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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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


                                    FORM 10-K

(MARK ONE)
|X|    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934
       [FEE REQUIRED]
For the fiscal year ended December 31, 1997
                                       OR
|_|    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
       [NO FEE REQUIRED]
For the transition period from               to
                         Commission file number 333-0214

                            HORSESHOE GAMING, L.L.C.
             (Exact name of registrant as specified in its charter)

               Delaware                                   88-0343515
   (State or other jurisdiction of                     (I.R.S. Employer
    incorporation or organization)                    Identification No.)


                              4024 Industrial Road
                             Las Vegas, Nevada 89103
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (702) 650-0080

        Securities registered pursuant to Section 12(b) of the Act: None

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

         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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|

         The aggregate market value of the equity of Horseshoe
Gaming, L.L.C. held by non-affiliates of Horseshoe Gaming, L.L.C.
is inapplicable as the equity of Horseshoe Gaming, L.L.C. is
privately held.

                       DOCUMENTS INCORPORATED BY REFERENCE

                                      None.


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                            HORSESHOE GAMING, L.L.C.

                       INDEX TO ANNUAL REPORT ON FORM 10-K

                   For the fiscal year ended December 31, 1997

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                                     PART I

Item 1.        Business...................................................................................    3
Item 2.        Properties.................................................................................   10
Item 3.        Legal Proceedings..........................................................................   11
Item 4.        Submission of Matters to a Vote of Security Holders........................................   11

                                     PART II

Item 5.        Market for Registrant's Common Equity and Related                                             11
               Stockholder Matters........................................................................
Item 6.        Selected Financial Data....................................................................   12
Item 7.        Management's Discussion and Analysis of Financial
               Condition and Results                                                                         13
               of Operations..............................................................................
Item 8.        Financial Statements and Supplementary Data................................................   17
Item 9.        Changes In and Disagreements With Accountants on
               Accounting and                                                                                17
               Financial Disclosure.......................................................................

                                    PART III

Item 10.       Directors and Executive Officers of the Registrant.........................................   17
Item 11.       Executive Compensation.....................................................................   19
Item 12.       Security Ownership of Certain Beneficial Owners and                                           22
               Management.................................................................................
Item 13.       Certain Relationships and Related Transactions.............................................   23

                                     PART IV

Item 14.       Exhibits, Financial Statement Schedules, and Reports
               on Form 8-K................................................................................   23
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                                     PART I

ITEM 1. BUSINESS.

         As used in this Annual Report on Form 10-K ("Form 10-K"), unless the
context indicates otherwise, the terms "Company" and "Horseshoe Gaming" refer to
Horseshoe Gaming, L.L.C., a Delaware limited liability company, and its
subsidiaries, including
predecessor companies.

GENERAL

         Entities controlled by Mr. Jack B. Binion developed and opened the
Horseshoe Bossier City, which is owned by Horseshoe Entertainment, L.P. ("HE")
and developed and opened the Horseshoe Casino Center, which is owned by Robinson
Property Group L.P. ("RPG"). HE commenced operations on July 9, 1994 and RPG
commenced operations on February 13, 1995. Effective October 1, 1995 the
ownership interests in such entities were transferred to the Company by Mr.
Binion and certain related and unrelated parties in exchange for ownership
interests in the Company (the "Roll-up Transaction"). Mr. Binion, the largest
equity holder of Horseshoe Gaming, is also the majority shareholder, Chairman of
the Board of Directors and Chief Executive Officer of Horseshoe Gaming, Inc., a
Delaware corporation ("HGI"). See "Directors and Executive Officers of the
Registrant." HGI became the manager of the Company as of October 1, 1995 as a
result of the Roll-up Transaction; HGI is also a member of the Company. Pursuant
to the Company's Limited Liability Company Agreement, HGI has exclusive control
over the business of the Company (subject to specified exceptions), including
the power to acquire and sell property, execute documents, make all business
management decisions, and raise equity capital on behalf of the Company. The
Company pays no compensation to HGI, but reimburses HGI for all out-of-pocket
expenses, including employment expenses. As of March 1, 1998, HGI had 35
employees.

         Management selected the Bossier City/Shreveport, Louisiana and Tunica,
Mississippi markets for entry into emerging gaming jurisdictions because of the
respective strengths of these markets and the ability to secure what Management
felt were the best sites within those markets.

         The principal executive offices of the Company and of HGI are located
at 4024 Industrial Road, Las Vegas, Nevada 89103 and their telephone number is
(702) 650-0080.

THE HORSESHOE CASINO CENTER

         Overview

         The Horseshoe Casino Center opened February 13, 1995 in Tunica County,
Mississippi at Casino Center, a 70-acre three-casino complex.

         Tunica, Mississippi Gaming Market

         The Tunica County gaming market consists entirely of dockside casino
operations located on the Mississippi River or its tributaries. Tunica County
benefits from its proximity to several major population centers and to the
popularity of the Memphis region as a vacation destination that offers numerous
attractions, ample hotel and entertainment facilities and excellent
transportation access. Over 2.5 million people live within 90 miles and over
10.7 million people live within 200 miles of the Horseshoe Casino Center. Within
500 miles (eight hours by car or approximately one-hour flight time) the total
population base increases to approximately 54.9 million.

         Memphis Area Economy/Tourism

         According to the Memphis Convention and Visitors Bureau, more than 3.5
million people visited Memphis and its surrounding areas (Shelby County) in
1994. The non-gaming attractions include the National Civil Rights Museum,
Graceland, Sun Recording Studios, the Memphis Zoo, the Great American Pyramid,
the Beale Street Historic District, Mud Island, the Liberty Bowl, the Kroger St.
Jude Tennis Classic, the FedEx St. Jude Golf Classic and a selection of museums,
art galleries and botanical gardens. Seasonal events such as the Memphis in May
International Festival and the Mid-South Fair make Memphis and its surroundings
a popular vacation area.

         Mississippi Gaming Environment

         The State of Mississippi legalized casino gaming on the waters of the
Mississippi River and the Mississippi

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Gulf Coast region in June 1990. The Mississippi gaming laws were patterned after
the gaming laws in Nevada. While the Mississippi gaming regulations state that
the casinos must be located on the water, they need not cruise or have engines.

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         Other aspects of the Mississippi gaming regulations include: the
relatively low gaming tax rate (8.8% at the State level and approximately 3.2%
plus an annual $82,000 fee at the local level), the ability to offer 24-hour a
day continuous gaming, the ability to offer all types of casino games (other
than bingo and race sports betting), no betting or loss limits, and no space or
size restrictions. Moreover, house credit may be extended to qualified patrons.
While there are no legislative limitations on the number of licenses in Tunica
County, competition is limited by the availability of legal and accessible sites
on the Mississippi River.

         In November 1996, the Mississippi County closest to Memphis (DeSoto
County) voted against legal gaming to be conducted aboard vessels located
therein. Legislation passed in 1997 precludes DeSoto County from holding a
subsequent election on the issue until at least October 2004. If gaming were
approved in DeSoto County or in Arkansas or Tennessee, numerous additional sites
closer to Memphis would be available for gaming. Thus, while Tunica County is
currently the closest legalized gaming jurisdiction to the Memphis metropolitan
area, there is no assurance that this situation will not change in the future.

         Competition

         The Tunica market is presently comprised of nine casinos, two of which
opened in 1996. One of the casinos which opened in 1996 is the largest casino
resort in Tunica County, and located approximately one mile closer than the
Horseshoe Casino Center to Memphis, currently the largest feeder market into
Tunica County.

THE HORSESHOE BOSSIER CITY

         Overview

         The Horseshoe Bossier City opened on July 9, 1994. According to
statistics published by the Louisiana State Gaming Authorities, the Bossier
City/Shreveport market is the largest market in the State of Louisiana, as
measured by gaming revenues.

         Bossier City/Shreveport, Louisiana Gaming Market

         The primary appeal of the Bossier City/Shreveport gaming market is its
local population base and its proximity to major population centers in
Louisiana, Texas, Oklahoma and Arkansas. Approximately 350,000 people are
full-time residents of Bossier City/Shreveport. This population includes the
Barksdale Air Force Base which directly employs over 7,000 people. The broad
market for the Horseshoe Bossier City consists of approximately 16.5 million
people residing within 250 miles (approximately four hours driving distance).
The broad market consists of local clientele, day trippers and multi-day
visitors.

         Approximately 26% of the Horseshoe Bossier City's customers have been
residents of Bossier City/Shreveport. The Horseshoe's next largest markets are
the Dallas/Ft. Worth and Longview/Marshall areas of Texas, which have accounted
for approximately 13% and 10% of the casino's customers, respectively. In
addition, the casino attracts day-trippers flying in from a short air distance.

         Bossier City/Shreveport Area Economy/Tourism

         According to the Shreveport-Bossier Convention & Tourist Bureau, there
were approximately 1.8 million overnight visitor/days and approximately 4.7
million day visitor/days in Bossier City/Shreveport in 1997, for a total of
approximately 6.5 million visitor/days for the year. Other amenities and tourist
attractions include Louisiana Downs Racetrack, the American Rose Center (North
America's largest rose garden), the Independence Bowl and the Eighth Air Force
Museum at Barksdale Air Force Base. With approximately 7,600 rooms at 52 area
hotels and motels, Bossier City/Shreveport hosts 250 conventions per year with
approximately 200,000 delegates. Over 30 annual festivals, approximately 400
restaurants and 11 golf courses provide entertainment for locals and visitors.

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         Louisiana Gaming Environment

         In 1991, the State of Louisiana legalized casino gaming on the water
and in one land location in New Orleans. The State has granted approval to 14 of
the 15 legislatively authorized licenses, five of which have been approved for
the northern region of the State in Bossier City/Shreveport. While the Louisiana
gaming regulations state that riverboat casinos must cruise, the Bossier
City/Shreveport casinos were granted a legislative exemption in June 1993 that
allows them to operate as dockside facilities.

         Louisiana permits most types of casino games (other than bingo and
sports betting) and has neither betting nor loss limits. Moreover, house credit
may be extended to qualified patrons. The only significant limitation imposed by
such regulations restricts gaming space on riverboats to no more than 30,000
square feet. The State of Louisiana imposes a fee on gaming revenue at the rate
of 18.5%. The city of Bossier City also imposes a 3.2% tax on gaming revenue
plus an annual fee of $700,000.

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         In addition, Legislation was passed in 1996 authorizing the Bossier
Police Jury, the governing body of Bossier Parish, to impose a $.50 boarding fee
with respect to all of the patrons entering riverboat gaming facilities in
Bossier Parish. The passage of such legislation resulted in litigation being
commenced between the Horseshoe Casino and the Isle of Capri Casino in Bossier
City and the Bossier Police Jury, as both Horseshoe and the Isle of Capri Casino
asserted that the Bossier Police Jury had previously contracted away their right
to impose such additional $.50 boarding fee. In January 1997, Horseshoe Casino
separately settled with the Bossier Police Jury, and such lawsuit was dismissed
as it relates to Horseshoe Casino (but not Isle of Capri Casino) and the Bossier
Police Jury. Such settlement resulted in Horseshoe agreeing to pay an additional
1% tax on its gross gaming revenues to Bossier Parish with a minimum annual
payment of $1,500,000, regardless of actual revenue. Under the terms of such
agreement, Horseshoe has the right to receive a credit against gross gaming tax
for the amount of increased property taxes assessed against its property in
Bossier Parish resulting from increased assessments attributable to its major
expansion project to be completed at the end of 1997. Such credit may be taken
up to a maximum of 80% of the tax on gaming revenues, and applies during the
entire ten-year term of the agreement.

         In the 1997 Regular Session of the Louisiana Legislature, a law was
passed authorizing the operation of slot machines at three horse racing tracks
in Louisiana, including a racetrack situated in Bossier Parish. The legislation
limits slot machine space at each racetrack to 15,000 square feet. Within the
gaming space, however, there is no numerical limit on the number of slot
machines that can be permissibly installed. Before slot machines can be operated
at the racetrack facilities, passage of companion legislation is required to
establish the tax rate to be levied on slot machine revenue.

         Competition

         The Horseshoe Bossier City competes directly with Harrah's in
Shreveport and the Isle of Capri and Casino Magic in Bossier City. These four
riverboats together currently comprise the Bossier City/Shreveport market. The
Louisiana Gaming Control Board has recently granted preliminary approval to a
proposal by Hollywood Casinos, Sodak Gaming Corp. and New Orleans Paddlewheels
Company to relocate the license for the New Orleans Flamingo Hilton Casino,
which is now closed, to a new proposed facility to be located adjacent to
Harrah's in Shreveport. The Louisiana Gaming Control Board is accepting
proposals until May 19, 1998 for the remaining fifteenth license. This license,
once granted, may be located in the Bossier City/Shreveport market. While
Management expects that any new competition will affect the Horseshoe Bossier
City's revenues and operating income, Management also believes the expansion of
the Horseshoe Bossier City and the potential addition of two riverboat casinos
and slot machines at the racetrack in the Bossier City/Shreveport market will
increase the size and scope of the overall gaming market, mitigating the
potential adverse impact on future operating levels at the Horseshoe Bossier
City. The impact on operating margins from the overall increase in supply to
this market is uncertain. As only 15 Louisiana riverboats and one land-based
casino in New Orleans are presently authorized by law, potential competition in
Louisiana is presently limited. The Bossier City/Shreveport casinos capture the
Dallas/Ft. Worth market and share the Houston area market with four existing
riverboats in Lake Charles, a land-based casino owned by the Coushatta Indian
Tribe located near Lake Charles and two riverboats in Baton Rouge. If Texas or
Arkansas were to approve gaming, competition would increase and the value of the
Horseshoe Bossier City would be negatively affected.

         Management believes that the Bossier City/Shreveport casinos have an
operational advantage over the other Louisiana riverboats because the Bossier
City/Shreveport riverboats do not have to cruise in three-hour increments. The
cruising exemption for the Bossier City/Shreveport market was included in the
Louisiana Gaming Statutes to account for the difficult navigational aspects of
the Red River. The Horseshoe Bossier City casino remains dockside, allowing
passengers to enter and exit as they please and enabling Management to conduct
24-hour a day continuous gaming operations.

COMPETITIVE STRATEGY

         The Company's objective is to develop a high volume of traffic through
its casinos and to attract middle income gamblers, tourists and local clientele
as its principal customers. These customers can be divided into the following
market segments: local clientele, day trippers and multi-day visitors. The
Company's strategy consists of offering favorable gaming odds and high limits,
treating every customer as an important player, having a comfortable atmosphere
where players are recognized and treated well by Horseshoe personnel, and
providing high quality food and beverages at reasonable prices. Management
believes that this strategy can be replicated in other emerging jurisdictions
with the right sites and appropriate facility designs.

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         While Management's marketing strategy primarily focuses on the middle
income customer, Management believes that the Horseshoe Casinos attract a
substantial number of high income customers with favorable odds and high limits,
and a substantial number of lower income customers with a wide variety of low
minimum table games and slot machines. The Company's competitive strategy also
involves locating the Company's casinos in the most favorable locations
available in favorable markets.

         The Horseshoe Casino Center is located in Tunica County, Mississippi,
which is currently the closest legalized gaming jurisdiction to the Memphis
metropolitan area and the largest gaming market in the State of Mississippi. The
Casino Center area is situated off U.S. Highway 61, approximately 30 miles from
downtown Memphis, Tennessee and 25 miles from the Memphis International Airport.
Major highway access to the area is provided by Interstates 40 and 55, and US
Highways 51, 61, 64, 70, 72, 78 and 79. The Horseshoe Casino Center's site is
accessed via the Casino Center Drive turn-off from U.S. Highway 61, the main
artery from metropolitan Memphis. The Horseshoe Casino Center's 100-foot high
neon sign draws the attention of arriving customers to the casino. In addition
to the visual impact of the signage, the Horseshoe Casino Center occupies the
middle site of Casino Center. See " -- The Horseshoe Casino Center -- Tunica,
Mississippi Gaming Market," " -- The Horseshoe Casino Center -- Memphis Area
Economy/Tourism" and " -- The Horseshoe Casino Center -- Mississippi Gaming
Environment."

         The Bossier City/Shreveport market is the largest market in the State
of Louisiana as measured by gaming revenues, according to statistics published
by the Louisiana State Gaming Authorities. Five federal highways and two
interstate highways lead to the Horseshoe Bossier City. Interstate 20, an
east-west traffic artery connecting Bossier City/Shreveport to Dallas/Fort
Worth, is heavily traveled by locals and extensively used by travelers. Bossier
City/Shreveport is the closest and most accessible gaming market to Dallas/Fort
Worth (approximately 180 miles or three hours drive time). The Horseshoe Bossier
City is directly accessible and visible from Interstate 20.

REGULATORY MATTERS

         The Company is subject to state and Federal laws which regulate
businesses generally and the gaming business specifically. Below is a brief
description of some of the more significant regulations to which the Company is
subject. All laws are subject to change and different interpretations. This is
especially true with respect to current laws regulating the gaming industry,
since in many cases these laws and the regulatory agencies that apply them are
new. Changes in laws or their interpretation may result in the imposition of
more stringent, burdensome or expensive requirements, or the outright
prohibition of an activity.

         Mississippi Gaming Regulation

         The ownership and operation of casino gaming facilities in Mississippi
are subject to extensive state and local regulation primarily through the
licensing and regulatory control of the Mississippi Gaming Commission and the
Mississippi State Tax Commission. The Company must register and be licensed
under the Mississippi Gaming Control Act (the "Mississippi Act") and its gaming
operations are subject to the regulatory control of the Mississippi Gaming
Commission and various local, city and county regulatory agencies. The
Mississippi Act, which legalized dockside casino gaming in Mississippi, was
enacted on June 29, 1990. Although not identical, the Mississippi Act is similar
to the gaming laws of Nevada. Effective October 29, 1991, the Mississippi Gaming
Commission adopted regulations in furtherance of the Mississippi Act which are
also similar in many respects to the Nevada gaming regulations.

         The laws, regulations and supervisory procedures of Mississippi and the
Mississippi Gaming Commission seek to: (i) prevent unsavory or unsuitable
persons from having any direct or indirect involvement with gaming at any time
or in any capacity; (ii) establish and maintain responsible accounting practices
and procedures; (iii) maintain effective control over the financial practices of
licensees, including establishing minimum procedures for internal fiscal affairs
and safeguarding of assets and revenues, providing reliable record keeping and
making periodic reports to the Mississippi Commission; (iv) prevent cheating and
fraudulent practices; (v) provide a source of state and local revenues through
taxation and licensing fees; and (vi) ensure that gaming licensees, to the
extent practicable, employ Mississippi residents. The regulations are subject to
amendment and interpretation by the Mississippi Gaming Commission.

         The Mississippi Act provides for legalized dockside gaming at the
discretion of the 14 counties that either border the Gulf Coast or the
Mississippi River but only if the voters in such counties have not voted to
prohibit
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gaming in that county. As of December 31, 1997, dockside gaming was permissible
in nine of the 14 eligible counties in the State and gaming operations had
commenced in Adams, Coahoma, Hancock, Harrison, Tunica, Warren and Washington
counties. The law permits unlimited stakes gaming on permanently moored vessels
on a 24-hour basis and does not restrict the percentage of space which may be
utilized for gaming. There are no limitations on the number of gaming licenses
which may be issued in Mississippi. The legal age for gaming in Mississippi is
21.

         Under Mississippi law, gaming vessels in Tunica county must be located
on the Mississippi River or on navigable waters. On May 29, 1993, the
Mississippi Gaming Commission granted site approval to the site. On October 13,
1994, the Horseshoe Casino Center received a gaming operator's license from the
Mississippi Gaming Commission. At the same meeting, certain key principals of
RPG were found suitable. Said license and findings of suitability were renewed
on September 17, 1996 and will be considered for renewal in September 1998.

         The Company and RPG are required to submit detailed financial,
operating and other reports to the Mississippi Gaming Commission. Substantially
all loans, leases, sales of securities and similar financing transactions
entered into by the Company and RPG must be reported to or approved by the
Mississippi Gaming Commission. RPG is also required to periodically submit
detailed financial and operating reports to the Mississippi Gaming Commission
and to furnish any other information required thereby.

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         Each of the directors, officers and key employees of the Company who
are actively and directly engaged in the administration or supervision of
gaming, or who have any other significant involvement with the activities of the
Company, and each of the officers and directors and certain employees of the
general partner of RPG, must be found suitable therefor, and may be required to
be licensed, by the Mississippi Gaming Commission. The finding of suitability is
comparable to licensing, and both require submission of detailed personal
financial information followed by a thorough investigation. In addition, any
individual who is found to have a material relationship to, or material
involvement with, the Company or RPG may be required to be investigated in order
to be found suitable or to be licensed as a business associate of the Company or
RPG. Key employees, controlling persons or others who exercise significant
influence upon the management or affairs of the Company or RPG may also be
deemed to have such a relationship or involvement. There can be no assurance
that such persons will be found suitable by the Mississippi Gaming Commission.
An application for licensing may be denied for any cause deemed reasonable by
the Mississippi Gaming Commission. Changes in licensed positions must be
reported to the Mississippi Gaming Commission. In addition to its authority to
deny an application for a license, the Mississippi Gaming Commission has
jurisdiction to disapprove a change in corporate position. If the Mississippi
Gaming Commission were to find a director, officer or key employee unsuitable
for licensing or unsuitable to continue having a relationship with the Company
or RPG, the Company or the general partner of RPG would have to suspend, dismiss
and sever all relationships with such person. The Company or RPG would have
similar obligations with regard to any person who refuses to file appropriate
applications. Each gaming employee must obtain a work permit which may be
revoked upon the occurrence of certain specified events.

         Mississippi statutes and regulations give the Mississippi Gaming
Commission the discretion to require a suitability finding with respect to
anyone who acquires any security of the Company or RPG, regardless of the
percentage of ownership. The current policy of the Mississippi Gaming Commission
is to require anyone acquiring 5% or more of any voting securities of a public
company with a licensed subsidiary or private company licensee to be found
suitable. If the owner of voting securities who is required to be found suitable
is a corporation, partnership or trust, it must submit detailed business and
financial information including a list of beneficial owners. The applicant is
required to pay all costs of investigation.

         Any owner of voting securities found unsuitable and who holds, directly
or indirectly, any beneficial ownership of equity interests in the Company or
RPG beyond such period of time as may be prescribed by the Mississippi Gaming
Commission may be guilty of a misdemeanor. Any person who fails or refuses to
apply for a finding of suitability or a license within 30 days after being
ordered to do so by the Mississippi Gaming Commission may be found unsuitable.
The Company is subject to disciplinary action if, after it receives notice that
a person is unsuitable to be an owner of or to have any other relationship with
it, the Company or RPG (i) pays the unsuitable persons any dividends or interest
upon any of its securities or any payments or distribution of any kind
whatsoever, (ii) recognizes the exercise, directly or indirectly, of any voting
rights of its securities by the unsuitable person, or (iii) pays the unsuitable
person any remuneration in any form for services rendered or otherwise, except
in certain limited and specific circumstances. In addition, if the Mississippi
Gaming Commission finds any owner of voting securities unsuitable, such owner
must immediately surrender all securities to the Company or RPG, as applicable,
and the Company or RPG must purchase the security so offered for cash at fair
market value within 10 days.

         The Company and RPG will be required to maintain current ownership
ledgers in the State of Mississippi which may be examined by the Mississippi
Gaming Commission at any time. If any securities are held in trust by an agent
or by a nominee, the record holder may be required to disclose the identity of
the beneficial owner to the Mississippi Gaming Commission. A failure to make
such disclosure may be grounds for finding the record holder unsuitable. The
Company and RPG also are required to render maximum assistance in determining
the identity of the beneficial owner. The Company may be required to disclose to
the Mississippi Gaming Commission, upon request, the identities of the holders
of the Senior Notes and the Senior Subordinated Notes. In addition, the
Mississippi Gaming Commission under the Mississippi Act may, in its discretion,
(i) require holders of debt securities, such as the Senior Notes and the Senior
Subordinated Notes, to file applications, (ii) investigate such holders, and
(iii) require such holders to be found suitable to own such debt securities.
Although the Mississippi Gaming Commission generally does not require the
individual holders of obligations such as notes to be investigated and found
suitable, the Mississippi Gaming Commission retains the discretion to do so for
any reason, including but not limited to a default, or where the holder of the
debt instrument exercises a material influence over the gaming operations of the
entity in question. Any holder of the debt securities required to apply for a
finding of suitability must pay all investigative fees and costs of the
Mississippi Gaming Commission in connection with such an investigation.

