HILTON HOTELS CORP, DEF 14A, 1998-03-30

HILTON HOTELS CORP
DEF 14A, 1998-03-30
HOTELS & MOTELS

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )

Filed by the Registrant [X]

Filed by a Party other than the Registrant [_]

Check the appropriate box:

[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED BY
RULE 14A-6(E)(2))

[X] Definitive Proxy Statement

[_] Definitive Additional Materials

[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12

HILTON HOTELS CORPORATION
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)

- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required

[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.

(1) Title of each class of securities to which transaction applies:

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(2) Aggregate number of securities to which transaction applies:

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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):

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(4) Proposed maximum aggregate value of transaction:

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(5) Total fee paid:

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[_] Fee paid previously with preliminary materials.

[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

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(2) Form, Schedule or Registration Statement No.:

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(3) Filing Party:

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(4) Date Filed:

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Notes:

<PAGE>

NOTICE OF MEETING OF STOCKHOLDERS

[LOGO OF HILTON HOTELS CORPORATION]

WORLD HEADQUARTERS
9336 CIVIC CENTER DRIVE
BEVERLY HILLS, CALIFORNIA 90210

The annual meeting of stockholders of Hilton Hotels Corporation, a Delaware
corporation (the "Company"), will be held at the Beverly Hilton, 9876 Wilshire
Boulevard, Beverly Hills, California 90210, on Thursday, May 7, 1998, at 10:00
A.M., for the following purposes:

(1) To elect four directors to the Board of Directors;

(2) To consider and vote on a proposal to approve the 1997 Independent
Director Stock Option Plan;

(3) To ratify the appointment of Arthur Andersen LLP to serve as auditors
for the Company for fiscal 1998;

(4) To transact any other business which may properly come before the
meeting.

Stockholders are cordially invited to attend the meeting in person.
Stockholders who wish to have their stock voted and do not now intend to
attend the meeting should complete, date and sign the enclosed proxy and
return it promptly by mail in the envelope provided.

Only stockholders of record on the books of the Company at the close of
business on March 12, 1998 will be entitled to notice of and to vote at the
meeting or any adjournments thereof. The stock transfer books will not be
closed.

By Order of the Board of Directors,

CHERYL L. MARSH,
Vice President and Corporate
Secretary

Beverly Hills, California
April 1, 1998
<PAGE>

HILTON HOTELS CORPORATION
9336 CIVIC CENTER DRIVE
BEVERLY HILLS, CALIFORNIA 90210

----------------

PROXY STATEMENT

----------------

INTRODUCTION

The enclosed proxy is solicited by and on behalf of the Board of Directors
of Hilton Hotels Corporation (the "Company") to be used at the annual meeting
of stockholders to be held at the Beverly Hilton, 9876 Wilshire Boulevard,
Beverly Hills, California 90210, on May 7, 1998, and at any adjournments
thereof. All shares represented by proxies will be voted at the meeting in
accordance with the specifications marked thereon or, if no specifications are
made, proxies will be voted FOR Proposals 1, 2 and 3, and in the discretion of
the proxy holder as to any other business which comes before the meeting. Any
stockholder giving a proxy may revoke the same at any time prior to the voting
of such proxy by giving written notice of revocation to the Corporate
Secretary of the Company or by submitting a later dated proxy. No proxy will
be used if the stockholder is personally present at the meeting and informs
the Corporate Secretary in writing prior to the voting of such proxy that he
or she wishes to vote his or her shares in person. This Proxy Statement and
the enclosed Proxy are first being mailed to stockholders on or about April 1,
1998.

VOTING AT THE MEETING

The Board of Directors has fixed the close of business on March 12, 1998 as
the record date for the determination of stockholders entitled to notice of
and to vote at the meeting. As of the close of business on such date, the
Company had outstanding and entitled to vote 246,298,045 shares of common
stock, $2.50 par value (the "Common Stock"), excluding 4,712,360 shares which
were held in the Company's treasury, and 14,832,200 shares of Preferred
Redeemable Increased Dividend Equity Securities, 8% PRIDESSM, Convertible
Preferred Stock, $1.00 par value (the "PRIDES"). Each holder of shares of
Common Stock is entitled to one vote per share and each holder of shares of
PRIDES is entitled to four-fifths ( 4/5) of a vote per share on each matter to
be voted on at the meeting. Shares held by the Company will not be considered
present or entitled to vote at the meeting. The holders of shares of Common
Stock and the holders of shares of PRIDES will vote together as one class on
each matter to be voted on at the meeting. Stockholders are not permitted to
cumulate votes for the purpose of electing directors or otherwise.

The presence in person or by proxy of the holders of a majority of the
outstanding shares entitled to vote at the meeting will constitute a quorum
for the transaction of business at the meeting. The affirmative vote of a
plurality of the votes cast in respect of shares represented at the meeting
and entitled to vote is required to elect directors. The affirmative vote of a
majority of the voting power of the shares represented at the meeting and
entitled to vote is required to approve the 1997 Independent Director Stock
Option Plan (the "1997 Plan"), the ratification of the appointment of Arthur
Andersen LLP as independent auditors for 1998 and such other matters as may
properly come before the meeting.
<PAGE>

Shares of a stockholder who abstains from voting on any or all proposals
will be included for the purpose of determining the presence of a quorum.
However, an abstention with respect to the election of the Company's directors
will not be counted either in favor of or against the election of the
nominees. In the case of any other proposal which is being submitted for
stockholder approval, an abstention will effectively count as a vote cast
against such proposal.

Brokers who hold shares for the account of their clients may vote such
shares either as directed by their clients or in their own discretion unless
they are not permitted to do so by the exchange or other organization of which
they are members. Shares held by a broker or nominee which are represented at
the meeting, but with respect to which such broker or nominee is not empowered
to vote on a particular proposal, are referred to as "broker non-votes."
Broker non-votes are included in determining the presence of a quorum, but do
not have the effect of a vote in favor of or against the proposal. However,
members of the New York Stock Exchange ("NYSE") are permitted to vote their
clients' proxies in their own discretion as to each of the Company's
proposals.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934, as amended (the "1934
Act"), requires the Company's reporting officers and directors, and persons
who beneficially own more than ten percent of the Company's Common Stock or
PRIDES, to file reports of ownership and changes in ownership on Forms 3, 4
and 5 with the Securities and Exchange Commission (the "Commission"), the
NYSE, the Pacific Exchange, Inc. and the Company. Based solely on the
Company's review of the forms filed with the Commission and written
representations from reporting persons that they were not required to file a
Form 5, the Company believes that all of its reporting officers, directors,
and greater than ten percent beneficial owners complied with all filing
requirements applicable to them with respect to transactions during fiscal
1997, with the exception of Benjamin V. Lambert and Donna F. Tuttle who each
filed one Form 4 late, reflecting one transaction, with the Commission.

2
<PAGE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND EXECUTIVE OFFICERS

The following table sets forth the names and addresses of all persons who
beneficially owned, to the knowledge of the Company, more than 5% of the
outstanding shares of Common Stock or the outstanding shares of PRIDES on
March 12, 1998. The following table also sets forth as of March 12, 1998 the
beneficial ownership of the Company's equity securities by each director and
nominee, the chief executive officer and the four other most highly
compensated executive officers (the "Named Officers") and all directors and
executive officers as a group (see "Summary Compensation Table" on page 9).

<TABLE>
<CAPTION>
APPROXIMATE
PERCENT APPROXIMATE
OF COMMON PERCENT OF
COMMON STOCK PRIDES
NAME AND ADDRESS OF OWNER STOCK PRIDES CLASS CLASS
------------------------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Barron Hilton............. 46,946,838(1)(2) -- 19.1 --
9336 Civic Center Drive
Beverly Hills, California
90210
Conrad N. Hilton Fund..... 16,498,736(2) -- 6.7 --
100 West Liberty Street
Reno, Nevada 89501
The Prudential Insurance
Company of America....... 16,247,133(3) -- 6.6 --
751 Broad Street
Newark, New Jersey 07102
Jennison Associates
Capital Corp. ........... 14,020,680(3) -- 5.7 --
466 Lexington Avenue
New York, New York 10017
Angelo Gordon & Co. L.P... -- 2,356,000(4) -- 15.9
245 Park Avenue
New York, New York 10167
Stephen F. Bollenbach..... 3,040,000(5) -- 1.2 --
A. Steven Crown........... 3,671,500(5)(6) -- 1.5 --
Arthur M. Goldberg........ 3,504,738(5) -- 1.4 --
Peter M. George........... -- -- -- --
Eric M. Hilton............ 9,400(2) -- * --
Dieter H. Huckestein...... 185,502(5) -- * --
Robert L. Johnson......... 2,000(5) -- -- --
Donald R. Knab............ 10,000(5) -- * --
Benjamin V. Lambert....... 203,000(5)(7) -- * --
Matthew J. Hart........... 67,475(5) -- * --
Donna F. Tuttle........... 15,367(5)(8) -- * --
Sam D. Young, Jr.......... 32,000(5) -- * --
All Directors and
Executive Officers as a
Group (14 persons)....... 57,686,118(9) -- 23.4 --
</TABLE>
- - -------
* The securities owned do not exceed 1% of the applicable class.

(1) Of the shares reflected in the above table, 24,000,000 shares are owned by
the Charitable Remainder Unitrust (the "Trust"), of which Barron Hilton is
sole trustee. As trustee, Barron Hilton has the sole voting power with
respect to, and is deemed to be the beneficial owner of, the 24,000,000
shares. The Trust will continue until the later of Barron Hilton's death
or May 8, 2009. By virtue of the foregoing and the other shares
beneficially owned by Mr. Hilton, Mr. Hilton may be deemed to "control"
the Company as such term is defined in the rules and regulations
promulgated by the Commission.

(2) Barron and Eric Hilton are two of the 11 directors of the Conrad N. Hilton
Fund (the "Fund"). They disclaim beneficial ownership of the 16,498,736
shares owned by the Fund.

(3) The amount of the Company's Common Stock beneficially owned by Jennison
Associates Capital Corp. ("Jennison") is reported on the basis of an
amended Schedule 13G filed with the Commission under the 1934 Act on
February 10, 1998. The amount of the Company's Common Stock beneficially
owned by The Prudential Insurance Company of America ("Prudential") is
reported on the basis of an amended Schedule 13G filed with the Commission
on February 10, 1998.

3
<PAGE>

(4) The amount of the Company's PRIDES beneficially owned by Angelo Gordon &
Co LP ("AGC") is reported on the basis of a Schedule 13G filed with the
Commission under the 1934 Act on February 12, 1998. As reported in such
Schedule 13G, John M. Angelo and Michael L. Gordon may be deemed to share
beneficial ownership of the 833,000 shares of PRIDES reported by AGC above
as they are officers of AGC and general partners of the general partner of
AGC.

