivable is recorded under assets on the accompanying Consolidated Balance Sheets and the unearned interest is recorded under "Deferred income" and is taken to Consolidated Profit and Loss as it falls due (see note 5i). n) SHARES OF THE CONTROLLING COMPANY The shares of the Controlling Company are stated at the lowest of the following three values: - Average cost. - The lower of their year-end price or the average price for the fourth quarter. - Consolidated net book value. Under current rules, the difference between the average cost and the listed price is taken to Consolidated Profit and Loss. On the other hand, the difference between the listed price and the book value is charged against Reserves of the Controlling Company. o) INCOME AND EXPENSES Income and expenses are recorded on the accruals basis, i.e. when the flow of assets and services which they represent actually takes place, irrespective of when the resulting monetary or financial flow occurs. However, in accordance with the principle of conservatism, the Group only accounts for income realized as at the year end, whereas any contingent liabilities and losses, even when they may or may not occur, are recorded as soon as they become known. In accordance with the General Chart of Accounts as adapted for Property Companies, the Group a policy of recording in its accounts the sales of buildings under construction and, consequently, the profit thereon at the time they are substantially complete, which is deemed to take place when the costs outstanding in order to complete construction work are no longer significant, as at least 80% of the total costs of the construction work, not taking into account the value of the land, has been included. Whenever at the year end the construction of any home for which the sale has already been recorded in the accounts has not been completed, the costs yet to be incurred by the Group in connection with the construction of said homes is recorded under the caption "Trade provisions" on the Consolidated Balance Sheet. As a general rule, in accordance with the principle of correlation of income and expense, staff commissions on sales and other expenses of a general nature (commercial, advertising, etc...) that cannot be specifically allotted to the  developments,  even  though  they  are  undoubtedly  connected  therewith,  which  have  been  incurred  between  when  the developments began and the time the sale is recorded in the accounts, are recorded in the accounts under the caption "Pre-paid expenses" under assets on the Consolidated Balance Sheet to be charged to expense when the sales are recorded in the accounts, provided that at the end of each year the margin on the sales contracts yet to be recorded in the accounts is larger than the expenses. CONSOLIDATED FINANCIAL STATEMENTS 2004

17 p) CORPORATION TAX Part of the NH Hoteles Group in Spain is included in the consolidated tax group (see note 28). The accounts payable or receivable generated under this heading are settled by NH Hoteles, S.A., the Controlling Company of the Group. The Corporation Tax expense for the year is calculated on the basis of the financial result before taxes, plus or minus any permanent differences between book results and tax results, the latter being the basis of assessment of Corporation Tax minus any tax rebates and deductions. The tax effect of any time differences is included in the appropriate deferred or advance tax account on the Balance Sheets. q) COMMITMENTS WITH REGARD TO STAFF The Spanish companies in the hotel industry are required to pay a certain number of months’ pay to employees of a certain seniority and meet certain prerequisites, who leave the company’s employ when they retire or become permanently disabled or reach a certain age. For companies in the Group governed by a different agreement (property companies) there is an incentive for early retirement the amount of which varies depending on the number of years of service and the date of retirement. The amount estimated as accruing and not provided for relating to these obligations is not significant as at 31^st  December 2004 and 2003. r) ENVIRONMENTAL POLICY Capital expenditures stemming from environmental activities are stated at cost and capitalised as an increased cost of fixed assets or inventories in the year they are incurred. Expenses arising from the protection and improvement of the environment are charged to expense in the year they are incurred, regardless of when the related monetary or financial flow takes place. The  provisions  for  probable  or  certain  contingencies,  disputes  under  way  or  indemnities  or  obligations  outstanding  for  an undetermined amount of an environmental nature, not covered by the insurance policies that have been taken out, are set up when the liability or the obligation that sets off the indemnity or payment arises. 6. FORMATION EXPENSES Set out below is an analysis and the movements on the different intangible asset accounts in 2004 and 2003 (thousand euros): Capital Formation Start-up Increase Expense Expense Expense Total Balance as at 31.12.02 3,123.88 6,482.15 5,753.42 15,359.45 Additions 12.70 7,610.30 976.50 8,599.50 Amortisation (1,022.06) (1,815.10) (2,702.66) (5,539.82) Extraordinary write-offs - (5,520.67) - (5,520.67) Balance as at 31.12.03 2,114.52 6,756.68 4,027.26 12,898.46 Additions 386.49 2,285.73 16.58 2,688.80 Translation differences - (45.35) - (45.35) Amortisation (1,072.56) (1,658.24) (2,796.65) (5,527.45) Extraordinary write-offs - (807.82) - (807.82) Rertirements - (39.50) - (39.50) Balance as at 31.12.04 1,428.45 6,491.50 1,247.19 9,167.14 In 2004 the "Additions" line includes 0.81 million euros (5.52 million euros for the same item in 2003) for capitalising initial operating losses incurred by the new hotels that have been written off early in the same year. In 2004 this line also includes the "start-up expenses" relating to the opening of the Spa at the Hotel NH Eurobuilding (0.59 million euros); and for the opening of the Hotel NH Laguna Palace in Italy (0.31 million euros). CONSOLIDATED FINANCIAL STATEMENTS 2004