         The regulations provide that a change in control of the Company or RPG
may not occur without the prior

                                       10
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approval of the Mississippi Gaming Commission. Mississippi law prohibits the
Company from making a public offering or private placement of its securities
without the approval of or waiver of approval by the Mississippi Gaming
Commission if any part of the proceeds of the offering is to be used to finance
the construction, acquisition or operation of gaming facilities in Mississippi,
or to retire or extend obligations incurred for one or more of such purposes.
The Mississippi Gaming Commission has approved the sale of the Senior Notes, the
sale of the Senior Subordinated Notes, the Amended and Restated Credit Facility
and certain other transactions to be consummated in connection therewith.

                                       11
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         The Mississippi Act requires that certificates representing securities
of the Company or RPG bear a legend to the general effect that the securities
are subject to the Mississippi Act and regulations of the Mississippi Gaming
Commission. The Mississippi Gaming Commission, through the power to regulate
licensees, has the power to impose additional restrictions on the holders of the
Company's or RPG's securities at any time.

         Neither the Company nor RPG may engage in gaming activities in
Mississippi while also conducting gaming operations outside of Mississippi
without approval of the Mississippi Gaming Commission. Such approvals were
granted by the Mississippi Gaming Commission on October 13, 1994. The failure to
obtain or retain any such approval could have a material adverse effect on the
Company or RPG. See "Risk Factors -- Government Approvals; Gaming Licensing and
Regulation."

         The licenses obtained by the Company and RPG are not transferable and
will need to be renewed every two years. There can be no assurance that any
renewal application will be approved. Each issuing agency may at any time
dissolve, suspend, condition, limit or restrict a license or approval to own
equity interests in the Company or RPG for any cause deemed reasonable by such
agency. Substantial fines for each violation of gaming laws or regulations may
be levied against the Company or RPG in Mississippi. A violation under any
gaming license held by the Company or RPG may be deemed a violation of all the
other licenses held by the Company or RPG. Suspension or revocation of any of
the foregoing licenses or of the approval of the Company or RPG would have a
material adverse effect upon the business of the Company.

         License fees and taxes, computed in various ways depending on the type
of gaming involved, are payable to the State of Mississippi and to the counties
and cities in which RPG's operations will be conducted. Depending upon the
particular fee or tax involved, these fees and taxes are payable either monthly,
quarterly or annually and are based upon (i) the percentage of the gross gaming
revenues received by the casino operation, (ii) the number of slot machines
operated by the casino, (iii) the number of table games operated by the casino
or (iv) the number of casino patrons.

         In October 1994, the Mississippi Gaming Commission adopted a regulation
requiring, as a condition of licensure or license renewal, that a gaming
establishment's site development plan include an approved 500-car parking
facility in close proximity to the casino complex and infrastructure facilities
which will amount to at least 25% of the casino cost. Such facilities may
include any of the following: a 250-room hotel of at least a two-star rating (as
defined by the current edition of the Mobil Travel Guide) a theme park, a golf
course, marinas, a tennis complex, entertainment facilities or any other such
facility as approved by the Mississippi Gaming Commission as infrastructure.
Parking facilities, roads, sewage and water systems or facilities normally
provided by governmental entities are excluded. The Mississippi Gaming
Commission may, in its discretion, reduce the number of hotel rooms required
where it is shown, to the satisfaction of the Mississippi Gaming Commission,
that sufficient rooms are available to accommodate the anticipated visitor load.
Such reduction in the number of rooms does not affect the 25% investment
requirement imposed by the regulation. The Horseshoe Casino Center and related
facilities have complied with such requirements.

         The sale of alcoholic beverages, including beer and wine, at the
Horseshoe Casino Center is subject to licensing, control and regulation by the
Alcoholic Beverage Control Division (the "ABC") of the Mississippi State Tax
Commission. The ABC requires that all equity owners and managers file personal
record forms and fingerprint cards for their licensing process. In addition,
owners of more than 5% of RPG's equity and RPG's officers and managers must
submit detailed financial information to ABC for licensing. All such licenses
are revocable and are non-transferable. The ABC has full power to limit,
condition, suspend or revoke any such license, and any such disciplinary action
could (and revocation would) have a material adverse effect on the operations of
the Horseshoe Casino Center.

                                       12
<PAGE>   13
         Louisiana Gaming Regulation

         In July 1991, the Louisiana legislature adopted legislation permitting
certain types of gaming activity on certain rivers and waterways in Louisiana.
The legislation granted authority to supervise riverboat gaming activities to
the Louisiana Riverboat Gaming Commission and the Riverboat Gaming Enforcement
Division of the Louisiana State Police (the "Louisiana Enforcement Division").
The Louisiana Riverboat Gaming Commission was authorized to hear and determine
all appeals relative to the granting, suspension, revocation, condition or
renewal of all licenses, permits and applications. In addition, the Louisiana
Riverboat Gaming Commission was authorized to establish regulations concerning
authorized routes, duration of excursions, minimum levels of insurance,
construction of riverboats and periodic inspections. The Louisiana Enforcement
Division was authorized to investigate applicants and issue licenses,
investigate violations of the statute and conduct continuing reviews of gaming
activities.

                                       13
<PAGE>   14
         In the 1996 special session of the Louisiana legislature, Louisiana
lawmakers passed a measure which established the Louisiana Gaming Control Board
and provides that the board is the successor to all such prior authorities with
regard to the regulation and supervision of gaming in Louisiana except for the
regulation of horse racing and offtrack betting and the conducting of charitable
gaming operations. Effective May 1, 1996, the powers, duties, functions, and
responsibilities with respect to riverboat gaming of the Louisiana Riverboat
Gaming Commission and the Louisiana Enforcement Division were transferred to the
Louisiana Gaming Control Board. The Louisiana Enforcement Division continues to
provide investigative and enforcement support to the Louisiana Gaming Control
Board.

         The statute authorizes issuance of up to 15 licenses to conduct gaming
activities on a riverboat of new construction in accordance with applicable law.
However, no more than six licenses may be granted to riverboats operating from
any one parish.

         In issuing a license, the Louisiana Gaming Control Board must find that
the applicant is a person of good character, honesty and integrity and a person
whose prior activities, criminal record, if any, reputation, habits, and
associations do not pose a threat to the public interest of the State of
Louisiana or to the effective regulation and control of gaming, or create or
enhance the dangers of unsuitable, unfair or illegal practices, methods and
activities in the conduct of gaming or the carrying on of business and financial
arrangements in connection therewith. The Louisiana Gaming Control Board will
not grant a license unless it finds that: (i) the applicant is capable of
conducting gaming operations, which means that the applicant can demonstrate the
capability, either through training, education, business experience, or a
combination of the above, to operate a gaming casino; (ii) the proposed
financing of the riverboat and the gaming operations is adequate for the nature
of the proposed operation and from a source suitable and acceptable to the
Louisiana Gaming Control Board; (iii) the applicant demonstrates a proven
ability to operate a vessel of comparable size, capacity and complexity to a
riverboat so as to ensure the safety of its passengers; (iv) the applicant
submits a detailed plan of design of the riverboat in its application for a
license; (v) the applicant designates the docking facilities to be used by the
riverboat; (vi) the applicant shows adequate financial ability to construct and
maintain a riverboat; and (vii) the applicant has a good faith plan to recruit,
train and upgrade minorities in all employment classifications.

         Certain persons affiliated with a riverboat gaming licensee, including
directors and officers of the licensee, directors and officers of any holding
company of the licensee involved in gaming operations, persons holding five
percent or greater interests in the licensee, and persons exercising influence
over a licensee ("Affiliated Gaming Persons"), are subject to the application
and suitability requirements of the Louisiana gaming law.

         The Louisiana gaming law specifies certain restrictions and conditions
relating to the operation of riverboat gaming, including the following: (i)
gaming is not permitted while a riverboat is docked, other than the forty-five
minutes between excursions, and during times when dangerous weather or water
conditions exist, except that the casinos operating in the Bossier
City/Shreveport area are permitted to operate exclusively at dockside pursuant
to a special exemption; (ii) each roundtrip riverboat cruise may not be less
than three nor more than eight hours in duration, subject to specified
exceptions; (iii) agents of the Louisiana Enforcement Division and the Louisiana
Gaming Control Board are permitted on board at any time during gaming
operations; (iv) gaming devices, equipment and supplies may only be purchased or
leased from permitted suppliers; (v) gaming may only take place in the
designated gaming area while the riverboat is upon a designated river or
waterway; (vi) gaming equipment may not be possessed, maintained or exhibited by
any person on a riverboat except in the specifically designated gaming area, or
a secure area used for inspection, repair or storage of such equipment; (vii)
wagers may be received only from a person present on a licensed riverboat;
(viii) persons under 21 are not permitted in designated gaming areas; (ix)
except for slot machine play, wagers may be made only with tokens, chips or
electronic cards purchased from the licensee aboard a riverboat; (x) licensees
may only use docking facilities and routes for which they are licensed and may
only board and discharge passengers at the riverboat's licensed berth; (xi)
licensees must have adequate protection and indemnity insurance; (xii) licensees
must have all necessary Federal and state licenses, certificates and other
regulatory approvals prior to operating a riverboat; and (xiii) gaming may only
be conducted in accordance with the terms of the license and the rules and
regulations adopted by the Louisiana Enforcement Division and the Louisiana
Gaming Control Board.

         An initial license to conduct riverboat gaming operations is valid for
a term of five years. HE was issued an initial operator's license by the
Louisiana Enforcement Division on November 22, 1993. The Louisiana gaming law
provides that a renewal application for each one-year period succeeding the
initial five year term of the operator's license must be made to the Louisiana
Enforcement Division. The application for renewal consists of a statement

                                       14
<PAGE>   15
under oath of any and all changes to the information, including financial
information, provided in the previous application.

         The transfer of a license or permit or an interest in a license or
permit is prohibited except as permitted by the Louisiana gaming law. The sale,
purchase, assignment, transfer, pledge or other hypothecation, lease,
disposition or acquisition (a "Transfer") by any person of securities which
represent 5% or more of the total outstanding shares issued by a corporation
that holds a license is subject to Louisiana Gaming Control Board disapproval. A
security issued by a corporation that holds a license may generally disclose
these restrictions. Prior Louisiana Gaming Control Board approval is required
for the Transfer of any ownership interest of 5% or more in any non-corporate
licensee or for the Transfer of any "economic interest" of 5% or more in any
licensee or Affiliated Gaming Person. An "economic interest" is defined for
purposes of a Transfer as any interest whereby a person receives or is entitled
to receive, by agreement or otherwise, a profit, gain, thing of value, loan,
credit, security interest, ownership interest or other economic benefit.

         Riverboat gaming licensees and their Affiliated Gaming Persons are
required to notify the Louisiana Enforcement Division prior to the receipt by
any such persons of any loans or extensions of credit. The Louisiana Gaming
Control Board is required to investigate the reported loan or extension of
credit and, subject to certain exemptions, to either approve or disapprove the
transaction. If disapproved, the loan or extension of credit cannot be
consummated by the licensee or Affiliated Gaming Person. The Company is an
Affiliated Gaming Person of HE. HE and the Company have submitted all required
disclosures to the Louisiana Gaming Control Board and the Louisiana Enforcement
Division. Any other advances by the Company to HE in the form of loans or other
intercompany indebtedness are subject to the disapproval power of the Louisiana
Gaming Control Board and the Louisiana Enforcement Division.

         Fees to the State of Louisiana for conducting gaming activities on a
riverboat include (i) $50,000 per riverboat for the first year of operation and
$100,000 per year per riverboat thereafter plus (ii) 18-1/2% of net gaming
proceeds.

EMPLOYEES

         As of March 1, 1998, the Company employed 5,262 persons of which 2,387
are employed at the Horseshoe Casino Center in Tunica, Mississippi, 2,840 are
employed at the Horseshoe Bossier City in Bossier City, Louisiana and 35 are
employed by HGI. At such date, none of the Company's employees were covered by
collective bargaining agreements.

         The Company believes that its relationship with its employees is
excellent and is not aware of any threatened labor activity affecting its
employees. The Company has never experienced a work stoppage due to a labor
dispute.

ITEM 2. PROPERTIES.

         The Company owns and operates casinos in Tunica County, Mississippi and
Bossier City, Louisiana. All of the Company's real properties are subject to
first priority liens securing the Amended and Restated Credit Facility Agreement
and second priority liens securing the Senior Notes.

                                       15
<PAGE>   16
         The Horseshoe Casino Center

         The Horseshoe Casino Center is located in Tunica County, Mississippi at
Casino Center, a 70-acre three-casino complex. The Company has just completed
the expansion and renovation of the Tunica facility and has increased the
overall size to approximately 253,000 square feet from 162,000 square feet.

         The gaming area comprises approximately 62,000 square feet and contains
1,449 slot machines, 56 table games and 12 poker tables. The casino facility
also includes two specialty restaurants, a newly expanded buffet, bars and
retail outlets. The Horseshoe Casino Center has also added 315 hotel suites in a
14 story tower, to add to its existing 196 room facility, and a multi-level,
1,100 space parking garage. In addition to the parking garage there are
approximately 4,000 lighted parking spaces provided in the Casino Center
complex. The facility includes over 46,000 square feet of expanded
administrative space and over 30,000 square feet of entertainment space,
featuring "Bluesville," a 1,000 seat entertainment venue connected to the casino
and hotel.

         The Horseshoe Bossier City

         The Horseshoe Bossier City is located on an approximately 30-acre site
on the east side of the Red River, directly facing downtown Shreveport,
Louisiana. The newly expanded development, construction of which is
substantially complete, consists of an approximately 62,400-square foot,
four-deck riverboat with approximately 30,000 square feet of gaming area and an
approximately 55,000-square foot dockside pavilion, including a 606 room, 25
story, all-suite hotel tower and a 1,100 car parking garage. The riverboat and
pavilion are joined via an enclosed, climate-controlled boarding ramp with
handicap access and escalators serving each of the gaming decks.

         The entire dockside facility has recently been renovated and expanded.
The newly expanded casino pavilion includes two specialty restaurants, a coffee
shop, an expanded buffet and over 7,800 square feet of specialty retail space.
The expanded facility also includes over 60,000 square feet of administrative
space.

         The main, second and third decks of the riverboat feature a total of
1,343 slot machines, 58 table games and a poker room containing 11 poker tables.
The casino area includes a deli/snack bar, one casino bar containing video poker
machines and an entertainment stage. The lowest level of the riverboat contains
the engine room, offices, count rooms, security and surveillance offices and
facilities for the Louisiana State Police.

                                       16
<PAGE>   17
         Management believes that the new hotel tower and dockside pavilion
offers the largest and most varied hotel and restaurant facilities in the
market. The 25 story, all-suite hotel tower features 606 rooms, a health club
and approximately 4,000 square feet of meeting space. The restaurants have been
designed to offer moderately priced, high quality food in order to attract local
and repeat patrons; this attraction is a hallmark of the marketing strategy at
the Horseshoe Casinos.

ITEM 3. LEGAL PROCEEDINGS.

         There are no material legal proceedings pending against the Company or
any of its properties.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

         Not applicable.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

         There is no established public trading market for the equity interests
in the Company. As of March 6, 1998, the number of record holders of equity
interests in the Company was 55.

         The Company has paid tax distributions since October 10, 1995, in an
aggregate amount equal to $37,999,000, which were calculated in accordance with
the Company's debt agreements to enable the holders of equity interests in the
Company to pay state and federal income taxes on their proportionate share of
the Company's income. In addition to these permitted tax distributions, the
Company declared a distribution of $15,000,000 as of December 31, 1997, which
was paid in February 1998. The Company anticipates that an additional
distribution of approximately $5 million will be paid in June 1998. The
Company's debt agreements contain provisions which restrict the ability of the
Company to make distributions to the holders of equity interests, based on the
Company's earnings, the ability of the Company to meet certain restrictions on
borrowing, and certain other criteria.

                                       17
<PAGE>   18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

         The following table summarizes certain selected consolidated financial
data, which should be read in connection with the Company's Consolidated
Financial Statements and notes thereto included elsewhere herein and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected consolidated financial data as of and for the years
ended December 31, 1997, 1996, 1995 and 1994 and for the period from inception
through December 31, 1993 have been derived from the Company's audited
consolidated financial statements included elsewhere herein.


<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31
                                                1997              1996             1995(c)           1994(b)          1993(a)
                                                ----              ----             -------           -------          -------
<S>                                          <C>               <C>               <C>               <C>               <C>
STATEMENT OF OPERATIONS DATA:                                              (Dollars in Thousands)
    Net revenues:
        Casino                               $ 321,236         $ 317,479         $ 283,402         $  59,230         $    --
        Non-casino                              13,857            14,258            14,983             4,173
                                             ---------         ---------         ---------         ---------         ---------
                                               335,093           331,737           298,385            63,403              --

OPERATING EXPENSES:
        Casino                                 175,394           162,408           133,299            24,339
        Non-casino                              20,283            20,474            20,131             4,987
        Other                                   48,217            51,980            54,331            26,637             1,742
        Corporate expenses(g)                   22,490            10,254             3,375
        Depreciation and
        amortization                            19,411            15,989            12,545             2,499
                                             ---------         ---------         ---------         ---------         ---------
    Operating income (loss)                     49,298            70,632            74,704             4,941            (1,742)
    Interest (expense) income,
    net                                        (15,796)          (21,964)          (18,735)           (6,259)              221
   Gain on sale of land                                                                                5,242
    Other, net                                    (429)              154
                                             ---------         ---------         ---------         ---------         ---------
    Net income (loss) before
    extraordinary loss on
    early retirement of debt and
    minority interest                           33,073            48,822            55,969             3,924            (1,521)
    Extraordinary loss on early
    retirement of debt                          (5,243)           (7,179)
    Minority interest in
    (income) loss of subsidiaries (d)             (420)           (1,861)           (8,850)           (5,691)              130
                                             ---------         ---------         ---------         ---------         ---------
    Net income (loss)                        $  27,410         $  46,961         $  39,940            (1,767)           (1,391)
                                             =========         =========         =========         =========         =========
</TABLE>




<TABLE>
<CAPTION>
                                                       AS OF DECEMBER 31
                                       1997           1996            1995            1994
                                       ----           ----            ----            ----
<S>                                 <C>             <C>             <C>             <C>
BALANCE SHEET DATA:
Cash and cash equivalents(f)        $ 48,710        $ 79,159        $ 65,541        $ 18,584
Total assets                         511,556         377,597         300,088         145,535
Long-term debt, including
current maturities (e)               313,275         232,708         197,603         124,963
Total members' equity                 64,595          79,782          52,747           3,633
</TABLE>



(a)      Includes the consolidated results of the Company and its subsidiaries
         from the date each entity was formed through December 31, 1993,
         including subsidiaries involved in development activities only.

(b)      The Horseshoe Bossier City opened on July 9, 1994.

(c)      The Horseshoe Casino Center opened on February 13, 1995.

(d)      Horseshoe Gaming owns less than 100% of certain subsidiaries. Minority
         interest represents the share of each subsidiary's income attributable
         to those interests not owned by Horseshoe Gaming as well as the 1994
         gain on sale of land by RPG of $5,242,000 distributed to some, but not
         all, of the Company's members.

(e)      Includes deferred interest payable on notes payable to affiliates of
         $2,467,000 as of December 31, 1994.

(f)      Excludes escrow funds, restricted for expansion of existing facilities,
         development of New Projects or repayment of debt, amounting to
         approximately $42,235,000 (1996) and $31,316,000 (1995).

(g)      Includes non-cash compensation charges relating to redeemable ownership
         interests of $15,066,000, $4,340,000 and $2,557,000 for the years ended
         December 31, 1997, 1996 and 1995, respectively.

                                       18
<PAGE>   19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

GENERAL

         The following discussion and analysis provides information which
Management believes is relevant to an assessment and understanding of the
Company's consolidated financial condition and results of operations. The
discussion should be read in conjunction with "Selected Consolidated Financial
Data" and the Consolidated Financial Statements and notes thereto.

INTRODUCTION

         The formation of the Company culminated with the completion of the
Roll-Up Transaction, which was deemed effective October 1, 1995. The Roll-Up
Transaction resulted in the Company (a newly-formed holding company) owning 50%
or more of several entities that were previously owned by Mr. Binion, certain
related parties and certain unrelated parties. Mr. Binion now serves as the
Chairman of the Board of Directors and Chief Executive Officer of HGI, the
manager of the Company.

         As a result of the Roll-Up Transaction, the Company initially owned 89%
of HE, the partnership that owns the Horseshoe Bossier City, 100% of RPG, the
partnership that owns the Horseshoe Casino Center and 80% of Horseshoe Ventures,
L.L.C., a Delaware limited liability company ("Horseshoe Ventures"), which was
formed to pursue casino development opportunities in new jurisdictions. As of
December 31, 1995, the Company acquired an additional 2.92% ownership interest
in HE bringing its total ownership to 91.92%. During 1996, the Company entered
into an option agreement to acquire an additional 1% ownership interest in HE.
The consolidated financial statements of the Company include the assets,
liabilities, revenues and expenses for all entities included in the Roll-Up
Transaction, as if such entities were subsidiaries of the Company for all
periods presented. Further, prior to the Roll-Up Transaction, certain expenses
incurred pursuing development of casinos in new jurisdictions were incurred by
Mr. Binion. Mr. Binion was reimbursed for such expenses by Horseshoe Ventures in
October 1995. These expenses are included in the consolidated financial
statements of the Company, for all periods presented, as if they had been
incurred by Horseshoe Ventures.

RESULTS OF OPERATIONS

         The Horseshoe Casino Center operates in the competitive Tunica County,
Mississippi, market, which currently consists of nine casinos. Horseshoe Casino
Center has substantially completed a significant expansion of its facilities.
Several of the other existing Tunica casinos, have also substantially completed
or are in the process of completing expansion, including hotel rooms (see
"Liquidity and Capital Resources" section below for additional discussion of
development plans). While management expects that its competitors' expansions
will affect the Horseshoe Casino Center's revenues and operating income,
management also believes they will increase the size and scope of the overall
Tunica gaming market, mitigating the potential adverse impact on future
operating levels at the Horseshoe Casino Center. The impact on operating margins
from the overall increase in supply to this market is uncertain.

         The Horseshoe Bossier City is one of four riverboat casinos currently
operating in the Bossier City/Shreveport, Louisiana market. The Louisiana Gaming
Control Board has recently granted preliminary approval for a proposal to
transfer the license for a New Orleans casino, which is now closed, to a new
proposed facility to be located adjacent to an existing competitor's facility in
Shreveport. Additionally, the Louisiana Gaming Control Board is accepting
proposals until May 19, 1998 for the remaining fifteenth license. This license,
once granted, may be located in the Bossier City/Shreveport market. The
Horseshoe Bossier City has substantially completed its major expansion project
(see "Liquidity and Capital Resources" section below for additional discussion
of such project). While Management expects that the possible new competition
from the transferred license and from the fifteenth license (if granted for
Shreveport/Bossier City) will affect the Horseshoe Bossier City's revenues and
operating income, Management also believes the expansion of the Horseshoe
Bossier City and the potential addition of two riverboat casinos and slot
machines at the racetrack in the Bossier City/Shreveport market will increase
the size and scope of the overall gaming market, mitigating the potential
adverse impact on future operating levels at the Horseshoe Bossier City. The
impact on operating margins from the overall increase in supply to this market
is uncertain.

         The Company has not experienced any significant seasonal trends;
however, the Company has a limited

                                       19
<PAGE>   20
operating history and may determine in the future that its revenues and income
may be seasonal in nature.

Years Ended December 31, 1997 and 1996

         Net revenues of the Company for the year ended December 31, 1997 were
$335.0 million as compared to $331.7 million for the comparable period in 1996.
The overall increase in net revenues of $3.3 million, or 1%, consists of a $3.8
million increase in casino revenues, offset by a slight decrease in non-casino
revenues. The Horseshoe Bossier City incurred a decrease in casino revenues of
$6.8 million, whereas the Horseshoe Casino Center reflects significant
improvements over 1996 in casino revenues of $10.6 million.

The Horseshoe Casino Center

         The Horseshoe Casino Center contributed net revenues and operating
profit before corporate expenses, respectively, of $167.2 million and $45.6
million for the year ended December 31, 1997 and $156.9 million and $50.2
million for the year ended December 31, 1996.

         The Horseshoe Casino Center's net revenues include casino revenues and
non-casino revenues, respectively, of $161.3 million and $5.9 million for the
year ended December 31, 1997 and $150.7 million and $6.2 million for the year
ended December 31, 1996. The increase in net revenues for the year ended
December 31, 1997 compared to the prior year period is primarily due to an
increase in total volume in slot machine revenue of 10.8%. Casino revenue per
day increased in 1997 to $442,000 from $412,000 for the year ended December 31,
1996 despite disruption related to the property's expansion project.

