<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549

                                   FORM 10-Q



(Mark One)
[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934

For the quarterly period ended   SEPTEMBER 30, 1997
                                 ------------------

                                       OR

[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES 
     EXCHANGE COMMISSION ACT OF 1934

For the transition period from _______________________to__________________
Commission file number  1-6339
                       --------

                         GREATE BAY CASINO CORPORATION
                         -----------------------------
            (Exact name of Registrant as specified in its charter)


          DELAWARE                                       75-1295630
-------------------------------                      ------------------
(State or other jurisdiction of                      (I.R.S. Employer
incorporation or organization)                       Identification No.)
 
     C/O SANDS HOTEL & CASINO
INDIANA AVENUE & BRIGHTON PARK, 9TH FLOOR
     ATLANTIC CITY, NEW JERSEY                             08401
-----------------------------------------            ------------------ 
(Address of principal executive offices)                 (Zip Code)
 
(Registrants' telephone number, including area code):   (609) 441-0704
                                                      -----------------
  TWO GALLERIA TOWER, SUITE 2200, 13455 NOEL ROAD, LB48, DALLAS, TEXAS 75240
-----------------------------------------------------------------------------
  (Former name, former address, and former fiscal year, if changed since last
   report.)

   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.   YES  X    NO
                                               -----     -----           

   Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

          CLASS                          OUTSTANDING AT NOVEMBER 11, 1997
----------------------------             --------------------------------
Common Stock, $.10 par value                    5,186,627 shares

                                       1
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES


PART I: FINANCIAL INFORMATION
-----------------------------

INTRODUCTORY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------

   Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC") are engaged primarily in the ownership, operation and management of the
Sands Hotel and Casino located in Atlantic City, New Jersey (the "Sands"); the
management of a riverboat gaming and entertainment facility located in Aurora,
Illinois (the "Aurora Casino") and providing consulting services to a gaming and
lodging facility in Tunica County, Mississippi (the "Tunica Casino").  GBCC has
also engaged in the casino gaming business in Puerto Rico and the management of
hotels in the United States.  GBCC's outstanding common shares are listed and
traded on the American Stock Exchange under the symbol GBY.  Prior to December
31, 1996, Hollywood Casino Corporation ("HCC", a Delaware corporation) owned
approximately 80% of the outstanding common stock of GBCC.  Effective December
31, 1996, HCC distributed such stock to its shareholders; as a result,
approximately 36% of GBCC's outstanding stock is owned by certain general
partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt, Jr. and
William D. Pratt and by other family members (collectively, the "Pratt Family").
The Pratt Family also owns approximately 53% of HCC.  HCC owns the Aurora Casino
and the Tunica Casino.

   A significant portion of GBCC's assets relate to its wholly owned subsidiary,
Greate Bay Hotel and Casino, Inc. ("GBHC"), which owns the Sands.  Historically,
the Sands' gaming operations have been highly seasonal in nature, with the peak
activity occurring from May to September; consequently, the results of
operations for the three and nine month periods ended September 30, 1997 are not
necessarily indicative of the operating results for the full year.

   The consolidated financial statements as of September 30, 1997 and for the
three and nine month periods ended September 30, 1997 and 1996 have been
prepared by GBCC without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission.  In the opinion of management, these
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the consolidated
financial position of GBCC as of September 30, 1997, and the results of its
operations for the three and nine month periods ended September 30, 1997 and
1996 and cash flows for the nine month periods ended September 30, 1997 and
1996.

   Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted.  These consolidated financial statements should
be read in conjunction with the consolidated financial statements and notes
thereto included in GBCC's 1996 Annual Report on Form 10-K.

                                       2
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

                                    ASSETS
<TABLE>
<CAPTION>
 
 
                                           SEPTEMBER 30,    DECEMBER 31,
                                                1997            1996
                                           -------------   -------------
<S>                                        <C>             <C>
Current Assets:
 Cash and cash equivalents                 $  21,729,000   $  22,991,000
 Short-term investment                                 -       2,000,000
 Accounts receivable, net of allowances
  of $14,539,000 and $15,524,000,
  respectively                                 9,318,000      10,656,000
 Inventories                                   3,717,000       4,016,000
 Due from affiliates                             862,000       2,525,000
 Deferred income taxes                         1,233,000       1,627,000
 Refundable deposits and other
  current assets                               3,600,000       2,388,000
                                           -------------   -------------
 
  Total current assets                        40,459,000      46,203,000
                                           -------------   -------------
 
Investment in Limited Partnership              1,973,000               -
                                           -------------   -------------
 
Property and Equipment:
 Land                                         38,957,000      38,957,000
 Buildings and improvements                  185,508,000     185,508,000
 Operating equipment                          94,355,000      92,769,000
 Construction in progress                      2,104,000       1,535,000
                                           -------------   -------------
 
                                             320,924,000     318,769,000
 Less - accumulated depreciation
  and amortization                          (171,145,000)   (161,882,000)
                                           -------------   -------------
 
  Net property and equipment                 149,779,000     156,887,000
                                           -------------   -------------
 
Other Assets:
 Obligatory investments                        7,604,000       6,382,000
 Deferred financing costs                      6,782,000       7,653,000
 Note receivable from affiliates               3,063,000               -
 Other assets                                  4,072,000       4,220,000
                                           -------------   -------------
 
  Total other assets                          21,521,000      18,255,000
                                           -------------   -------------
 
                                           $ 213,732,000   $ 221,345,000
                                           =============   =============
 
</TABLE>
    The accompanying introductory notes and notes to consolidated financial
    statements are an integral part of these consolidated balance sheets.

                                       3
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                                  (UNAUDITED)

                     LIABILITIES AND SHAREHOLDERS' DEFICIT

                                 
<TABLE>
<CAPTION>
 
                                              SEPTEMBER 30,   DECEMBER 31,
                                                  1997            1996
                                             --------------  --------------
<S>                                          <C>             <C>
Current Liabilities:
 Borrowings from affiliate                   $   6,750,000   $   6,750,000
 Short-term credit facilities                            -       2,000,000
 Current maturities of long-term debt            5,499,000       3,127,000
 Accounts payable                                7,169,000       8,981,000
 Accrued liabilities -
  Salaries and wages                             4,982,000       5,090,000
  Interest                                       9,321,000      11,673,000
  Insurance                                      3,216,000       3,276,000
  Other                                          7,452,000       6,687,000
 Other current liabilities                       4,009,000       5,479,000
                                             -------------   -------------
 
  Total current liabilities                     48,398,000      53,063,000
                                             -------------   -------------
 
Long-Term Debt                                 315,557,000     322,897,000
                                             -------------   -------------
 
Other Noncurrent Liabilities                     3,710,000       3,592,000
                                             -------------   -------------
 
Due to Affiliate                                         -       1,000,000
                                             -------------   -------------

Commitments and Contingencies
 
Shareholders' Deficit:
 Common stock, $.10 par value per
  share; 10,000,000 shares authorized;
  5,186,627 shares issued and outstanding          519,000         519,000
 Additional paid-in capital                     51,581,000      38,557,000
 Accumulated deficit                          (206,033,000)   (198,283,000)
                                             -------------   -------------
 
  Total shareholders' deficit                 (153,933,000)   (159,207,000)
                                             -------------   -------------
 
                                             $ 213,732,000   $ 221,345,000
                                             =============   =============
 
</TABLE>



    The accompanying introductory notes and notes to consolidated financial
    statements are an integral part of these consolidated balance sheets.