(5) Includes options to acquire 3,000,000, 2,000, 1,200,000, 175,750, 2,000,
2,000, 2,000, 2,000, 2,000 and 62,500 shares of Common Stock, exercisable
within the next 60 days, held by Messrs. Bollenbach, Crown, Goldberg,
Huckestein, Johnson, Knab, Lambert, and Ms. Tuttle, and Messrs. Young and
Hart, respectively.

(6) Mr. Crown is a partner of The Crown Fund, which owns 239,888 shares of
Common Stock. In addition, Arie and Ida Crown Memorial, of which Mr. Crown
is a director, owns 894,272 shares of Common Stock; Pines Trailer Limited
Partnership, of which a corporation of which Mr. Crown is a director,
officer and shareholder and a partnership of which Mr. Crown is a partner,
are partners, owns 600,000 shares of Common Stock; and Areljay, L.P., of
which a corporation of which Mr. Crown is a director, officer and
shareholder and a trust of which Mr. Crown is a beneficiary are partners,
owns 1,935,340 shares of Common Stock. Mr. Crown disclaims beneficial
ownership of the shares held by The Crown Fund, Arie and Ida Crown
Memorial, Pines Trailer Limited Partnership and Areljay, L.P., except to
the extent of his beneficial interest therein.

(7) Includes 1,000 shares owned directly by Mr. Lambert's spouse.

(8) Includes 784 shares owned in trust for Ms. Tuttle's children.

(9) Includes 4,450,250 shares issuable upon exercise of employee stock options
granted to Named Officers and/or executive officers, exercisable within
the next 60 days, but excludes the shares owned by the Fund (see note 2
above).

PROPOSAL 1

ELECTION OF DIRECTORS

The By-laws of the Company provide for the election of twelve directors to
constitute the Board and, under the terms of the Company's Restated
Certificate of Incorporation and By-laws, as amended, the Board has been
divided into three classes of directors, each of which is elected to serve a
term of three years. With respect to the directors to be elected at the
Company's 1998 annual meeting for the term expiring in 2001, the Company's By-
laws provide that nominations for directors shall be made by the Board of
Directors (based on recommendations made by the Nominating Committee) at a
Board meeting, or by written consent in lieu of a meeting, not less than 30
days prior to the date of the meeting at which directors are scheduled to be
elected and that each nominee shall, at the request of the Company, provide
the Company with certain information for inclusion in the Company's proxy
statement for such meeting. The By-laws further provide that notice of
proposed stockholder nominations for election of directors must be given to
the Nominating Committee of the Company not less than 60 days prior to the
meeting at which directors are to be elected and requires that such notice
must contain certain information about each proposed nominee, including age,
business and residence addresses, principal occupation, the number of shares
of capital stock of the Company beneficially owned and such other information
as would be required to be included in a proxy statement soliciting proxies
for the election of such proposed nominee. Provision is also made for
substitution of nominees by the Board of Directors or the proposing
stockholder, as the case may be, in the event that a designated nominee is
unable or unwilling to stand for election at the meeting. If the Chairman of
the meeting of stockholders determines that a nomination was not made in
accordance with the foregoing procedures, such nomination shall be void.

All of the nominees have previously been elected by the Company's
stockholders, except Arthur M. Goldberg.

4
<PAGE>

The Board of Directors has nominated, and it is the intention of the persons
named in the enclosed proxy to vote for the election of, the four nominees
named below, each of whom has consented to serve as a director if elected. The
terms of the remaining directors expire as indicated in the following table.

The information set forth below is submitted with respect to the persons
nominated for election to the Board and the remaining directors. Unless
otherwise indicated in the table or a footnote thereto, each such person has
engaged in his or her principal occupation since at least January 1993. Only
directorships of issuers with a class of securities registered pursuant to
Section 12 of the 1934 Act or subject to the requirements of Section 15(d)
thereof and directorships of issuers registered as investment companies under
the Investment Company Act of 1940 are listed in the table below.

5
<PAGE>

<TABLE>
<CAPTION>
TERM TO
EXPIRE YEAR
AT SERVICE
ANNUAL COMMENCED
NAME, PRINCIPAL OCCUPATION MEETING OR WILL
AND OTHER DIRECTORSHIPS AGE IN COMMENCE
-------------------------- --- ------- ---------
<S> <C> <C> <C>
PRESENT DIRECTORS:
Stephen F. Bollenbach..................................... 55 1999 1996
Chief Financial Officer, Marriott Corporation, until
October 1993, President and Chief Executive Officer, Host
Marriott Corporation, until April 1995, Senior Executive
Vice President and Chief Financial Officer, The Walt
Disney Co., until February 1996 and, thereafter,
President and Chief Executive Officer, Hilton Hotels
Corporation. He is a director of America West Airlines,
Inc., Kmart Corporation, Ladbroke Group PLC and Time
Warner, Inc.
Peter M. George........................................... 54 2000 1997
Vice Chairman and Joint Managing Director, Ladbroke Group
PLC until January 1994 and, thereafter, Vice Chairman and
Group Chief Executive, Ladbroke Group PLC. Mr. George is
a citizen of the United Kingdom.(1)
Barron Hilton............................................. 70 2000 1965
Chairman of the Board, President and Chief Executive
Officer, Hilton Hotels Corporation, until February 1993,
Chairman of the Board and Chief Executive Officer, Hilton
Hotels Corporation until February 1996 and, thereafter,
Chairman of the Board, Hilton Hotels Corporation.
Dieter H. Huckestein...................................... 54 1999 1995
Senior Vice President--Hawaii/California/Arizona Region,
Hilton Hotels Corporation, until May 1994 and,
thereafter, Executive Vice President, Hilton Hotels
Corporation and President--Hotel Operations. Mr.
Huckestein is a citizen of Germany.
Robert L. Johnson......................................... 51 2000 1994
Chairman and Chief Executive Officer of Black
Entertainment Television, a cable programming service,
and Chairman, President and Chief Executive Officer of
BET Holdings, Inc., a diversified media holding company
from August 1991 until March 1996 and, thereafter,
Chairman and Chief Executive Officer, and Chairman and
President of District Cablevision, cable operator in the
District of Columbia. He is a director of U.S. Airways.
Donald R. Knab............................................ 75 1999 1989
President, Donald R. Knab Associates, Inc., an investment
advisory firm, and, until December 1997, Vice Chairman,
Deansbank Investments, Inc.--property investments.
Benjamin V. Lambert....................................... 59 1999 1976
Chairman and Chief Executive Officer, Eastdil Realty
Company L.L.C., real estate investment bankers.
Sam D. Young, Jr.......................................... 68 2000 1975
Chairman, Trans West Enterprises, Inc., an investment
company, and director, Texas Commerce Bank--El Paso.
</TABLE>
- - -------
(1) In January 1997, the Company entered into agreements with Ladbroke Group
PLC ("Ladbroke"), whose wholly-owned subsidiary, Hilton International Co.
owns the rights to the Hilton name outside the United States. The
agreements provide for, among other things, reunification of the Hilton
brand worldwide through a strategic alliance between the companies.
Pursuant to the alliance, Mr. Bollenbach has joined the Ladbroke Board of
Directors and Mr. George has joined the Company's Board of Directors.

6
<PAGE>

INFORMATION CONCERNING THE BOARD OF DIRECTORS AND CERTAIN COMMITTEES THEREOF

Among the committees created by the Board of Directors are the Audit
Committee, the Compliance Committee, the Personnel and Compensation Committee
and the Nominating Committee. Presently, the members of the Audit Committee
are A. Steven Crown, Peter M. George, Robert L. Johnson, Donald R. Knab
(Chair), Benjamin V. Lambert, Donna F. Tuttle and Sam D. Young, Jr.; the
members of the Compliance Committee are A. Steven Crown (Chair), Donald R.
Knab, Benjamin V. Lambert, Robert L. Johnson, Thomas E. Gallagher (Executive
Vice President and General Counsel), Matthew J. Hart and Bernard J. Murphy
(Senior Vice President-Corporate Compliance); the members of the Personnel and
Compensation Committee are A. Steven Crown, Peter M. George, Robert L. Johnson
(Chair), Donald R. Knab, Donna F. Tuttle and Sam D. Young, Jr.; and the
members of the Nominating Committee are Stephen F. Bollenbach, Barron Hilton,
Donald R. Knab, Benjamin V. Lambert and Donna F. Tuttle (Chair).

The functions of the Audit Committee include reviewing the independence of
the independent auditors, recommending to the Board of Directors the
engagement and discharge of independent auditors, reviewing with the
independent auditors the plan and results of auditing engagements, approving
or ratifying each professional service provided by independent auditors which
is estimated by management to cost more than 10% of the previous year's audit
fee, considering the range of audit and nonaudit fees, reviewing the scope and
results of the Company's procedures for internal auditing and the adequacy of
internal accounting controls and directing and supervising special
investigations.

The Compliance Committee supervises the Company's efforts to assure that its
business and operations are conducted in compliance with the highest standards
applicable to it as a matter of legal and regulatory requirements as well as
ethical business practices. In particular, the Compliance Committee is
responsible for the establishment and implementation of the Company's internal
reporting system regarding compliance by the Company with regulatory matters
associated with its gaming operations. The Committee supervises the activities
of the Company's Compliance Officer and communicates on a periodic basis with
gaming regulatory agencies on compliance matters. It reviews information and
reports regarding the suitability of potential key employees of the Company as
well as persons and entities proposed to be involved in material transactions
or relationships with the Company.

The Personnel and Compensation Committee reviews and establishes the general
employment and compensation practices and policies of the Company and approves
procedures for the administration thereof, including such matters as the total
salary and fringe benefit programs. However, the Stock Option Committees, the
memberships of which are identical to that of the Personnel and Compensation
Committee, administer the Company's 1990 Stock Option and Stock Appreciation
Rights Plan (the "1990 Plan"), the 1996 Stock Incentive Plan (the "1996 Plan")
and the 1996 Chief Executive Stock Incentive Plan (the "1996 CEO Plan," and
together with the 1990 Plan and the 1996 Plan, the "Plans") and the Committees
of the 1990 Plan, the 1996 Plan and the 1996 CEO Plan recommend to the Board
of Directors the granting of options and stock appreciation rights under the
respective Plans (see "Executive Compensation" on page 9).

The functions of the Nominating Committee include recommending nominees to
the Board of Directors to fill vacancies on the Board, reviewing on a
continuing basis, and at least once a year, the structure of the Board to
assure its continuity and to assure that the proper skills and experience are
represented on the Board, and reviewing any potential conflicts of Board
members individually whenever a prospective Board member is being considered
for election to the Board. See "Election of Directors" for procedures to be
followed by stockholders in submitting recommendations to the Nominating
Committee for nominees to the Board of Directors.

The Board of Directors, Audit Committee, Personnel and Compensation
Committee and Nominating Committee held a total of eight, four, six and one
meetings during 1997, respectively. Each director attended more than 75% of
the aggregate number of meetings of the Board and the Committees on which each
director served.