         The Horseshoe Casino Center's margin for operating profit before
corporate expenses for the year ended December 31, 1997 was 27.9% before the
write-off of pre-opening expenses, compared with 32.0% for the year ended
December 31, 1996. The reduction in operating profit before corporate expenses
margin of 4.1 percentage points was primarily caused by three factors: (1) an
increase in bad debt reserves because total gaming receivables increased more
rapidly than revenue, (2) an increase in depreciation and amortization expense
due to the expansion of the casino facility, and (3) increases in promotional
programs and direct marketing programs.

The Horseshoe Bossier City

         The Horseshoe Bossier City contributed net revenues and operating
profit before corporate expenses, respectively, of $167.9 million and $27.9
million for the year ended December 31, 1997 and $174.9 million and $36.9
million for the year ended December 31, 1996.

         The Horseshoe Bossier City's net revenues include casino revenues and
non-casino revenues, respectively, of $160.0 million and $7.9 million for the
year ended December 31, 1997 and $166.8 million and $8.1 million for the year
ended December 31, 1996. The decrease in net revenues for the year ended
December 31, 1997 compared to the prior year period is due to a decrease in
total casino volume in slot machine revenue of 2.8% as well as decreases in win
percentages in both slots and table games. Casino revenue per day decreased
approximately 3.9% in 1997 to $438,000 from $456,000 for the year ended December
31, 1996. The reduction in total casino volume occurred as a result of increased
competition in the Bossier/Shreveport market as well as the ongoing development
and expansion of the entire operating facility.

         The Horseshoe Bossier City's margin for operating profit before
corporate expenses for the year ended December 31, 1997 was 17.7% before the
write-off of pre-opening expenses, compared with 21.1% for year ended December
31, 1996. The reduction in operating profit before corporate expenses margin of
3.4 percentage points was primarily caused by two factors: (1) an increase in
depreciation and amortization due to the property improvements and (2) the
decline in win percentage in slots and table games.

                                       20
<PAGE>   21
Other Factors Affecting Earnings

         Development expenses, which are included in operating income, were $1.7
million and $6.6 million for the years ended December 31, 1997 and 1996,
respectively. The 1996 period includes expenses associated with the Company's
failure to obtain a license to conduct gaming in the state of Indiana.

         Corporate expenses increased approximately $12.2 million during 1997
primarily due to the non-cash charge to compensation expense to reflect the
increased value of redeemable ownership interests in the Company. Certain of the
Company's employees have ownership interests that are subject to provisions that
require the Company to repurchase these ownership interests in the event of
their termination at a price equal to the then fair market of the Company based
on an independent appraisal.

         Interest expense declined approximately $7.3 million in 1997 as
compared to 1996, principally as a result of the capitalization of interest
expense related to the Horseshoe Casino Center and Horseshoe Bossier City
expansion projects. Total interest capitalized for the years ended December 31,
1997 and 1996 was $11.2 and $1.3 million, respectively.

         In November 1997, the Company completed the exchange offering of its
$160 million of 9 3/8% Senior Subordinated Notes due June 15, 2007, for publicly
registered notes with identical terms. Proceeds from the original offering of
notes in a private placement in June 1997 were used to extinguish certain
borrowings of the Company and fund a portion of the expansion of the Company's
existing facilities. An extraordinary loss of approximately $5.2 million was
recognized in the second quarter in conjunction with the debt redemption.

Years Ended December 31, 1996 and 1995

         The significant improvement in the Company's net revenues for the year
ended December 31, 1996, compared with the prior year is related primarily to
improvements in revenue per day at the Horseshoe Bossier City and the Horseshoe
Casino Center operating for a full year in 1996 compared with a partial year in
1995. Operating results for 1995 include operations for the Horseshoe Casino
Center commencing February 13, 1995.

The Horseshoe Casino Center

         The Horseshoe Casino Center contributed net revenues and operating
profit before corporate expenses, respectively, of $156.9 million and $50.2
million for the year ended December 31, 1996 and $137.6 million and $44.4
million for the year ended December 31, 1995.

The Horseshoe Casino Center's net revenues include casino revenues and
non-casino revenues, respectively, of $150.7 million and $6.2 million for the
year ended December 31, 1996 and $132.2 million and $5.4 million for the year
ended December 31, 1995. The increase in net revenues for the year ended
December 31, 1996 compared to the prior year period is primarily due to the
increase in the number of days of operation. The year ended December 31, 1995
only includes 322 days of operations, whereas the 1996 period includes a full
year. Casino revenue per day increased in 1996 to $412,000 from $411,000 for the
year ended December 31, 1995.

         The Horseshoe Casino Center's margin for operating profit before
corporate expenses for the year ended December 31, 1996 was 32.0% compared with
37.3%, before the write-off of pre-opening expenses, for the year ended December
31, 1995. The reduction in operating margin of 5.3 percentage points was caused
by an increase in expenses associated with promotional programs and direct
marketing programs, including one-time promotional charges which were incurred
by the Company prior to the opening and during the first month of operations of
a new competing casino facility in the Tunica market. An increase in bad debt
expenses also contributed to the lower operating margins in 1996.

The Horseshoe Bossier City

         The Horseshoe Bossier City contributed net revenues and operating
profit before corporate expenses, respectively, of $174.9 million and $36.9
million for the year ended December 31, 1996 and $160.8 million and $38.1
million for the year ended December 31, 1995.

                                       21
<PAGE>   22
         The Horseshoe Bossier City's net revenues include casino revenues and
non-casino revenues, respectively, of $166.8 million and $8.1 million for the
year ended December 31, 1996 and $151.2 million and $9.6 million for the year
ended December 31, 1995. The increase in net revenues for the year ended
December 31, 1996 compared to the prior year period is due to an increase in
total casino volume of 24.4%. The increase in total volume was offset by a
reduction in overall win percentage. Casino revenue per day increased
approximately 10.1% in 1996 to $456,000 from $414,000 for the year ended
December 31, 1995.

         The Horseshoe Bossier City's margin for operating profit before
corporate expenses for the year ended December 31, 1996 was 21.1% compared with
23.7% for year ended December 31, 1995. The reduction in operating margin of 2.6
percentage points was caused by an increase in expenses associated with
promotional programs and direct marketing programs. Depreciation and
amortization increased $2.7 million over the 1995 period due to amortization of
goodwill which began in October, 1995 and an increase in depreciation expense
due to property improvements.

Other Factors Affecting Earnings

         Corporate expenses increased approximately $6.9 million in 1996 as
compared to 1995 due to the 1995 period only including corporate expenses for
the three months following the roll-up transaction. Prior to the roll-up
transaction HE and RPG absorbed any expenses associated with the management of
the respective casino operations.

         The increase in net interest expense of $3.2 million for the year ended
December 31, 1996, compared with the year ended December 31, 1995, is due to an
increase in the amount of debt outstanding. This was partially offset by a
reduction in the overall interest rate on the Company's long-term debt, which
resulted from the Company's refinancing of substantially all of its existing
indebtedness in October 1995. This refinancing resulted in an extraordinary loss
on early retirement of debt of $7.2 million in 1995.
         Development expenses, which are included in operating income, were $6.6
million and $4.4 million for the years ended December 31, 1996 and 1995,
respectively. The increase in development expenses in 1996 over 1995 is due to
the Company's failure to obtain a license to conduct gaming in the state of
Indiana. Total expenses incurred by the Company pursuing its Indiana license
were $3.9 million and $1.7 million for the years ended December 31, 1996 and
1995, respectively.

LIQUIDITY AND CAPITAL RESOURCES

         In October 1995, the Company refinanced substantially all of its
exiting indebtedness with net proceeds from an initial draw of $93.2 million on
a $100 million credit facility (the "Initial Credit Facility") and from the sale
of $100 million of 12.75% Senior Notes, due September 30, 2000 (the "Senior
Notes"). The Senior Notes were sold with warrants to purchase an additional $50
million of Senior Notes on April 10, 1996, at a price of 98.15% of par value
which, upon exercise, raised approximately $49 million after fees and expenses.

        On June 15, 1997, the Company issued $160 million of 9 3/8% Senior
Subordinated Notes ( the "Subordinated Notes") due June 15, 2007. The
Subordinated Notes were issued at 99.899% of par value and have an effective
interest rate of 9.39%. The Subordinated Notes are unsecured and require
semi-annual interest payments. A portion of the proceeds were used to
substantially retire the Initial Credit Facility and to purchase $13 million in
Senior Notes. An extraordinary loss on early retirement of debt of $5,243,000
was recognized in 1997 for prepayment penalties and premium and the write-off of
unamortized discounts and deferred finance charges. The remaining proceeds were
used to fund a portion of the expansion of the Company's existing facilities.

On November 12, 1997, the Company finalized a restructuring of its Initial
Credit Facility. Pursuant to the terms of the amended and restated loan
agreement, CIBC Wood Gundy Securities Corp. agreed to provide a $130 million
Senior Secured Revolving Credit Facility (the "Amended and Restated Credit
Facility"). As of December 31, 1997, the Company had drawn $15.1 million under
the Amended and Restated Credit Facility. An additional $45 million had been
borrowed as of February 13, 1998. The borrowings under the Amended and Restated
Credit Facility has enabled the Company to fund the completion of the expansion
of the Bossier City and Tunica properties.

DEVELOPMENT

                                       22
<PAGE>   23
         Tunica, Mississippi

         Horseshoe Casino Center has substantially completed the expansion of
its entire casino facility at a cost of approximately $109 million, of which
approximately $99 million had been incurred and placed in service of December
31, 1997. The newly expanded casino complex, which officially opened on January
21, 1998, includes an additional 15,000 square feet of gaming space (the entire
gaming facility features 1,449 slot machines, 56 table games and 12 poker
tables), 312 hotel suites (to add to its existing 195 room hotel facility), a
multi-level, 1,100 space parking garage and Bluesville, an entertainment
facility which will accommodate approximately 1,000 customers. Additional
facilities include a health club, one additional restaurant, a new, relocated
and expanded buffet, a remodeled steak house, meeting room facilities and other
amenities.

         Bossier City, Louisiana

         Horseshoe Bossier City has substantially completed the expansion of its
entire casino facility at a cost of approximately $210 million, of which
approximately $177 million had been incurred and approximately $110 million had
been placed in service as of December 31, 1997. The newly expanded casino
facility, which officially opened on January 28, 1998, features a new expanded
riverboat casino facility (with approximately 40% more gaming positions and
featuring a total of 1,343 slot machines, 58 table games and 11 poker tables), a
25 story hotel tower with 606 suites, meeting room facilities, a health club,
the renovation and expansion of existing dockside facilities, the addition of
two specialty restaurants, the complete renovation and expansion of the existing
buffet and the recently completed 1,100 space parking garage, administration
building and remodeled existing steak house restaurant.

         The Horseshoe Bossier City's new riverboat casino facility replaced the
existing riverboat casino facility (the "Queen of the Red"). The Queen of the
Red, along with related gaming equipment, was transferred to assets held for
sale in January 1998. Management intends to use the Queen of the Red, and the
related gaming equipment, in conjunction with the Company's proposed riverboat
gaming facility set forth below in the Vicksburg, Mississippi discussion.

                                       23
<PAGE>   24
         Vicksburg, Mississippi

         In August 1997, the Company and Lady Luck Vicksburg, Inc. ("Lady Luck")
signed a Contribution and Sale Agreement with respect to a proposed new limited
liability company, which is intended to develop a riverboat gaming facility,
including a riverboat casino, a hotel of approximately 200 rooms, an 800-car
parking garage and other amenities in Vicksburg, Mississippi. The consummation
of the Contribution and Sale Agreement and the development of the facility are
subject to certain conditions precedent including the mutual determination by
the Company and Lady Luck of the intended scope and cost of the proposed
facility, the obtaining of requisite regulatory approvals, and the arrangement
of appropriate project financing. The facility is to be developed and operated
by a wholly-owned subsidiary of the Company, which will have an equity interest
of 75% in the proposed limited liability company, with Lady Luck holding the
remaining 25% interest. Under the terms of the Contribution and Sale Agreement,
the Company and Lady Luck intend to contribute certain real property and other
previously acquired assets having a combined net book value of approximately $42
million. The total cost of the project, including the value of the contributed
assets, is estimated to be approximately $100 million.

OTHER ITEMS

        Cash and cash equivalents totaled $48,710,000 as of December 31, 1997.
Included in accrued expenses at December 31, 1997 is a distribution payable to
the owners of the Company amounting to $15,000,000, which was paid in February,
1998.

        Management believes that the Company's cash and cash equivalents on
hand, cash from operations and additional borrowings under its Amended and
Restated Credit Facility will be adequate to meet the Company's existing
obligations when they become due.

         The Company has assessed and continues to assess the impact of the Year
2000 Issue on its reporting systems and operations. The Company has not fully
determined which systems are not Year 2000 compliant but this determination is
expected to be completed in 1998. Therefore, the total cost of remediation is
still uncertain. If the Company's remediation plan is not successful, there
could be a significant disruption of the Company's ability to transact business
with its major vendors, as well as possible shutdown of certain
computer-operated functions.

         The Company may be required to repurchase ownership interests held by
employees, in the event of termination of their employment, at a price based on
an independent appraisal. The total ownership interest held by employees subject
to buy-out provisions was 9.1% as of December 31, 1997. The value of these
ownership interests, amounting to $51.6 million, has been recorded as a
liability in the accompanying consolidated financial statements as Redeemable
Ownership Interests.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         See the Index to Consolidated Financial Statements and the Index to
Financial Statement Schedules included at "Item 14. Exhibits, Financial
Statement Schedules, and Reports on Form 8-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE.

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

         Section 6.2 of the Limited Liability Company Agreement of the Company
(the "Company Agreement") provides that the Company shall be managed by a
manager (the "Manager"). Pursuant to Section 6.1 of the Company Agreement, HGI
serves as the Manager of the Company until the occurrence of its "Withdrawal,"
which pursuant to Section 1 of the Company Agreement, means the occurrence of
the bankruptcy (as defined in the Company Agreement), dissolution or liquidation
of HGI, or the withdrawal, resignation or retirement of HGI from the Company for
any reason, and those situations when HGI may no longer continue as a member of
the Company by reason of any law or pursuant to any terms of the Company
Agreement. HGI has only one class of stock outstanding. The outstanding shares
of common stock of HGI are owned 68.52% by Mr. Binion, 15.74% by Peri Howard,
15.74% by Leslie Kenny.

                                       24
<PAGE>   25
         The current executive officers and directors of HGI and of HGP, and
certain officers of RPG and HE, are listed below, together with their ages and
all positions and offices held by them.

<TABLE>
<CAPTION>
                                  Age                Position
                                  ---                --------
<S>                               <C>    <C>
Jack B. Binion                    61     Chairman of the Board of Directors and
                                         Chief Executive Officer of HGI, and Sole
                                         Director and Chief Executive Officer of HGP.
Phyllis M. Cope                   63     Director of HGI.
Peri Howard                       37     Director of HGI.
Paul R. Alanis                    49     President of HGI and of HGP.
Walter J. Haybert                 55     Treasurer and Chief Financial Officer of
                                         HGI and of HGP.
John J. Schreiber                 57     Senior Vice President - Governmental
                                         Relations of HGI and of HGP.
J. Michael Allen                  50     Senior Vice President - Operations of HGI
                                         and of HGP.
Loren S. Ostrow                   46     Senior Vice President, Secretary and
                                         General Counsel of HGI and of HGP.
Gary Border                       48     Senior Vice President - Marketing of HGI
                                         and of HGP.
J. Lawrence Lepinski              51     Senior Vice President and General Manager
                                         of Horseshoe Bossier City.
Bob McQueen                       44     Senior Vice President and General Manager
                                         of Horseshoe Casino Center.
</TABLE>


         Mr. Binion has served as Chief Executive Officer of HGI since its
inception (under the name New Gaming Capital Corporation) in December 1992 and
as Chief Executive Officer of HGP since its inception immediately prior to the
Roll-Up Transaction. Mr. Binion served as the Chief Executive Officer of Gaming
Consulting, Inc., the general partner of the entity that was the general partner
of RPG, from its inception in May 1993 until it merged into HGI in the Roll-Up
Transaction. Mr. Binion has also been the President and Chief Executive Officer
since 1964 of the Horseshoe Club Operating Company, which owns and operates
Binion's Horseshoe in Las Vegas, Nevada.

         Ms. Cope is the wife of Jack Binion. She was elected director of HGI in
January 1997 and will serve until further notice.

         Ms. Howard is the daughter of Phyllis Cope. She was elected director of
HGI in January 1997 and will serve until further notice.

         Mr. Alanis has served as President of HGI and of HGP since January 1,
1996. Mr. Alanis has served as President of KII-Pasadena, Inc. since December
1988 and President of Koar International, Inc. from 1991 until 1995.

         Mr. Haybert became employed by an affiliate of the Company in August
1995, and became employed as the Treasurer and Chief Financial Officer of HGI
and of HGP upon the consummation of the Roll-Up Transaction. From April 1992
until July 1995, Mr. Haybert was the Vice President of Gaming Development of
Harrah's Entertainment, Inc.

         Mr. Schreiber has served as Senior Vice President of HGI since the
Roll-Up Transaction and, prior to that, as Senior Vice President of Horseshoe
Club Operating Company since April 1994. From May 1992 through April 1994, Mr.
Schreiber served as President of St. Charles Riverfront Station and as Vice
President of Governmental Affairs for Station Casinos, Inc.

         Mr. Allen has served as Senior Vice President of Horseshoe Gaming, Inc.
since the Roll-up Transaction and prior to that as General Manager of the
Horseshoe Casino Center since May 1994. Prior to that, Mr. Allen served as
Principal of Gaming Associates, Inc. from September 1992.

         Mr. Ostrow has served as Senior Vice President and General Counsel of
HGI and of HGP since January 1, 1996. Mr. Ostrow has served as Senior Vice
President of KII-Pasadena, Inc., since December 1988, and Senior Vice President
of Koar International, Inc. from 1991 until 1995.

         Mr. Border has served as Senior Vice President - Marketing of HGI since
July 1996.  Since 1987, Mr. Border served as President and founder of Marketing
Results, Inc.

         Mr. Lepinski has served as Senior Vice President and General Manager of
the Horseshoe Bossier City since September 1995. Prior to that, Mr. Lepinski
served as General Manager of Bally's Saloon and Gambling Hall in Tunica,
Mississippi since August 1993.

                                       25
<PAGE>   26
         Mr. McQueen has served as Senior Vice President and General Manager of
the Horseshoe Casino Center since July 1996 and prior to that as Vice President
of Casino Operations for Horseshoe Casino Center since June 1994. From April
1992 to June 1994 Mr. McQueen served as a Senior Level Executive with Carnival
Cruise Lines.

                                       26
<PAGE>   27
ITEM 11. EXECUTIVE COMPENSATION.

         The following table sets forth all compensation awarded to, earned by
or paid to the Chief Executive Officer and the other four most highly
compensated executive officers (the "Named Executive Officers") for their
services to the Company for the years ended December 31, 1997, 1996 and 1995.

                           SUMMARY COMPENSATION TABLE


<TABLE>
<CAPTION>
                                        ANNUAL COMPENSATION
                         -------------------------------------------------------
NAME AND PRINCIPAL       YEAR          SALARY         BONUS       OTHER ANNUAL      RESTRICTED         ALL OTHER
     POSITION                                                    COMPENSATION(1)     UNITS(2)         COMPENSATION
     --------            ----          ------         -----      ---------------     --------         ------------
<S>                      <C>         <C>           <C>           <C>                <C>               <C>
Jack B. Binion           1997        $             $             $                  $                 $
                         1996
                         1995
Paul R. Alanis           1997         500,000       195,000                                             19,355(6)
                         1996          494,63       200,000                                              7,351(6)
                         1995                                                                          110,000(3)
Loren S. Ostrow          1997          287,16        92,500                                              5,706(6)
                         1996          271,50        75,000                                              1,370(6)
                         1995                                                                           55,000(3)
Walter J. Haybert(4)     1997          350,00                                                            9,975(6)
                         1996          351,79                                                            6,785(6)
                         1995          94,231        35,138       342,098            1,026,296           4,681(6)
J. Michael Allen(5)      1997          350,00                                                           10,853(6)
                         1996          367,71                                                            1,792(6)
                         1995          90,192        67,000       251,052            1,117,342           5,653(7)
</TABLE>


(1)      The Company has determined the value of the Units for purposes of this
         table based on the appraisal conducted by the investment banking firm
         of Houlihan Lokey Howard and Zukin in connection with the Roll-Up
         Transaction.

(2)      The Company will make Permitted Distributions to its members with
         respect to the Units, including those Units that are restricted (see
         "Description of New Notes").

(3)      While Mr. Alanis and Mr. Ostrow performed policy making functions of
         HGI similar to that of officers during fiscal year 1995, they were
         employees of KII-Pasadena, Inc., which was party to a consulting
         agreement with HGI. The consulting agreement provided for payments to
         KII-Pasadena, Inc. of $55,000 per month (See "Related Party
         Transactions"). Mr. Alanis and Mr. Ostrow own 67% and 33% of the stock,
         respectively of KII-Pasadena, Inc. The amount of compensation to Mr.
         Alanis and Mr. Ostrow indicated is equal to their respective share of
         the consulting payments to KII-Pasadena, Inc. for the three-month
         period ended December 31, 1995.

(4)      375,367 of the 500,489 Units granted to Mr. Haybert in fiscal year 1995
         have vested as of December 31, 1997, the remaining units vest pursuant
         to the schedule in Mr. Haybert's employment agreement with HGI. (See
         "--Employment Agreements.") The value of the unvested units at December
         31, 1997 is $341,708.

(5)      986,063 of the 1,316,203 Units granted to Mr. Allen in fiscal year 1995
         have vested as of December 31, 1997, the remaining units vest pursuant
         to the schedule in Mr. Allen's employment agreement with HGI. (See
         "--Employment Agreements.") The value of the unvested units at December
         31, 1997 is $901,612.

(6)      Premium on insurance policies.

                                       27
<PAGE>   28
(7)      Housing and automobile allowance.

                                       28
<PAGE>   29
COMPENSATION OF DIRECTORS; COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

         The Bylaws of HGI provide for a six member board of directors. There
are currently three directors. Directors serve until the next annual meeting of
stockholders and until their successors have been elected and qualified.
Vacancies on the board of directors may be filled by a majority of the remaining
directors. The Chairman of the Board of Directors receives no compensation for
services on the board, Peri Howard receives $150,000 and Phyllis Cope receives
$100,000 per year as compensation for their services on the Board.

         Officers serve at the discretion of the Board. The Board has no
Compensation Committee. Mr. Alanis has participated in discussions with Mr.
Binion regarding executive compensation.

EMPLOYMENT AGREEMENTS

         Mr. Binion has provided services pursuing, developing and managing
gaming operations for the Company and its Subsidiaries. Mr. Binion has not been
compensated for his services in the past nor is there an existing employment
agreement providing for Mr. Binion to receive compensation for his services in
the future. It is anticipated, however, that Mr. Binion will enter into an
employment agreement with HGI, the Manager of the Company in 1998. Mr. Binion is
not currently compensated for his services to the Company.

         Mr. Alanis is party to an employment agreement with HGI, which
agreement contains customary employment terms and provides for a current annual
base salary of $500,000, fringe benefits, participation in such health and
pension plans as HGI shall adopt for all HGI executives, and a bonus of $200,000
which was paid during 1996. The employment agreement provides for a bonus in
1997 and 1998 should the Company in 1996 and 1997 sustain a level of activity
and financial performance equal or greater to the level of activity and
financial performance of the Company during calendar year 1995. The employment
agreement also contains a put/call provision whereby, upon termination of Mr.
Alanis' employment, the Company may, at its option, or must, at Mr. Alanis'
option (with either option exercisable within 30 days of such termination),
purchase Mr. Alanis' ownership interest for cash in an amount equal to its then
fair market value. The employment agreement provides that Mr. Alanis' employment
shall terminate on December 31, 1998, unless earlier terminated as provided
therein. HGI may terminate Mr. Alanis' employment for cause (including upon Mr.
Alanis' disability) or without cause. If, as of December 31, 1997, the
employment of Mr. Alanis had been terminated for cause, $41,667 would have been
payable to Mr. Alanis, and $700,000 would have been payable if his employment
had been terminated without cause. The employment agreement also includes
confidentiality provisions.