                                       4
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                      THREE MONTHS ENDED
                                                         SEPTEMBER 30,
                                              ----------------------------------
                                                   1997                1996
                                              ---------------    ---------------
<S>                                            <C>                <C>
Revenues:
 Casino                                        $ 63,272,000       $ 65,820,000
 Rooms                                            2,713,000          3,817,000
 Food and beverage                                9,043,000          9,532,000
 Other                                            1,634,000          4,690,000
                                               ------------       ------------
                                                                  
                                                 76,662,000         83,859,000
 Less - promotional allowances                   (6,962,000)        (7,462,000)
                                               ------------       ------------
                                                                  
  Net revenues                                   69,700,000         76,397,000
                                               ------------       ------------
                                                                  
Expenses:                                                         
 Casino                                          52,384,000         56,265,000
 Rooms                                              630,000          1,043,000
 Food and beverage                                3,105,000          3,605,000
 Other                                              913,000          1,741,000
 General and administrative                       4,263,000          4,532,000
 Depreciation and amortization                    3,453,000          5,189,000
                                               ------------       ------------
                                                                  
  Total expenses                                 64,748,000         72,375,000
                                               ------------       ------------
                                                                  
 Income from operations                           4,952,000          4,022,000
                                               ------------       ------------
                                                                  
Non-operating income (expenses):                                  
 Interest income                                    392,000            462,000
 Interest expense                                (9,484,000)       (10,073,000)
 Gain (loss) on disposal of assets                   22,000           (625,000)
 Equity in earnings of limited partnership        1,974,000                  -
                                               ------------       ------------
                                                                  
  Total non-operating expense, net               (7,096,000)       (10,236,000)
                                               ------------       ------------
                                                                  
Loss before income taxes                         (2,144,000)        (6,214,000)
 Income tax provision                              (131,000)        (1,457,000)
                                               ------------       ------------
                                                                  
Net loss                                       $ (2,275,000)      $ (7,671,000)
                                               ============       ============
                                                                  
Net loss per common share                      $      (0.43)      $      (1.48)
                                               ============       ============
 
</TABLE>



    The accompanying introductory notes and notes to consolidated financial
    statements are an integral part of these consolidated statements.

                                       5
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
  
                                                      NINE MONTHS ENDED
                                                        SEPTEMBER 30,
                                               ------------------------------
                                                   1997             1996
                                               -------------    -------------
<S>                                            <C>              <C>
Revenues:
 Casino                                        $183,425,000     $188,735,000
 Rooms                                            7,405,000       11,107,000
 Food and beverage                               25,420,000       27,693,000
 Other                                            9,161,000       14,253,000
                                               ------------     ------------
                                                               
                                                225,411,000      241,788,000
 Less - promotional allowances                  (19,418,000)     (21,616,000)
                                               ------------     ------------
                                                               
  Net revenues                                  205,993,000      220,172,000
                                               ------------     ------------
                                                               
Expenses:                                                      
 Casino                                         152,789,000      169,243,000
 Rooms                                            1,897,000        3,644,000
 Food and beverage                                8,325,000        9,749,000
 Other                                            2,065,000        3,773,000
 General and administrative                      12,646,000       14,789,000
 Depreciation and amortization                   11,172,000       15,790,000
                                               ------------     ------------
                                                               
  Total expenses                                188,894,000      216,988,000
                                               ------------     ------------
                                                               
 Income from operations                          17,099,000        3,184,000
                                               ------------     ------------
                                                               
Non-operating income (expenses):                               
 Interest income                                  1,046,000        1,565,000
 Interest expense                               (28,665,000)     (29,813,000)
 Gain (loss) on disposal of assets                   46,000         (612,000)
 Equity in earnings of limited partnership        2,755,000                -
                                               ------------     ------------
                                                               
  Total non-operating expense, net              (24,818,000)     (28,860,000)
                                               ------------     ------------
                                                               
Loss before income taxes and                                  
 extraordinary item                              (7,719,000)     (25,676,000)
 Income tax provision                              (341,000)        (118,000)
                                               ------------     ------------
                                                               
Loss before extraordinary item                   (8,060,000)     (25,794,000)
Gain on early extinguishment of debt                310,000                -
                                               ------------     ------------
                                                               
Net loss                                       $ (7,750,000)    $(25,794,000)
                                               ============     ============
                                                               
Net loss per common share:                                     
 Loss before extraordinary item                $      (1.55)    $      (4.97)
 Extraordinary item                                     .06                -
                                               ------------     ------------
                                                               
 Net loss                                      $      (1.49)    $      (4.97)
                                               ============     ============
 
</TABLE>
    The accompanying introductory notes and notes to consolidated financial
    statements are an integral part of these consolidated statements.

                                       6
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>
 
                                                                     NINE MONTHS ENDED
                                                                       SEPTEMBER 30,
                                                               -----------------------------
                                                                    1997           1996
                                                               --------------  -------------
<S>                                                             <C>            <C>
OPERATING ACTIVITIES:
 Net loss                                                       $ (7,750,000)  $(25,794,000)
 Adjustments to reconcile net loss to net cash provided by 
(used in) operating activities:
  Gain on early extinguishment of debt                              (310,000)             -
  Depreciation and amortization, including
   accretion of debt discount                                     16,757,000     21,168,000
  (Gain) loss on sale of assets                                      (46,000)       612,000
  Provision for doubtful accounts                                  2,265,000      1,562,000
  Equity in earnings of limited partnership                       (2,755,000)             -
  Dividends received from limited partnership                      2,882,000              -
  Deferred income tax provision                                            -         51,000
  Increase in accounts receivable and
   due from affiliate                                               (842,000)      (709,000)
  Decrease in accounts payable and
   other accrued liabilities                                      (2,821,000)      (579,000)
  Net change in other current assets and liabilities              (2,438,000)    (1,948,000)
  Net change in other noncurrent assets and liabilities               12,000       (216,000)
                                                                ------------   ------------
 
   Net cash provided by (used in) operating activities             4,954,000     (5,853,000)
                                                                ------------   ------------
 
INVESTING ACTIVITIES:
 Net property and equipment additions                             (2,124,000)    (7,237,000)
 Proceeds from disposal of assets                                     46,000      2,581,000
 Decrease in cash from sale of limited partnership interest         (451,000)             -
 Collections on notes receivable                                     206,000      9,361,000
 Obligatory investments                                           (2,089,000)    (2,248,000)
 Short-term investments                                            2,000,000     (2,000,000)
 Distributions from unconsolidated affiliate                         500,000              -
                                                                ------------   ------------
 
   Net cash (used in) provided by investing activities            (1,912,000)       457,000
                                                                ------------   ------------
 
FINANCING ACTIVITIES:
 Issuance of long-term debt                                                -        700,000
 Net (repayments) borrowings on credit facilities                 (2,000,000)     2,000,000
 Net borrowings from affiliate                                             -      1,750,000
 Repayments of long-term debt                                     (2,304,000)    (2,295,000)
 Deferred financing costs                                                  -        (10,000)
                                                                ------------   ------------
 
  Net cash (used in) provided by financing activities             (4,304,000)     2,145,000
                                                                ------------   ------------
 
  Net decrease in cash and cash equivalents                       (1,262,000)    (3,251,000)
  Cash and cash equivalents at beginning of period                22,991,000     28,067,000
                                                                ------------   ------------
 
  Cash and cash equivalents at end of period                    $ 21,729,000   $ 24,816,000
                                                                ============   ============
</TABLE>
    The accompanying introductory notes and notes to consolidated financial
    statements are an integral part of these consolidated statements.

                                       7
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)


(1)  ORGANIZATION, BUSINESS AND BASIS OF PRESENTATION

   Greate Bay Casino Corporation, a Delaware corporation, and its subsidiaries
("GBCC"), are engaged in the operation or management of casino properties.
GBCC's principal assets are the Sands Hotel and Casino located in Atlantic City,
New Jersey (the "Sands") and management and consulting contracts with gaming
facilities located in Aurora, Illinois (the "Aurora Casino") and Tunica,
Mississippi (the "Tunica Casino") (see Note 5).  GBCC, through its subsidiaries
and various joint ventures, has also engaged to a lesser extent in other hotel
and casino operations in the United States and the Caribbean.

   Prior to December 31, 1996, Hollywood Casino Corporation ("HCC", a Delaware
corporation) owned approximately 80% of the outstanding common stock of GBCC.
Effective December 31, 1996, HCC distributed such stock to its shareholders; as
a result, approximately 36% of GBCC's outstanding stock is owned by certain
general partnerships and trusts controlled by Jack E. Pratt, Edward T. Pratt,
Jr. and William D. Pratt and by other family members (collectively, the "Pratt
Family").  The Pratt Family also owns approximately 53% of HCC.  HCC owns the
Aurora Casino and the Tunica Casino.