7
<PAGE>

Each director who is not also an officer was paid an annual fee of $25,000.
In addition, each director received $900 for each meeting of the Board of
Directors attended and $750 (except the Chair of a Committee received $1,000)
for each meeting of a Committee attended. Commencing August 1, 1997, the
annual fee was increased to $30,000 and the Board meeting fee was increased to
$1,000. Such directors also receive, with certain exceptions, complimentary
rooms and 25% discount on food and beverage when traveling on non-business
travel to Company owned or managed properties.

In July 1997, the Board of Directors authorized the amendment of the
Directors' Retirement Benefit Plan to cease the accrual of benefits thereunder
and to provide that each Directors' vested interest be converted into stock
units.

Also, in July 1997, the Board of Directors authorized the adoption of the
1997 Independent Director Stock Option Plan whereby each Independent Director
would receive an annual grant of 2,000 shares per year commencing on July 16,
1997 and, thereafter, 2,000 shares per year beginning with the 1998 Annual
Meeting of Stockholders, subject to stockholder approval at such meeting. This
plan will be administered by the full Board of Directors, acting by a majority
of its members. See "Proposal 2--Approval of the 1997 Independent Director
Stock Option Plan."

Except as disclosed in the column entitled "Name, Principal Occupation and
Other Directorships" in the table above, none of the nominees' or directors'
principal occupations have been as an employee of the Company or its
subsidiaries and affiliates. Barron Hilton and Eric M. Hilton are brothers.
Except for such family relationship, none of the nominees and directors are
related to executive officers of the Company.

CERTAIN RELATIONSHIPS AND INTERESTS IN CERTAIN TRANSACTIONS

The Company, its subsidiaries and affiliates have, from time to time,
entered into agreements with Eastdil Realty Company, L.L.C. ("Eastdil")
pursuant to which Eastdil has, among other things, assisted in negotiations
for the acquisition, disposition, financing and refinancing of hotel
properties. Benjamin V. Lambert, a director of the Company, is the Chairman
and Chief Executive Officer of Easdil.

Further, the Company's casinos in Las Vegas and Reno, Nevada, regularly send
and pay for their guests to visit certain conference facilities in Yerington,
Nevada, which are owned by Barron Hilton. In this regard, Mr. Hilton received
payments in excess of $100,000 in 1997. Management believes that the rates
paid were comparable to those which would have been paid to unaffiliated
parties providing similar services.

8
<PAGE>

EXECUTIVE COMPENSATION

The following table sets forth information concerning the annual and long-
term compensation of the Named Officers for services rendered in all
capacities to the Company for the fiscal years ended December 31, 1997, 1996
and 1995.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------------------- UNDERLYING
NAME AND PRINCIPAL OTHER ANNUAL OPTIONS/SARS ALL OTHER
POSITION YEAR SALARY BONUS(4) COMPENSATION($) (#)(5) COMPENSATION($)(6)
------------------ ---- --------- -------- -------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Barron Hilton(1)........ 1997 $ 600,000 -- -- -- $7,250
Chairman and Chief 1996 610,417 -- -- -- 3,000
Executive Officer
1995 650,000 $350,000 -- -- 3,000
Stephen F. Bollen-
bach(1)................ 1997 540,000 406,350 -- -- --
President and 1996 490,846 509,154 $58,085(7) 6,000,000 --
Chief Executive Officer 1995 -- -- -- -- --

Arthur M. Goldberg(2)... 1997 1,000,000 -- -- 600,000 7,125
Executive Vice
President 1996 57,692 -- -- 600,000 --
Hilton Hotels
Corporation, 1995 -- -- -- -- --
and President--Gaming
Operations

Matthew J. Hart(3)...... 1997 472,917 243,440 -- 50,000 1,188
Executive Vice 1996 303,462 292,500 -- 200,000 --
President
and Chief Financial 1995 -- -- -- -- --
Officer

Dieter H. Huckestein.... 1997 396,000 205,000 -- 37,000 6,750
Executive Vice 1996 350,833 250,000 -- 60,000 3,000
President,
Hilton Hotels 1995 336,917 250,000 -- -- 3,000
Corporation, and
President--Hotel
Operations
</TABLE>
- - --------
(1) Effective February 2, 1996, Mr. Hilton resigned as Chief Executive
Officer. Effective the same date, Stephen F. Bollenbach was elected
President and Chief Executive Officer.

(2) In December 1996, upon consummation of the Company's acquisition of Bally
Entertainment Corporation ("Bally") through the merger of Bally with and
into the Company, with the Company surviving the merger (the "Bally
Merger"), Arthur M. Goldberg was elected Executive Vice President, Hilton
Hotels Corporation, and President--Gaming Operations. See "Consulting and
Employment Agreement and Deferred Compensation Agreement with Arthur M.
Goldberg" on page 13.

(3) Effective April 29, 1996, Matthew J. Hart was elected Executive Vice
President and Chief Financial Officer.

(4) The Personnel and Compensation Committee approved the payment of such
bonuses. Such bonus amounts were accrued in 1997 for Messrs. Bollenbach,
Hart and Huckestein pursuant to the Company's Annual Bonus Plan.

(5) Although the Company's Plans permit grants of stock appreciation rights
(SARs), no grants of SARs have been made.

9
<PAGE>

(6) Represents amounts contributed or accrued for fiscal 1997, 1996 and 1995
for the Named Officers under the Company's Investment Plan, which provides
benefits to eligible employees, including the Named Officers. Each dollar
contributed by an eligible employee through payroll deductions, which may
be up to 6% of such employee's annual earnings, is matched by a Company
contribution, subject to certain government limitations.

(7) As part of Mr. Bollenbach's compensation arrangement, the Company paid
this amount to be applied to the purchase of a Company vehicle.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information on option grants in
fiscal 1997 to the Named Officers.

<TABLE>
<CAPTION>
POTENTIAL REALIZED
% OF TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF OPTIONS/SARS RATES OF STOCK PRICE
SECURITIES GRANTED EXERCISE APPRECIATION FOR OPTION
UNDERLYING TO EMPLOYEES OR BASE TERM (2)
OPTIONS/SARS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(#)(1) YEAR ($/SH) DATE 5%($) 10%($)
- - ------------------------ ------------- ------------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Barron Hilton........... -- -- -- -- -- --
Stephen F. Bollenbach... -- -- -- -- -- --
Arthur M. Goldberg...... 600,000 19.7694 $26.9063 12/18/07 $10,152,718 $25,728,980
Matthew J. Hart......... 50,000 1.6475 26.0625 1/16/07 819,528 2,076,846
Dieter H. Huckestein.... 37,000 1.2191 26.0625 1/16/07 606,451 1,536,866
</TABLE>
- - --------
(1) The options listed were granted pursuant to the Plans. Option exercise
prices are at fair market value when granted; the options generally have a
ten year term and generally vest over four years.

(2) Potential realizable values are based upon assumed annual rates of return
specified by the Commission.

OPTION EXERCISES AND FISCAL YEAR-END VALUES

Shown below is information with respect to the exercised options and the
unexercised options to purchase the Company's Common Stock granted under the
Company's 1984 Stock Option Plan and the Plans to the Named Officers and held
by them at December 31, 1997.

AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS
OPTIONS/SARS AT FY-END(#) AT FY-END(1)($)
SHARES ACQUIRED VALUE ------------------------- -------------------------
NAME ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barron Hilton........... -- -- -- -- -- --
Stephen F. Bollenbach... -- -- 1,500,000 4,500,000 $16,242,188 $48,726,562
Arthur M. Goldberg...... -- -- 1,200,000 -- 3,318,750 --
Matthew J. Hart......... -- -- 50,000 200,000 185,938 729,688
Dieter H. Huckestein.... -- -- 145,000 107,000 2,225,680 786,945
</TABLE>
- - --------
(1) Based on the fair market value of $29.50, which represents the mean
between the highest and lowest prices at which the Company's Common Stock
was traded on December 31, 1997 on the NYSE.

10
<PAGE>

Notwithstanding anything to the contrary set forth in any of the Company's
previous filings under the Securities Act of 1933, as amended, or the 1934
Act, that might incorporate future filings, including this Proxy Statement, in
whole or in part, the following Personnel and Compensation Committee Report on
Executive Compensation and the Stockholder Return Performance Graph on page 15
shall not be and shall not be deemed to be incorporated by reference into any
such filings.

PERSONNEL AND COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION PROGRAMS

The Company's Personnel and Compensation Committee (the "Committee") and the
Stock Option Committees establish and monitor policies and procedures and
approve actions associated with the compensation and stock option programs
affecting the Named Officers and other senior officers of the Company (the
"Executive Group").

The Company's executive compensation program is designed to closely link the
compensation received by participants to the achievement of specific earnings
goals for the Company and its business units, to appreciation in the price of
the Company's Common Stock, and, in certain instances, to the achievement of
individual goals. Through this direct link between pay and Company and
individual performance, it is the intent of the program to focus participants
on factors that drive the Company's financial success and the creation of
incremental stockholder value.

The key components of the Company's executive compensation program include
annual compensation consisting of base salaries and annual performance
bonuses, and long-term incentive compensation consisting exclusively of stock
options. It is the Committee's policy to target total compensation (i.e., the
sum of base salary, annual performance bonus, stock option grants and other
benefits) for the Executive Group approximately at the median (50th
percentile) of a "competitive market" consisting of a combination of large,
publicly traded hotel/gaming companies (publicly held companies that primarily
operate land-based casinos) and a randomly selected sample of Fortune 500
Service firms comparable in size to the Company. To the extent possible, the
same hotel/gaming companies used to competitively assess the Company's
executive compensation levels are used to compare the Company's stock
performance in the Stockholder Return Performance Graph.

Actual total compensation paid to the Executive Group as a whole and to
individual executives within the Executive Group may exceed or fall below
median competitive levels both annually and over time based on a variety of
factors, including the Company's financial performance, the performance of the
Company's Common Stock, the performance of the executive's area of
responsibility, the Committee's assessment of an executive's individual
performance, the executive's experience in his or her role, and the
executive's length of service with the Company. The Committee believes that
providing a performance-sensitive target total compensation opportunity
approximately equal to the median of the "competitive market" is required to
attract, motivate and retain quality management talent.

The Committee does not use competitive financial and stockholder value
performance comparisons to determine the compensation of the Company's
Executive Group, due primarily to the limited number of other publicly traded
firms with a mix of business (i.e., hotels and gaming) similar to the Company.
Also, it is the Committee's opinion that because the Company's financial
performance and stockholder value are influenced to a meaningful degree by a
unique set of external factors (i.e., gaming regulations and global economic
conditions which influence travel trends), comparing the Company's financial
or stock price performance across different industries can be misleading.

In establishing target total compensation levels for the Executive Group,
the Company periodically reviews data on market compensation practices
prepared by outside, independent compensation consultants. It is the
Committee's belief that the actual 1997 total compensation provided to the
Company's Executive Group is consistent with the Committee's policy of
providing target total pay at median market levels with meaningful upside and
downside leverage based on performance.

11
<PAGE>

BASE SALARY

During fiscal 1997, the Named Officers, excluding Stephen F. Bollenbach and
Arthur M. Goldberg, who are covered by employment agreements, received salary
increases generally averaging approximately 4.0% which was based on the
Committee's understanding of the increase required to maintain salary levels
consistent with reasonable market practices.