         Mr. Ostrow is party to an employment agreement with HGI, which
agreement contains customary employment terms and provides for a current annual
base salary of $300,000, fringe benefits, participation in such health and
pension plans as HGI shall adopt for all HGI executives, and a bonus. The
employment agreement also contains a put/call provision whereby, upon
termination of Mr. Ostrow's employment, the Company may, at its option, or must,
at Mr. Ostrow's option (with either option exercisable within 30 days of such
termination), purchase Mr. Ostrow's ownership interest for cash in an amount
equal to its then fair market value. The employment agreement provides that Mr.
Ostrow's employment shall terminate on December 31, 1998, unless earlier
terminated as provided therein. HGI may terminate Mr. Ostrow's employment for
cause (including upon Mr. Ostrow's disability) or without cause. If, as of
December 31, 1997, the employment of Mr. Ostrow had been terminated for cause,
$25,000 would have been payable to Mr. Ostrow and $300,000 would have been
payable if his employment had been terminated without cause. The employment
agreement also includes confidentiality provisions.

         Mr. Haybert is party to an employment agreement with HGI, which
agreement contains customary employment terms and provides for a current annual
base salary of $350,000, fringe benefits, and participation in such health and
pension plans as HGI shall adopt for all HGI executives. The employment
agreement also provides Mr. Haybert with 500,489 Units in the Company, subject
to a specified divestiture schedule. Under such schedule, 25% is subject to
divestiture upon Mr. Haybert's termination or voluntary resignation prior to
July 31, 1998. HGI also agreed to make available, within ten (10) days after a
request by Mr. Haybert, a personal loan of up to $200,000, bearing interest at
the rate of 10% per annum to be secured by the pledge of Mr. Haybert's Units in
the Company. The employment agreement also contains a put/call provision
whereby, upon termination of Mr. Haybert's employment, the Company may, at its
option, or must, at Mr. Haybert's option (with either option exercisable within
90 days of such termination), purchase that portion of Mr. Haybert's ownership
interest that is not subject to divestiture for cash in an amount equal to the
amount the fair market value exceeds $1,366,923. If

                                       29
<PAGE>   30
Mr. Haybert is terminated without cause, his ownership interest shall no longer
be subject to divestiture. The employment agreement provides that Mr. Haybert's
employment shall terminate on July 31, 1998, unless earlier terminated as
provided therein. HGI may terminate Mr. Haybert's employment for cause
(including upon Mr. Haybert's disability) or without cause. Upon the termination
of Mr. Haybert's employment for any reason (including a failure to renew his
employment agreement or to enter into a new employment agreement), the Company
shall immediately pay Mr. Haybert a severance benefit in cash as follows: (a) if
such termination is for cause, then $1,025,192 is payable if Mr. Haybert is
terminated on or before July 20, 1998 and $1,366,923 is payable thereafter, or
(b) if such termination is by Mr. Haybert or is by the Company without cause,
then $1,366,923 is payable. The aforementioned severance benefit shall be
increased by the difference between the ordinary income tax rate and the capital
gains tax rate (expressed as a percentage) in effect at the time of termination.
The employment agreement also provides that all of Mr. Haybert's ownership
interest shall become fully vested, and his severance benefit shall become fully
vested and paid, immediately upon the occurrence of any transaction whereby Mr.
Binion (including any entities through which he holds his ownership interest in
the Company), family members of Mr. Binion and/or trusts established for the
benefit of Mr. Binion's heirs transfer a controlling interest in the Company to
a third party in a transaction other than a public offering. The employment
agreement also includes confidentiality provisions. The assignment agreement
whereby the Company issued the ownership interest to Mr. Haybert provides that,
for purposes of determining the fair market value of Mr. Haybert's ownership
interest, prior to any Subsidiary being granted a license to own and/or operate
a gaming business, the value of such Subsidiary shall be limited to the amount
of the Company's capital investment therein. Because it originally was
contemplated that Mr. Haybert would receive his ownership interest and the share
of Net Profits to which it would entitle him in July 1995, and Mr. Haybert did
not in fact receive his ownership interest until the October 1, 1995 effective
date of the Roll-Up Transaction, HGI paid Mr. Haybert a one time bonus in an
amount equal to the $35,138 in Net Profits to which he would have been entitled.

         Mr. Allen is party to an employment agreement with HGI, which agreement
contains customary employment terms and provides for a current annual base
salary of $350,000, fringe benefits, participation in such health and pension
plans as HGI shall adopt for all HGI executives, and a one time bonus of $67,000
which was paid during 1995. The employment agreement also increased Mr. Allen's
ownership interest in the Company by 500,489 Units, subject to a specified
divestiture schedule. Under such schedule, 45% of Mr. Allen's ownership interest
vested fully upon execution of the employment agreement, an additional 15%
vested on May 15, 1996 and May 15, 1997; and the remaining 25% vests as follows:
an additional 15% vests and shall not be subject to divestiture beginning on May
15, 1998; and the remaining 10% vests and shall not be subject to divestiture
beginning on May 11, 1999. The employment agreement also contains a put/call
provision whereby, upon termination of Mr. Allen's employment, the Company may,
at its option, or must, at Mr. Allen's option (with either option exercisable
within 30 days of such termination), purchase that portion of Mr. Allen's
ownership interest that is not subject to divestiture for cash in an amount
equal to the amount the fair market value exceeds $1,366,923. The employment
agreement provides that Mr. Allen's employment shall terminate on May 11, 1999,
unless earlier terminated as provided therein. HGI may terminate Mr. Allen's
employment solely for cause (including upon Mr. Allen's disability). Upon the
termination of Mr. Allen's employment for any reason (including a failure to
renew his employment agreement or to enter into a new employment agreement), the
Company shall immediately pay Mr. Allen a severance benefit in cash as follows:
(i) $486,630 is payable if Mr. Allen is terminated on or before May 15, 1998;
(ii) $1,025,606 is payable if Mr. Allen is terminated on or before May 15, 1999
and (iii) $1,366,923 is payable thereafter. The aforementioned severance benefit
shall be increased by the difference between the ordinary income tax rate and
the capital gains tax rate (expressed as a percentage) in effect at the time of
termination. The employment agreement also provides that all of the ownership
interest shall become fully vested, and his severance benefit shall become fully
vested and paid, immediately upon the occurrence of any transaction whereby Mr.
Binion (including any entities through which he holds his ownership interest in
the Company), family members of Mr. Binion and/or trusts established for the
benefit of Mr. Binion's heirs transfer a controlling interest in the Company to
a third party in a transaction other than a public offering. The employment
agreement also includes confidentiality provisions. The assignment agreement
whereby the Company issued the ownership interest to Mr. Allen provides that,
for purposes of determining the fair market value of Mr. Allen's ownership
interest, prior to any Subsidiary being granted a license to own and/or operate
a gaming business, the value of such Subsidiary shall be limited to the amount
of the Company's capital investment therein.

                                       30
<PAGE>   31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The following table sets forth certain information regarding beneficial
ownership of membership interests in the Company ("Units"), as of December 31,
1997, by each person who is known by the Company to own beneficially more than
5% of the Units, by each director of the Company, each of the executive officers
and by all directors and executive officers of the Company as a group.


<TABLE>
<CAPTION>
                                    NAME(1)                          NUMBER OF            PERCENTAGE OF
                                    -------                            UNITS                  UNITS
                                                                       -----                  -----
<S>                                                               <C>                     <C>
                        Jack B. Binion .................           80,999,065(2)           80.704818%
                        Phyllis M. Cope.................            6,555,882(3)            6.532066%
                        Hanwa...........................            7,017,220(4)            6.991728%
                        HGI.............................           30,715,128(5)           30.603548%
                        Peri Howard.....................            9,027,039(6)            8.994246%
                        Paul Alanis.....................               3,155,935            3.144470%
                        J. Michael Allen................               1,316,203            1.311422%
                        Walter J. Haybert...............                 500,489                   *
                        Loren S. Ostrow.................               1,577,967            1.572235%
                        Directors and executive
                        officers as a group (5 persons).              87,799,904           87.480951%
</TABLE>


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

*        Less than 1%.

(1)      The persons named in this table have sole voting power and investment
         power with respect to all shares of capital stock shown as beneficially
         owned by them, subject to community property laws where applicable and
         the information contained in this table and these notes.

(2)      Includes (a) the 17,366,247 Units held by Mr. Binion as an individual;
         (b) the 30,715,128 Units owned by HGI, of which Mr. Binion is
         President, Chairman of the Board of Directors and the majority
         shareholder; (c) the 6,555,882 Units owned by Phyllis M. Cope; (d) the
         9,027,039 Units owned by Peri Howard; and (e) 17,334,769 Units held by
         members of Mr. Binion's family or trusts for the benefit of members of
         Mr. Binion's family. Mr. Binion expressly disclaims beneficial
         ownership of the 63,632,818 Units which are held of record by HGI or by
         members of Mr. Binion's family or by trusts established for the benefit
         of certain members of the families of Mr. Binion or Phyllis M. Cope,
         for purposes of Sections 13(d) and 13(g) of the Exchange Act.

(3)      Includes 3,277,941 Units held by Phyllis M. Cope, as Trustee
         of the Ted J. Fechser Trust, and 3,277,941 Units held by Phyllis M.
         Cope, as Trustee of the Fancy Ann Fechser Trust. Phyllis M. Cope
         expressly disclaims beneficial ownership of any Units held by her as
         trustee of such trusts, which are trusts established for the benefit of
         certain members of the families of Mr. Binion or Phyllis M. Cope, for
         purposes of Sections 13(d) and 13(g) of the Exchange Act.

(4)      Issuable upon Hanwa's exercise of Company Warrants.

(5)      Includes 7,017,220 Units to be surrendered upon Hanwa's exercise of
         Company Warrants.

(6)      Includes 945,059 Units held by Peri Howard, as Trustee of the Ted J.
         Fechser Trust, 945,059 Units held by Peri Howard, as Trustee of the
         Fancy Ann Fechser Trust, 945,059 Units held by Peri Howard, as Trustee
         of the James Christopher Fechser Trust, 945,059 Units held by Peri
         Howard, as Trustee of the Robert Daniel Fechser Trust, 945,059 Units
         held by Peri Howard, as Trustee of the Katie O'Neill Trust, 945,059
         Units held by Peri Howard, as Trustee of the Kellie O'Neill Trust,
         945,059 Units held by Peri Howard, as Trustee of the Rachel Fechser
         Trust, 945,059 Units held by Peri Howard, as Trustee of the Ben E.
         Johnson Trust, 189,013 Units held by Peri Howard, as Trustee of the
         Bonnie Binion Trust, and 189,013 Units held by Peri Howard, as Trustee
         of the Benny Behnen Trust; 189,013 Units held by Peri Howard, as
         Trustee of the Jack Behnen Trust, 231,779 Units held by Robinson
         Property Group, Inc. (of which Peri Howard is the sole shareholder,
         director and officer), 289,724 Units held by Jerry Howard, and 378,025
         Units held by Peri

                                       31
<PAGE>   32
         Howard as an individual. Peri Howard expressly disclaims beneficial
         ownership of any Units held by her as trustee of such trusts, which are
         trusts established for the benefit of certain members of the families
         of Mr. Binion or Phyllis M. Cope, for purposes of Sections 13(d) and
         13(g) of the Exchange Act.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

         In 1995 the Company engaged certain placement agents, including Onyx
Partners, Inc. ("Onyx") to offer the Senior Notes and Warrants and agreed to pay
the placement agents a fee equal to 2.0% of the gross proceeds. The Company also
engaged Onyx to arrange the Credit Facility and agreed to pay Onyx an additional
fee for those services. Onyx has in the past and may in the future perform
financial advisory services for the Company for a fee. The Company has agreed to
indemnify the placement agents and their controlling persons against certain
liabilities in connection with the offer and sale of the Senior Notes and
Warrants and the arrangement of the Credit Facility, including liabilities under
the Securities Act, and to contribute to payments that the placement agents may
be required to make in respect thereof. Affiliates of Onyx, who were owners of
limited partnership interests and warrants for the purchase of limited
partnership interests in NGCP and RPG, exercised their warrants and rolled their
ownership interests into the Company.

         The Company retained the services of KII-Pasadena, Inc. ("KII"), a
California corporation owned by Paul Alanis and Loren Ostrow, pursuant to a
consulting agreement (the "Consulting Agreement") that originally was entered
into between Koar International, Inc., a California corporation that was owned
by Messrs. Alanis and Ostrow, and Mr. Binion (who later assigned his rights and
obligations to HE and RPG). Pursuant to the Consulting Agreement, KII acted on
behalf of the Company as developer of the Horseshoe Bossier City and the
Horseshoe Casino Center and has provided consulting services to the Company
related to new gaming developments. The total amount paid pursuant to the
Consulting Agreement, which was canceled December 31, 1995, since its inception
in March 1993 was $1,255,000, as well as reimbursements for out-of-pocket
expenditures. Onyx has agreed to pay KII or its principals for introducing to
Onyx the opportunity of providing financing services to the Company, a finder's
fee equal to 30% of the net fees, commissions and other compensation received by
Onyx for its services in placing the Senior Notes and arranging the Credit
Facility after deduction for all relevant unreimbursed expenses. The total fee
paid to KII, or its principals, by Onyx, including the amount payable with
respect to the sale of Senior Notes upon the exercise of the warrants was
approximately $1,151,000. In the Roll-Up Transaction, Messrs. Alanis and Ostrow
exchanged limited partnership interests in NGCP and RPG for Units in the
Company. On January 1, 1996, Paul Alanis and Loren Ostrow became officers of the
Company.

         The Company conducts a portion of its marketing through an entity that
is owned by the wife of an officer. Amounts paid to this company for fees and
reimbursable expenses totaled $2,648,000, $1,633,000, $1,029,000 and $84,000 for
the years ended December 31, 1997, 1996, 1995 and 1994, respectively.

         The Company has made loans to various employees with ownership
interests in the Company. The amount outstanding under these notes was
$2,214,000 and $1,715,000 as of December 31, 1997 and 1996, respectively. The
notes to employees are secured by their ownership interests in the Company. The
notes have various due dates through October 1999 and interest rates ranging
from 7% to 10%.

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

<TABLE>
<CAPTION>
                                                                                                              PAGE
                                                                                                             NUMBER
                                                                                                             ------
<S>      <C>                                                                                                 <C>
(a)(1)   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS:

         HORSESHOE GAMING L.L.C. AND SUBSIDIARIES...............................................................F-2
         NEW GAMING CAPITAL PARTNERSHIP AND SUBSIDIARY ........................................................F-20
         ROBINSON PROPERTY GROUP, L.P. ........................................................................F-33

(a)(2)   INDEX TO FINANCIAL STATEMENT SCHEDULES:

         SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS........................................................S-2
</TABLE>


         All other schedules are omitted as the required information is
inapplicable or not present in amounts

                                       32
<PAGE>   33
sufficient to require submission of the schedule, or because the information is
presented in the consolidated financial statements or related notes thereto.

         The exhibits listed on the accompanying Exhibit Index are filed as part
of this Form 10-K.

(b)      REPORTS ON FORM 8-K:

         None.

                                       33
<PAGE>   34
                                   SIGNATURES


                  Pursuant to the requirements of Section 13 or 15(d) 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, in the
City of Las Vegas, State of Nevada, on March 30, 1998.

                                    Horseshoe Gaming, L.L.C.,
                                    a Delaware limited liability company

                                    By:      Horseshoe Gaming, Inc.,
                                             a Nevada corporation
                                    Its:     Manager


                                             By:      /s/ Jack B. Binion
                                                      -------------------------
                                                      Jack B. Binion
                                             Its:     Chief Executive
                                                      Officer and Chairman
                                                      of the Board of
                                                      Directors

                  Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
         SIGNATURE                           TITLE                                          DATE
<S>                                   <C>                                                 <C>
     /s/ Jack B. Binion               Chief Executive Officer                             March 30, 1998
---------------------------           and Chairman of the Board
        Jack B. Binion                of Directors (Principal
                                      Executive Officer) of
                                      Horseshoe Gaming, Inc.

                                      Chief Financial Officer                             March 30, 1998
  /s/ Walter J. Haybert               and Treasurer
---------------------------           (Principal Financial
     Walter J. Haybert                and Accounting Officer)
                                      of Horseshoe Gaming, Inc.
</TABLE>

                                       34
<PAGE>   35
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
  Exhibit                           Description                                                        Sequentially
   Number                           -----------                                                          Numbered
   ------                                                                                                --------
                                                                                                         Page
<S>         <C>                                                                                        <C>
   3.1*     Certificate of Formation of Horseshoe Gaming, L.L.C.

   3.2**    Limited Liability Company Agreement of Horseshoe Gaming, L.L.C., as
            amended to date.

   3.3*     Articles of Incorporation of Horseshoe Gaming, Inc. (formerly New
            Gaming Capital  Corporation), as amended to date.

   3.4*     Bylaws of Horseshoe Gaming, Inc. (formerly New Gaming Capital
            Corporation).

   3.5*     Certificate of Limited Partnership of Robinson Property Group
            Limited Partnership, as amended to date.

   3.6*     Second Amended and Restated Limited Partnership Agreement of
            Robinson Property Group Limited Partnership, as amended to date.

   3.7*     Articles of Incorporation of Horseshoe GP, Inc., as amended to date.

   3.8*     Bylaws of Horseshoe GP, Inc.

   4.3*     Exchange Offer Letters dated October 10, 1995 by and between
            Horseshoe Gaming, L.L.C., Horseshoe Riverboat Casinos, LLC,
            Horseshoe Entertainment and Robinson Property Group Limited
            Partnership, on the one hand, and each of the holders of 14.00%
            Senior Secured Notes due April 15, 2000 and/or 14.00% Subordinated
            Notes due April 15, 2001 issued by Horseshoe Riverboat Casinos, LLC
            on the other hand.

   4.7*     Mortgage, Security Agreement and Assignment of Leases and Rents
            executed by Horseshoe Entertainment, as Mortgagor, in favor of
            Horseshoe Gaming, L.L.C., as Mortgagee.

   4.8*     First Preferred Ship Mortgage on the whole of the Queen of the Red
            executed by Horseshoe Entertainment, as Owner and Mortgagor, in
            favor of Horseshoe Gaming, L.L.C., as Mortgagee.

   4.9*     Bossier City Security Agreement and Assignment thereof.

  4.10*     Deed of Trust Security Agreement and Assignment of Leases and Rents from
            Robinson Property Group Limited Partnership, as Grantor, to Rowan H.
            Taylor, Jr., an individual, as Trustee for the benefit of Horseshoe
            Gaming, L.L.C., and Hanwa American Corp., Yewdale Holdings Limited
            and debis Financial Services, Inc., as Beneficiaries.

  4.11*     First Preferred Ship Mortgage on the whole of the Horseshoe Casino
            and Hotel, Tunica executed by Robinson Property Group Limited
            Partnership, as Owner and Mortgagor, in favor of Horseshoe Gaming,
            L.L.C. and Chemical Trust Company of California, as Mortgagee.

  4.12*     Tunica County Security Agreement and Assignment thereof.

  4.14*     Note Assignment, dated as of October 10, 1995, from Horseshoe
            Gaming, L.L.C., in favor of the Holders of Senior Secured Credit
            Facility Notes due September 30, 1999, issued by Horseshoe Gaming,
            L.L.C. and United States Trust Company of New York for the ratable
            benefit of the Holders of 12.75% Senior Notes due September 30, 2000
            issued by Horseshoe Gaming, L.L.C.

  4.15*     Intercompany Senior Secured Note due September 30, 2000, executed by
            Horseshoe Entertainment in favor of Horseshoe Gaming, L.L.C.

  4.16*     Intercompany Senior Secured Note due September 30, 2000, executed by
            Robinson Property Group Limited Partnership in favor of Horseshoe
            Gaming, L.L.C.
</TABLE>
<PAGE>   36
<TABLE>
<CAPTION>
  Exhibit                           Description                                                        Sequentially
   Number                           -----------                                                          Numbered
   ------                                                                                                --------
<S>         <C>                                                                                        <C>
  4.20*     12.75% Senior Notes due 2000 Senior Note Purchase Agreement by and
            among Horseshoe Gaming, L.L.C., Robinson Property Group Limited
            Partnership, as Guarantor, and the Purchasers thereof.

  4.21*     Form of Senior Note of Horseshoe Gaming, L.L.C. 12.75% Senior Notes
            due 2000.

  4.22*     Indenture, dated as of October 10, 1995, by and among Horseshoe
            Gaming, L.L.C., U.S. Trust Company of California, N.A., as Trustee,
            and Robinson Property Group Limited Partnership, as Guarantor, with
            respect to the 12.75% Senior Notes due 2000.

  4.23*     Collateral Agency Agreement, dated as of October 6, 1995, by and
            among Horseshoe Gaming, L.L.C., Robinson Property Group Limited
            Partnership, B&O Development Limited Partnership, JBB Gaming
            Investments, L.L.C. (formerly Worldwide Gaming Investments, L.L.C.),
            and Jack Binion, as Grantors, the Purchasers of the 12.75% Senior
            Notes due 2000, and United States Trust Company of New York, as
            Collateral Agent.

  4.24*     Exchange and Registration Rights Agreement, dated as of October 10,
            1995, by and among Horseshoe Gaming, L.L.C., Robinson Property Group
            Limited Partnership, as Guarantor, and the Purchasers of the 12.75%
            Notes due 2000 issued under the Indenture.

  4.25*     Second Pledge Agreement, dated as of October 10, 1995, from Jack
            Binion, B&O Development Limited Partnership, and JBB Gaming
            Investments, L.L.C. (formerly Worldwide Gaming Investments, L.L.C.)
            in favor of United States Trust Company of New York, as Collateral
            Agent for the benefit of the Holders of 12.75% Senior Notes due
            September 30, 2100 issued by Horseshoe Gaming, L.L.C.

  4.26*     Second Pledge Agreement, dated as of October 10, 1995, from
            Horseshoe Gaming, L.L.C. in favor of United States Trust Company of
            New York, for the ratable benefit of the Holders of 12.75% Senior
            Notes due September 30, 2000 issued by Horseshoe Gaming, L.L.C.

  4.27*     Second Ship Mortgage on the whole of the Queen of the Red by
            Horseshoe Entertainment owner and mortgagor in favor of Horseshoe
            Gaming, L.L.C., as Mortgagee.

  4.28*     Bossier City Second Security Agreement and Assignment thereof.

  4.29*     Second Deed of Trust, Security Agreement and Assignment of Leases
            and Rents from Robinson Property Group Limited Partnership, as
            Grantor, to Rowan H. Taylor, Jr., an individual, as Trustee for the
            benefit of Horseshoe Gaming, L.L.C. and United States Trust Company
            of New York, as Collateral Agent for the Senior Note Holders, as
            beneficiaries.

  4.30*     Second Ship Mortgage on the whole of the Horseshoe Casino and Hotel,
            Tunica executed by Robinson Property Group Limited Partnership, as
            Owner and Mortgagor, in favor of Horseshoe Gaming, L.L.C. and United
            States Trust Company of New York, as Collateral Agent for the
            ratable benefit of the Senior Note Holders.

  4.31*     Tunica County Second Security Agreement and Assignment thereof.

  4.37+     Amendment No. 1 to Indenture, dated as of July 19, 1996, by and among Horseshoe
            Gaming, L.L.C., Robinson Property Group Limited Partnership and U.S.
            Trust Company of California, N.A., as Trustee under the Indenture.

  4.40+++   Intercompany Senior Secured Note due September 30, 2000 executed by
            Robinson Property Group Limited Partnership in favor of Horseshoe
            Gaming, L.L.C.

  4.41+++   Intercompany Senior Secured Note due September 30, 2000 executed by
            Horseshoe Entertainment in favor of Horseshoe Gaming, L.L.C.
</TABLE>
<PAGE>   37
<TABLE>
<CAPTION>
<S>         <C>
  4.42#     Purchase Agreement for 9-3/8% Series A Senior Subordinated Notes by and among
            Horseshoe Gaming, L.L.C. and Robinson Property Group Limited Partnership, as
            guarantor, and Wasserstein Perella Securities, Inc. as Initial Purchaser

  4.43#     Form of 9-3/8% Senior Subordinated Note due 2007 of Horseshoe Gaming, L.L.C.

  4.44#     Indenture, dated as of June 15, 1997, by and among Horseshoe Gaming, L.L.C., U.S.
            Trust Company of Texas, N.A. as Trustee, and Robinson Property Group Limited
            Partnership, as guarantor, with respect to the 9-3/8% Senior Subordinated Notes due
            2007.

  4.45#     Exchange and Registration Rights Agreement, dated as of June 25, 1997, by and
            among Horseshoe Gaming, L.L.C., Robinson Property Group Limited Partnership and
            Wasserstein Perella Securities, Inc.

  4.46#     Intercompany Senior Secured Note due June 15, 2007 executed by Robinson Property
            Group Limited Partnership in favor of Horseshoe Gaming, L.L.C.