   Effective as of April 1, 1997, HCC acquired the general partnership interest
in Pratt Management, L.P. ("PML"), the limited partnership which holds the
management contract on the Aurora Casino, from PPI Corporation, a wholly owned
subsidiary of GBCC.  As a result, GBCC's investment in the limited partnership
is now being presented under the equity method of accounting (see Note 6).  For
all periods through March 31, 1997, PML was wholly owned by subsidiaries of
GBCC; accordingly, the operating results of PML, together with its assets and
liabilities, were consolidated with GBCC for financial statement purposes.

   GBCC estimates that a significant amount of the Sands' revenues are derived
from patrons living in southeastern Pennsylvania, northern New Jersey and
metropolitan New York City.  Competition in the Atlantic City gaming market is
intense and management believes that this competition will continue or intensify
in the future.

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

   GBCC is self insured for a portion of its general liability, certain health
care and other liability exposures.  Accrued insurance includes estimates of
such accrued liabilities based on an evaluation of the merits of individual
claims and historical claims experience; accordingly, GBCC's ultimate liability
may differ from the amounts accrued.

   Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets" requires, among other things, that an entity
review its long-lived assets and certain related intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be fully recoverable.  As a result of its review, GBCC does not believe
that any material impairment currently exists related to its long-lived assets.

                                       8
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)


   The consolidated financial statements as of September 30, 1997 and for the
three and nine month periods ended September 30, 1997 and 1996 have been
prepared by GBCC without audit.  In the opinion of management, these
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the consolidated
financial position of GBCC as of September 30, 1997, and the results of its
operations for the three and nine month periods ended September 30, 1997 and
1996 and cash flows for the nine month periods ended September 30, 1997 and
1996.

   The accompanying consolidated financial statements have been prepared
assuming GBCC will continue as a going concern.  Operating results for the first
six months of 1997 at the Sands, which is GBCC's most significant operation,
reflected a substantial improvement over 1996 and were on target with
management's operating plan due to mild winter weather conditions compared to a
year ago, an abatement of the intense marketing competition for bus customers
and implementation of cost containment measures. The Sands' operating results
for the third quarter, although improved from the prior year period results,
were significantly below its operating plan.  Accordingly, the Sands has
incurred an operating cash flow deficit of $1,698,000 through the third quarter
of 1997 and, consequently, cash reserves have been reduced.  October operating
results continued to be below management's operating plan.  In order to meet its
debt service requirements of approximately $12,500,000 in January 1998, the
Sands will require financial assistance from affiliated companies or other
sources.  The availability of additional borrowings from GBCC and other
subsidiaries of GBCC during the remainder of 1997 is limited.  HCC which, prior
to December 31, 1996, owned approximately 80% of the outstanding common stock of
GBCC, loaned $6,500,000 to GBCC in 1996 for use by the Sands (see Note 5); HCC
is subject to certain indenture provisions which restrict its ability to provide
ongoing financial support to an additional $3,500,000.  There is no assurance
that HCC, which is no longer the parent of GBCC, or GBCC will agree to provide
such additional financial support, if needed.

(2)  SHORT-TERM CREDIT FACILITIES AND BORROWINGS FROM AFFILIATES

   As of December 31, 1996, GBHC had $2,000,000 outstanding under a bank line of
credit. Borrowings under the line of credit were guaranteed to the extent of
$2,000,000 by another subsidiary of GBCC, which pledged a certificate of deposit
in the face amount of $2,000,000 as collateral for the line of credit.  The line
of credit was repaid upon maturity of the certificate of deposit during January
1997 and the line of credit was cancelled.

   GBCC and its subsidiaries had outstanding affiliate borrowings from HCC of
$6,750,000 and $7,750,000 as of September 30, 1997 and December 31, 1996,
respectively.  Included in the balance at December 31, 1996 was a $1,000,000,
14% note which was assumed by HCC in connection with its acquisition of the
general partnership interest in PML.  During the third quarter of 1996, GBCC
borrowed $6,500,000 from HCC on a demand basis with interest at the rate of 13
3/4% per annum payable quarterly commencing October 1, 1996; such funds were
loaned by GBCC to GBHC on  the same terms for working capital purposes.  An
additional $250,000 is due on demand, or if no demand is made, on April 1, 1998
and bears interest at the rate of 14% per annum, payable semiannually.

                                       9
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



(3)  LONG-TERM DEBT AND PLEDGE OF ASSETS

   Substantially all of GBCC's assets are pledged in connection with GBCC's
long-term indebtedness. Additionally, the indentures with respect to the
February 1994 refinancing of substantially all of GBCC's casino related
outstanding debt contain certain cross-default provisions.
<TABLE>
<CAPTION>
 
                                                       SEPTEMBER 30,   DECEMBER 31,
                                                           1997           1996
                                                      --------------  -------------
<S>                                                    <C>            <C>
 
 10 7/8% first mortgage notes, due 2004 (a)            $182,500,000   $185,000,000
 11 5/8% senior notes, due 2004 (b)                      85,000,000     85,000,000
 14 7/8% secured promissory note, due 2006, net of
   discount of $32,554,000 and $44,015,000,
   respectively (c)                                      52,049,000     54,338,000
 Other                                                    1,507,000      1,686,000
                                                       ------------   ------------
 
     Total indebtedness                                 321,056,000    326,024,000
   Less - current maturities                             (5,499,000)    (3,127,000)
                                                       ------------   ------------
 
     Total long-term debt                              $315,557,000   $322,897,000
                                                       ============   ============
</TABLE>
----------------------------
(a)  On February 17, 1994, a subsidiary of GBCC issued $185,000,000 of non-
     recourse first mortgage notes due January 15, 2004 (the "10 7/8% First
     Mortgage Notes") and collateralized by a first mortgage on the Sands.
     Interest on the notes accrues at the rate of 10 7/8% per annum, payable
     semiannually commencing July 15, 1994.  Interest only was payable during
     the first three years. Commencing on July 15, 1997, semiannual principal
     payments of $2,500,000 are due on each interest payment date with the
     balance due at maturity.  Such semiannual payments may be made in cash or
     by tendering to the trustee 10 7/8% First Mortgage Notes previously
     purchased or otherwise acquired by GB Property Funding.  GB Property
     Funding acquired $2,500,000 face amount of 10 7/8% First Mortgage Notes at
     a discount during May 1997 which it used during June to make its July 15,
     1997 required principal payment.  The 10 7/8% First Mortgage Notes are
     redeemable at the option of the issuer, in whole or in part, on or after
     January 15, 1999 at stated redemption prices ranging up to 104.08% of par
     plus accrued interest.

     The indenture for the 10 7/8% First Mortgage Notes contains various
     provisions which, among other things, restrict the ability of certain
     subsidiaries to pay dividends to GBCC, to merge, consolidate or sell
     substantially all of their assets or to incur additional indebtedness
     beyond certain limitations.  In addition, the indenture requires the
     maintenance of certain cash balances and requires minimum expenditures, as
     defined in the indenture, for property and fixture renewals, replacements
     and betterments at the Sands.

(b)  On February 17, 1994, a subsidiary of GBCC issued $85,000,000 of unsecured
     senior notes due April 15, 2004 (the "PRT Funding Notes").  Interest on the
     PRT Funding Notes accrues at the rate of 11 5/8% per annum, payable
     semiannually commencing October 15, 1994.  The PRT Funding Notes are
     redeemable at the option of the issuer, in whole or in part, on or after
     April 15, 1999 

                                       10
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



     at stated redemption prices ranging up to 104.36% of par
     plus accrued interest.  The indenture for the PRT Funding Notes contains
     various provisions which, among other things, restrict the ability of
     certain subsidiaries of GBCC to pay dividends to GBCC, to merge,
     consolidate or sell substantially all of their assets or to incur
     additional indebtedness beyond certain limitations.  The indenture also
     contains certain cross default provisions with respect to the 10 7/8% First
     Mortgage Notes described in (a) above.