ANNUAL BONUS PLAN

Each participant in the Company's executive annual bonus plan is assigned a
maximum formula-based award opportunity expressed as a percentage of the
participant's base salary. The maximum formula-based award opportunity for the
participants in the program ranges from 0% to 33% of base salary, depending on
the participant's role. Mr. Bollenbach, according to the provisions of his
employment agreement, will be eligible for a formula-based bonus of up to 33%
of base salary beginning with the Company's 1997 fiscal year.

The amount of the formula-based award earned under the program depends upon
the Company's level of achievement relative to an objective established by the
Committee for the Company's earnings per share (EPS). In addition to formula-
based awards, the Company may pay discretionary awards based upon the
Committee's judgment regarding other performance indicators, including the
Company's EPS performance compared to the maximum formula-based objective, the
Company's and business unit's earnings before interest, taxes, depreciation,
amortization and non-cash items (EBITDA), market share growth, achievement of
cost containment goals, Company stock price performance, and individual
performance relative to each participant's primary area of responsibility. The
weighting of these factors varies and is subjective.

During fiscal 1997, the Company did not achieve the target EPS objective
established by the Committee for the formula-based award under the annual
bonus plan. However, the Company did achieve a level of performance sufficient
to fund formula-based bonuses at the 5% level for senior officers and the
6.25% level for executive officers after adjusting for nonrecurring items. In
addition, the Committee paid individual goal awards to certain individuals to
recognize superior individual contributions made during the year.

LONG TERM INCENTIVE PROGRAM

The Company's long term incentive program consists exclusively of periodic
grants of stock options at the discretion of the Stock Option Committee, with
an exercise price equal to the fair market value of the Company's Common Stock
on the date of grant. To encourage retention, the ability to exercise options
granted under the program is subject to vesting restrictions determined by the
Committee. Decisions made by the Committee regarding the timing and size of
option grants take into account Company and individual performance,
"competitive market" practices, and the size of option grants made in prior
years. The weighting of these factors varies and is subjective. The Committee
does not consider current option holdings when granting options.

During 1997, stock options totaling 87,000 shares (excluding the grant to
Mr. Goldberg, described later in this report) were awarded to the Named
Officers. (See "Option Grants in Last Fiscal Year" on page 10.)

CHIEF EXECUTIVE OFFICER COMPENSATION

In February 1996, the Company hired Mr. Bollenbach as President and Chief
Executive Officer and entered into a five-year employment agreement with Mr.
Bollenbach. The agreement establishes a minimum annual base salary of $540,000
and provides for a target annual bonus opportunity of up to 100% of base
salary. During fiscal year 1997, the Company did not achieve its target EPS.
Therefore, the formula-based portion of Mr. Bollenbach's bonus amounted to
8.25%. In addition, the Committee awarded an individual goal amount equal to
67% to recognize his superior individual contribution. Mr. Bollenbach's 1997
fiscal year bonus amounted to $406,350 which, when added to his actual salary
received during 1997 of $540,000, totaled $946,350.

12
<PAGE>

In addition, Mr. Bollenbach was granted 1,500,000 stock option shares (now
6,000,000 option shares after adjusting for the Company's 4 for 1 stock split)
under the 1996 CEO Plan of the Company that was approved by stockholders at
the Company's 1996 annual stockholders meeting. The options carry a five-year
maximum term, have an exercise price equal to the fair market value of the
Company's Common Stock on the date of grant, and vest in four equal annual
installments which began in January 1, 1997, subject to acceleration for a
change of control or qualified transaction (as each are defined in the
employment agreement). Also, in the event that Mr. Bollenbach's employment
with the Company is terminated by the Company at any time without cause or Mr.
Bollenbach voluntarily terminates employment with the Company three or more
years after his initial employment, he shall be entitled to a minimum payment
(the "Substitute Payment") of $20,000,000 (or, if his employment terminates
due to death or disability, $10,000,000) less the amount of any gain received
or receivable from the 6,000,000 option shares, including any appreciation in
the price of shares acquired by Mr. Bollenbach by the exercise of his options.
If Mr. Bollenbach receives the Substitute Payment, his options will cease to
be exercisable five trading days thereafter.

The agreement also provides that the Company will lend, and the Company has
lent, Mr. Bollenbach $5,000,000. The loan bears interest, compounded semi-
annually, at 100% of the applicable Federal rate provided under Section 7872
of the Internal Revenue Code of 1986, as amended (the "Code") and must be
repaid in full at the earlier of January 1, 2000 or upon Mr. Bollenbach's
termination of employment from the Company. The loan is on a full recourse
basis and also will be secured by any net shares of the Company acquired by
Mr. Bollenbach through the exercise of his option shares and, if applicable,
his Substitute Payment.

The agreement entered into with Mr. Bollenbach was the result of arms'
length negotiations between the Company and Mr. Bollenbach. It is the
Committee's opinion that the compensation provisions contained in the
agreement were necessary to secure Mr. Bollenbach's employment and are in the
best interests of the Company and its stockholders.

CONSULTING AND EMPLOYMENT AGREEMENT AND DEFERRED COMPENSATION AGREEMENT WITH
ARTHUR M. GOLDBERG

In June 1996, the Company entered into a consulting agreement with Mr.
Goldberg (the former Chairman, President and Chief Executive Officer of
Bally), effective with the closing date of the Bally Merger, December 18,
1996, (the "effective date" of the Agreement) pursuant to which Mr. Goldberg
agreed to render part-time consulting services to the Company. The agreement
was amended in November and December 1996 as a Consulting and Employment
Agreement (as so amended, the "Agreement"), under which Mr. Goldberg agreed to
serve as Executive Vice President of the Company and President of the
Company's Gaming Operations, for a period of three years from the effective
date of the Agreement. The Agreement provides for an annual base salary during
the term of the agreement of $2,000,000, a grant of 600,000 stock option
shares on the effective date of the Agreement, and subsequent grants of
600,000 stock option shares on each of the first and second anniversary of the
effective date. The options have an exercise price equal to the average of the
high and low prices of the Company's Common Stock on the date of grant, have a
maximum term of five years from the date of grant, and are fully exercisable
on the date of grant. A substantial portion of the base salary payable to Mr.
Goldberg during any taxable year under the agreement will be deferred and
payable to Mr. Goldberg after he ceases to be one of the Company's Named
Officers. The Agreement provides that such deferred amounts will be credited
with interest at prime rate during the deferral period. The Agreement provides
that Mr. Goldberg will serve as a consultant to the Company until the third
anniversary of the Bally Merger if his employment with the Company is
terminated before that date. The Agreement also provides that if any payments
made by the Company to Mr. Goldberg, pursuant to the Agreement or otherwise,
would be subject to the excise tax imposed by Section 4999 of the Code, Mr.
Goldberg will be entitled to receive an additional payment in an amount such
that after payment by Mr. Goldberg of all taxes (including any interest or
penalties imposed with respect to such taxes) imposed upon the additional
payment, Mr. Goldberg would receive the same amount of compensation which he
would have received in the absence of any such taxes.

13
<PAGE>

In January 1997, the Company entered into a Deferred Compensation Agreement
with Mr. Goldberg under which the Company agreed to make a lump sum payment to
Mr. Goldberg of $2,400,000 after he ceases to be one of the Company's Named
Officers. As with deferrals of Mr. Goldberg's base salary, this deferred
payment will be credited with interest at the prime rate during the deferral
period. The deferred payment provided by the Deferred Compensation Agreement
was to recognize (i) Mr. Goldberg's significant contributions in obtaining
gaming commission approvals of the Bally Merger and facilitating the
integration of the Company's and Bally's gaming operations, and (ii) that the
compensation provided for under Mr. Goldberg's Agreement did not provide for
any increase in Mr. Goldberg's compensation when it was amended in connection
with Mr. Goldberg's agreement to serve as a full-time executive officer of the
Company.

COMMITTEE POLICY REGARDING COMPLIANCE WITH SECTION 162(M) OF THE INTERNAL
REVENUE CODE

Under Section 162(m) of the Code, Federal income tax deductions of publicly
traded companies may be limited to the extent total compensation (including
base salary, annual bonus, restricted stock awards, stock option exercises,
and nonqualified benefits) for certain executive officers exceeds $1,000,000
in any one year. Under Section 162(m), the deduction limit does not apply to
payments which qualify as "performance based." To qualify as "performance
based," compensation payments must be made from a plan that is administered by
a committee of outside directors and be based on achieving objective
performance goals. In addition, the material terms of the plan must be
disclosed to and approved by stockholders, and the committee must certify that
the performance goals were achieved before payments can be awarded.

The Committee intends to design the Company's compensation programs to
conform with Section 162(m) so that the total compensation paid to any
employee will not exceed $1,000,000 in any one year, except for compensation
payments in excess of $1,000,000 which qualify as "performance based" or which
are exempt for other reasons. However, the Company may pay compensation which
is not deductible if sound management of the Company so requires.

The foregoing report has been approved by all of the members of the
Committee:

Robert L. Johnson, Chair
A. Steven Crown
Peter M. George
Donald R. Knab
Donna F. Tuttle
Sam D. Young, Jr.

14
<PAGE>

STOCKHOLDER RETURN PERFORMANCE GRAPH

Set forth below is a line graph comparing the yearly percentage change in
the cumulative total stockholder return on the Company's Common Stock against
the cumulative total return of the S&P Composite-500 Stock Index and a
hotel/gaming peer group for the five fiscal years ending December 31, 1997.

<TABLE>

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG HILTON HOTELS CORPORATION,S&P 500 INDEX AND PEER GROUP

<CAPTION>
PEER GROUP
Measurement Period HILTON HOTELS S&P (WEIGHTED
(Fiscal Year Covered) CORPORATION 500 INDEX AVERAGE)
- - ------------------- ------------- --------- ----------
<S> <C> <C> <C>
Measurement Pt-
12/92 $100 $100 $100
12/93 $143 $110 $170
12/94 $164 $112 $106
12/95 $151 $153 $140
12/96 $260 $189 $165
12/97 $298 $251 $177
</TABLE>

Assumes $100 invested on December 31, 1992 in the Common Stock of Hilton
Hotels Corporation, the S&P 500 Index, and Peer Companies (Weighted by Market
Capitalization). Total return assumes reinvestment of dividends and common
stock equivalents.
- - --------
(1) The Company-constructed hotel/gaming peer group is weighted annually by
market capitalization and consists of major publicly-traded companies,
three in the gaming industry and three in the hotel industry. The
composition of the blended, Company-constructed hotel/gaming peer group
produces a composite representative of the major publicly-traded
competitors of the Company. However, it must be recognized that the number
of publicly-traded companies with significant hotel operations is limited.
Hence, the performance of the hotel/gaming peer group is driven to a
greater degree by gaming companies. The hotel/gaming peer group includes
Circus Circus Enterprises, Inc., Harrah's Entertainment, Inc., Host
Marriott Corporation, ITT Corporation, Marriott International, Inc., and
Mirage Resorts, Inc.