  4.47#     Intercompany Senior Secured Note due June 15, 2007 executed by Horseshoe
            Entertainment in favor of Horseshoe Gaming, L.L.C.

  4.48###   Intercompany Senior Secured Note due June 15, 2000 executed by Robinson Property
            Group Limited Partnership in favor of Horseshoe Gaming, L.L.C.

  4.49###   Intercompany Senior Secured Note due June 15, 2000 executed by Horseshoe
            Entertainment in favor of Horseshoe Gaming, L.L.C.

  4.50###   Amended and Restated Credit Facility Agreement, dated as of November 12, 1997, by
            and among Horseshoe Gaming, L.L.C. and Canadian Imperial Bank of Commerce as agent
            for the lenders

  4.51###   Form of Revolving Note between Horseshoe Gaming, L.L.C. and Lender pursuant to the
            Amended and Restated Credit Facility Agreement.

  4.52###   Form of Swingline Note between Horseshoe Gaming, L.L.C. and Canadian Imperial Bank of
            Commerce pursuant to the Amended and Restated Credit Facility Agreement

  4.53###   Security Agreement made as of November 12, 1997 by the Company in favor of Canadian
            Imperial Bank of Commerce (the "Bank").

  4.54###   Guarantee and Security Agreement made by Horseshoe Gaming, Inc. as of November 12,
            1997 in favor of the Bank.

  4.55###   Guarantee and Security Agreement made by Horseshoe GP, Inc. as of November 12, 1997
            in favor of the Bank.

  4.56###   Amended and Restated Guarantee and Security Agreement made by Robinson Property
            Group LP as of November 12, 1997 in favor of the Bank.

  4.57###   Guarantee and Security Agreement made by New Gaming Capital Partnership as of
            November 12, 1997 in favor of the Bank.

  4.58###   Guarantee and Security Agreement made by Horseshoe Ventures as of November 12, 1997 in
            favor of the Bank.

  4.59###   Amended and Restated Note Assignment made by the Company as of November 12, 1997 in
            favor of the Bank.

  4.60###   Amended and Restated Pledge Agreement of the Company as of November 12, 1997 in favor
            of the Bank.

  4.61###   Amended and Restated Pledge Agreement of JBB Gaming Investments as of November 12, 1997
            in favor of the Bank.
</TABLE>
<PAGE>   38
<TABLE>
<CAPTION>
<S>         <C>
  4.62###   Amended and Restated Intercreditor Agreement dated as of November 12, 1997 by and
            between Horseshoe Gaming, L.L.C. and Canadian Imperial Bank of Commerce.

  10.1*     Employment Agreement dated January 1, 1996 by and between Horseshoe Gaming, Inc. and
            Paul Alanis.

  10.2**    Employment Agreement dated as of October 1, 1995 by and between Horseshoe Gaming, Inc.
            and Walter J. Haybert.

  10.3**    Assignment Agreement dated as of October 1, 1995 by and between Horseshoe Gaming,
            L.L.C. and Walter J. Haybert.

  10.4**    Employment Agreement dated as of October 1, 1995 by and between Horseshoe Gaming, Inc.
            and John J. Schreiber.

  10.5**    Assignment Agreement dated as of October 1, 1995 by and between Horseshoe Gaming,
            L.L.C. and John J. Schreiber.

  10.6**    Employment Agreement dated as of October 1, 1995 by and between Horseshoe Gaming, Inc.
            and John Michael Allen.

  10.7**    Assignment Agreement dated as of October 1, 1995 by and between Horseshoe Gaming,
            L.L.C. and John Michael Allen.

  10.8*     Consulting Agreement dated March 10, 1993 by and between Jack Binion and Koar
            International, Inc. (ultimately assigned to Horseshoe Gaming, Inc. and KII-Pasadena,
            Inc.)

  10.9*     Warrant to purchase 1,941,981 Horseshoe Gaming Units, dated as of October 10, 1995,
            issued to Hanwa American Corp.

 10.10*     Warrant to purchase 1,941,980 Horseshoe Gaming Units, dated as of October 10, 1995,
            issued to Yewdale Holdings Limited.

 10.11*     Warrant to purchase 1,566,629 Horseshoe Gaming Units, dated as of October 10, 1995,
            issued to Hanwa American Corp.

 10.12*     Warrant to purchase 1,566,630 Horseshoe Gaming Units, dated as of October 10, 1995,
            issued to Yewdale Holdings Limited.

 10.13**    Registration Rights Agreement dated as of October 10, 1995 by and between Horseshoe
            Gaming, L.L.C., on the one hand, and Yewdale Holdings Limited, Post Balanced Fund, L.P.,
            Capital Fund Foundation, Raymond Zimmerman, as Trustee for the Charles N. Mathewson
            Charitable Remainder Uni Trust, Hanwa American Corp., Onyx Partners, Inc., Alpine
            Associates, Janless Corp., Andrew Astrachan, and Donald Schupak, on the other hand.

 10.14*     Assignment and Purchase Agreement dated as of October 1, 1995 between Jack Binion and
            Horseshoe Gaming, L.L.C.

 10.15*     Promissory Note dated October 10, 1995 by Horseshoe Gaming, L.L.C.
            in favor of Jack B. Binion in the principal amount of $500,000.

 10.16*     Purchase Agreement dated as of October 1, 1995 between B&O
            Development Limited Partnership and Horseshoe Gaming, L.L.C.

 10.17*     Assignment Agreement dated as of October 1, 1995 between KR, Inc. and Horseshoe
            Ventures, L.L.C.

 10.18*     Promissory Note dated October 10, 1995 by Horseshoe Ventures,
            L.L.C., in favor of KR, Inc. in the principal amount of
            $4,769,016.47.

 10.19*     Option Agreement dated as of October 10, 1995 between Horseshoe
            Gaming, L.L.C., on the one hand, and Hanwa American Corp. and
            Yewdale Holdings Limited, on the other hand.
</TABLE>
<PAGE>   39
<TABLE>
<CAPTION>
<S>         <C>
 10.20*     Letter Agreement dated as of October 10, 1995 between Horseshoe Gaming, L.L.C. and
            Hanwa American Corp.

 10.21*     Letter Agreement dated as of October 10, 1995 between Horseshoe Gaming, L.L.C. and
            Yewdale Holdings Limited.

 10.22**    Purchase and Sale Agreement dated as of November 15, 1995 by and  between Frank
            Pernici and New Gaming Capital Partnership, with Horseshoe Gaming, L.L.C., as Guarantor.

 10.23*     Employment Agreement dated January 1, 1996 by and between Horseshoe Gaming, L.L.C. and
            Loren S. Ostrow.

 10.24*     401(k) Plan of Robinson Property Group Limited Partnership.

 10.25**    Limited Partnership Agreement of Horseshoe Entertainment, a Louisiana limited
            partnership, dated April 20th, 1993.

 10.26**    Second and Amended and Restated Limited Partnership Agreement of New Gaming Capital
            Partnership, a Nevada limited partnership, dated as of October 1, 1995.

 10.27**    Limited Liability Company Agreement of Horseshoe Ventures, L.L.C., a Delaware limited
            liability company, dated as of October 1, 1995.

 10.30**    Amendment No. 1 to Option Agreement, dated as of April 15, 1996, between Horseshoe
            Gaming, L.L.C., on the one hand, and Hanwa American Corp. and Yewdale Holdings
            Limited, on the other hand.

 10.32**    Agreement to Purchase and Sell Real Estate, dated March 13, 1996, by and between Le
            Bossier, L.L.C., as Seller, and Horseshoe Entertainment, as Buyer.

 10.33++    Amended Employment Agreement dated October 1, 1995 by and between Horseshoe Gaming,
            Inc. and John Michael Allen.

 10.34++    Employment Agreement dated July 1, 1996 by and between Horseshoe Gaming, Inc. and Gary
            Border.

 10.35++    Amended Employment Agreement dated October 1, 1995 by and between Horseshoe Gaming,
            Inc. and Walter J. Haybert.

 10.36++    Amended Employment Agreement dated October 1, 1995 by and between Horseshoe Gaming,
            Inc. and John J. Schreiber.

 10.37#     Second Amended and Restated Employment Agreement dated as of October 1, 1995 by and
            between Horseshoe Gaming, Inc. and John Michael Allen.

 10.38#     Second Amended and Restated Employment Agreement dated as of October 1, 1995 by and
            between Horseshoe Gaming, Inc. and Walter J. Haybert.

 10.39#     Second ,Amended and Restated Employment Agreement dated as of October 1, 1995, by  and
            between Horseshoe Gaming, Inc. and John J. Schreiber.

 10.40#     1997 Unit Option Plan of Horseshoe Gaming, L.L.C.

 10.41#     Unit Option Agreement dated as of February 1, 1997 by and between Horseshoe Gaming,
            L.L.C. and Larry Lepinski.

 10.42#     Agreement Between Owner and Contractor for the Construction of a Hotel between
            Horseshoe Entertainment and Manhattan Construction Company and Whitaker Construction
            Company  d.b.a.  Manhattan/Withtaker, a  Joint Venture.

 10.43#     Vessel Construction Agreement dated as of March 6, 1997 between Levac Shipyards, Inc.
            and Horseshoe Entertainment.
</TABLE>
<PAGE>   40
<TABLE>
<CAPTION>
<S>         <C>
 10.44#     Contract for Construction dated as of August 6, 1996 between
            Robinson Property Group Limited Partnership and Charles N. White
            Construction Company, together with Change Orders Numbered 1 through
            6.

 10.45##    Contribution and Sale Agreement dated as of August 26, 1997 by and
            between Lady Luck Vicksburg, Inc. and Horseshoe Gaming, L.L.C.

  21.1###   Subsidiaries of Horseshoe Gaming, L.L.C.

  27.1###   Financial Data Schedule-Horseshoe Gaming L.L.C. and Subsidiaries.
</TABLE>


-----------

*        Filed as an Exhibit to Registration Statement on Form S-4 (No.
         333-0214) filed on January 8, 1996.
**       Filed as an Exhibit to Amendment No. 1 to Registration Statement filed
         on April 26, 1996.
***      Filed as an Exhibit to Amendment No. 2 to Registration Statement filed
         on May 9, 1996.
+        Filed as an Exhibit to Form 10-Q for the Quarter Ended June 30, 1996,
         filed on August 13, 1996.
++       Filed as an Exhibit to Form 10-K for the Year Ended December 31, 1996,
         filed on March 31, 1997.
+++      Filed as an Exhibit to Form 10-Q for the Quarter Ended March 31, 1997,
         filed on May 7, 1997.
#        Filed as an Exhibit to Registration Statement on Form S-4 (No.
         333-33145) filed on August 7, 1997.
##       Filed as an Exhibit to Amendment No. 1 to Registration Statement filed
         on October 8, 1997.
###      Filed herewith.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

         No annual report or proxy material has been sent to security holders
during the fiscal year ended December 31, 1997.

<PAGE>   41
<TABLE>
<CAPTION>
                                      HORSESHOE GAMING, L.L.C. AND SUBSIDIARIES

                                            INDEX TO FINANCIAL STATEMENTS


Horseshoe Gaming, L.L.C. and Subsidiaries                                                                      Page
-----------------------------------------                                                                      ----
<S>                                                                                                            <C>
Report of Independent Public Accountants                                                                        F-2
Consolidated Financial Statements:
    Balance sheets as of December 31, 1997 and 1996                                                             F-3
    Statements of operations for the years ended December 31, 1997, 1996 and 1995                               F-4
    Statements of members' equity for the years ended December 31, 1997, 1996 and 1995                          F-5
    Statements of cash flows for the years ended December 31, 1997, 1996 and 1995                               F-6
    Notes to consolidated financial statements                                                                  F-7

New Gaming Capital Partnership and Subsidiary

Report of Independent Public Accountants                                                                       F-20
Consolidated Financial Statements:
    Balance sheets as of December 31, 1997 and 1996                                                            F-21
    Statements of operations for the years ended December 31, 1997, 1996 and 1995                              F-22
    Statements of partners' capital for the years ended December 31, 1997, 1996 and 1995                       F-23
    Statements of cash flows for the years ended December 31, 1997, 1996 and 1995                              F-24
    Notes to consolidated financial statements                                                                 F-25

Robinson Property Group, L.P.

Report of Independent Public Accountants                                                                       F-33
Financial Statements:
    Balance sheets as of December 31, 1997 and 1996                                                            F-34
    Statements of operations for the years ended December 31, 1997, 1996 and 1995                              F-35
    Statements of partners' capital for the years ended December 31, 1997, 1996 and 1995                       F-36
    Statements of cash flows for the years ended December 31, 1997, 1996 and 1995                              F-37
    Notes to financial statements                                                                              F-38
</TABLE>


                                       F-1
<PAGE>   42
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To Horseshoe Gaming, L.L.C.:

We have audited the accompanying consolidated balance sheets of Horseshoe
Gaming, L.L.C. (a Delaware limited liability company) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, members' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Horseshoe Gaming, L.L.C. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.



                                                             ARTHUR ANDERSEN LLP

Las Vegas, Nevada,
    February 13, 1998.


                                       F-2
<PAGE>   43
<TABLE>
<CAPTION>
                             HORSESHOE GAMING, L.L.C. AND SUBSIDIARIES
                                    CONSOLIDATED BALANCE SHEETS
                                           (IN THOUSANDS)

                                                                             December 31,
                                                                    -------------------------------
                                                                      1997                  1996
                                                                    ---------             ---------
                                               ASSETS
<S>                                                                 <C>                   <C>
Current Assets:
    Cash and cash equivalents                                       $  48,710             $  79,159
    Accounts receivable, net of allowance for doubtful
       accounts of $8,965 and $3,452                                   13,518                 8,026
    Inventories                                                         2,958                 1,435
    Prepaid expenses and other                                          2,102                 1,639
                                                                    ---------             ---------
                 Total current assets                                  67,288                90,259
                                                                    ---------             ---------

Property and Equipment:
    Land                                                               14,688                10,225
    Buildings, boat, barge and improvements                           276,936               121,807
    Furniture, fixtures and equipment                                  68,194                41,572
    Less:  accumulated depreciation                                   (42,769)              (26,493)
                                                                    ---------             ---------
                                                                      317,049               147,111
    Construction in progress                                           67,428                38,644
                                                                    ---------             ---------
                 Net property and equipment                           384,477               185,755
                                                                    ---------             ---------

Other Assets:
    Escrow funds                                                           --                42,235
    Goodwill, net                                                      37,960                39,226
    Other                                                              21,831                20,122
                                                                    ---------             ---------
                                                                    $ 511,556             $ 377,597

                                  LIABILITIES AND MEMBERS' EQUITY
Current Liabilities:
    Current maturities of long-term debt                            $   1,674             $  11,060
    Accounts payable                                                    8,784                 3,184
    Construction payables                                              27,984                14,106
    Accrued expenses and other                                         46,601                23,751
                                                                    ---------             ---------
                 Total current liabilities                             85,043                52,101

Long-term Debt, less current maturities                               311,601               221,648

Minority Interest                                                      (1,317)                 (827)

Commitments and Contingencies (Notes 7 and 8)

Redeemable Ownership Interests, net of deferred
    compensation of $1,954 and $3,033                                  51,634                24,893

Members' Equity                                                        64,595                79,782
                                                                    ---------             ---------
                                                                    $ 511,556             $ 377,597


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


                                                F-3
</TABLE>
<PAGE>   44
<TABLE>
<CAPTION>
                                    HORSESHOE GAMING, L.L.C. AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF OPERATIONS
                                                 (IN THOUSANDS)

                                                                         Year Ended December 31,
                                                             1997                  1996                  1995
                                                           ---------             ---------             ---------
<S>                                                        <C>                   <C>                   <C>
Revenues:
    Casino                                                 $ 321,236             $ 317,479             $ 283,402
    Food and beverage                                         29,990                26,947                24,299
    Hotel                                                      8,773                 7,919                 7,289
    Retail and other                                           4,305                 4,425                 4,092
                                                           ---------             ---------             ---------
                                                             364,304               356,770               319,082
    Promotional allowances                                   (29,211)              (25,033)              (20,697)
                                                           ---------             ---------             ---------
       Net revenues                                          335,093               331,737               298,385
                                                           ---------             ---------             ---------

Expenses:
    Casino                                                   175,394               162,408               133,299
    Food and beverage                                         10,981                12,317                12,741
    Hotel                                                      7,877                 6,798                 5,662
    Retail and other                                           1,425                 1,359                 1,728
    General and administrative                                43,600                45,351                42,923
    Development                                                1,653                 6,629                 4,387
    Depreciation and amortization                             19,411                15,989                12,545
    Preopening                                                 2,964                    --                 7,021
                                                           ---------             ---------             ---------
       Total expenses                                        263,305               250,851               220,306
                                                           ---------             ---------             ---------

Operating Profit Before Corporate Expenses                    71,788                80,886                78,079
    Corporate expenses                                        22,490                10,254                 3,375
                                                           ---------             ---------             ---------

Operating Income                                              49,298                70,632                74,704

Other Income (Expense):
    Interest expense                                         (20,792)              (28,090)              (20,188)
    Interest and other income                                  4,996                 6,126                 1,453
    Other, net                                                  (429)                  154                    --
    Minority interest in income of subsidiaries                 (420)               (1,861)               (8,850)
                                                           ---------             ---------             ---------

Income Before Extraordinary
    Loss on Early Retirement of Debt                          32,653                46,961                47,119

Extraordinary Loss on Early Retirement of Debt                (5,243)                   --                (7,179)
                                                           ---------             ---------             ---------

Net Income                                                 $  27,410             $  46,961             $  39,940
                                                           =========             =========             =========

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


                                                      F-4
</TABLE>
<PAGE>   45
<TABLE>
<CAPTION>
                                      HORSESHOE GAMING, L.L.C. AND SUBSIDIARIES
                                      CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
                                     YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                                    (IN THOUSANDS)


                                                                           Members'         Contributions
                                                                            Equity         Receivable          Total
                                                                           --------         --------         --------
<S>                                                                        <C>             <C>              <C>
Balance at December 31, 1994                                               $  3,633         $     --         $  3,633

Contributions                                                                 1,273           (1,150)             123
Distributions:
    Cash                                                                    (21,222)              --          (21,222)
    Payable                                                                  (1,857)              --           (1,857)
Increase in redeemable ownership interests                                  (13,963)              --          (13,963)
Capital accounts of minority interests purchased                              4,543               --            4,543
Step-up in basis of assets due to purchase
    of minority interests                                                    41,755             (205)          41,550
Net income                                                                   39,940               --           39,940
                                                                           --------         --------         --------

Balance at December 31, 1995                                                 54,102           (1,355)          52,747

Collection of contributions receivable                                           --            1,355            1,355
Cash distributions                                                          (18,853)              --          (18,853)
Increase in redeemable ownership interests                                   (2,428)              --           (2,428)
Net income                                                                   46,961               --           46,961
                                                                           --------         --------         --------

Balance at December 31, 1996                                                 79,782               --           79,782

Distributions:
    Cash                                                                    (11,056)              --          (11,056)
    Payable                                                                 (15,000)              --          (15,000)
Increase in redeemable ownership interests                                  (16,541)              --          (16,541)
Net income                                                                   27,410               --           27,410
                                                                           --------         --------         --------

Balance at December 31, 1997                                               $ 64,595         $     --         $ 64,595
                                                                           ========         ========         ========

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


                                                         F-5
</TABLE>
<PAGE>   46
<TABLE>
<CAPTION>
                                         HORSESHOE GAMING, L.L.C. AND SUBSIDIARIES
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (IN THOUSANDS)

                                                                                      Year Ended December 31,
                                                                         1997                  1996                  1995
                                                                      ---------             ---------             ---------
<S>                                                                   <C>                   <C>                   <C>
Cash flows from operating activities:
    Net income                                                        $  27,410             $  46,961             $  39,940
    Adjustments to reconcile net income to
       net cash provided by operating activities:
          Minority interest in income of subsidiaries                       420                 1,861                 8,850
          Depreciation and amortization                                  19,411                15,989                12,545
          Amortization of debt discount,
              deferred finance charges and other                          2,313                 3,032                 2,849
          Loss on disposal of land and other assets                         389                 1,011                    --
          Provision for doubtful accounts                                 7,556                 4,388                 2,186
          Increase in redeemable ownership
              interests                                                  15,066                 4,546                 6,003
          Extraordinary loss on early retirement of debt                  5,243                    --                 7,179
          Preopening expenses                                                --                    --                 3,819
          Net change in assets and liabilities                           (6,482)               (8,390)                7,746
                                                                      ---------             ---------             ---------
                 Net cash provided by operating activities               71,326                69,398                91,117
                                                                      ---------             ---------             ---------

Cash flows from investing activities:
    Purchases of property and equipment                                (215,576)              (58,824)              (18,986)
    Increase (decrease) in construction payables                         13,879                10,906                   (84)
    Proceeds from sale of land                                               --                 1,400                    --
    Purchase of land held for sale                                           --                    --                (1,344)
    Net decrease (increase) in escrow funds                              42,235               (10,919)              (31,316)
    Net increase in other assets                                         (1,717)               (8,024)               (6,588)
                                                                      ---------             ---------             ---------
                 Net cash used in investing activities                 (161,179)              (65,461)              (58,318)
                                                                      ---------             ---------             ---------

Cash flows from financing activities:
    Proceeds from debt and warrants                                     175,438                49,073               200,772
    Payments on debt                                                    (97,877)              (15,547)             (149,879)
    Capital contributions                                                    --                    --                   123
    Capital distributions                                               (11,056)              (20,710)              (21,222)
    Contributions from minority holders                                      --                    --                   600
    Distributions to minority holders                                      (910)               (1,560)               (6,069)
    Deferred interest payable                                                --                    --                (2,467)
    Debt issue costs and commitment fees                                 (6,191)               (1,575)               (7,700)
                                                                      ---------             ---------             ---------
                 Net cash provided by financing activities               59,404                 9,681                14,158
                                                                      ---------             ---------             ---------

Net change in cash and cash equivalents                                 (30,449)               13,618                46,957
Cash and cash equivalents, beginning of period                           79,159                65,541                18,584
                                                                      ---------             ---------             ---------
Cash and cash equivalents, end of period                              $  48,710             $  79,159             $  65,541
                                                                      =========             =========             =========

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


                                                            F-6
</TABLE>
<PAGE>   47
                    HORSESHOE GAMING, L.L.C. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.      ORGANIZATION AND BASIS OF PRESENTATION

General

Horseshoe Gaming, L.L.C. (the "Company") was formed in Delaware in August 1995
to acquire, through a roll-up transaction effective October 1, 1995, entities
under the control of Mr. Jack B. Binion ("Mr. Binion"), which conduct gaming,
hotel and other related operations in Bossier City, Louisiana, and Tunica
County, Mississippi, and are actively involved in efforts to develop gaming
operations in new jurisdictions. Because of the integrated nature of these
operations, the Company is considered to be engaged in one industry segment. A
description of each entity is as follows:

-        New Gaming Capital Partnership ("NGCP") is a Nevada limited partnership
         which was formed on February 4, 1993. NGCP is 100% owned by the Company
         and its subsidiary Horseshoe GP, Inc. As of December 31, 1997 and 1996,
         NGCP owned 91.92% of Horseshoe Entertainment, L.P. ("HE"), a Louisiana
         limited partnership which owns and operates the Horseshoe Bossier City
         (see Note 8).

-        Robinson Property Group, L.P. ("RPG") is a Mississippi limited
         partnership which was formed on June 7, 1993. RPG owns and operates the
         Horseshoe Casino Center located in Tunica County, Mississippi, and is
         100% owned by the Company and its subsidiary Horseshoe GP, Inc.

-        Horseshoe Ventures, L.L.C. ("Horseshoe Ventures") is a Delaware limited
         liability company which was formed in August 1995 to pursue the
         development of casinos in new jurisdictions and is 80% owned and
         managed by the Company.