(c)  On February 17, 1994, PPI Funding Corp., a newly formed subsidiary of GBCC,
     issued $40,524,000 discounted principal amount of new deferred interest
     notes (the "PPI Funding Notes") to HCC in exchange for the $38,779,000
     principal amount of 15 1/2% unsecured notes held by HCC and issued by PCPI
     Funding Corp., a subsidiary of GBCC (the "PCPI Notes").  The increased
     principal amount of the new notes included a call premium on the exchange
     ($1,745,000) equal to 4 1/2% of the principal amount of PCPI Notes
     exchanged; such premium was paid to all third party holders of $58,364,000
     principal amount of PCPI Notes concurrently redeemed.  The PPI Funding
     Notes were discounted to yield interest at the rate of 14 7/8% per annum
     and had an original face value of $110,636,000.  Subsequent principal
     payments by PPI Funding Corp. reduced the maturity value of the notes to
     $98,353,000 at December 31, 1996.  During the second quarter of 1997, HCC
     assigned $13,750,000 undiscounted principal amount of the PPI Funding Notes
     to PPI Corporation as consideration, in part, for HCC's acquisition of the
     general partnership interest in PML (see Note 5).  Such assignment reduced
     the maturity value of the notes to $84,603,000.  Payment of interest is
     deferred through February 17, 2001 at which time interest will become
     payable semiannually, with the unpaid principal balance due on February 17,
     2006. The PPI Funding Notes are collateralized by a pledge of all of the
     common stock of a subsidiary of GBCC.

     Scheduled payments of long-term debt as of September 30, 1997 are set forth
below:
<TABLE>
<CAPTION>
 
       <S>                                      <C>
       1997 (three months)                      $    448,000
       1998                                        5,068,000
       1999                                        5,074,000
       2000                                        5,079,000
       2001                                        5,467,000
       Thereafter                                332,474,000
                                                ------------
                                     
        Total                                   $353,610,000
                                                ============
</TABLE>
     Interest paid amounted to $25,138,000 and $26,018,000, respectively, during
the nine month periods ended September 30, 1997 and 1996.

                                       11
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)
  
  
  
(4)  INCOME TAXES
  
     Components of GBCC's provision for income taxes consist of the following:
<TABLE>
<CAPTION>
 
                                  THREE MONTHS ENDED           NINE MONTHS ENDED
                                     SEPTEMBER 30,               SEPTEMBER 30,
                               ------------------------     -----------------------
                                  1997         1996            1997         1996
                               ----------  ------------     ----------   ---------- 
<S>                            <C>         <C>              <C>          <C>
Federal income tax benefit     $       -   $         -      $       -    $       -
State income tax provision:                             
 Current                        (131,000)   (1,299,000)      (341,000)     (67,000)
 Deferred                              -      (158,000)             -      (51,000)
                               ---------   -----------      ---------    ---------
                               $(131,000)  $(1,457,000)     $(341,000)   $(118,000)
                               =========   ===========      =========    =========
</TABLE>

   For periods prior to December 31, 1996, GBCC was included in the consolidated
federal income tax return of HCC, GBCC's parent prior to that date.  Pursuant to
agreements between HCC and GBCC, GBCC's provision for federal income taxes was
based on the amount of tax which would have been provided if a separate federal
income tax return were filed.  In addition, HCC compensated GBCC for the use by
HCC and its subsidiaries (exclusive of GBCC and its subsidiaries) of GBCC's
available tax net operating loss carryforwards ("NOL's").  GBCC paid no federal
income taxes for the nine month periods ended September 30, 1997 and 1996.  GBCC
paid state income taxes totaling $124,000 and $114,000 during the nine month
periods ended September 30, 1997 and 1996, respectively.

   Federal and state income tax provisions or benefits are based upon estimates
of the results of operations for the current period and reflect the
nondeductibility for income tax purposes of certain items, including certain
amortization, meals and entertainment and other expenses.

   Deferred income taxes result primarily from the use of the allowance method
rather than the direct write-off method for doubtful accounts, the use of
accelerated methods of depreciation for federal and state income tax purposes
and differences in the timing of deductions taken between tax and financial
reporting purposes for contributions of and adjustments to the carrying value of
certain investment obligations and for vacation and other accruals.

   As a result of the distribution of GBCC's stock by HCC to its shareholders,
GBCC is no longer included in HCC's consolidated Federal income tax return.  At
September 30, 1997, GBCC and its subsidiaries have NOL's totaling approximately
$81 million for Federal income tax purposes of which approximately $64 million
do not begin to expire until the year 2003.  Additionally, GBCC and its
subsidiaries have various tax credits available totaling $3,378,000, most of
which expire by the year 2004. Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS 109") requires that the tax benefit of
such NOL's, credit carryforwards and deferred tax assets resulting from
temporary differences be recorded as an asset and, to the extent that management
can not assess that the utilization of all or a portion of such NOL's and
deferred tax assets is more likely than not, a valuation allowance should be
recorded.  Due to the continued availability of NOL's originating in  prior
years and 

                                       12
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



the book and tax losses sustained in 1997 to date, management is
unable to determine that realization of such asset is more likely than not and,
thus, has provided a valuation allowance for the entire deferred tax asset for
all periods presented.

   Sales or purchases of GBCC common stock by certain five percent stockholders,
as defined in the Internal Revenue Code of 1986, as amended (the "Code"), can
cause a "change of control", as defined in Section 382 of the Code, which would
limit the ability of GBCC to utilize these loss carryforwards in later tax
periods.  Should such a change of control occur, the amount of annual loss
carryforwards available for use would most likely be substantially reduced.
Future treasury regulations, administrative rulings or court decisions may also
effect GBCC's utilization of its loss carryforwards.

   The Internal Revenue Service is currently examining the consolidated Federal
income tax returns of HCC for the years 1993 and 1994 in which GBCC was
included.  Management believes that the results of such examination will not
have a material adverse effect on the consolidated financial position of GBCC.

   The components of the net deferred tax asset were as follows:
<TABLE>
<CAPTION>
 
                                              SEPTEMBER 30,   DECEMBER 31,
                                                   1997           1996
                                              --------------  -------------
<S>                                           <C>             <C>
 
Deferred tax assets:
 Net operating loss carryforwards              $ 27,449,000   $ 26,335,000
 Allowance for doubtful accounts                  5,736,000      6,428,000
 Investment and jobs tax credits                  3,378,000      3,223,000
 Equity in subsidiaries and joint ventures        4,902,000      3,293,000
 Other liabilities and accruals                   3,256,000      3,034,000
 Other                                            2,360,000      2,037,000
                                               ------------   ------------
 
  Total deferred tax assets                      47,081,000     44,350,000
                                               ------------   ------------
 
Deferred tax liabilities:
 Depreciation and amortization                   (8,952,000)    (8,334,000)
 Other                                             (597,000)      (597,000)
                                               ------------   ------------
 
  Total deferred tax liabilities                 (9,549,000)    (8,931,000)
                                               ------------   ------------
 
Net deferred tax asset                           37,532,000     35,419,000
Valuation allowance                             (37,532,000)   (35,419,000)
                                               ------------   ------------
 
                                               $          -   $          -
                                               ============   ============
</TABLE>

                                       13
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



(5)  TRANSACTIONS WITH RELATED PARTIES

   Prior to sale of the property in September 1996, GBCC operated the Holiday
Inn located at the north entrance of the Dallas/Fort Worth Airport ("DFW North")
which was owned by Metroplex Hotel Limited ("Metroplex"), a partnership
controlled by certain members of the Pratt Family.  During the nine month period
ended September 30, 1996, GBCC made capital expenditures under the hotel
operating agreement totaling $1,715,000.  GBCC was also obligated by the hotel
operating agreement to make minimum rental payments equal to Metroplex's
principal and interest payments on the underlying indebtedness of this hotel.
During February 1994, GBCC utilized funds borrowed from HCC to purchase such
underlying indebtedness with a principal balance of $13,756,000 from third
parties at a cost of $6,750,000 and subject to third party indebtedness
amounting to $2,706,000.  The required minimum rental payments (net of debt
service receipts) amounted to $133,000 and $398,000, respectively, during the
three and nine month periods ended September 30, 1996. Upon the sale of the
hotel by Metroplex, GBCC received proceeds sufficient to repay third party
indebtedness of $1,873,000, recover its $6,750,000 acquisition cost of the
underlying indebtedness, recover $2,851,000 of its total investment in property
improvements and receive additional cash of approximately $770,000.