(2) ITT Corporation is excluded from hotel/gaming peer group during the period
represented by the graph because it began trading as a stand-alone company
in December 1995.

15
<PAGE>

RETIREMENT PLANS

Set forth below is a table with respect to the estimated annual amounts
payable to the Named Officers upon retirement at age 65 from the Company's
Retirement Plan and the Company's two plans associated with the Retirement
Plan, the Benefit Replacement Plan and the Supplemental Executive Retirement
Plan (collectively, the "Retirement Plans").

Effective December 31, 1996, the Retirement Plans were amended to provide
that employees earn no further benefits under the Retirement Plans. Thus, the
benefits under the Retirement Plans are based upon compensation and years of
service through December 31, 1996. The compensation covered by the Retirement
Plans includes a participant's salary, bonus (if any) and live-in allowance
(if any). Benefits under the Retirement Plan and the Benefit Replacement Plan
are determined according to the highest five consecutive years of compensation
(through December 31, 1996), and benefits under the Supplemental Executive
Retirement Plan are based upon the highest three years of compensation
including compensation in the year immediately prior to retirement (but not
including compensation after December 31, 1996). Compensation above $800,000
paid in any year after 1993 is disregarded, but this limitation is not applied
to any year before 1994. On December 31, 1996, Messrs. Barron Hilton,
Bollenbach, Goldberg, Hart, and Huckestein had 45, 0, 0, 0 and 11 years of
service, respectively, under the Retirement Plans. The only two Named Officers
who have benefits under the Retirement Plans are Messrs. Barron Hilton and
Huckestein. Until April 1, 1994, the Supplemental Executive Retirement Plan
and the Benefit Replacement Plan provided that the present value of a Named
Officer's benefit would be transferred from time-to-time to a grantor trust
established by such officer, along with additional amounts needed to equalize
the trust account to the after-tax benefits which would have been provided in
the absence of the trust. Such transfers will resume if a change in control
occurs.

Effective January 1, 1997, the Company adopted the Executive Deferred
Compensation Plan ("Deferred Compensation Plan") and amended its Investment
Plan to provide for the matching contributions described below. Under the
Deferred Compensation Plan and the Investment Plan, employees may elect to
defer compensation which otherwise would have been paid to them. Executives
eligible to participate in the Executive Deferred Compensation Plan may, based
on their age, defer 25% to 100% of their compensation. Deferred Compensation
Plan participants are eligible to receive a matching contribution of 50% of
the first 10% of the executive's deferred compensation. Participants in the
Investment Plan who have five or fewer years of service receive a matching
contribution of 50% of the first 6% of the participant's deferred
compensation. Investment Plan participants with more than five years of
service receive a matching contribution of 75% of the first 6% of the
participant's deferred compensation. In 1997 compensation above $160,000 was
disregarded for deferrals and matching contribution credits under the
Investment Plan. Effective January 1, 1997, the Company adopted the Employee
Stock Purchase Plan, under which employees may purchase common shares of the
Company at a 5% discount. The maximum investment which may be made by an
employee under the Employee Stock Purchase Plan in any year is $25,000.

CHANGE OF CONTROL AGREEMENTS

The Company's Board of Directors has adopted a Change of Control Agreement
("Agreement") and, pursuant thereto, Agreements have been entered into with
each of the members of the Company's Executive Group, including the Company's
Named Officers. Messrs. Bollenbach's and Goldberg's Agreements are written to
take into account the terms of their employment agreements, but are otherwise
identical to the Agreements entered into with the Named Officers. Under the
terms of the Agreement, upon the occurrence of a Change of Control (as
hereinafter defined), the Company agrees to continue the employment of each
Named Officer for a three-year period, or until the Named Officer's retirement
if earlier (the "Employment Period"), in a position which is at least
commensurate with the Named Officer's position prior to the Change of Control
and to provide the Named Officer with base salary, annual bonuses, incentive
plan, retirement plan, welfare benefit plan, fringe benefits and other
employment policy coverage which is at least equal to the coverage in effect
prior to the Change of Control. Under the Agreement, each Named Officer will
receive an amount equal to up to three times annual salary and bonus if,
following a Change of Control (as hereinafter defined), such Named Officer is

16
<PAGE>

terminated without cause or if such Named Officer terminates for good reason
(including, but not limited to, the assignment to such Named Officer of duties
inconsistent with such Named Officer's position at the time of the Change of
Control). In addition, upon such a termination of employment, each Named
Officer is entitled to receive a lump sum payment equal to the difference
between the value of the Named Officer's benefits under the Company's
Retirement Plans and the value of the benefits which the Named Officer would
have received under such plans if the Named Officer had continued to be
employed by the Company during the Employment Period and to receive benefits
under the Company's welfare benefit and fringe benefit plans and policies
during the remaining period of the Employment Period. The Agreement continues
for renewable three-year terms or until the Named Officer's normal retirement
date, if earlier. Under the Agreement, a Change of Control with respect to the
Company and the Agreement means (i) the acquisition (other than from the
Company) by any person, entity or group, within the meaning of Section
13(d)(3) or 14(d)(2) of the 1934 Act (excluding, for this purpose, (A) the
Company or its subsidiaries, (B) any employee benefit plan of the Company or
its subsidiaries which acquires beneficial ownership of voting securities of
the Company or (C) Barron Hilton or the Fund, collectively, the "Hilton
Interests"), of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the 1934 Act) of 20% or more of either the then outstanding
shares of Common Stock or the combined voting power of the Company's then
outstanding voting securities entitled to vote generally in the election of
directors; or (ii) a majority of the membership of the present incumbent Board
of Directors changes other than in the ordinary course; or (iii) there is a
dissolution or liquidation of the Company, a sale of substantially all of its
assets, or a merger that forces out a majority of the pre-merger stockholders.
If any payment, whether pursuant to the Agreement or otherwise (i.e., under
Retirement or Stock Option Plans), would be subject to the excise tax imposed
by Section 4999 of the Code, then the Named Officer shall be entitled to
receive an additional payment in an amount such that after payment by the
Named Officer of all taxes (including any interest or penalties imposed with
respect to such taxes), including any excise tax, imposed upon the additional
payment, the Named Officer receives the same amount of compensation pursuant
to the Agreement which such Named Officer would have received in the absence
of any such taxes. Under the Agreement, each Named Officer agrees to maintain
the confidentiality of all secret or confidential information relating to the
Company which the Named Officer obtained during the Named Officer's employment
by the Company.

17
<PAGE>

LEGAL PROCEEDINGS

Bally Merger Litigation

A purported class action against Bally, its directors and Hilton, was
commenced in August 1996 under the caption Parnes v. Bally Entertainment
Corporation, et al. in the Court of Chancery of the State of Delaware, New
Castle County. The Plaintiff alleged breaches of fiduciary duty in connection
with the Bally Merger, including allegedly illegal payments to Arthur M.
Goldberg purportedly denying Bally shareholders other than Mr. Goldberg an
opportunity to sell their shares to Hilton or any other bidder at the best
possible price. In the complaint, the plaintiff sought, among other things:
(i) an order enjoining the Bally Merger; (ii) an award of damages in an
unspecified amount; (iii) an order requiring Mr. Goldberg to disgorge his
profits; and (iv) an award of attorneys' fees and expenses. In orders dated
May 13, 1997 and February 3, 1998, this litigation was dismissed. Plaintiff
has appealed this dismissal to the Delaware Supreme Court.

Two other purported class actions relating to the Bally Merger are pending
against Bally and its directors, one commenced in April 1996 under the caption
Kinder v. Brunet, et al. and the other commenced in June 1996 under the
caption Lord v. Brunet, et al., in the Court of Chancery of the State of
Delaware, New Castle County. These actions are virtually identical, and the
plaintiffs also allege breaches of fiduciary duty in connection with the Bally
Merger. In the complaint, the plaintiffs seek, among other things: (i) a
declaration that defendants have breached their fiduciary duties; (ii) an
order requiring defendants to act in accordance with their fiduciary duties in
order to maximize the value obtained for Bally's shareholders; (iii) an award
of damages in an unspecified amount; and (iv) an award of expenses, including
attorneys' fees.

On June 13, 1997, Bally's Grand, Inc. ("BGI") announced that it had reached
an agreement to settle the In re: Bally's Grand, Inc. Shareholders Litigation.
This litigation involved two derivative actions purportedly brought on behalf
BGI against its directors and Bally, one commenced in October 1995 and the
other in September 1996 which were consolidated under the caption In re:
Bally's Grand Derivative Litigation in the Court of Chancery of the State of
Delaware, New Castle County. A third derivative action purportedly brought on
behalf of BGI against its directors, Bally, Hilton and Bally's Grand
Management Co., Inc., a wholly owned subsidiary of Bally ("BGM"), was
commenced in November 1996 under the caption Tower Investment Group, Inc., et
al. v. Bally's Grand, Inc., et al. in the Court of Chancery of the State of
Delaware, New Castle County. This action was consolidated with the original
consolidated action under the caption In re: Bally's Grand, Inc. Shareholders
Litigation. Plaintiffs alleged breaches of fiduciary duty and waste of
corporate assets in connection with certain actions including the sale by BGI
to Bally of the capital stock of BGI's subsidiary that owns the land and the
development rights with respect to the Paris Casino-Resort in Las Vegas (the
"Paris Transaction"), alleged improper delegation of duties by BGI's board of
directors by virtue of a management agreement (the "Management Agreement")
between BGI and BGM, BGM's designation pursuant to the Management Agreement of
recipients awarded BGI stock options and stock repurchases by BGI and Bally.
Plaintiffs also alleged fraud, willful misconduct or gross negligence by Bally
and BGM in connection with the Management Agreement, purchases of BGI stock by
Bally while in possession of material inside information concerning BGI's
earnings, violation of Delaware law by BGI's directors and Bally in connection
with the Paris Transaction and aiding and abetting by Hilton of the breaches
of fiduciary duty and waste of corporate assets by BGI's directors and Bally.
The plaintiffs sought, among other things: (i) rescission of the Paris
Transaction; (ii) termination of the Management Agreement; (iii) appointment
of a custodian to manage BGI's affairs;(iv) disgorgement by defendants of
payments and profits earned as a result of the transactions complained of; (v)
compensatory damages; and (vi) costs and expenses, including reasonable
attorneys' fees.

Prior to the settlement, Hilton indirectly owned approximately 84% of the
common stock of BGI and public shareholders owned the remaining 16%. Under the
terms of the settlement, BGI repurchased 966,747 shares of its common stock
and 102,698 warrants to purchase shares of its common stock from certain
plaintiffs at a price of $52.75 per share in cash for the common stock and
$52.75 less the exercise price per warrant in cash for the warrants. Following
such repurchases, Hilton indirectly owned in excess of 90% of the outstanding
common stock of BGI.