NGCP and RPG

The Company obtained its ownership interest in NGCP and RPG by exchanging
ownership interests in the Company for partnership interests in NGCP and RPG.
The exchange of ownership interests between the Company and Mr. Binion and
certain affiliates of Mr. Binion has been accounted for at historical cost
similar to that in pooling of interests accounting. On the effective date of the
roll-up transaction, Mr. Binion and certain affiliates of Mr. Binion owned 80.0%
and 82.7% of NGCP and RPG, respectively. The exchange for the remaining
partnership interests of NGCP and RPG, other than ownership interests issued
pursuant to employee compensation arrangements (see Note 7), have been accounted
for as a purchase of minority interests based on fair value as determined by an
independent appraisal. The total cost of the minority interests in NGCP and RPG
acquired by the Company, based on the fair value of the ownership interests
exchanged, was $17,729,000 and $24,026,000, respectively, which has been
allocated as follows (in thousands):

<TABLE>
<CAPTION>
                                                                  NGCP              RPG            Total
                                                                 -------          -------          -------
<S>                                                              <C>              <C>              <C>
                  Land                                           $   149          $ 2,231          $ 2,380
                  Gaming licenses                                    154               76              230
                  Goodwill                                        17,426           21,514           38,940
                  Contribution receivable                             --              205              205
                                                                 -------          -------          -------
                       Total                                     $17,729          $24,026          $41,755
                                                                 =======          =======          =======
</TABLE>



                                      F-7
<PAGE>   48
1 ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)

Gaming licenses are amortized over the remaining term of each license, which is
approximately two and one-half years for NGCP and approximately twelve months
for RPG. Goodwill is amortized on a straight-line basis over 25 years, which
management estimates is the related benefit period (see discussion of the
Company's accounting policy for long-lived assets below). Management regularly
evaluates whether or not the future undiscounted cash flows of NGCP and RPG are
sufficient to recover the carrying amount of the goodwill associated with each
entity. Additionally, management continually monitors such factors as the status
of new or proposed legislation, the competitive environment and the general
economic conditions of the markets in which it operates. If the estimated future
undiscounted cash flows are not sufficient to recover the carrying amount of
goodwill and, accordingly, an impairment has occurred, management intends to
write down the carrying amount of goodwill to its estimated fair value based on
discounted cash flows. The amount of amortization expense recorded for the years
ended December 31, 1997 and 1996 and for the three months in 1995 following the
roll-up transaction was $1,624,000, $1,668,000 and $418,000, respectively.

The financial statements for NGCP and RPG are consolidated for all periods
presented. Prior to the roll-up transaction, the ownership interests not owned
by Mr. Binion and certain affiliates of Mr. Binion, other than ownership
interests issued pursuant to employee compensation arrangements (see Note 7),
are included in minority interests in the accompanying consolidated financial
statements. Such minority interests represented 15.4% of NGCP and 15.1% of RPG
for all periods prior to the roll-up transaction. Subsequent to October 1, 1995,
minority interests represent the limited partners of HE, which owned 11% of HE
at the time of the roll-up transaction and 8.08% at December 31, 1997 and 1996
(see Note 8).

Horseshoe Ventures

The Company and JBB Gaming Investments, L.L.C. ("JBB"), a Delaware limited
liability company owned by Mr. Binion and an affiliate of Mr. Binion, formed
Horseshoe Ventures to pursue the development of casinos in new jurisdictions.
The Company is the manager of Horseshoe Ventures and contributed a note for
$400,000, plus a commitment to provide future financing, in exchange for an 80%
membership interest. The note was paid in full on October 26, 1995. JBB
contributed $100,000 in cash in exchange for a 20% membership interest.
Horseshoe Ventures reimbursed Mr. Binion for the total costs and expenses
incurred pursuing the development of casinos in new jurisdictions in the form of
a note for $4,269,000, which was paid in full on October 26, 1995. Since these
costs and expenses were reimbursed to Mr. Binion, such amounts are included in
the accompanying consolidated financial statements as if they were incurred by
the Company and its subsidiaries. The amount of Horseshoe Ventures' net loss,
which is included in development expenses in the accompanying consolidated
statements of operations, was $1,558,000, $2,183,000 and $2,663,000 for the
years ended December 31, 1997, 1996 and 1995, respectively. There is no minority
interest in these losses reflected in the accompanying consolidated statements
of operations, because the Company funded 100% of such losses and is obligated
to fund 100% of future losses.



                                      F-8
<PAGE>   49

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
all of its subsidiaries (see Note 1), since the Company either holds more than a
50% ownership interest or has the ability to control such subsidiaries in its
capacity as manager. All significant intercompany accounts and transactions have
been eliminated.

Cash and Cash Equivalents

Cash and cash equivalents include commercial paper, amounts held in mutual funds
and other investments with original maturities of 90 days or less when
purchased.

Inventories

Inventories are stated at the lower of cost, as determined on a first-in,
first-out basis, or market value and consist primarily of food, beverage, retail
merchandise, kitchen smallwares and employee wardrobe.

Property and Equipment

Property and equipment are stated at cost. The costs of normal repairs and
maintenance are expensed as incurred while major expenditures that extend the
useful lives of assets are capitalized.

Depreciation is provided on the straight-line basis over the estimated useful
lives as follows:

        Buildings, boat, barge and improvements             15 to 30 years
        Furniture, fixtures and equipment                    3 to 10 years

Capitalized Interest

The Company capitalizes interest for associated borrowing costs of major
construction projects. Capitalization of interest ceases when the asset is
substantially complete and ready for its intended use. Interest capitalized
during the years ended December 31, 1997, 1996 and 1995 was $11,191,000,
$1,272,000 and $651,000, respectively.

Deferred Finance Charges

Deferred finance charges, which are included in other assets, consists of fees
and expenses incurred to obtain the Company's debt. The deferred finance charges
are being amortized over the term of the debt using the effective interest
method (see Note 5).

Casino Revenues

In accordance with industry practice, casino revenues represent the net win from
gaming activities, which is the difference between gaming wins and losses.



                                      F-9
<PAGE>   50

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Casino Promotional Allowances

Casino promotional allowances consist primarily of the retail value of
complimentary food and beverage, rooms and other services furnished to guests
without charge. Such amounts are included in gross revenues and deducted as
promotional allowances. The estimated costs of providing such complimentary
services, which are substantially included in casino department expenses, are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                             1997             1996             1995
                                           -------          -------          -------
<S>                                        <C>              <C>              <C>
         Food and beverage                 $24,967          $22,055          $17,165
         Hotel                               3,360            3,034            2,665
         Other operating expenses              664              619              486
                                           -------          -------          -------
                                           $28,991          $25,708          $20,316
                                           =======          =======          =======
</TABLE>

Advertising Costs

The Company expenses all costs associated with advertising as incurred, and such
amounts are included in general and administrative expenses in the accompanying
consolidated statements of operations.

Development and Preopening Expenses

Until all necessary approvals to proceed with the development of a new casino
project are obtained from the appropriate regulatory authorities, the related
development costs are expensed as incurred. Preopening costs incurred after the
receipt of necessary approvals are deferred as incurred and expensed upon the
opening of the related casino. Preopening costs of $7,021,000 were expensed in
connection with the opening of the Horseshoe Casino Center in February 1995.
Preopening costs incurred during the expansion and development of existing
casino properties are expensed as incurred. Total preopening costs of $2,964,000
were expensed during 1997 in conjunction with the expansion efforts at the
Horseshoe Bossier City and Horseshoe Casino Center.

Corporate Expenses

The Company is managed by Horseshoe Gaming, Inc. ("HGI"), which owns
approximately 30.6% of the Company and is owned by Mr. Binion and certain
affiliates of Mr. Binion. Mr. Binion is the Chief Executive Officer of HGI. The
Company reimburses HGI for expenses associated with the management of the
Company but does not compensate HGI for services as manager. HGI's sole purpose
is to manage the Company; accordingly, all expenses incurred by HGI are charged
to the Company as corporate expenses and are reflected in the accompanying
consolidated statements of operations in the period such expenses are incurred
by HGI.

Included in corporate expenses for the years ended December 31, 1997, 1996 and
for the three months in 1995 following the roll-up transaction are normal
operating expenses of HGI. Also included in corporate expenses is the non-cash
compensation expenses related to ownership interest in the Company issued to
employees pursuant to employment agreements (see Note 7).



                                      F-10
<PAGE>   51
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes

The Company is organized as a limited liability company under Delaware laws. The
Internal Revenue Service will classify a limited liability company as a
partnership for federal income tax purposes if the limited liability company
lacks certain characteristics of corporations. Management believes that the
Company lacks the corporate characteristics and will be classified as a
partnership for federal income tax purposes. Accordingly, no provision is made
in the accounts of the Company for federal income taxes, as such taxes are
liabilities of the members. The Company's income tax return and the amount of
allocable taxable income are subject to examination by federal taxing
authorities. If an examination results in a change to taxable income, the income
tax reported by the members may also change. The tax bases in the Company's
assets and liabilities were in excess of the amounts reported in the
accompanying consolidated financial statements by $1,613,000 and $7,754,000 at
December 31, 1997 and 1996, respectively. Taxable income was in excess of net
income reported in the accompanying consolidated statements of operations for
all periods presented.

Redeemable Ownership Interests

The Company is obligated to repurchase ownership interests held by certain
employees in the event of their termination at a price equal to the then fair
market value, based on an independent appraisal. The fair value of such
ownership interests is reported outside of members' equity in the accompanying
consolidated balance sheets for all periods presented. The ownership interests
issued to employees pursuant to employment contracts is recorded as deferred
compensation in the accompanying consolidated balance sheets and expensed at
fair market value over the vesting period (see Note 7).

In addition, certain individuals obtained ownership interests in the Company or
its subsidiaries prior to becoming employees of the Company. Upon becoming an
employee, each individual entered into an employment agreement which includes,
among other things, a put/call provision in the event of the employee's
termination at a price equal to the then fair market value, based on an
independent appraisal. These individuals became employees of the Company between
October 1, 1995, and January 1, 1996, and held ownership interests in the
Company totaling 5.1% as of December 31, 1997 and 1996. The fair value of these
ownership interests of $32,931,000 and $16,391,000 has also been classified
outside of members' equity in the accompanying consolidated balance sheets as of
December 31, 1997 and 1996, respectively.

Capital Distributions

The Company's debt agreements contain covenants that limit capital distributions
to the members. Capital distributions to the members are to be based upon
taxable income and the federal and state corporate statutory tax rates in
effect. Such distributions are to be paid quarterly based upon estimated taxable
income. After filing by the Company and its subsidiaries of their annual tax
returns, each member is to reimburse the Company for overpayments of capital
distributions or the Company is to withhold such amounts from future
distributions to the members. On December 31, 1997, the Company declared a
distribution of $15,000,000, which is included in accrued expenses in the
accompanying consolidated balance sheets. The dividend was paid in February
1998.

                                      F-11
<PAGE>   52
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," management continually evaluates whether events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable. Based on management's evaluations, no significant impairments of
long-lived assets have occurred during the three years ended December 31, 1997.

Use of Estimates

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.

Reclassifications

Certain reclassifications were made to prior period financial statements to
conform to current year presentation.

3.      CONSOLIDATED STATEMENTS OF CASH FLOWS

Non-cash investing and financing activities consist of the following:

        Cash payments made for interest, excluding amounts capitalized, totaled
        $29,524,000, $24,799,000 and $19,848,000 for the years ended December
        31, 1997, 1996 and 1995, respectively.

        Distributions totaling $15,000,000, which were accrued at December 31,
        1997 were paid in February 1998.
        Purchases of property and equipment financed through payables totaled
        $17,817,000 for the year ended December 31, 1995.

        A capital contribution of $1,150,000 was made through the issuance of a
        contribution receivable during the year ended December 31, 1995. The
        Company received land in satisfaction of the receivable during 1996.

        Distributions totaling $1,857,000, which were accrued at December 31,
        1995, were paid during 1996. Additionally, in 1995, the Company recorded
        a payable for the purchase of an employee's ownership in the Company in
        the amount of $3,306,000, of which $1,653,000 was paid during 1996 and
        1997.



                                      F-12
<PAGE>   53

3.      CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

The net change in assets and liabilities consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                               1997               1996               1995
                                             --------           --------           --------
<S>                                          <C>                <C>                <C>
(Increase) decrease in assets:
    Accounts receivable                      $(13,091)          $ (7,207)          $ (6,327)
    Inventories                                (1,523)                46               (142)
    Prepaid expenses and other                   (493)              (281)              (335)
Increase (decrease) in liabilities:
    Accounts payable                            5,600               (726)               (24)
    Accrued expenses and other                  3,025               (222)            14,574
                                             --------           --------           --------
                                             $ (6,482)          $ (8,390)          $  7,746
                                             ========           ========           ========
</TABLE>

4.      ACCRUED EXPENSES AND OTHER

Accrued expenses and other consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                    December 31,
                                                              1997             1996
                                                             -------          -------
<S>                                                          <C>              <C>
         Payroll and related tax liabilities                 $ 8,814          $ 2,811
         Vacation and other employee benefits                  3,050            3,969
         Accrued interest                                      5,165            5,283
         Gaming, sales, use and property taxes                 2,542            2,400
         Progressive slot and slot club liabilities            4,681            4,325
         Distributions payable                                15,000               --
         Other accrued expenses                                7,349            4,963
                                                             -------          -------
                                                             $46,601          $23,751
                                                             =======          =======
</TABLE>

5.      LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
                                                                                                          December 31,
                                                                                                    -----------------------
                                                                                                      1997           1996
                                                                                                    --------       --------
                                                                                                         (in thousands)
<S>                                                                                                 <C>            <C>
                 Revolving Senior Secured Credit Facility, secured by substantially all
                    of the assets of the Company, $130 million borrowing capacity, due
                    June 15, 2000, interest at 200
                    basis points above the Eurodollar rate (7.91%)                                  $ 15,100       $     --

                 9.38% Senior Subordinated Notes (effective interest of
                    9.39%), due June 15, 2007, net of unamortized
                    discount of $152,000                                                             159,848             --

                 12.75% Senior Notes (effective interest rate of 13.01%),
                    due September 30, 2000, net of unamortized
                    discount of $1,522,000 and $2,272,000                                            135,478        147,728
</TABLE>



                                      F-13
<PAGE>   54
5.      LONG-TERM DEBT (CONTINUED)

<TABLE>
<CAPTION>
                                                                                          December 31,
                                                                                     ----------------------
                                                                                        1997         1996
                                                                                     ---------    ---------
                                                                                          (in thousands)
<S>                                                                                  <C>          <C>
         Senior Secured Credit Facility; variable interest at LIBOR plus 3%
            (weighted average interest rate of 9.68% during
            1996); retired June 1997 (see below)                                            --       79,303

         Notes Payable, interest ranging from 6% to
            8.25%, due in various installments through
            January 1999                                                                 2,849        5,677
                                                                                     ---------    ---------
                                                                                       313,275      232,708
         Less:  current maturities                                                      (1,674)     (11,060)
                                                                                     ---------    ---------
                                                                                     $ 311,601    $ 221,648
                                                                                     =========    =========
</TABLE>

In April 1994, Horseshoe Riverboat Casinos, LLC ("HRC"), which was owned 50% by
HE and 50% by RPG, completed a private placement of debt securities which were
used for the construction of the Horseshoe Bossier City and the Horseshoe Casino
Center. The total amount of Senior Notes and Subordinated Notes (collectively,
the "Old Notes") issued by HRC was $38,000,000 and $32,000,000, respectively,
and was loaned to HE and RPG on identical terms. These notes were retired in
October 1995 with the proceeds from the New Senior Notes and Senior Secured
Credit Facility (see discussion below).

On October 10, 1995, the Company retired the Old Notes, senior vessel financing
and certain notes payable to affiliates with a portion of the proceeds from a
$150,000,000 Senior Secured Credit Facility due September 30, 1999 (the "Credit
Facility") and a private placement of $100,000,000 of 12.75% senior notes (with
an effective interest rate of approximately 13.01%) due September 30, 2000 (the
"New Senior Notes"). Senior equipment financing was retired in December 1995. An
extraordinary loss on early retirement of debt of $7,179,000 was recognized in
1995 for prepayment penalties and the write-off of the unamortized discounts and
deferred finance charges.

The New Senior Notes were issued at 98% of par value and included warrants to
purchase an additional $50,000,000 of New Senior Notes at a price of 98.15% of
par value. These warrants were exercised on April 10, 1996, and the Company
received proceeds of $49,073,000. The New Senior Notes and the related interest
are guaranteed unconditionally by RPG and are secured by a second pledge of the
Company's ownership interest in all present and future subsidiaries with the
exception of NGCP's ownership interest in HE. The New Senior Notes are also
secured by (i) a second lien position on substantially all of the assets of
Horseshoe Casino Center other than certain gaming equipment; (ii) a second lien
position on all intercompany notes received by the Company from its
subsidiaries, in each case secured by a second lien on the casino and real
property of each subsidiary; and (iii) a second pledge of the minority interest
in all present and future subsidiaries owned by Mr. Binion and certain
affiliates of Mr. Binion.

The New Senior Notes are not redeemable prior to September 30, 1999, except
prior to September 30, 1998, the Company may redeem up to 35% of the aggregate
principal amount at 110% of the par value with the net cash proceeds of a public
offering of the Company's stock.

                                      F-14
<PAGE>   55
5.      LONG-TERM DEBT (CONTINUED)

On June 15, 1997, the Company issued $160,000,000 of 9 3/8% Senior Subordinated
Notes ("Subordinated Notes") due June 15, 2007. The Subordinated Notes were
issued at 99.899% of par value and have an effective interest rate of 9.39%. The
Subordinated Notes are unsecured and require semi-annual interest payments on
June 15 and December 15. A portion of the proceeds were used to retire the
Credit Facility, as well as, purchase $13 million in New Senior Notes. An
extraordinary loss on early retirement of debt of $5,243,000 was recognized in
1997 for prepayment penalties and premium, and the write-off of unamortized
discounts and deferred finance charges. The remaining proceeds were used to fund
a portion of the expansion of the Company's existing facilities.

On November 12, 1997, the Company finalized a restructuring of its Senior
Secured Credit Facility. Pursuant to the terms of the amended and restated loan
agreement, CIBC Wood Gundy Securities Corp. has agreed to provide a $130 million
Senior Secured Revolving Credit Facility (the "Amended and Restated Credit
Facility"). As of December 31, 1997, the Company had drawn $15,100,000 under the
Amended and Restated Credit Facility. An additional $45,000,000 had been
borrowed as of February 13, 1998. The borrowings under the Amended and Restated
Credit Facility has enabled the Company to fund the completion of the expansion
of the Bossier City and Tunica properties.

The Amended and Restated Credit Facility and the related interest are guaranteed
unconditionally by RPG and are secured by a first pledge of the Company's
ownership interest in all present and future subsidiaries with the exception of
NGCP's ownership interest in HE. The Amended and Restated Credit Facility is
also secured by (i) a first lien position on substantially all of the assets of
Horseshoe Casino Center other than certain gaming equipment; (ii) a first lien
position on all intercompany notes received by the Company from its
subsidiaries, in each case secured by a first lien on the casino and real
property of each subsidiary; and (iii) a first pledge of the minority interest
in all present and future subsidiaries owned by Mr. Binion and certain
affiliates of Mr. Binion.

The New Senior Notes and the Amended and Restated Credit Facility contain
covenants that, among other things, (i) limit the amount of additional
indebtedness which may be incurred by the Company and its subsidiaries; (ii)
prohibit any consolidation or merger of the Company or its subsidiaries with an
affiliate or third party, any sale of substantially all of the Company or its
subsidiaries' assets, or any payment of subordinated indebtedness prior to its
scheduled maturity; and (iii) require the Company and its subsidiaries to invest
excess funds in cash equivalents, as defined, and government securities with a
maturity of one year or less.

As of December 31, 1997 the five year maturities for long-term debt are
$1,674,000 (1998), $1,175,000 (1999), $152,100,000 (2000), $0 (2001) and $0
(2002).

As of December 31, 1997 and December 31, 1996 the fair market value of the New
Senior Notes, based on quoted market prices was $151,385,000 and $162,750,000,
respectively. As of December 31, 1997, the fair market value of the Senior
Subordinated Notes, based on quoted market prices was $168,000,000. The fair
market value of the Company's other long-term debt approximated its carrying
value as of December 31, 1997 and 1996 based on the borrowing rates currently
available for debt with similar terms.



                                      F-15
<PAGE>   56
6.    TRANSACTIONS WITH RELATED PARTIES

Mr. Binion has provided services pursuing, developing and managing gaming
operations for the Company and its subsidiaries. Mr. Binion has not been
compensated for his services in the past nor is there an existing employment
agreement providing for Mr. Binion to receive compensation for his services in
the future; however, the Company and Mr. Binion may enter into such an
employment agreement during 1998.

KII-Pasadena, Inc., which is owned by two individuals that became executive
officers of HGI on January 1, 1996, has acted on behalf of the Company as
developer for the Horseshoe Bossier City and the Horseshoe Casino Center and has
provided consulting services to the Company related to pursuing new gaming
developments. Total fees paid to KII-Pasadena, Inc. for such services were
$660,000 for the year ended December 31, 1995. Additionally, one of the
placement agents for the New Senior Notes and Credit Facility discussed in Note
5 agreed to pay the principals of KII-Pasadena, Inc. a finders' fee equal to 30%
of the net fees, commissions and other compensation received, or to be received,
by the placement agent for its services related to these financing transactions.
The total fees paid to KII-Pasadena, Inc., or its principals, by the placement
agent was $0, $260,000 and $891,000 during the years ended December 31, 1997,
1996 and 1995, respectively.

The principals of the placement agent referred to above own approximately 3.9%
of the Company. In connection with the sale of the New Senior Notes and the
arrangement of the Credit Facility, the Company paid fees to the placement agent
of $3,210,000 and indemnified the placement agent and its principals against
certain liabilities, including liabilities under the Securities Act of 1933. In
connection with the exercise of the warrants to purchase an additional
$50,000,000 of New Senior Notes, the Company paid fees to the placement agent of
$981,000. These fees were recorded as deferred finance charges in the
accompanying financial statements. Additional fees were paid to the placement
agent during 1997 and 1996 for various financial advisory services totaling
$600,000 and $510,000, respectively.

Included in other assets in the accompanying consolidated balance sheets are
notes receivable from employees with ownership interests in the Company and
limited partners of HE totaling $6,844,000 and $4,643,000 as of December 31,
1997 and 1996, respectively. The notes to employees are secured by their
ownership interests in the Company, and the notes to the limited partners are
secured by their ownership interests in HE. The notes have various due dates
ranging from February 1998 through October 1999 and interest rates ranging from
7% to 10%.

In November 1995, HE canceled a legal service retainer agreement it had entered
into in 1993 with an individual for a one-time fee of $600,000, which is
included in general and administrative expenses in 1995. Two relatives of such
individual are limited partners in HE, holding an aggregate ownership interest
of 5.08%.

The Company conducts a portion of its marketing through an entity that is owned
by the wife of an officer. Fees and expenses paid to this company totaled
$2,648,000, $1,632,000 and $1,029,000 for the years ended December 31, 1997,
1996 and 1995, respectively.

Payments to other parties affiliated with the Company totaled $36,000, $63,000
and $671,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
These transactions included payments for consulting fees and various operating
expenses.

                                      F-16
<PAGE>   57
7.      EMPLOYEE COMPENSATION AND BENEFITS

Employment Agreements

HE and RPG have employment agreements with certain key employees that provide
certain benefits in the event such employees are terminated. These employees
also received ownership interests in NGCP and RPG, which were subsequently
exchanged for membership interests in the Company and vest over the term
specified in the various employment agreements, which is generally five years.
These employment agreements include a put/call provision which, if exercised by
the employee, would require the Company to repurchase these ownership interests
in the event of termination at the then fair market value based on an
independent appraisal. Accordingly, these compensation agreements are accounted
for as variable stock purchase plans. Compensation expense is recorded each
period equal to the change in the fair market value of ownership interests
issued pursuant to these agreements.

During the fourth quarter of 1995, certain employees of HGI received ownership
interests in the Company, vesting generally over three years, pursuant to
similar employment agreements which also include put/call provisions in the
event of termination. As stated in Note 1, the Company is required to reimburse
HGI for all expenses incurred related to the operations of the Company and would
be required to fund any repurchase of HGI employees' ownership interests in the
Company, pursuant to these employment agreements. Accordingly, the deferred
compensation and related compensation expense associated with the HGI employees
are included in the accompanying consolidated financial statements of the
Company.

The total ownership interest in the Company issued to employees pursuant to such
employment agreements was 4.0% as of December 31, 1997 and 1996, of which 3.1%
and 2.4% was vested, respectively. The amount of compensation expense recorded
in the accompanying consolidated statements of operations related to these
ownership interests was $15,066,000, $4,340,000 and $6,272,000 for the years
ended December 31, 1997, 1996 and 1995, respectively.

During September 1995, one of the HE employees who had entered into an
employment agreement during 1993 resigned from HE. Pursuant to a settlement
agreement with the employee, HE agreed to pay severance benefits of $230,000
which was expensed in 1995. In addition, the Company agreed to acquire the
employee's vested ownership interest in the Company of .95% for $3,306,000 based
on an independent appraisal, which is included in the 1995 compensation expense
amount discussed above. Such amount was paid in two equal installments on April
1, 1997 and 1996, including interest at 9%.