   PML, a limited partnership wholly owned through March 31, 1997 by GBCC, earns
management fees pursuant to a management agreement with Hollywood Casino -
Aurora, Inc. ("HCA"), an HCC subsidiary.  Such fees include a base management
fee equal to 5% of the Aurora Casino's operating revenues (as defined in the
agreement) subject to a maximum of $5.5 million annually, and an incentive fee
equal to 10% of gross operating profit (as defined in the agreement to generally
include all revenues, less expenses other than depreciation, interest,
amortization and taxes).  Effective as of April 1, 1997, HCC acquired the
general partnership interest in PML from PPI Corporation.  Management fees
earned by GBCC prior to the April 1, 1997 sale of the general partnership
interest amounted to $2,727,000.  Such fees amounted to $2,339,000 and
$6,810,000, respectively, during the three and nine month periods ended
September 30, 1996.  Unpaid fees totaling $2,096,000 are included in due from
affiliates in the accompanying consolidated balance sheet at December 31, 1996.

   PPI Corporation received a five-year note in the original amount of
$3,800,000 together with the assignment of $13,750,000 undiscounted principal
amount of PPI Funding Notes (see Note 4) and $350,000 of accrued interest due
from GBCC from HCC in exchange for the general partnership interest. The
$3,800,000 note is payable in monthly installments of $83,000, including
interest at the rate of 14% per annum, commencing on May 1, 1997, with
additional quarterly variable principal payments commencing on July 1, 1997 in
an amount equal to the general partner's share of quarterly cash distributions,
as defined, from PML.  Interest income on the note from HCC amounted to $129,000
and $260,000, respectively, during the three and nine month periods ended
September 30, 1997.  Accrued interest receivable of $41,000 is included in due
from affiliates on the accompanying consolidated balance sheet at September 30,
1997.

   Pursuant to a ten-year consulting agreement with Hollywood Casino - Tunica,
Inc. ("HCT"), the HCC subsidiary which owns and operates the Tunica Casino, a
subsidiary of GBCC receives monthly consulting fees of $100,000.  Total fees
earned amounted to $300,000 for each of the three month periods 

                                       14
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



ended September 30, 1997 and 1996 and $900,000 for each of the nine month
periods ended September 30, 1997 and 1996.

   GBCC and its subsidiaries share certain general and administrative costs with
HCC.  Net allocated costs and fees charged to GBCC and its subsidiaries by HCC
amounted to $439,000 and $590,000, respectively, during the three month periods
ended September 30, 1997 and 1996 and $1,402,000 and $1,884,000, respectively,
during the nine month periods ended September 30, 1997 and 1996.  In connection
with such allocated costs and fees, payables in the amount of $129,000 and
$203,000 are included in accounts payable in the accompanying consolidated
balance sheets at September 30, 1997 and December 31, 1996, respectively.

   HCT and Advanced Casino Systems Corporation ("ACSC"), a GBCC subsidiary,
entered into a Computer Services Agreement dated as of January 1, 1994 and
renewed through December 31, 1999.  The agreement provides, among other things,
that ACSC will sell HCT computer hardware and information systems equipment and
will license or sublicense to HCT computer software necessary to operate HCT's
casino, hotel and related facilities and business operations.  HCT pays ACSC for
such equipment and licenses such software at amounts and on terms and conditions
that ACSC provides to unrelated third parties as well as a fixed license fee of
$33,600 per month ($30,000 prior to January 1, 1997).  HCT also reimburses ACSC
for its direct costs and expenses incurred under this agreement.  Total charges
incurred under such agreement amounted to $162,000 and $97,000, respectively,
for the three month periods ended September 30, 1997 and 1996 and $406,000 and
$409,000, respectively, for the nine month period ended September 30, 1997 and
1996.  HCA also receives certain computer-related services from ACSC  including
hardware, software, and operator support.  HCA reimburses ACSC for its direct
costs and any expenses incurred.  Such costs totaled $18,000 and $121,000,
respectively, during the three month periods ended September 30, 1997 and 1996
and $73,000 and $201,000, respectively, during the nine month periods ended
September 30, 1997 and 1996.

   GBHC and ACSC also perform certain administrative and marketing services on
behalf of HCA, HCT and PML.  During the three month periods ended September 30,
1997 and 1996, fees charged by GBHC and ACSC for such services totaled $163,000
and $321,000, respectively.  Such fees totaled $720,000 and $911,000,
respectively, during the nine month periods ended September 30, 1997 and 1996.
Unpaid fees amounting to $91,000 and $128,000 are included in due from
affiliates in the accompanying consolidated balance sheets at September 30, 1997
and December 31, 1996, respectively.

   On February 17, 1994, PRT Funding Corp., a subsidiary of GBCC, issued
$15,000,000 of 14 5/8% junior subordinated notes (the "Junior Subordinated
Notes") to HCC.  Principal totaling $6,262,000 with respect to the Junior
Subordinated Notes was subsequently assigned to GBCC by HCC in recognition of
tax net operating losses of GBCC used by HCC.  The remaining $8,738,000 of
Junior Subordinated Notes, together with interest accrued thereon, was assigned
to GBCC by HCC in connection with the distribution of its stock in GBCC to HCC's
shareholders on December 31, 1996.

                                       15
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)


   Interest expense with respect to borrowings from HCC is set forth below:
<TABLE>
<CAPTION>
 
                                        THREE MONTHS ENDED         NINE MONTHS ENDED  
                                           SEPTEMBER 30,             SEPTEMBER 30,
                                     -----------------------    ----------------------
                                         1997        1996          1997        1996
                                     -----------  ----------    ----------  ----------
<S>                                  <C>          <C>           <C>         <C>
PPI Funding Notes held by                                    
   HCC (Note 3)                      $1,832,000   $1,845,000    $5,585,000  $5,378,000
Junior Subordinated Notes                     -      320,000             -     958,000
Short-term borrowings (Note 2)          237,000      350,000       739,000     776,000
</TABLE>

   During 1994, a GBCC subsidiary issued $40,524,000 discounted principal amount
of PPI Funding Notes in exchange for the PCPI Notes held by HCC (see Note 3).
Accretion of interest on the PPI Funding Notes is included in the outstanding
note payable balances at September 30, 1997 and December 31, 1996.

   Interest accrued on short-term borrowings at September 30, 1997 and December
31, 1996 amounting to $602,000 and $323,000, respectively,  is included in
interest payable on the accompanying consolidated balance sheets at September
30, 1997 and December 31, 1996.

(6)  INVESTMENT IN PRATT MANAGEMENT, L.P.

   Effective as of April 1, 1997, HCC acquired the general partnership interest
in PML (see Notes 1 and 5) from PPI Corporation.  PML earns management fees from
the Aurora Casino and incurs operating and other expenses with respect to its
management thereof.  The general partner receives 99% of the first $84,000 of
net income earned by the partnership each month and 1% of any income earned
above such amount.   PML earned management fees amounting to $2,668,000 during
the three month period ended September 30, 1997 and $4,113,000 during the period
since April 1, 1997.  PML also incurred operating and other expenses amounting
to $423,000 during the three month period ended September 30, 1997 and $830,000
during the period since April 1, 1997.

(7)  LITIGATION

   PLANET HOLLYWOOD LITIGATION
   ---------------------------

   Planet Hollywood International, Inc., a Delaware corporation, and Planet
Hollywood (Region IV), Inc., a Minnesota corporation (collectively, "PHII"),
filed a complaint in the United States District Court for the Northern District
of Illinois, Eastern Division on July 29, 1996 against HCC, HCA and a member of
the Pratt Family (collectively, the "Original Hollywood Defendants").  The
Original Hollywood Defendants filed with the Court on September 18, 1996 an
answer to PHII's lawsuit, along with numerous counterclaims against PHII, Robert
Earl and Keith Barish (collectively, the "PHII Defendants").  PHII filed with
the Court on January 21, 1997, an amendment to their complaint which, among
other things, added HCT (together with the Original Hollywood Defendants, the
"Hollywood Defendants") and GBCC as defendants.  The Original Hollywood
Defendants filed with the Court on February 4, 1997, and GBCC 

                                       16
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)


and HCT filed with the Court on February 20, 1997, answers and counterclaims to
such amended complaint.
  
   In its lawsuit, PHII alleges, among other things, that the Hollywood
Defendants and GBCC have, in opening and operating the Hollywood Casino concept,
infringed on PHII's trademark, service mark and trade dress and have engaged in
unfair competition and deceptive trade practices. In their counterclaims, the
Hollywood Defendants and GBCC allege, among other things, that the PHII
Defendants have, through their planned use of their mark in connection with
casino services, infringed on certain of HCC's service marks and trade dress and
have engaged in unfair competition.
 