18
<PAGE>

On October 9, 1997, Hilton received court approval of the settlement
agreement. Pursuant to the settlement agreement, a Hilton subsidiary will
merge into BGI, and the remaining outstanding shares of BGI common stock not
currently owned by Hilton will be converted into the right to receive $52.75
(less certain attorneys' fees) per share in cash, and the remaining
outstanding warrants to purchase BGI common stock not currently owned by
Hilton will be converted into the right to receive the difference between
$52.75 (less certain attorneys' fees) and the exercise price per warrant in
cash. Hilton anticipates that the merger and conversion of shares will be
completed by March 31, 1998. Holders of BGI common stock will be entitled to
appraisal rights under Delaware law in connection with such merger.

Bally Entertainment Litigation

Several purported derivative actions against Bally and certain of its former
directors, including Arthur M. Goldberg, originally filed in December 1990 and
January 1991, were consolidated under the caption In re: Bally Manufacturing
Corporation Shareholders Litigation in the Court of Chancery of the State of
Delaware, New Castle County. The consolidated complaint alleges, among other
things: breach of fiduciary duty, corporate mismanagement and waste of
corporate assets in connection with certain actions including, among other
things, payment of compensation, certain acquisitions by Bally, the
dissemination of allegedly materially false and misleading information, the
restructuring of Bally's debt, and a subsidiary's allegedly discriminatory
practices. The plaintiffs sought, among other things: (i) injunctions against
payment of certain termination compensation benefits and implementation of the
restructuring plan; (ii) rescission of consummated transactions and a
declaration that the complained of transactions are null and void, (iii) an
accounting by individual defendants of damages to Bally and benefits received
by such defendants; (iv) the appointment of a representative to negotiate on
behalf of the former Bally stockholders in connection with any restructuring;
and (v) costs and disbursements, including a reasonable allowance for the fees
and expenses of plaintiffs' attorneys, accountants and experts. On November 6,
1997, this litigation was dismissed by stipulation of the parties with the
approval of the Court.

In management's opinion, disposition of the pending litigation against the
Company, including the litigation described above, is not expected to have a
material adverse effect on the Company's financial position or results of
operations.

PROPOSAL 2
APPROVAL OF 1997 INDEPENDENT DIRECTOR STOCK OPTION PLAN

In July 1997, the Board of Directors authorized an amendment, effective July
31, 1997, to the Directors' Retirement Plan to cease the accrual of retirement
benefits and to convert such benefits into stock units. The number of stock
units was determined by (a) calculating the annual retirement benefit that
each Independent Director would receive under the Plan if such retirement
benefit was fully vested and if such Director retired from service as a
Director on July 31, 1997 at or after age 65, (b) converting the amount
obtained in (a) above to a present value lump sum using a 6.5% discount rate
and assuming that such annual benefit would be paid to such Director for ten
years, (c) multiplying the amount obtained in (b) above by a fraction, the
numerator of which is the number of full months that such Director served on
the Board of Directors of the Company through July 31, 1997 (not to exceed 120
months), and the denominator of which is 120, and (d) dividing the amount
obtained in (c) above by the average fair market value of one share of the
Company's Common Stock on July 31, 1997.

Also, in July 1997, the Board of Directors authorized the adoption of the
1997 Independent Director Stock Option Plan (the "1997 Plan") whereby each
Independent Director would receive an annual grant of 2,000 shares per year
commencing on July 16, 1997 and, thereafter, 2,000 shares per year beginning
with the 1998 Annual Meeting of Stockholders, subject to stockholder approval
at such meeting. This plan will be administered by the full Board of
Directors, acting by a majority of its members. See "Proposal 2--Approval of
the 1997 Independent Director Stock Option Plan."

The purpose of the Plan is to provide the Company's Independent Directors
with a plan of stock ownership that will further ensure that the compensation
of its Directors is closely aligned with stockholder interests and

19
<PAGE>

the performance of the Company, and to assist the Company in attracting and
retaining well-qualified individuals to serve as Independent Directors. The
Board of Directors believes it is in the Company's best interest to adopt the
1997 Plan.

The material features of the 1997 Plan are summarized below. The summary is
qualified in its entirety by reference to the specific provisions of the 1997
Plan, the full text of which is set forth as Exhibit A to this proxy
statement.

Participation in the 1997 Plan is limited to Independent (non-employee)
Directors of the Company who are not former employees of the Company or any
subsidiary. Subject to adjustment as set forth in the 1997 Plan, the total
number of shares of Common Stock reserved and available for grant under the
1997 Plan is 200,000. The 1997 Plan is administered by the full Board of
Directors, acting by a majority of its members. The 1997 Plan is effective as
of July 31, 1997 and will expire ten years after the effective date.

Each person who is an Independent Director as of the date of adoption of the
1997 Plan by the Board automatically is granted (i) a stock option to purchase
2,000 shares of Common Stock on the date of adoption, and (ii) a stock option
to purchase 2,000 shares of Common Stock on the date of each annual meeting of
stockholders after such adoption, beginning with the 1998 annual meeting of
stockholders, all of the foregoing being subject to stockholder approval at
the 1998 annual meeting of stockholders. The option price per share of Common
Stock will equal 100% of the fair market value of the Common Stock on the date
of grant. As of March 12, 1998, the closing price of a share of Common Stock
on the NYSE was $33.00. Each such option will be exercisable immediately upon
grant and shall terminate ten years from the date of grant.

Accordingly, in July 1997, the Independent Directors (Ms. Tuttle and Messrs.
Crown, Johnson, Knab, Lambert and Young) were each granted an option to
purchase 2,000 shares of Common Stock at an exercise price of $29 3/8 (fair
market value of the Common Stock on the date of grant) and will each be
granted an option for 2,000 shares of Common Stock upon receipt of stockholder
approval of the 1997 Plan. This grant is also subject to stockholder approval
at the 1998 annual meeting of stockholders.

VOTE REQUIRED AND BOARD RECOMMENDATION. The affirmative vote of the holders
of a majority of the voting power of the shares represented at the meeting, in
person or by proxy, and entitled to vote on this proposal will be necessary
for the adoption of Proposal 2. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR PROPOSAL 2.

PROPOSAL 3
RATIFICATION OF SELECTION OF AUDITORS

Arthur Andersen LLP ("Andersen") was the Company's auditor for the year
ended December 31, 1997. A representative of Andersen is expected to attend
the annual meeting where the representative will have the opportunity to make
a statement and will be available to respond to appropriate questions.
Although the Board is not required to submit its selection of auditors for
stockholder approval, the Board has elected to seek ratification by
stockholders at the annual meeting of its appointment of Andersen to serve as
the Company's auditor for fiscal 1998.

1999 ANNUAL MEETING OF STOCKHOLDERS

The 1999 Annual Meeting of Stockholders is presently scheduled to be held on
May 6, 1999. Any proposals of stockholders intended to be presented at such
meeting must be received by the Corporate Secretary of the Company for
inclusion in the Company's Proxy Statement and form of proxy no later than
December 2, 1998.

20
<PAGE>

GENERAL

The cost of preparing and mailing the notice of meeting, Proxy Statement and
form of proxy will be paid by the Company. In addition to mailing copies of
this material to all stockholders, the Company has retained D.F. King & Co.,
Inc. to request banks and brokers to forward copies of such material to
persons for whom they hold stock of the Company and to request authority for
execution of the proxies. The Company will pay D.F. King & Co., Inc. a fee of
$9,000 plus out-of-pocket expenses and disbursements.

The only other business to be presented to the meeting, of which the
directors and executive officers have knowledge, will be the approval of the
minutes of the last meeting of stockholders, but it is not intended that
action taken under the proxies will constitute approval of the matters
referred to in such minutes. Although all nominees have indicated their
readiness to serve if elected, if at the time of the meeting any of said
nominees should be unable to serve as directors, the persons named in the
proxies or their substitute(s) will, in their discretion, vote for other
nominees, and if matters other than those for which authority is herein sought
should arise at the meeting, the shares represented by the proxies will be
voted in the discretion of the persons named therein.

21
<PAGE>

EXHIBIT A

HILTON HOTELS CORPORATION

1997 INDEPENDENT DIRECTOR STOCK OPTION PLAN

SECTION 1. PURPOSE; DEFINITIONS

The purpose of the Plan is to give the Corporation a competitive advantage
in attracting, retaining and motivating non-employee directors and to provide
the Corporation and its subsidiaries with a stock plan providing incentives
more directly linked to the profitability of the Corporation's businesses and
increases in shareholder value.

For purposes of the Plan, the following terms are defined as set forth
below:

(a) "Affiliate" means a corporation or other entity controlled by the
Corporation and designated by the Board from time to time as such.

(b) "Board" means the Board of Directors of the Corporation.

(i) An acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (1) the then outstanding shares
of common stock of the Corporation (the "Outstanding Corporation Common
Stock") or (2) the combined voting power of the then outstanding voting
securities of the Corporation entitled to vote generally in the election of
directors (the "Outstanding Corporation Voting Securities") (a "Control
Purchase"); excluding, however, the following: (1) Any acquisition directly
from the Corporation, other than an acquisition by virtue of the exercise
of a conversion privilege unless the security being so converted was itself
acquired directly from the Corporation, (2) Any acquisition by the
Corporation, (3) Any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Corporation or any corporation
controlled by the Corporation, (4) Any acquisition by any corporation
pursuant to a transaction which complies with clauses (1), (2) and (3) of
subparagraph (iii) of this definition, or (5) Any acquisition by Barron
Hilton, the Charitable Remainder Unitrust created by Barron Hilton to
receive shares from the Estate of Conrad N. Hilton, or the Conrad N. Hilton
Fund; or

(ii) A change in the composition of the Board such that the individuals
who, as of the effective date of the Plan, constitute the Board (such Board
shall be hereinafter referred to as the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board; provided, however,
for purposes of this definition, that any individual who becomes a member
of the Board subsequent to the effective date of the Plan, whose election,
or nomination for election by the Corporation's shareholders, was approved
by a vote of at least a majority of those individuals who are members of
the Board and who were also members of the Incumbent Board (or deemed to be
such pursuant to this proviso) shall be considered as though such
individual were a member of the Incumbent Board; but, provided further,
that any such individual whose initial assumption of office occurs as a
result of either an actual or threatened election contest (as such terms
are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) or other actual or threatened solicitation of proxies or consents by
or on behalf of a Person other than the Board shall not be so considered as
a member of the Incumbent Board (a "Board Change"); or

(iii) The approval by the shareholders of the Corporation of a
reorganization, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Corporation ("Corporate
Transaction"); excluding however, such a Corporate Transaction pursuant to
which (1) all or substantially all of the individuals and entities who are
the beneficial owners, respectively, of the Outstanding Corporation Common
Stock and Outstanding Corporation Voting Securities immediately prior to
such Corporate Transaction will beneficially own, directly or indirectly,
more than 60% of, respectively, the
<PAGE>

outstanding shares of common stock, and the combined voting power of the
then outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation resulting
from such Corporate Transaction (including, without limitation, a
corporation which as a result of such transaction owns the Corporation or
all or substantially all of the Corporation's assets either directly or
through one or more subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Corporate Transaction, of the
Outstanding Corporation Common Stock and Outstanding Corporation Voting
Securities, as the case may be, (2) no Person (other than the Corporation,
any employee benefit plan (or related trust) of the Corporation or such
corporation resulting from such Corporate Transaction) will beneficially
own, directly or indirectly, 20% or more of, respectively, the outstanding
shares of common stock of the corporation resulting from such Corporate
Transaction or the combined voting power of the outstanding voting
securities of such corporation entitled to vote generally in the election
of directors except to the extent that such ownership existed prior to the
Corporate Transaction, and (3) individuals who were members of the
Incumbent Board will constitute at least a majority of the members of the
board of directors of the corporation resulting from such Corporate
Transaction; or

(iv) The approval by the stockholders of the Corporation of a complete
liquidation or dissolution of the Corporation.