Some of the employment agreements also include a guaranteed severance payment in
the event of termination. The amount of such liability was $5,795,000 and
$3,289,000 at December 31, 1997 and 1996, respectively. Of the total liability
at December 31, 1997, $4,658,000 is included in accrued expenses which
represents the liability associated with employment agreements that expire
during 1998. The remaining $1,137,000 and the balance at December 31, 1996 of
$3,289,000 are included in redeemable ownership interests in the accompanying
consolidated balance sheets.


                                      F-17
<PAGE>   58
7.      EMPLOYEE COMPENSATION AND BENEFITS (CONTINUED)

Unit Option Plan

During 1997, HGI approved the Company's 1997 Unit Option Plan which provides for
certain employees to be granted options to purchase membership units in the
Company at a fixed price of $3.47 per unit. The options vest in three equal
annual installments beginning one year subsequent to the date of the option
holder's employment and expire after 10 years. At December 31, 1997, 631,225
units had been granted, of which 378,735 had vested.

Any units purchased by employees upon exercise of the options may be repurchased
by the Company at a price equal to the then fair market value of the units.
Accordingly, the unit option plan is accounted for as a variable stock purchase
plan. Compensation expense is recorded each period equal to the change in the
fair market value of the membership units in the Company, provided such value
exceeds the exercise price of the options. During 1997, the Company recognized
compensation expense of $1,107,000 related to this option plan.

401(k) Savings Plan

Effective January 1, 1995, a 401(k) savings plan was established for RPG whereby
eligible employees may contribute up to 15% of their salary. An identical 401(k)
savings plan was established on January 1, 1996 for employees of the Company and
its subsidiaries other than RPG. The Company matches 50% of the employees'
contributions up to a maximum of 6% of their salary, and the employees vest in
the matching contribution over six years. Employees are eligible to participate
in the plan on the first day of the next calendar quarter following six months
of service. The Company's matching contributions were $716,000, $667,000 and
$158,000 for the years ended December 31, 1997, 1996 and 1995, respectively.

8.      COMMITMENTS AND CONTINGENCIES

Litigation

The Company and its subsidiaries, during the normal course of operating its
business, become engaged in various litigation. In the opinion of the Company's
management, the ultimate disposition of such litigation will not have a material
impact on the Company's operations.

Minority Interest Purchase Commitments

In February 1996, NGCP entered into an option agreement to purchase an
additional 1% limited partnership interest in HE for $1,541,000, of which
approximately $514,000 was paid at closing. The option expires on December 31,
1998. In September 1996, NGCP loaned the limited partner $900,000, which is
included in other assets in the accompanying consolidated balance sheet as of
December 31, 1997 and 1996. The note, including interest at 7%, is due December
31, 1998.


                                      F-18
<PAGE>   59
8.    COMMITMENTS AND CONTINGENCIES (CONTINUED)

Effective December 31, 1995, NGCP purchased a 2.92% limited partnership interest
in HE for $4,473,000, of which $1,473,000 was paid at closing during January
1996, with the remaining $3,000,000 evidenced by a 6% per annum promissory note,
payable in three annual installments of $1,000,000, plus accrued interest,
beginning January 2, 1997. The limited partner remitted to HE approximately
$123,000, which was equal to his negative capital balance at the time of
closing. The purchase agreement allocated $2,384,000 of the purchase price to a
non-compete agreement with the remaining $2,089,000 allocated to the purchase of
the limited partner's interest. The asset related to the non-compete agreement
is being amortized over the life of the agreement (three years). The purchase
price of the limited partnership interest is included in goodwill and is being
amortized over an estimated benefit period of approximately 25 years. The
Company has agreed to pay additional consideration of up to $500,000 a year for
three years based on certain earnings criteria which will be added to the
purchase price and amortized accordingly. At December 31, 1997 and 1996, the
earnings criteria were met and additional consideration was recorded. Of the
additional consideration recorded, $534,000 was allocated to the non-compete
agreement, and the remaining $466,000 was allocated to goodwill. The unamortized
balance of the non-compete agreement is included in other assets in the
accompanying consolidated balance sheets and was $1,229,000 and $1,851,000 as of
December 31, 1997 and 1996, respectively.

The Company is also required to purchase the minority ownership interests in any
new projects developed by Horseshoe Ventures following 36 months of operations.
The purchase price is to be based on earnings during the 36-month period and is
payable in cash or ownership interests in the Company.

Construction Commitments

The Company is nearing the completion of the expansion efforts at both of its
existing casino properties. As of December 31, 1997, the Horseshoe Casino Center
was substantially complete, the total amount incurred and placed in service was
$98,841,000 with remaining commitments of $10,355,000. As of December 31, 1997
the Horseshoe Bossier City had incurred a total of $176,981,000 with remaining
commitments of $33,326,000. Of the total amount incurred, $109,553,000 had been
placed in service as of December 31, 1997.


                                      F-19
<PAGE>   60
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Partners of New Gaming Capital Partnership:

We have audited the accompanying consolidated balance sheets of New Gaming
Capital Partnership (a Nevada partnership) and subsidiary as of December 31,
1997 and 1996, and the related consolidated statements of operations, partners'
capital and cash flows for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of New Gaming Capital Partnership
and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.



                                                             ARTHUR ANDERSEN LLP

Las Vegas, Nevada,
    February 13, 1998


                                      F-20
<PAGE>   61
<TABLE>
<CAPTION>
                              NEW GAMING CAPITAL PARTNERSHIP AND SUBSIDIARY
                                       CONSOLIDATED BALANCE SHEETS
                                              (IN THOUSANDS)

                                                                                     December 31,
                                                                            -----------------------------
                                                                              1997                1996
                                                                            ---------           ---------
<S>                                                                         <C>                 <C>
                                              ASSETS
         Current Assets:
             Cash and cash equivalents                                      $  16,143           $  14,913
             Accounts receivable, net of allowance for doubtful
                accounts of $2,410 and $803                                     2,589               1,901
             Inventories                                                        1,535                 957
             Prepaid expenses and other                                         1,329               1,102
                                                                            ---------           ---------
                          Total current assets                                 21,596              18,873
                                                                            ---------           ---------

         Property and Equipment:
             Land                                                              10,579               6,115
             Buildings, boat and improvements                                 145,781              71,554
             Furniture, fixtures and equipment                                 34,914              24,125
             Less:  accumulated depreciation                                  (23,452)            (15,028)
                                                                            ---------           ---------
                                                                              167,822              86,766
             Construction in progress                                          67,428              18,482
                                                                            ---------           ---------
                          Net property and equipment                          235,250             105,248
                                                                            ---------           ---------

         Other Assets:
             Goodwill, net                                                     18,290              18,788
             Other                                                             12,137              11,269
                                                                            $ 287,273           $ 154,178
                                                                            =========           =========

                                 LIABILITIES AND PARTNERS' CAPITAL
         Current Liabilities:
             Current maturities of long-term debt                           $  15,003           $  11,854
             Accounts payable                                                   3,568               1,882
             Due to affiliates                                                 12,796               2,536
             Construction payables                                             18,757               7,161
             Accrued expenses and other                                         9,793               8,373
                                                                            ---------           ---------
                          Total current liabilities                            59,917              31,806

         Long-term Debt, less current maturities                              199,989              97,837

         Minority Interest                                                     (1,317)               (827)

         Commitments and Contingencies (Note 8)

         Partners' Capital                                                     28,684              25,362
                                                                            ---------           ---------
                                                                            $ 287,273           $ 154,178
                                                                            =========           =========

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


                                                  F-21
</TABLE>
<PAGE>   62
<TABLE>
<CAPTION>
                              NEW GAMING CAPITAL PARTNERSHIP AND SUBSIDIARY
                                  CONSOLIDATED STATEMENTS OF OPERATIONS
                                             (IN THOUSANDS)

                                                                     Year Ended December 31,
                                                       -------------------------------------------------
                                                          1997                1996                1995
                                                       ---------           ---------           ---------
<S>                                                    <C>                 <C>                 <C>
Revenues:
    Casino                                             $ 159,956           $ 166,768           $ 151,210
    Food and beverage                                     16,389              15,573              14,618
    Hotel                                                  4,726               4,431               4,197
    Retail and other                                       1,741               1,650               1,863
                                                       ---------           ---------           ---------
                                                         182,812             188,422             171,888
    Promotional allowances                               (14,918)            (13,559)            (11,106)
                                                       ---------           ---------           ---------
       Net revenues                                      167,894             174,863             160,782
                                                       ---------           ---------           ---------

Expenses:
    Casino                                                90,709              89,713              78,071
    Food and beverage                                      6,728               8,484               9,246
    Hotel                                                  4,679               3,429               3,600
    Retail and other                                         473                 597               1,035
    General and administrative                            25,034              26,414              24,549
    Development                                               --                 500                  --
    Depreciation and amortization                         10,553               8,855               6,162
    Preopening                                             1,819                  --                  --
                                                       ---------           ---------           ---------
       Total expenses                                    139,995             137,992             122,663
                                                       ---------           ---------           ---------

Operating Profit Before Corporate Expenses                27,899              36,871              38,119
    Corporate Expenses                                    11,245               4,676               1,853
                                                       ---------           ---------           ---------

Operating Income                                          16,654              32,195              36,266

Other Income (Expense):
    Interest expense                                     (13,124)            (11,436)            (10,235)
    Interest income                                          893                 867                 664
    Other, net                                               (18)                418                  --
    Minority interest in income of subsidiary               (420)             (1,861)             (2,580)
                                                       ---------           ---------           ---------

Income Before Extraordinary Loss
    on Early Retirement of Debt                            3,985              20,183              24,115

Extraordinary Loss on Early Retirement
    of Debt                                                   --                  --              (4,081)
                                                       ---------           ---------           ---------

Net Income                                             $   3,985           $  20,183           $  20,034
                                                       =========           =========           =========

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


                                                  F-22
</TABLE>
<PAGE>   63
                  NEW GAMING CAPITAL PARTNERSHIP AND SUBSIDIARY
                  CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
                  YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
<S>                                                   <C>
Balance at December 31, 1994                          $  6,522

Net income                                              20,034
Contributions                                              123
Distributions:
    Cash                                                (8,137)
    Payable                                             (1,857)
Step-up in basis of assets due to purchase
    of minority interest                                17,729
                                                       --------

Balance at December 31, 1995                            34,414

Net income                                              20,183
Cash distributions                                     (29,235)
                                                       --------

Balance at December 31, 1996                            25,362

Net income                                               3,985
Cash distributions                                        (663)
                                                       --------

Balance at December 31, 1997                          $ 28,684
                                                      ========
</TABLE>

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


                                      F-23
<PAGE>   64
<TABLE>
<CAPTION>
                                       NEW GAMING CAPITAL PARTNERSHIP AND SUBSIDIARY
                                           CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (IN THOUSANDS)

                                                                                     Year Ended December 31,
                                                                      -----------------------------------------------------
                                                                        1997                  1996                  1995
                                                                      ---------             ---------             ---------
<S>                                                                   <C>                   <C>                   <C>
Cash flows from operating activities:
    Net income                                                        $   3,985             $  20,183             $  20,034
    Adjustments to reconcile net income
       to net cash provided by operating activities:
          Minority interest in income of subsidiary                         420                 1,861                 2,580
          Depreciation and amortization                                  10,553                 8,855                 6,162
          Provision for doubtful accounts                                 1,646                   987                   930
          Amortization of debt discounts,
              deferred finance costs and other                            1,266                   708                 3,171
          Loss (gain) on disposal of land and other assets                   38                   (96)                   --
          Extraordinary loss on early retirement of debt                     --                    --                 4,081
          Change in assets and liabilities                                  (33)               (2,359)                2,144
                                                                      ---------             ---------             ---------
                 Net cash provided by operating activities               17,875                30,139                39,102
                                                                      ---------             ---------             ---------

Cash flows from investing activities:
    Purchase of property and equipment                                 (138,597)              (37,326)              (13,788)
    Increase (decrease) in construction payables                         11,596                 3,961                   (84)
    Proceeds from sale of land held for sale                                 --                 1,440                    --
    Purchase of land held for sale                                           --                    --                (1,344)
    Increase in other assets                                               (934)               (4,379)               (4,895)
                                                                      ---------             ---------             ---------
                 Net cash used in investing activities                 (127,935)              (36,304)              (20,111)
                                                                      ---------             ---------             ---------

Cash flows from financing activities:
    Proceeds from long-term debt                                        120,900                40,000                81,600
    Payments on long-term debt                                          (15,599)               (8,821)              (70,925)
    Capital contributions                                                    --                    --                   123
    Capital distributions                                                  (663)              (31,092)               (8,137)
    Distributions to minority interests                                    (910)               (1,560)               (3,460)
    Increase (decrease) in due to affiliates                             10,167                (3,128)                 (259)
    Debt issue costs and commitment fees                                 (2,605)               (1,346)               (2,524)
                                                                      ---------             ---------             ---------
                 Net cash provided by (used in)
                     financing activities                               111,290                (5,947)               (3,582)
                                                                      ---------             ---------             ---------

Net change in cash and cash equivalents                                   1,230               (12,112)               15,409
Cash and cash equivalents, beginning of period                           14,913                27,025                11,616
                                                                      ---------             ---------             ---------
Cash and cash equivalents, end of period                              $  16,143             $  14,913             $  27,025
                                                                      =========             =========             =========

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


                                                           F-24
</TABLE>
<PAGE>   65
                  NEW GAMING CAPITAL PARTNERSHIP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.      ORGANIZATION AND BASIS OF PRESENTATION

New Gaming Capital Partnership (the "Partnership") was formed as a Nevada
limited partnership on February 4, 1993. The Partnership is 100% owned, directly
and indirectly, by Horseshoe Gaming, L.L.C. ("Gaming"), and is the 89% general
partner of Horseshoe Entertainment, L.P. ("HE"), a Louisiana limited
partnership, which owns and operates the Horseshoe Bossier City (the "Casino"),
a dockside riverboat casino located in Bossier City, Louisiana. Effective
December 31, 1995, the Partnership purchased a 2.92% limited partnership
interest from one of the minority owners (see Note 8). The minority interest
amounts in the accompanying consolidated financial statements represent the
remaining 8.08% of HE owned by limited partners. HE was formed on February 4,
1993 and the Casino opened on July 9, 1994. Consistent with Louisiana state law,
the gaming license granted to HE is for a five year period, after which it must
be renewed. HE's license is up for renewal in July 1998.

On October 1, 1995, Gaming completed a roll-up transaction which resulted in the
acquisition by Gaming of approximately 15% of the Partnership's ownership
interests (the "Roll-up"). The total cost of the Partnership interests purchased
by Gaming, based on the fair value of the ownership interests in Gaming
exchanged, was $17,729,000, of which $149,000 was allocated to land, $154,000
was allocated to gaming licenses and $17,426,000 was allocated to goodwill. The
purchase price allocation was based on an independent appraisal of the
individual assets, and these amounts were pushed down to the accompanying
financial statements of the Partnership.

The gaming license is amortized over its remaining term, which is approximately
two and one-half years. Goodwill, which represents various intangibles with
indeterminate values, is amortized on a straight-line basis over 25 years, which
management estimates is the related benefit period (see discussion of the
Company's accounting policy for long-lived assets below). Management intends to
regularly evaluate whether or not the future undiscounted cash flows of the
Partnership are sufficient to recover the carrying amount of the goodwill
associated with each entity. Additionally, management continually monitors such
factors as the status of new or proposed legislation, the competitive
environment and the general economic conditions of the market in which it
operates. If the undiscounted cash flows are not sufficient to recover the
carrying amount of goodwill and, accordingly, an impairment has occurred,
management intends to write down the carrying amount of goodwill to its
estimated fair value based on discounted cash flows. The amount of amortization
expense recorded in the years ended December 31, 1997, 1996, and for the three
months in 1995 following the roll-up transaction was $755,000, $748,000 and
$187,000, respectively.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Partnership
and HE. All significant intercompany accounts and transactions have been
eliminated.

Cash and Cash Equivalents

Cash and cash equivalents include commercial paper, amounts held in mutual funds
and other investments with original maturities of 90 days or less when
purchased.


                                      F-25
<PAGE>   66
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Inventories

Inventories are stated at the lower of cost, as determined on a first-in,
first-out basis, or market value and consist primarily of food, beverage, retail
merchandise, kitchen smallwares and employee wardrobe.

Property and Equipment

Property and equipment are stated at cost. The costs of normal repairs and
maintenance are expensed as incurred while major expenditures that extend the
useful lives of assets are capitalized.

Depreciation is provided on the straight-line basis over the estimated useful
lives of the assets as follows:

        Buildings, boat and improvements                    15 to 30 years
        Furniture, fixtures and equipment                    3 to 10 years

Capitalized Interest

The Partnership capitalizes interest for associated borrowing costs of major
construction projects. Capitalization of interest ceases when the asset is
substantially complete and ready for its intended use. Interest capitalized
during the years ended December 31, 1997, 1996 and 1995, was $7,777,000,
$667,000 and $0, respectively.

Deferred Finance Charges

Deferred finance charges consists of fees and expenses incurred by Gaming in
connection with its corporate borrowings. Gaming charges the Partnership its
pro-rata share of the total deferred finance charges as funds are borrowed by
the Partnership from Gaming. Deferred finance charges of $4,344,000 and
$3,005,000 as of December 31, 1997 and 1996, respectively, are included in other
assets and are being amortized over the period from the initial funding of the
debt through the latest date for repayment using the effective interest method.

Capital Distributions

Gaming's debt agreements contain covenants that limit capital distributions to
the limited partners of HE equal to the limited partners' share of taxable
income for each period. Such distributions are to be paid quarterly based upon
estimated taxable income. Promptly after filing by HE of its annual tax returns,
each limited partner of HE is to reimburse HE for overpayments of capital
distributions or HE is to withhold such amounts from future distributions to the
limited partners. Distributions to limited partners are a component of minority
interest in the accompanying consolidated balance sheets. All required
distributions to the limited partners for 1997, 1996 and 1995 were made in full
prior to the end of each year.

                                      F-26
<PAGE>   67
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Casino Promotional Allowances

Casino promotional allowances consist primarily of the retail value of
complimentary food and beverage, rooms and other services furnished to guests
without charge. Such amounts are included in gross revenues and deducted as
promotional allowances. The estimated costs of providing such complimentary
services are substantially included in casino department expenses as follows (in
thousands):

<TABLE>
<CAPTION>
                                                   Year Ended December  31,
                                        ---------------------------------------------
                                         1997               1996               1995
                                        -------            -------            -------
<S>                                     <C>                <C>                <C>
    Food and beverage                   $11,648            $10,276            $ 6,921
    Hotel                                 1,396              1,631              1,663
    Other operating expenses                191                112                 85
                                        -------            -------            -------
                                        $13,235            $12,019            $ 8,669
                                        =======            =======            =======
</TABLE>

Casino Revenues

In accordance with industry practice, casino revenues represent the net win from
gaming activities, which is the difference between gaming wins and losses.

Advertising Costs

The Partnership expenses all costs associated with advertising as incurred, and
such amounts are included in general and administrative expenses in the
accompanying consolidated statements of operations.

Preopening Expenses

Preopening costs incurred during the expansion of the existing casino property
are expensed as incurred and were $1,819,000 during 1997.

Corporate Expenses

The Partnership reimburses Gaming for its share of expenses incurred associated
with the management of Gaming and related entities. Included in corporate
expenses are normal operating costs, as well as, the non-cash compensation
expense relating to ownership interests in Gaming issued to employees pursuant
to employment contracts (see Note 7).

Income Taxes

No provision is made in the accounts of the Partnership for federal and state
income taxes, as such taxes are liabilities of the members of Gaming. The
Partnership's income tax return and the amount of allocable taxable income are
subject to examination by federal and state taxing authorities. If an
examination results in a change to Partnership income, the income tax reported
by the members of Gaming may also change. The tax bases in the Partnership's
assets and liabilities were in excess of the amounts reported in the
accompanying consolidated financial statements by $3,461,000 and $4,677,000 at
December 31, 1997 and 1996, respectively. Taxable income was in excess of net
income reported in the accompanying consolidated statements of operations for
all periods presented.


                                      F-27
<PAGE>   68
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," management continually evaluates whether events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable. Based on management's evaluations, no significant impairments of
long-lived assets have occurred during the three years in the period ended
December 31, 1997.

Use of Estimates

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.

Reclassifications

Certain reclassifications were made to prior period financial statements to
conform to current year presentation.

3.      CONSOLIDATED STATEMENTS OF CASH FLOWS

The net change in assets and liabilities consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                                              Year Ended December  31,
                                                   -----------------------------------------------
                                                     1997                1996                1995
                                                   -------             -------             -------
<S>                                                <C>                 <C>                 <C>
    (Increase) decrease in assets:
       Accounts receivable                         $(2,334)            $(1,063)            $(1,849)
       Inventories                                    (578)                106                 187
       Prepaid expenses and other                     (227)                123                (653)
    Increase (decrease) in liabilities:
       Accounts payable                              1,686                 643              (1,828)
       Accrued expenses and other                    1,420              (2,168)              7,957
       Deferred interest payable                        --                  --              (1,670)
                                                   -------             -------             -------
                                                   $   (33)            $(2,359)            $ 2,144
                                                   =======             =======             =======
</TABLE>

Cash payments made for interest, excluding amounts capitalized, totaled
$19,378,000, $10,530,000 and $12,999,000 for the three years ended December 31,
1997, 1996 and 1995.



                                      F-28
<PAGE>   69
4.      ACCRUED EXPENSES AND OTHER

Accrued expenses and other consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                     December 31,
                                                               ------------------------
                                                                1997              1996
                                                               ------            ------
<S>                                                            <C>               <C>
         Payroll and related tax liabilities                   $2,154            $1,479
         Vacation and other employee benefits                   1,424             2,173
         Accrued interest                                         372               181
         Gaming, sales, use and property taxes                  1,090             1,349
         Outstanding chip and token liabilities                 1,190               614
         Progressive slot and slot club liabilities             1,225             1,896
         Other accrued expenses                                 2,338               681
                                                               ------            ------
                                                               $9,793            $8,373
                                                               ======            ======
</TABLE>

5.      LONG-TERM DEBT

Long-term debt consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                                        -------------------------------
                                                                           1997                  1996
                                                                        ---------             ---------
<S>                                                                     <C>                   <C>
    Notes payable to Gaming:

        9.39%, due June 15, 2007, semi-annual payments of
        interest only on June 15 and December 15                        $ 50,000              $      --

        9.39%, due June 15, 2000, semi-annual payments of
        interest only on June 15 and December 15 (available
        borrowing of $100,000,000)                                         24,000                    --

        13.31%, due in semi-annual installments of 5% of the
        outstanding principal balance, including interest
        through September 30, 2000                                        138,492               106,191

    6% Promissory Note Payable, due in annual installments
        through January 1999 (see Note 8)                                   2,500                 3,500
                                                                        ---------             ---------
                                                                          214,992               109,691
    Less:  current maturities                                             (15,003)              (11,854)
                                                                        ---------             ---------
                                                                        $ 199,989             $  97,837
                                                                        =========             =========
</TABLE>

HE's notes with Gaming are Senior obligations of the Partnership and also serve
as collateral for the repayment of the debt obligations of Gaming, which totaled
$315,462,000 including accrued interest, at December 31, 1997.

The Company's debt agreements contain covenants that, among other things, (i)
limit the amount of additional indebtedness which may be incurred by Gaming and
its subsidiaries; (ii) prohibit any consolidation or merger of Gaming or its
subsidiaries with an affiliate or third party, any sale of substantially all of
Gaming or its subsidiaries' assets, or any payment of subordinated indebtedness
prior to its scheduled maturity; and (iii) require Gaming and its subsidiaries
to invest excess funds in cash equivalents and government securities with a
maturity of one year or less.


                                      F-29
<PAGE>   70
5.      LONG-TERM DEBT (CONTINUED)

As of December 31, 1997, the five year maturities for long-term debt are
$15,003,000 (1998), $13,186,000 (1999), $136,803,000 (2000), $0 (2001) and $0
(2002).

6.      TRANSACTIONS WITH RELATED PARTIES

At December 31, 1997 and 1996, the due to affiliates balance relates primarily
to costs and expenses of the Partnership and HE paid for by Gaming.

Initial funding to HE was provided by loans from affiliates of the Partnership.
Such notes payable to affiliates accrued interest at 10% and had a scheduled
maturity of April 15, 2004. The notes payable to affiliates, and the related
deferred interest payable balances, were repaid in October 1995 with proceeds
from the intercompany loan from Gaming discussed in Note 5.

Included in other assets in the accompanying consolidated balance sheets are
notes receivable from limited partners of HE totaling $4,630,000 and $2,954,000
as of December 31, 1997 and 1996, respectively. The notes are secured by their
ownership interests in HE and are due in December 1998 with interest at 10%.