   Given the uncertainties inherent in litigation, no assurance can be given
that the Hollywood Defendants and GBCC will prevail in this litigation; however,
the Hollywood Defendants and GBCC believe that PHII's claims are without merit
and intend to defend their position and pursue their counterclaims vigorously.
The accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of the uncertainties described
above.

   OTHER LITIGATION
   ----------------

   GBCC and its subsidiaries are parties in various legal proceedings with
respect to the conduct of casino and hotel operations.  Although a possible
range of loss cannot be estimated, in the opinion of management, based upon the
advice of counsel, settlement or resolution of these proceedings should not have
a material adverse impact upon the consolidated financial position or results of
operations of GBCC and its subsidiaries.  The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of the uncertainties described above.

(8)  SUPPLEMENTAL CASH FLOW INFORMATION

   During the second quarter of 1997, HCC acquired the general partnership
interest in PML (see Notes 1 and 5).  The purchase price included the assignment
of certain receivables from GBCC and the issuance of a note to PPI Corporation.
In connection with the acquisition, certain liabilities of PPI Corporation were
assumed as follows:
<TABLE>
<CAPTION>
 
<S>                                                         <C>
   Assignment of PPI Funding Notes                          $(7,597,000)
   Assignment of interest receivable                           (350,000)
   Note issued                                               (3,800,000)
   Interest reserve on PPI Funding Notes                       (277,000)
   Charge to paid-in capital                                 13,024,000
                                                            -----------
                                                  
   Liabilities assumed                                      $ 1,000,000
                                                            ===========
</TABLE>

                                       17
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                  (UNAUDITED)



(9)  RECLASSIFICATIONS

   Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1997 consolidated financial statement
presentation.

                                       18
<PAGE>
 
                 GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

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


RESULTS OF OPERATIONS

   This Quarterly Report on Form 10-Q contains forward-looking statements about
the business, financial condition and prospects of GBCC.  The actual results
could differ materially from those indicated by the forward-looking statements
because of various risks and uncertainties including, among other things,
changes in competition, economic conditions, tax regulations, state regulations
applicable to the gaming industry in general or GBCC in particular, and other
risks indicated in GBCC's filing with the Securities and Exchange Commission.
Such risks and uncertainties are beyond management's ability to control and, in
many cases, can not be predicted by management.  When used in this Quarterly
Report on Form 10-Q, the words "believes", "estimates", "anticipates" and
similar expressions as they relate to GBCC or its management are intended to
identify forward-looking statements.

   GENERAL

   GBCC's consolidated net revenues decreased to $69.7 million and $206 million,
respectively, during the third quarter and first nine months of 1997 from $76.4
million and $220.2  million, respectively, for the third quarter and first nine
months of 1996.  There were also significant reductions in operating expenses
during these same periods.  A portion of the revenue and operating expense
decreases is attributable to the April 1, 1997 acquisition by HCC of the general
partnership interest in PML.  As a consequence of such acquisition, PML's
revenues and operating expenses are no longer consolidated with those of GBCC
and GBCC's remaining limited partnership interest in PML is accounted for as an
equity investment.   Income from operations improved to $5 million and $17.1
million, respectively, in 1997 compared to income from operations of $4 million
and $3.2 million, respectively, during the 1996 periods. The improvement in
operating results is attributable to operations at the Sands as discussed below.

   The Sands earned income from operations of $4.1 million and $9.8 million,
respectively, during the three and nine month periods ended September 30, 1997
compared to income from operations of $1 million and a loss from operations of
$6 million, respectively, reported for the three and nine month periods ended
September 30, 1996.  Operating results during the first nine months of 1997 were
favorably impacted by operating efficiencies and by management's decision to
discontinue certain aggressive marketing programs. Operating results during the
first nine months of 1996 were adversely affected by the advent of both
unprecedented and highly aggressive marketing programs instituted by certain
other Atlantic City casinos seeking to increase their market share together with
record snowstorms in January and weekend snowstorms in February.  Net revenues
declined for the respective three and nine month periods (to $69.2 million and
$199.9 million in 1997 from $71.7 million and $205.2 million in 1996).  However,
operating expenses also decreased significantly, most notably (i) marketing and
advertising costs which decreased by $1.2 million (6.3%) and $8.8 million
(15.3%) during the quarter and nine month period, respectively, as a result of
management's efforts to control costs while maintaining positive gross operating
profit and (ii) salaries and related benefits costs which decreased by $1.6
million (6.5%) and $5 million (6.7%), respectively.

                                       19
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)


   GAMING OPERATIONS

   The following table sets forth certain unaudited financial and operating data
relating to the Sands' operations:
<TABLE>
<CAPTION>
                               THREE MONTHS ENDED    NINE MONTHS ENDED
                                  SEPTEMBER 30,         SEPTEMBER 30,
                             --------------------  ------------------------
                                1997       1996       1997          1996
                             ---------  ---------  -----------  -----------
                                      (IN THOUSANDS, EXCEPT PERCENTAGES)
<S>                          <C>        <C>        <C>          <C>
REVENUES:
 Table games                 $ 19,764   $ 21,170   $   58,920   $   61,750
 Slot machines                 42,726     43,663      122,096      123,934
 Other (1)                        782        987        2,409        3,051
                             --------   --------   ----------   ----------
                                                                
  Total                      $ 63,272   $ 65,820   $  183,425   $  188,735
                             ========   ========   ==========   ==========
                                                                
TABLE GAMES:                                                    
 Gross Wagering                                                 
  (Drop) (2)                 $143,483   $161,052   $  406,116   $  444,435
                             ========   ========   ==========   ==========
                                                                
 Hold Percentages: (3, 4)                                       
  Sands                          13.8%      13.1%        14.5%        13.9%
  Atlantic City                  14.6%      15.2%        15.0%        15.5%
                                                                
SLOT MACHINES:                                                  
 Gross Wagering                                                 
  (Handle) (2)               $526,470   $535,346   $1,486,379   $1,510,865
                             ========   ========   ==========   ==========
                                                                
 Hold Percentages: (3, 4)                                       
  Sands                           8.1%       8.2%         8.2%         8.2%
  Atlantic City                   8.4%       8.3%         8.4%         8.3%
----------------------------
</TABLE>

(1) Consists of revenues from poker and simulcast horse racing wagering.

(2) Gross wagering consists of the total value of chips purchased for table
    games (excluding poker) and keno wagering (collectively, the "drop") and
    coins wagered in slot machines ("handle").

(3) Casino revenues consist of the portion of gross wagering that a casino
    retains and, as a percentage of gross wagering, is referred to as the "hold
    percentage".

(4) The Sands' hold percentages are reflected on an accrual basis.  Comparable
    data for the Atlantic City gaming industry is not available; consequently,
    industry percentages have been calculated based on information available
    from the New Jersey Casino Control Commission.

                                       20
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)
          

    Table game drop at the Sands declined $17.6 million  (10.9%) and $38.3
million (8.6%), respectively, during the three and nine month periods ended
September 30, 1997 compared with the same periods of 1996.  The Sands' decreases
compare to increases of 0.9% and 3.9%, respectively, in table drop for all other
Atlantic City casinos during the same periods.  As a result, the Sands' table
game market share (expressed as a percentage of the Atlantic City industry
aggregate table game drop) decreased to 6.8% and 7%, respectively, during the
three and nine month periods ended September 30, 1997 from 7.6% and 7.9%,
respectively, during the same periods of 1996.  The Sands' table game drop
decreases are primarily attributable to declines in patron volume from the
unrated or "mass" segment.  Expansions of other Atlantic City casinos resulted
in an increase of approximately 91,000 square feet of gaming space and 80 tables
at September 30, 1997 compared to September 30, 1996.  Such expansions typically
result in intense marketing campaigns which lure the "mass" segment to the new
facility.  Gaming space at the Sands has remained virtually unchanged since mid-
1996 and the number of table games has decreased by 5.4%.  The decline in table
game drop during the second and third quarters of 1997 also reflects
management's decision to discontinue certain promotional activities, including
the use of "special odds" offered at table games, which has caused a decline in
the rated table market segment.
      