(d) "Change in Control Price" means the higher of (i) the highest reported
sales price, regular way, of a share of Common Stock in any transaction
reported on the New York Stock Exchange Composite Tape or other national
exchange on which such shares are listed or on NASDAQ during the 60-day period
prior to and including the date of a Change in Control or (ii) if the Change
in Control is the result of a tender or exchange offer or a Corporate
Transaction, the highest price per share of Common Stock paid in such tender
or exchange offer or Corporate Transaction; provided, however, that in the
case of a Stock Option which (A) is subject to Section 16(b) of the Exchange
Act and (B) was granted within 240 days of the Change in Control, then the
Change in Control Price for such Stock Option shall be the Fair Market Value
of the Common Stock on the date such Stock Option is exercised or deemed
exercised. To the extent that the consideration paid in any such transaction
described above consists all or in part of securities or other noncash
consideration, the value of such securities or other noncash consideration
shall be determined in the sole discretion of the Board.

(e) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.

(f) "Commission" means the Securities and Exchange Commission or any
successor agency.

(g) "Common Stock" means common stock, par value $1.00 per share, of the
Corporation.

(h) "Corporation" means Hilton Hotels Corporation, a Delaware corporation.

(i) "Director" means a member of the Board.

(j) "Disability" means permanent and total disability as determined under
procedures established by the Board for purposes of the Plan.

(k) "Employee" means any officer or other employee (as defined in accordance
with Section 3401(c) of the Code) of the Corporation or of any corporation
which is a subsidiary of the Corporation.

(l) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, and any successor thereto.

(m) "Fair Market Value" means, as of any given date, the mean between the
highest and lowest reported sales prices of the Common Stock on the New York
Stock Exchange Composite Tape or, if not listed on such exchange, on any other
national securities exchange on which the Common Stock is listed or on NASDAQ.
If there is no regular public trading market for such Common Stock, the Fair
Market Value of the Common Stock shall be determined by the Board in good
faith.

(n) "Independent Director" means a member of the Board who is not an
Employee.
<PAGE>

(o) "Plan" means the Hilton Hotels Corporation 1997 Independent Director
Stock Option Plan, as set forth herein and as hereinafter amended from time to
time.

(p) "Retirement" means retirement from service as a Director at or after age
65.

(q) "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.

(r) "Stock Option" means a non-qualified option to purchase Common Stock
granted under Section 5.

(s) "Termination of Directorship" means the time when an optionee who is an
Independent Director ceases to be a Director for any reason, including, but
not by way of limitation, a termination by resignation, failure to be elected,
death or Retirement. The Board, in its sole and absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Directorship with respect to Independent Directors.

In addition, certain other terms used herein have definitions given to them
in the first place in which they are used.

SECTION 2. ADMINISTRATION

The Plan shall be administered by the full Board, acting by a majority of
its members then in office.

The Board shall have plenary authority to grant Stock Options pursuant to
the terms of the Plan to Independent Directors.

Among other things, the Board shall have the authority, subject to the terms
of the Plan to:

(a) Determine the terms and conditions of any Stock Option granted hereunder
(subject to the terms and conditions of the Plan), any vesting condition,
restriction or limitation (which may be related to the performance of the
participant, the Corporation or any subsidiary or Affiliate) and any
forfeiture waiver regarding any Stock Option and the shares of Common Stock
relating thereto, in accordance with the terms of the Plan;

(b) Modify, amend or adjust the terms and conditions of any Stock Option, at
any time or from time to time;

(c) Determine to what extent and under what circumstances Common Stock and
other amounts payable with respect to a Stock Option shall be deferred; and

The Board shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Stock Option issued under the Plan (and any agreement relating
thereto) and to otherwise supervise the administration of the Plan.

The Board may act only by a majority of its members then in office, except
that the members thereof may (i) delegate to an officer of the Corporation the
authority to make decisions pursuant to paragraphs (c), (f), (g), (h) and (i)
of Section 5 (provided that no such delegation may be made that would cause
Stock Options or other transactions under the Plan to cease to be exempt from
Section 16(b) of the Exchange Act) and (ii) authorize any one or more of their
number or any officer of the Corporation to execute and deliver documents on
behalf of the Board.

Any determination made by the Board or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Stock Option shall
be made in the sole discretion of the Board or such delegate at the time of
the grant of the Stock Option or, unless in contravention of any express term
of the Plan, at any time thereafter. All decisions made by the Board or any
appropriately delegated officer pursuant to the provisions of the Plan shall
be final and binding on all persons, including the Corporation and Plan
participants.
<PAGE>

SECTION 3. COMMON STOCK SUBJECT TO PLAN

The total number of shares of Common Stock reserved and available for grant
under the Plan shall be 200,000. Shares subject to a Stock Option under the
Plan may be authorized and unissued shares or may be treasury shares.

If any Stock Option terminates without being exercised, shares subject to
such Stock Option shall again be available for distribution in connection with
Stock Options under the Plan.

In the event of any change in corporate capitalization, such as a stock
split or a corporate transaction, such as any merger, consolidation,
separation, including a spin-off, or other distribution of stock or property
of the Corporation, any reorganization (whether or not such reorganization
comes within the definition of such term in Section 368 of the Code) or any
partial or complete liquidation of the Corporation, the Board may make such
substitution or adjustments in the aggregate number and kind of shares
reserved for issuance under the Plan, in the number, kind and option price of
shares subject to outstanding Stock Options, in the number and kind of shares
subject to other outstanding Stock Options granted under the Plan and/or such
other equitable substitution or adjustments as it may determine to be
appropriate in its sole discretion; provided, however, that the number of
shares subject to any Stock Option shall always be a whole number.

SECTION 4. ELIGIBILITY

Independent Directors are eligible to be granted Stock Options under the
Plan.

SECTION 5. STOCK OPTIONS

No Stock Option granted under the Plan shall constitute an "incentive stock
option" under Section 422 of the Code. Any Stock Option granted under the Plan
shall be in such form as the Board may from time to time approve.

During the term of the Plan, each person who is an Independent Director as
of the date of the adoption of the Plan by the Board automatically shall be
granted (i) a Stock Option to purchase two thousand (2,000) shares of Common
Stock (subject to adjustment as provided herein) on the date of such adoption,
and (ii) a Stock Option to purchase two thousand (2,000) shares of Common
Stock (subject to adjustment as provided herein) on the date of each annual
meeting of stockholders after such adoption, beginning with the 1998 annual
meeting of stockholders, for so long as such person remains an Independent
Director. During the term of the Plan, each person who is initially elected to
the Board after the adoption of the Plan by the Board and who is an
Independent Director at the time of such initial election automatically shall
be granted (i) a Stock Option to purchase two thousand (2,000) shares of
Common Stock (subject to adjustment as provided herein) on the date of such
initial election, and (ii) a Stock Option to purchase two thousand (2,000)
shares of Common Stock (subject to adjustment as provided herein) on the date
of each annual meeting of stockholders after such initial election for so long
as such person remains an Independent Director. All of the foregoing Stock
Option grants authorized by this Section 5 are subject to stockholder approval
of the Plan.

Stock Options shall be evidenced by option agreements, the terms and
provisions of which may differ. The grant of a Stock Option shall occur on the
dates specified above. The Corporation shall notify a participant of any grant
of a Stock Option, and a written option agreement or agreements shall be duly
executed and delivered by the Corporation to the participant. Such agreement
or agreements shall become effective upon execution by the Corporation and the
participant.

Stock Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions as the
Board shall deem desirable:

(a) Option Price. The option price per share of Common Stock purchasable
under a Stock Option shall equal 100% of the Fair Market Value of the Common
Stock subject to the Stock Option on the date of grant.
<PAGE>

(b) Option Term. The term of each Stock Option shall be 10 years from the
date such Stock Option is granted, without variation or acceleration
hereunder, but subject to paragraphs (f), (g), (h) and (i) of this Section 5,
and no Stock Option shall be exercisable more than ten years after the date
the Stock Option is granted.

(c) Exercisability. Except as otherwise provided herein, Stock Options shall
be exercisable from and after the date on which such Stock Option is granted.

(d) Method of Exercise. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the option
term by giving written notice of exercise to the Corporation specifying the
number of shares of Common Stock subject to the Stock Option to be purchased.

Such notice shall be accompanied by payment in full of the purchase price by
certified or bank check or such other instrument as the Board may accept.
Payment, in full or in part, may also be made in the form of unrestricted
Common Stock already owned by the optionee of the same class as the Common
Stock subject to the Stock Option (based on the Fair Market Value of the
Common Stock on the date the Stock Option is exercised).

Payment for any shares subject to a Stock Option may also be made by
delivering a properly executed exercise notice to the Corporation, together
with a copy of irrevocable instructions to a broker to deliver promptly to the
Corporation the amount of sale or loan proceeds to pay the purchase price,
and, if requested, by the amount of any Federal, state, local or foreign
withholding taxes. To facilitate the foregoing, the Corporation may enter into
agreements for coordinated procedures with one or more brokerage firms.

No shares of Common Stock shall be issued until full payment therefor has
been made. An optionee shall have all of the rights of a shareholder of the
Corporation holding the class or series of Common Stock that is subject to
such Stock Option (including, if applicable, the right to vote the shares and
the right to receive dividends), when the optionee has given written notice of
exercise, has paid in full for such shares and, if requested, has given the
representation described in Section 8(a).

(e) Nontransferability of Stock Options. No Stock Option shall be
transferable by the optionee other than (i) by will or by the laws of descent
and distribution; or (ii) pursuant to a qualified domestic relations order (as
defined in the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended) whether directly or indirectly or by means of a trust or
partnership or otherwise, under the applicable option agreement. All Stock
Options shall be exercisable, subject to the terms of this Plan, during the
optionee's lifetime, only by the optionee or by the guardian or legal
representative of the optionee or its alternative payee pursuant to such
qualified domestic relations order, it being understood that the terms
"holder" and "optionee" include the guardian and legal representative of the
optionee named in the option agreement and any person to whom an option is
transferred by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order.

(f) Termination by Death. Unless otherwise determined by the Board, if an
optionee's directorship terminates by reason of death, any Stock Option held
by such optionee may thereafter be exercised, to the extent then exercisable,
for a period of one year (or such other period as the Board may specify in the
option agreement) from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter.

(g) Termination by Reason of Disability. Unless otherwise determined by the
Board, if an optionee's directorship terminates by reason of Disability, any
Stock Option held by such optionee may thereafter be exercised by the
optionee, to the extent it was exercisable at the time of termination, for a
period of one year (or such other period as the Board may specify in the
option agreement) from the date of such termination of directorship or until
the expiration of the stated term of such Stock Option, whichever period is
the shorter; provided, however, that if the optionee dies within such period,
any unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which
it was exercisable at the time of death for a period of 12 months from the
date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.
<PAGE>

(h) Termination by Reason of Retirement. Unless otherwise determined by the
Board, if an optionee's directorship terminates by reason of Retirement, any
Stock Option held by such optionee may thereafter be exercised by the
optionee, to the extent it was exercisable at the time of such Retirement, for
a period of two years (or such other period as the Board may specify in the
option agreement) from the date of such termination of directorship or until
the expiration of the stated term of such Stock Option, whichever period is
the shorter; provided, however, that if the optionee dies within such period
any unexercised Stock Option held by such optionee shall, notwithstanding the
expiration of such period, continue to be exercisable to the extent to which
it was exercisable at the time of death for a period of 12 months from the
date of such death or until the expiration of the stated term of such Stock
Option, whichever period is the shorter.

(i) Other Termination. Unless otherwise determined by the Board: (A) if an
optionee incurs a Termination of Directorship, other than by death, Disability
or Retirement, all Stock Options held by such optionee shall thereupon
terminate; and (B) if an optionee incurs a Termination of Directorship for any
reason other than death, Disability or Retirement, any Stock Option held by
such optionee, to the extent then exercisable, may be exercised, for the
lesser of three months from the date of such Termination of Directorship or
the balance of such Stock Option's term; provided, however, that if the
optionee dies within such three-month period, any unexercised Stock Option
held by such optionee shall, notwithstanding the expiration of such three-
month period, continue to be exercisable to the extent to which it was
exercisable at the time of death for a period of 12 months from the date of
such death or until the expiration of the stated term of such Stock Option,
whichever period is the shorter. Notwithstanding the foregoing, if an optionee
incurs a Termination of Directorship at or after a Change in Control, other
than by reason of death, Disability or Retirement, any Stock Option held by
such optionee shall be exercisable for the lesser of (1) six months and one
day from the date of such Termination of Directorship, and (2) the balance of
such Stock Option's term.

(j) Change in Control Cash-Out. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the
"Exercise Period"), unless the Board shall determine otherwise at the time of
grant, an optionee shall have the right, whether or not the Stock Option is
fully exercisable and in lieu of the payment of the exercise price for the
shares of Common Stock being purchased under the Stock Option and by giving
notice to the Corporation, to elect (within the Exercise Period) to surrender
all or part of the Stock Option to the Corporation and to receive cash, within
30 days of such notice, in an amount equal to the amount by which the Change
in Control Price per share of Common Stock on the date of such election shall
exceed the exercise price per share of Common Stock under the Stock Option
(the "Spread") multiplied by the number of shares of Common Stock granted
under the Stock Option as to which the right granted under this Section 5(j)
shall have been exercised; provided, however, that if the Change in Control is
within six months of the date of grant of a particular Stock Option and is
subject to Section 16(b) of the Exchange Act no such election shall be made by
such optionee with respect to such Stock Option prior to six months from the
date of grant. However, if the end of such 60-day period from and after a
Change in Control is within six months of the date of grant of a Stock Option
and is subject to Section 16(b) of the Exchange Act, such Stock Option shall
be canceled in exchange for a cash payment to the optionee, effected on the
day which is six months and one day after the date of grant of such Option,
equal to the Spread multiplied by the number of shares of Common Stock granted
under the Stock Option. Notwithstanding the foregoing, if any right granted
pursuant to this Section 5(j) would make a Change in Control transaction
ineligible for pooling of interests accounting under APB No. 16 that but for
this Section 5(j) would otherwise be eligible for such accounting treatment,
the Board shall have the ability to substitute the cash payable pursuant to
this Section 5(j) with Stock with a Fair Market Value equal to the cash that
would otherwise be payable hereunder.

SECTION 6. TERM, AMENDMENT AND TERMINATION

The Plan will terminate 10 years after the effective date of the Plan. Under
the Plan, Stock Options outstanding as of such date shall not be affected or
impaired by the termination of the Plan.

The Board may amend, alter, or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would (i) impair the rights
of an optionee under a Stock Option theretofore granted without the
<PAGE>

optionee's consent, except such an amendment made to cause the Plan to qualify
for the exemption provided by Rule 16b-3, or (ii) disqualify the Plan from the
exemption provided by Rule 16b-3. In addition, no such amendment shall be made
without the approval of the Corporation's shareholders (i) if such amendment
would increase the limit imposed under Section 3 on the maximum number of
shares of Common Stock reserved and available for grant under the Plan, or
(ii) to the extent such approval is required by law or agreement.

The Board may amend the terms of any Stock Option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights
of any holder without the holder's consent except such an amendment made to
cause the Plan or Stock Option to qualify for the exemption provided by Rule
16b-3.

Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules as well
as other developments, and to grant Stock Options which qualify for beneficial
treatment under such rules without stockholder approval.

SECTION 7. UNFUNDED STATUS OF PLAN

It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Board may authorize the creation of
trusts or other arrangements to meet the obligations created under the Plan to
deliver Common Stock or make payments; provided, however, that unless the
Board otherwise determines, the existence of such trusts or other arrangements
is consistent with the "unfunded" status of the Plan.

SECTION 8. GENERAL PROVISIONS

(a) The Board may require each person purchasing or receiving shares
pursuant to a Stock Option to represent to and agree with the Corporation in
writing that such person is acquiring the shares without a view to the
distribution thereof. The certificates for such shares may include any legend
which the Board deems appropriate to reflect any restrictions on transfer.

Notwithstanding any other provision of the Plan or agreements made pursuant
thereto, the Corporation shall not be required to issue or deliver any
certificate or certificates for shares of Common Stock under the Plan prior to
fulfillment of all of the following conditions:

(i) Listing or approval for listing upon notice of issuance, of such
shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Common Stock;

(ii) Any registration or other qualification of such shares of the
Corporation under any state or Federal law or regulation, or the
maintaining in effect of any such registration or other qualification which
the Board shall, in its absolute discretion upon the advice of counsel,
deem necessary or advisable; and

(iii) Obtaining any other consent, approval, or permit from any state or
Federal governmental agency which the Board shall, in its absolute
discretion after receiving the advice of counsel, determine to be necessary
or advisable.

(b) Nothing contained in the Plan shall prevent the Corporation or any
subsidiary or Affiliate from adopting other or additional compensation
arrangements for its employees or Directors.

(c) Adoption of the Plan shall not confer upon any Independent Director any
right to continue to serve as a Director, nor shall it interfere in any way
with the right of the Corporation to terminate the directorship of any
Independent Director at any time.

(d) No later than the date as of which an amount first becomes includible in
the gross income of the participant for Federal income tax purposes with
respect to any Stock Option under the Plan, the participant shall pay to the
Corporation, or make arrangements satisfactory to the Board regarding the
payment of, any Federal, state, local or foreign taxes of any kind required by
law to be withheld with respect to such amount. The
<PAGE>

obligations of the Corporation under the Plan shall be conditional on such
payment or arrangements, and the Corporation and its Affiliates shall, to the
extent permitted by law, have the right to deduct any such taxes from any
payment otherwise due to the participant. The Board may establish such
procedures as it deems appropriate, including making irrevocable elections,
for the settlement of withholding obligations with Common Stock.

(e) The Board shall establish such procedures as it deems appropriate for a
participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to be paid or by whom any rights of the
participant, after the participant's death, may be exercised.

(f) The Plan and all Stock Options granted and actions taken thereunder
shall be governed by and construed in accordance with the laws of the State of
Delaware, without reference to principles of conflict of laws.

SECTION 9. EFFECTIVE DATE OF PLAN

The Plan shall be effective as of July 16, 1997, provided that it is
approved and adopted by at least a majority of the shares voted of Common
Stock of the Corporation within 12 months after such date.

<PAGE>

- - --------------------------------------------------------------------------------
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE Please mark [X]
MANNER DIRECTED HEREIN. IF NO DIRECTION IS MADE, THIS your votes as
PROXY WILL BE VOTED FOR ITEMS 1, 2, 3 AND 4. indicated in
this example

1. Election of the following FOR WITHHELD
nominees as Directors: ALL FOR ALL
[_] [_]
01 A. Steven Crown,
02 Arthur M. Goldberg,
03 Eric M. Hilton and
04 Donna F. Tuttle

Withheld for the following only (Write the name of the nominee(s) in the space
below).
- - --------------------------------------------------------------------------------

FOR AGAINST ABSTAIN

2. Proposal to ratify the adoption of the Corporation's [_] [_] [_]
1997 Independent Director Stock Option Plan.

3. Proposal to ratify the appointment of Arthur [_] [_] [_]
Andersen LLP as auditors for the Company for
fiscal 1998.

4. In their discretion the Proxies are authorized to [_] [_] [_]
vote upon such other business as may properly come
before the meeting or any adjournments thereof.

I plan to attend meeting [_]

COMMENTS/ADDRESS CHANGE [_]
Please mark this box if you have
written comments/address change
on the reverse side

*** IF YOU WISH TO VOTE BY TELEPHONE, PLEASE READ THE INSTRUCTIONS BELOW ***

___
|

SIGNATURE(S) _______________________________ DATED ______________________, 1998

<PAGE>

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- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - -
- FOLD AND DETACH HERE -
- - --------------------------------------------------------------------------------
VOTE BY TELEPHONE

QUICK --- EASY --- IMMEDIATE

Your telephone vote authorizes the named proxies to vote your shares in the
same manner as if you marked, signed and returned your proxy card.

. You will be asked to enter a Control Number which is located in the box in
the lower right hand corner of this form.

OPTION #1: To vote as the Board of Directors recommends on ALL proposals,
Press 1

WHEN ASKED, PLEASE CONFIRM YOUR VOTE BY PRESSING 1.

OPTION #2: If you choose to vote on each proposal separately, press 0. You
will hear these Instructions.

Proposal 1: To vote FOR ALL nominees press 1; to WITHHOLD FOR ALL nominees
press 9.

To withhold FOR AN INDIVIDUAL nominee, press 0 and listen to the
instructions.

Proposal 2: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press 0.

The instructions are the same for all remaining proposals.

WHEN ASKED, PLEASE CONFIRM YOUR VOTE BY PRESSING 1.

PLEASE DO NOT RETURN THE ABOVE PROXY CARD IF VOTED BY PHONE.

CALL -- TOLL FREE -- ON A
TOUCH TONE TELEPHONE

1-800-840-1208 - ANYTIME

There is NO CHARGE to you
for this call.