    Slot machine handle decreased $8.9 million (1.7%) and $24.5 million (1.6%),
respectively, during the three and nine month periods ended September 30, 1997
compared with the same periods of 1996.  The Sands' decreases in slot machine
handle compare with increases of  1.3% and 2.2%, respectively, in handle for all
other Atlantic City casinos.  The Sands' average number of slot machines
remained virtually unchanged during 1997 compared to an increase of 8.1% for all
other Atlantic City casinos.  The below industry-wide performance in handle
experienced by the Sands is a result of the same competitive pressures resulting
from casino expansions and related marketing campaigns at other properties as
discussed above with respect to table games.

    REVENUES

    Casino revenues at the Sands, including poker and simulcast horse racing
wagering revenues, decreased slightly by $2.5  million (3.9%) and $5.3 million
(2.8%), respectively, for the three and nine month periods ended September 30,
1997 compared with the same periods of 1996.  Decreases in both slot machine and
table game wagering were partially offset by improvements in the table game hold
percentage.

    Rooms revenue decreased $1.1 million (28.9%) and $3.7 million (33.3%),
respectively, during the three and nine month periods ended September 30, 1997
compared with 1996.  Such declines resulted from GBCC's sale of its last
remaining non-casino hotel property in September 1996.  Food and beverage
revenues decreased $489,000 (5.1%) and $2.3 million (8.2%), respectively, for
the three and nine month periods ended September 30, 1997 compared with the
prior year periods as a result of the aforementioned hotel sale combined with
reduced patron volume, the rescheduling of unit operating hours to increase
overall profitability and the reduction of certain promotional activities at the
Sands.  Other revenues decreased $3.1 million (65.2%) and $5.1 million (35.7%),
respectively, during the three and nine month periods ended September 30, 1997
compared to the 1996 periods.  Decreases resulting from the deconsolidation of
PML's revenues ($2.4 million and $3.9 million, respectively, during the three
and nine 

                                       21
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)


month periods ended September 30, 1996), from the hotel sale and from reductions
in theater entertainment at the Sands were partially offset by the receipt of
$1.5 million as a termination fee in connection with the first quarter 1997 sale
of a casino/hotel property managed by GBCC.

    Promotional allowances represent the estimated value of goods and services
provided free of charge to casino customers under various marketing programs.
As a percentage of rooms, food and beverage and other revenues at the Sands,
these allowances decreased to 53.8% and 54.1%, respectively, during the three
and nine month periods ended September 30, 1997 from 55.8% and 56.8%,
respectively, during the same periods of 1996.  Such decreases are primarily
attributable to reductions in certain marketing programs and other promotional
activities.

    DEPARTMENTAL EXPENSES

    Casino expenses at the Sands decreased $3.9 million (6.9%) and $16.5 million
(9.7%), respectively, during the three and nine month periods ended September
30, 1997 compared with 1996.  During 1996, an unprecedented and highly
aggressive industry-wide attempt to increase market share resulted in
significantly higher costs with respect to coin incentive packages.  The
abatement of these competitive pressures during 1997 together with management's
ongoing efforts to create operating efficiencies, have significantly reduced
expenses.  Such factors have also resulted in a reduction in the allocation of
rooms, food and beverage and other expenses to casino expense.

    Rooms expense decreased $413,000 (39.6%) and $1.7 million (47.9%),
respectively, during the third quarter and first nine months of 1997 compared to
the same periods of 1996 primarily due to GBCC's sale of a noncasino hotel
partially offset by increases in rooms expense at the Sands.  Food and beverage
expense decreased by $500,000 (13.9%) and $1.4 million (14.6%), respectively,
during the three and nine month periods ended September 30, 1997 compared to the
same periods in 1996 also as a result of the previously noted hotel sale.  Other
expenses decreased $828,000 (47.6%) and $1.7 million (45.3%), respectively,
during the three and nine month periods ended September 30, 1997 compared with
1996 primarily due to the hotel sale and to cost savings with respect to theater
entertainment at the Sands.

    GENERAL AND ADMINISTRATIVE

    General and administrative expenses decreased by $269,000 (5.9%) and $2.1
million (14.5%), respectively, during the three and nine month periods ended
September 30, 1997 compared to the 1996 period primarily due to the
deconsolidation of PML's operating expenses, the disposal of GBCC's remaining
noncasino hotel property and reduced overhead allocations from HCC.

    DEPRECIATION AND AMORTIZATION

    As a result of a revision in the estimated useful life of the Sands'
buildings effective October 1, 1996 and the completion of amortization with
respect to certain of its long lived assets, GBCC's depreciation and

                                       22
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)



amortization expense for the third quarter and first nine months of 1997
decreased by $1.7 million (33.5%) and $4.6 million (29.2%), respectively,
compared to the same periods during 1996.

    INTEREST

    Interest income decreased $70,000 (15.2%) and $519,000 (33.2%),
respectively, during the third quarter and first nine months of 1997 compared to
the same periods during 1996 as the hotel sale resulted in GBCC no longer
receiving interest income on an associated note receivable.  Interest expense
decreased by $589,000 (5.8%) and $1.1 million (3.9%), respectively, during the
1997 periods compared to the prior year periods due to overall reductions in
outstanding obligations to HCC.  HCC contributed $8.7 million of notes due from
a GBCC subsidiary to GBCC in connection with HCC's distribution of its stock in
GBCC to its shareholders.  In addition, HCC exchanged $13.7 undiscounted
principal amount of notes issued by a GBCC subsidiary to GBCC as consideration,
in part, for the acquisition of the general partnership interest in PML.  The
resulting reductions in interest expense for GBCC have been partially offset by
additional interest on $6.5 million of new borrowings from HCC for the benefit
of GBHC.  See "Liquidity and Capital Resources - Financing Activities" below.

    EQUITY IN EARNINGS OF LIMITED PARTNERSHIP

    Effective as of April 1, 1997, HCC acquired the general partnership interest
in PML from PPI Corporation.  The Agreement of Limited Partnership of PML
provides for distributions to a GBCC subsidiary of 1% of the first $84,000 of
net income earned by PML each month and 99% of any net income earned above such
amount, with all remaining income distributed to the general partner.  GBCC's
equity in the earnings of PML amounted to $2 million and $2.8 million,
respectively, during the 1997 third quarter and the period from April 1, 1997
through September 30, 1997.

    INCOME TAX BENEFIT

    From May 1992 through December 31, 1996, GBCC's results of operations were
included in HCC's consolidated Federal income tax return.  Pursuant to
agreements between HCC and GBCC, GBCC's provision for Federal income taxes was
based on the amount of tax which would have been provided if a separate Federal
income tax return had been filed.  As a result of the distribution of GBCC's
common stock by HCC to its shareholders, GBCC is no longer included in HCC's
consolidated Federal income tax return.

    At September 30, 1997, GBCC and its subsidiaries have tax net operating loss
carryforwards ("NOL's") totaling approximately $81 million, of which
approximately $64 million do not begin to expire until the year 2003.
Additionally, GBCC and its subsidiaries have various tax credits available
totaling approximately $3.4 million, most of which expire by the year 2004.
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes"  requires that the tax benefit of such NOL's, credit carryforwards and
deferred tax assets resulting from temporary differences be recorded as an asset
and, to the extent that management can not assess that utilization of such NOL's
is more likely than not, a valuation allowance should be recorded.  Due to the
continued availability of NOL's originating in prior 

                                       23
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)



years and the book and tax losses sustained in 1997 to date, management is
unable to determine that realization of such asset is more likely than not and,
thus, has provided a valuation allowance for the entire deferred tax asset at
September 30, 1997.

    EXTRAORDINARY ITEM

    GBHC acquired $2.5 million of its 10 7/8% First Mortgage Notes at a discount
of $375,000 with which to make its scheduled July 1997 principal payment (see
"Liquidity and Capital Resources - Financing Activities" below).  Such gain was
partially offset by the write off of associated financing costs, resulting in a
net gain from early extinguishment of debt amounting to $310,000.

    INFLATION

    Management believes that in the near term, modest inflation, together with
increasing competition within the gaming industry for qualified and experienced
personnel, will continue to cause increases in operating expenses, particularly
labor and employee benefits costs.

    SEASONALITY

    Historically, the Sands' operations have been highly seasonal in nature,
with the peak activity occurring from May to September.  Consequently, the
results of GBCC's operations for the first and fourth quarters are traditionally
less profitable than the other quarters of the fiscal year.  Furthermore, the
Aurora Casino has also experienced seasonality, but to a lesser degree than the
Sands, and, as a result, the management fees earned have fluctuated with such
seasonality.  In addition, the Sands' and the Aurora Casino's operations may
fluctuate significantly due to a number of factors, including chance.  Such
seasonality and fluctuations may materially affect GBCC's casino revenues and
profitability.

LIQUIDITY AND CAPITAL RESOURCES

    OPERATING ACTIVITIES

    GBCC's principal assets and sources of revenues are the Sands and management
and consulting contracts with the Aurora Casino and the Tunica Casino.  During
the first nine months of 1997, GBCC's net cash provided by operating activities
(after net interest expense and income taxes) amounted to $5 million.  Through
the first quarter of 1997, a GBCC subsidiary received a base management fee
equal to 5% of operating revenues (as defined in the management agreement)
subject to a maximum of $5.5 million annually, and an incentive fee equal to 10%
of gross operating profit (as defined in the management agreement) from the
operation of the Aurora Casino.  Management fees received during the first
quarter of 1997 amounted to $2.7 million; costs associated with such revenues
totaled $460,000 during the first quarter of 1997.  The GBCC subsidiary
continues to receive distributions from the limited partnership which manages
the Aurora Casino approximating GBCC's equity in the earnings of such
partnership (see "Results of Operations - Equity in Earnings of Limited
Partnership" above).  During 1994, a subsidiary 

                                       24
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)



of GBCC entered into a consulting agreement with HCT with respect to the Tunica
Casino which provides for the payment of $1.2 million annually by the Tunica
Casino to the subsidiary for consulting services and for reimbursement of direct
costs and expenses incurred.

    Prior to 1996, the Sands' earnings before depreciation, interest,
amortization, taxes and intercompany management fees were sufficient to meet its
debt service obligations (other than certain maturities of principal that have
been refinanced) and to fund a substantial portion of its capital expenditures.
Historically, the Sands has also used short-term borrowings to fund seasonal
cash needs and has used long-term borrowings for certain capital projects.

    GBCC utilized cash from operations, including $1.5 million received as a
termination fee in connection with the sale of a casino/hotel property managed
by GBCC, and distributions from an unconsolidated affiliate during the nine
month period ended September 30, 1997 to make its required principal payment
with respect to the 10 7/8% First Mortgage Notes, to fund capital additions
totaling $2.1 million and to make obligatory investments at the Sands of $2.1
million.

    FINANCING ACTIVITIES

    During February 1994, GBCC completed the refinancing of virtually all of its
casino-related outstanding debt.  The refinancing was completed through a public
offering of $270 million of debt securities consisting of $185 million of 10
7/8% First Mortgage Notes due January 15, 2004 and $85 million of 11 5/8% PRT
Funding Notes due April 15, 2004.  Proceeds from the debt offerings were used,
in part, to refinance outstanding mortgage notes on the Sands and other
indebtedness scheduled to mature in 1994, to repay $58.4 million of the other
publicly held indebtedness and to provide partial funding for an expansion of
gaming space at the Sands.  During the first nine months of 1997, GBCC repaid
long-term indebtedness of $2.3 million.  Commencing in July 1997, semiannual
principal payments of $2.5 million are due with respect to the 10 7/8% First
Mortgage Notes.  Such semiannual payments may be made in cash or by tendering to
the trustee 10 7/8% First Mortgage Notes previously purchased or otherwise
acquired by GB Property Funding.  GB Property Funding acquired $2.5 million face
amount of 10 7/8% First Mortgage Notes at a discount during May 1997 which it
used during June to make its July 15, 1997 required principal payment.  Total
scheduled maturities of long-term debt during the remainder of 1997 are
$448,000.

    In connection with the refinancing discussed in the previous paragraph, HCC
loaned $15 million on a junior subordinated basis to GBCC at 14 5/8% interest
(the "Junior Subordinated Notes").  As of December 31, 1996, HCC had assigned
the entire principal amount of the Junior Subordinated Notes together with
accrued interest thereon to GBCC in consideration for tax net operating losses
of GBCC utilized by HCC in 1994 ($6.3 million principal and $1.9 million
interest) and as a capital contribution in connection with the distribution of
GBCC stock to HCC's shareholders ($8.7 million principal and $1.8 million
interest).

                                       25
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)



    Also in connection with the refinancing, GBCC issued $40.5 million
discounted principal amount of deferred interest notes (the "PPI Funding Notes")
to HCC in exchange for $38.8 million principal amount of 15 1/2% notes issued by
another GBCC subsidiary and held by HCC.  Effective as of April 1, 1997, HCC
acquired the general partnership interest in the limited partnership which holds
the Aurora management agreement from PPI Corporation.  The acquisition price for
the general partnership interest included a note in the amount of $3.8 million
and the assignment of $13.8 million undiscounted principal amount of PPI Funding
Notes and $350,000 of accrued interest due from GBCC.  Annual principal and
interest payments by HCC on the $3.8 million note will approximate the general
partner's share of annual partnership distributions which will now be made to
HCC.  With respect to the assignment of PPI Funding Notes, GBCC has reduced both
the amount of its future debt obligation to HCC and its annual non-cash interest
expense.

    During the third quarter of 1996, GBCC borrowed $6.5 million from HCC which
accrues interest at the rate of 13 3/4% per annum payable quarterly commencing
October 1, 1996.  GBCC loaned such funds to GBHC on similar terms.

    GBHC repaid its $2 million bank line of credit during January 1997 and the
line of credit was cancelled.

    CAPITAL EXPENDITURES AND OTHER INVESTMENTS

    Property and equipment additions during the first nine months of 1997
totaled $2.1 million, substantially all of which were at the Sands.  Management
anticipates capital expenditures during the remainder of 1997 will be
approximately $1 million.  Projects currently planned during the remainder of
1997 include upgrades and improvements to rooms at the Sands, including its
higher-end suite product, and other departmental expenditures.

    The Sands is required by the New Jersey Casino Control Act to make certain
investments with the Casino Reinvestment Development Authority, a governmental
agency which administers the statutorily mandated investments made by casino
licensees.  Deposit requirements for the nine months ended September 30, 1997
totaled $2.1 million and are anticipated to be approximately $780,000 during the
remainder of 1997.

    SUMMARY

    Operating results for the first six months of 1997 at the Sands, which is
GBCC's most significant operation, reflected a substantial improvement over 1996
and were on target with management's operating plan due to mild winter weather
conditions compared to a year ago, an abatement of the intense marketing
competition for bus customers and implementation of cost containment measures.
The Sands' operating results for the third quarter, although improved from the
prior year period results, were significantly below its operating plan.
Accordingly, the Sands has incurred an operating cash flow deficit of $1.7
million through the third quarter of 1997 and, consequently,  cash reserves have
been reduced.  October operating 

                                       26
<PAGE>
 
                GREATE BAY CASINO CORPORATION AND SUBSIDIARIES

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                     AND RESULTS OF OPERATIONS (CONTINUED)



results continued to be below management's operating plan. In order to meet its
debt service requirements of approximately $12.5 million in January 1998, the
Sands will require financial assistance from affiliated companies or other
sources. The availability of additional borrowings from GBCC and other
subsidiaries of GBCC during the remainder of 1997 is limited. HCC which, prior
to December 31, 1996, owned approximately 80% of the outstanding common stock of
GBCC, loaned $6.5 million to GBCC in 1996 for use by the Sands (see Note 5); HCC
is subject to certain indenture provisions which restrict its ability to provide
ongoing financial support to an additional $3.5 million. There is no assurance
that HCC, which is no longer the parent of GBCC, or GBCC will agree to provide
such additional financial support, if needed.
 

                                       27
<PAGE>
 
PART II:  OTHER INFORMATION
---------------------------

The Registrant did not file any reports on form 8-K during the quarter ended
September 30, 1997.

SIGNATURES
----------

   Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                         GREATE BAY CASINO CORPORATION



Date:  November 12 , 1997                By: /s/ John C. Hull
       --------------------                  --------------------
                                             John C. Hull
                                             Corporate Controller

                                       28