In November 1995, HE canceled a legal service retainer agreement it had entered
into in 1993 with an individual for a one-time fee of $600,000, which is
included in general and administrative expenses in 1995. Two relatives of such
individual are limited partners in HE holding an aggregate ownership interest of
5.08%. The original agreement covered legal services for a period of five years
commencing December 1, 1993, and ending November 30, 1998, and required sixty
monthly payments of $16,667. The amounts paid under this contract for legal
services amounted to $167,000 for the year ended December 31, 1995. He has no
further obligations under the legal service retainer agreement.

The Partnership conducts a portion of its marketing through an entity that is
owned by the wife of an officer of Gaming. Fees and expenses paid to this
company totaled $1,594,000, $393,000 and $413,000 for the years ended December
31, 1997, 1996 and 1995, respectively.

Payments to other parties affiliated with the Partnership totaled $5,000,
$18,000 and $305,000 for the years ended December 31, 1997, 1996 and 1995,
respectively. These transactions included payments for consulting fees and
various operating expenses.

7.      EMPLOYEE COMPENSATION AND BENEFITS

Employment Agreements

HE has employment agreements with certain key employees that provide certain
benefits in the event such employees are terminated. These employees also
received ownership interests in the Partnership, which were subsequently
exchanged for membership interests in Gaming and vest over terms specified in
the various employment agreements, which is generally five years. These
employment agreements include a put/call provision which, if exercised by the
employee, would require Gaming to repurchase these ownership interests in the
event of termination at the then fair market value based on an independent
appraisal. Accordingly, these compensation agreements are accounted for as
variable stock purchase plans. Compensation expense is recorded each period
equal to the change in the fair market value of ownership interests issued
pursuant to these agreements. NGCP reimburses Gaming for the expense related to
these


                                      F-30
<PAGE>   71
7.      EMPLOYEE COMPENSATION AND BENEFITS (CONTINUED)

ownership interests; therefore, there is no deferred compensation reported in
the accompanying consolidated balance sheet at December 31, 1997 and 1996.

Prior to the roll-up transaction discussed in Note 1, the Partnership recorded
the compensation expense related to employee ownership interests in general and
administrative expenses. Included in general and administrative expenses in 1995
for the period prior to the Roll-up is $2,103,000 of compensation expense from
employee ownership interests. Subsequent to the Roll-up, these amounts are
included in corporate expenses. Corporate expenses for the years ended December
31, 1997 and 1996 and for the three months ended December 31, 1995 include
compensation expense related to employee ownership interests of $7,533,000,
$1,720,000 and $1,444,000, respectively.

During September 1995, one of HE's employees who had entered into an employment
agreement during 1993 resigned. Pursuant to a settlement agreement with the
employee, HE agreed to pay severance benefits of $230,000 which was expensed in
1995. In addition, Gaming agreed to acquire the employee's vested ownership
interest in HE for $3,306,000 based on an independent appraisal which is
included in the 1995 compensation expense amount discussed above. Such amount
was paid in two equal installments on April 1, 1997 and 1996, including interest
at 9%.

401(k) Savings Plan

Effective January 1, 1996, a 401(k) savings plan was established whereby
eligible employees of HE may contribute up to 15% of their salary. HE matches
50% of the employees' contributions up to a maximum of 6% of their salary.
Employees vest in HE's matching contribution over six years. Employees are
eligible to participate in the Plan on the first day of the next calendar
quarter following six months of service. HE's matching contributions were
$341,000 and $368,000 for the years ended December 31, 1997 and 1996.

8.      COMMITMENTS AND CONTINGENCIES

Litigation

The Partnership and its subsidiary, during the normal course of operating its
business, become engaged in various litigation. In the opinion of the
Partnership's management, the ultimate disposition of such litigation will not
have a material impact on the Partnership's operations.

Minority Interest Purchase Commitment

In February 1996, the Partnership entered into an option agreement to purchase
an additional 1% limited partnership interest in HE for $1,541,000, of which
approximately $514,000 was paid at closing. The option expires on December 31,
1998. In September 1996, the Partnership loaned the limited partner $900,000,
which is included in other assets in the accompanying consolidated balance sheet
as of December 31, 1997 and 1996. The note, including interest at 7%, is due on
December 31, 1998.

                                      F-31
<PAGE>   72
8.    COMMITMENTS AND CONTINGENCIES (CONTINUED)

Effective December 31, 1995, the Partnership purchased a 2.92% limited
partnership interest in HE for $4,473,000, of which $1,473,000 was paid at
closing during January 1996, with the remaining $3,000,000 evidenced by a 6% per
annum promissory note, payable in three annual installments of $1,000,000, plus
accrued interest, beginning January 2, 1997. The limited partner agreed to remit
to the partnership approximately $123,000, which was equal to his negative
capital balance at the time of closing. The purchase agreement allocated
$2,384,000 of the purchase price to a non-compete agreement with the remaining
$2,089,000 allocated to the purchase of the limited partner's interest. The
asset related to the non-compete agreement is being amortized over the life of
the agreement (three years). The purchase price of the limited partnership
interest is included in goodwill and is being amortized over an estimated
benefit period of approximately 25 years. The Partnership has agreed to pay
additional consideration of up to $500,000 a year for three years based on
certain earnings criteria. At December 31, 1997 and 1996, the earnings criteria
were met and additional consideration was recorded. Of the additional
consideration recorded, $534,000 was allocated to the non-compete agreement and
the remaining $466,000 was allocated to goodwill. The unamortized balance of the
non-compete agreement is included in other assets in the accompanying
consolidated balance sheets and was $1,229,000 and $1,851,000 as of December 31,
1997 and 1996, respectively.

Construction Commitments

The Partnership is nearing the completion of the expansion of its casino and
hotel facilities. The total estimated cost of the project was $210,307,000, of
which $176,981,000 had been incurred as of December 31, 1997 and $109,553,000
had been placed in service.

                                      F-32
<PAGE>   73
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Partners of Robinson Property Group, L.P.:

We have audited the accompanying balance sheets of Robinson Property Group, L.P.
(a Mississippi limited partnership) as of December 31, 1997 and 1996, and the
related statements of operations, partners' capital and cash flows for each of
the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Robinson Property Group, L.P.
as of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.



                                                             ARTHUR ANDERSEN LLP

Las Vegas, Nevada,
    February 13, 1998.


                                      F-33
<PAGE>   74
<TABLE>
<CAPTION>
                          ROBINSON PROPERTY GROUP, L.P.
                                 BALANCE SHEETS
                                 (IN THOUSANDS)

                                                                                December 31,
                                                                     -------------------------------
                                                                        1997                  1996
                                                                     ---------             ---------
                                               ASSETS
<S>                                                                  <C>                   <C>
Current Assets:
    Cash and cash equivalents                                        $  23,159             $  22,858
    Accounts receivable, net of allowance for doubtful
       accounts of $6,555 and $2,649                                    10,718                 5,883
    Inventories                                                          1,424                   478
    Prepaid expenses and other                                             505                   275
                                                                     ---------             ---------
                 Total current assets                                   35,806                29,494
                                                                     ---------             ---------

Property and Equipment:
    Land                                                                 4,110                 4,110
    Buildings, barge and improvements                                  131,154                50,253
    Furniture, fixtures and equipment                                   32,670                16,933
    Less:  accumulated depreciation                                    (19,066)              (11,370)
                                                                     ---------             ---------
                                                                       148,868                59,926
    Construction in progress                                                --                20,162
                                                                     ---------             ---------
                 Net property and equipment                            148,868                80,088
                                                                     ---------             ---------

Other Assets:
    Goodwill, net                                                       19,670                20,438
    Other                                                                4,739                 3,857
                                                                     ---------             ---------
                                                                     $ 209,083             $ 133,877
                                                                     =========             =========

                                  LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities:
    Accounts payable                                                 $   4,941             $   1,274
Construction payables                                                    9,228                 6,945
    Due to affiliates                                                   10,315                 1,736
    Accrued expenses and other                                           9,901                 8,503
                                                                     ---------             ---------
                 Total current liabilities                              34,385                18,458

Long-term Debt                                                          85,400                43,000

Commitments and Contingencies (Note 8)

Partners' Capital                                                       89,298                72,419
                                                                     ---------             ---------
                                                                     $ 209,083             $ 133,877
                                                                     =========             =========

                               The accompanying notes are an integral
                                 part of these financial statements.


                                                F-34
</TABLE>
<PAGE>   75
<TABLE>
<CAPTION>
                                       ROBINSON PROPERTY GROUP, L.P.
                                          STATEMENTS OF OPERATIONS
                                               (IN THOUSANDS)

                                                                     Year Ended December 31,
                                                        1997                  1996                  1995
                                                      ---------             ---------             ---------
<S>                                                   <C>                   <C>                   <C>
Revenues:
    Casino                                            $ 161,280             $ 150,711             $ 132,192
    Food and beverage                                    13,601                11,374                 9,681
    Hotel                                                 4,047                 3,488                 3,092
    Retail and other                                      2,564                 2,775                 2,229
                                                      ---------             ---------             ---------
                                                        181,492               168,348               147,194
    Promotional allowances                              (14,293)              (11,474)               (9,591)
                                                      ---------             ---------             ---------
       Net revenues                                     167,199               156,874               137,603
                                                      ---------             ---------             ---------

Expenses:
    Casino                                               84,685                72,695                55,228
    Food and beverage                                     4,253                 3,833                 3,495
    Hotel                                                 3,198                 3,369                 2,062
    Retail and other                                        952                   762                   693
    General and administrative                           18,566                18,937                18,376
    Depreciation and amortization                         8,838                 7,114                 6,376
    Preopening expenses                                   1,144                    --                 7,021
                                                      ---------             ---------             ---------
       Total                                            121,636               106,710                93,251
                                                      ---------             ---------             ---------

Operating Profit Before Corporate Expenses               45,563                50,164                44,352
    Corporate Expenses                                   11,245                 5,578                 1,522
                                                      ---------             ---------             ---------

Operating Income                                         34,318                44,586                42,830

Other Income (Expense):
    Interest expense                                     (4,088)               (6,190)               (8,381)
    Interest and other income                               569                   797                   445
    Other, net                                             (356)                   (6)                   --
                                                      ---------             ---------             ---------

Income Before Extraordinary Loss on
    Early Retirement of Debt                             30,443                39,187                34,894

Extraordinary Loss on Early Retirement
    of Debt                                                  --                    --                (3,098)
                                                      ---------             ---------             ---------

Net Income                                            $  30,443             $  39,187             $  31,796
                                                      =========             =========             =========


                                   The accompanying notes are an integral
                                    part of these financial statements.


                                                   F-35
</TABLE>
<PAGE>   76
<TABLE>
<CAPTION>
                                        ROBINSON PROPERTY GROUP, L.P.
                                       STATEMENTS OF PARTNERS' CAPITAL
                                 YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
                                                (IN THOUSANDS)

                                                              Partners'        Contributions
                                                               Capital           Receivable           Total
                                                               --------           --------           --------
<S>                                                           <C>                <C>                <C>
Balance at December 31, 1994                                   $  1,413           $     --           $  1,413

Net income                                                       31,796                 --             31,796
Contributions                                                     1,150             (1,150)                --
Cash distributions                                              (16,953)                --            (16,953)
Step-up in basis of assets due to purchase
    of minority interest                                         24,026               (205)            23,821
                                                               --------           --------           --------

Balance at December 31, 1995                                     41,432             (1,355)            40,077

Net income                                                       39,187                 --             39,187
Collection of contributions receivable                               --              1,355              1,355
Cash distributions                                               (8,200)                --             (8,200)
                                                               --------           --------           --------

Balance at December 31, 1996                                     72,419                 --             72,419

Net income                                                       30,443                 --             30,443
Cash distributions                                              (13,564)                --            (13,564)
                                                               --------           --------           --------

Balance at December 31, 1997                                   $ 89,298           $     --           $ 89,298
                                                               ========           ========           ========


                                    The accompanying notes are an integral
                                     part of these financial statements.


                                                    F-36
</TABLE>
<PAGE>   77
<TABLE>
<CAPTION>
                                           ROBINSON PROPERTY GROUP, L.P.
                                             STATEMENTS OF CASH FLOWS
                                                  (IN THOUSANDS)

                                                                               Year Ended December 31,
                                                                      1997               1996               1995
                                                                    --------           --------           --------
<S>                                                                 <C>                <C>                <C>
Cash flows from operating activities:
    Net income                                                      $ 30,443           $ 39,187           $ 31,796
    Adjustments to reconcile net income to net cash
       provided by (used in) operating activities:
          Depreciation and amortization                                8,838              7,114              6,376
          Amortization of debt discount,
             deferred finance charges and other                          651                482              2,931
          Loss on disposal of assets                                     351                 --                 --
          Provision for doubtful accounts                              5,910              3,401              1,256
          Preopening expenses                                             --                 --              3,819
          Extraordinary loss on early retirement of debt                  --                 --              3,098
          Change in assets and liabilities                            (6,856)            (7,302)             1,480
                                                                    --------           --------           --------
                 Net cash provided by operating activities            39,337             42,882             50,756
                                                                    --------           --------           --------

Cash flows from investing activities:
    Purchases of property and equipment                              (76,882)           (21,007)            (1,690)
    Increase (decrease) in construction payables                       2,283              6,945             (3,284)
    Increase in other assets                                            (503)              (257)            (1,411)
                                                                    --------           --------           --------
                 Net cash used in investing activities               (75,102)           (14,319)            (6,385)
                                                                    --------           --------           --------

Cash flows from financing activities:
    Proceeds from long-term debt                                      42,400              5,000             72,987
    Payments on long-term debt                                            --            (32,000)           (75,592)
    Capital distributions                                            (13,564)            (8,200)           (15,875)
    Increase (decrease) in due to affiliates                           8,486             (3,042)             2,204
    Debt issue costs and commitment fees                              (1,256)              (169)            (2,355)
                                                                    --------           --------           --------
                 Net cash provided by (used in)
                     financing activities                             36,066            (38,411)           (18,631)
                                                                    --------           --------           --------

Net change in cash and cash equivalents                                  301             (9,848)            25,740
Cash and cash equivalents, beginning of period                        22,858             32,706              6,966
                                                                    --------           --------           --------

Cash and cash equivalents, end of period                            $ 23,159           $ 22,858           $ 32,706
                                                                    ========           ========           ========

                                      The accompanying notes are an integral
                                        part of these financial statements.


                                                       F-37
</TABLE>
<PAGE>   78
                          ROBINSON PROPERTY GROUP, L.P.

                          NOTES TO FINANCIAL STATEMENTS


1.      ORGANIZATION AND BASIS OF PRESENTATION

Robinson Property Group, L.P. (the "Partnership") was formed as a Mississippi
limited partnership on June 7, 1993 and is 100% owned, directly and indirectly,
by Horseshoe Gaming, L.L.C. ("Gaming"). The Partnership owns and operates the
Horseshoe Casino Center (the "Casino"), a permanently moored vessel consisting
of a casino and hotel located in Tunica County, Mississippi, which opened on
February 13, 1995. Consistent with state law, the gaming license granted to the
Partnership in the State of Mississippi is for a two-year period and must be
renewed. In September 1996, the Partnership renewed its license for an
additional two-year period.

On October 1, 1995, Gaming completed a roll-up transaction which resulted in the
acquisition by Gaming of approximately 15% of the Partnership's ownership
interest held by minority interests (the "Roll-up"). The total cost of the
Partnership interests purchased by Gaming, based on the fair value of the
ownership interests in Gaming exchanged, was $24,026,000, of which $2,231,000
was allocated to land, $76,000 was allocated to gaming licenses, $205,000 was
allocated to contribution receivable and $21,514,000 was allocated to goodwill.
The purchase price allocation was based on an independent appraisal of the
individual assets, and these amounts were pushed down to the accompanying
financial statements of the Partnership.

The gaming license was amortized over its initial remaining term, and at
December 31, 1996 was fully amortized. Goodwill is amortized on a straight-line
basis over 25 years, which management estimates is the related benefit period
(see discussion of the Partnership's accounting policy for long-lived assets
below). Management regularly evaluates whether or not the future undiscounted
cash flows of the Partnership are sufficient to recover the carrying amount of
the goodwill. Additionally, management continually monitors such factors as the
status of new or proposed legislation, the competitive environment and the
general economic conditions of the market in which it operates. If the estimated
future undiscounted cash flows are not sufficient to recover the carrying amount
of goodwill and accordingly, an impairment has occurred, management intends to
write down the carrying amount of goodwill to its estimated fair value based on
discounted cash flows. The amount of amortization expense recorded in 1997, 1996
and for the three months in 1995 following the roll-up transaction was $869,000,
$920,000 and $231,000, respectively.

2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash and Cash Equivalents

Cash and cash equivalents include commercial paper, amounts held in mutual funds
and other investments with original maturities of 90 days or less when
purchased.

Inventories

Inventories are stated at the lower of cost, as determined on a first-in,
first-out basis, or market value and consist primarily of food, beverage, retail
merchandise, kitchen smallwares and employee wardrobe.


                                      F-38
<PAGE>   79
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Property and Equipment

Property and equipment are stated at cost. The costs of normal repairs and
maintenance are expensed as incurred while major expenditures that extend the
useful lives of assets are capitalized.

Depreciation is provided on a straight-line basis over the estimated useful
lives as follows:

           Buildings, barge and improvements                15 to 30 years
           Furniture, fixtures and equipment                 3 to 10 years

Capitalized Interest

The Partnership capitalizes interest for associated borrowing costs of major
construction projects. Capitalization of interest ceases when the asset is
substantially complete and ready for its intended use. Interest capitalized
during the years ended December 31, 1997, 1996 and 1995 was $3,413,000, $620,000
and $651,000, respectively.

Deferred Finance Charges

Deferred finance charges consists of fees and expenses incurred by Gaming in
conjunction with its corporate borrowings. Gaming charges the Partnership its
pro-rata share of the total deferred finance charges as funds are borrowed by
the Partnership from Gaming. Deferred finance charges of $2,529,000 and
$1,924,000 as of December 31, 1997 and 1996, respectively, are included in other
assets and are being amortized over the period from the initial funding of the
debt through the latest date for repayment using the effective interest method.

Impairment of Long-Lived Assets

In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," management continually evaluates whether events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable. Based on management's evaluations, no significant impairments of
long-lived assets have occurred during the three years ended December 31, 1997.

Casino Revenues

In accordance with industry practice, casino revenues represent the net win from
gaming activities, which is the difference between gaming wins and losses.


                                      F-39
<PAGE>   80
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Casino Promotional Allowances

Casino promotional allowances consist primarily of the retail value of
complimentary food and beverage, rooms and other services furnished to guests
without charge. Such amounts are included in gross revenues and deducted as
promotional allowances.

The estimated costs of providing such complimentary services, which are
substantially included in casino department expenses, are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                           -----------------------------------------
                                            1997             1996             1995
                                           -------          -------          -------
<S>                                        <C>              <C>              <C>
         Food and beverage                 $13,319          $11,779          $10,244
         Hotel                               1,964            1,403            1,002
         Other operating expenses              473              507              401
                                           -------          -------          -------
                                           $15,756          $13,689          $11,647
                                           =======          =======          =======
</TABLE>

Advertising Costs

The Partnership expenses all costs associated with advertising as incurred, and
such amounts are included in general and administrative expenses in the
accompanying statements of operations.

Preopening Expenses

Preopening costs incurred after the receipt of necessary approvals were deferred
as incurred and expensed upon the opening of the related casino. Preopening
costs of $7,021,000 were expensed in connection with the opening of the Casino
in February 1995. Preopening costs incurred during the expansion of the existing
casino property are expensed as incurred. Total preopening costs of $1,144,000
were expensed during 1997 in conjunction with the expansion efforts at the
casino.

Corporate Expenses

The Partnership reimburses Gaming for its share of expenses incurred associated
with the management of Gaming and related entities. Included in corporate
expenses are normal operating costs, as well as, the non-cash compensation
expense relating to ownership interests in Gaming issued to employees pursuant
to employment contracts (see Note 7).

Income Taxes

No provision is made in the accounts of the Partnership for federal and state
income taxes, as such taxes are liabilities of the members of Gaming. The
Partnership's income tax return and the amount of allocable taxable income are
subject to examination by federal and state taxing authorities. If an
examination results in a change to Partnership income, the income tax reported
by the individual partners may also change. The tax bases in the Partnership's
assets and liabilities were greater than the amounts reported in the
accompanying financial statements by $1,848,000 and $3,077,000 at December 31,
1997 and 1996, respectively. In 1997 and 1995 taxable income was in excess of
net income reported in the accompanying statements of operations and in 1996,
taxable income was less than net income reported in the accompanying statements
of operations.


                                      F-40
<PAGE>   81
2.      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Use of Estimates

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.

Reclassifications

Certain reclassifications were made to the prior period financial statements to
conform with current year presentation.

3.      STATEMENTS OF CASH FLOWS

Non-cash financing and investing activities consist of the following:

     Property and equipment was acquired through the issuance of debt totaling
     $17,817,000 for the year ended December 31, 1995.

     A capital contribution of $1,150,000 was made through the issuance of a
     contribution receivable during the year ended December 31, 1995. The
     Partnership received land in satisfaction of the receivable during 1996.

     Cash payments for interest, excluding amounts capitalized, totaled
     $6,727,000, $8,436,000 and $8,271,000 for the years ended December 31,
     1997, 1996 and 1995, respectively.

The net change in assets and liabilities consists of the following (in
thousands):

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                            1997               1996               1995
                                                          --------           --------           --------
<S>                                                       <C>                <C>                <C>
(Increase) decrease in assets:
    Accounts receivable                                   $(10,745)          $ (6,140)          $ (4,400)
    Due from affiliates                                         --                 --              2,214
    Interest receivable - related party                         --                305                 32
    Inventories                                               (946)               (60)              (329)
    Prepaid expenses and other                                (230)              (109)               215
Increase (decrease) in liabilities:
    Accounts payable                                         3,667             (1,397)             2,100
    Accrued expenses and other                               1,398                 99              2,445
       Deferred interest payable - related party                --                 --               (797)
                                                          --------           --------           --------
                                                          $ (6,856)          $ (7,302)          $  1,480
                                                          ========           ========           ========
</TABLE>


                                      F-41
<PAGE>   82
4.      ACCRUED EXPENSES AND OTHER

Accrued expenses and other consists of the following (in thousands):

<TABLE>
<CAPTION>
                                                                   December 31,
                                                              1997            1996
                                                             ------          ------
<S>                                                          <C>             <C>
         Payroll and related tax liabilities                 $1,879          $1,225
         Vacation and other employee benefits                 1,611           1,793
         Gaming, sales, use and property taxes                1,450           1,051
         Outstanding chip and token liabilities               1,053             939
         Progressive slot and slot club liabilities           3,451           2,429
         Other accrued expenses                                 457           1,066
                                                             ------          ------
                                                             $9,901          $8,503
                                                             ======          ======
</TABLE>

5.      LONG-TERM DEBT

RPG's original note payable to Gaming of $125,000,000 bears interest at 13.31%
and requires the Partnership to apply 100% of its available cash flow, as
defined, towards the outstanding principal balance with the balance due in full
on September 30, 2000. Interest is payable semi-annually on March 31 and
September 30. There are no material restrictions on the amount of cash or other
assets which the Partnership may distribute to Gaming, and the Partnership may
prepay the outstanding balance of the intercompany note at any time prior to
maturity without premium or penalty. The last borrowing under this note occurred
in April 1997. The total amount due under this note was $49,400,000 and
$43,000,000 as of December 31, 1997 and 1996, respectively.

Additional borrowings have been evidenced by new notes payable to Gaming in the
amounts of $25,000,000 and $50,000,000, bear interest at 9.39%, are due June 15,
2007 and June 15, 2000, respectively, and require semi-annual interest payments
on June 15 and December 15. The total amount due under the notes were
$25,000,000 and $11,000,000, respectively, as of December 31, 1997.

Substantially all of the assets of the Partnership serve as collateral for the
repayment of the debt obligations of Gaming. The Partnership guarantees such
debt, which totaled $315,462,000 including accrued interest, at December 31,
1997.

The Company's debt agreements contain covenants that, among other things, (i)
limit the amount of additional indebtedness which may be incurred by Gaming and
its subsidiaries; (ii) prohibit any consolidation or merger of Gaming or its
subsidiaries with an affiliate or third party, any sale of substantially all of
Gaming or its subsidiaries' assets or any payment of subordinated indebtedness
prior to its scheduled maturity; and (iii) require Gaming and its subsidiaries
to invest excess funds in cash equivalents and government securities with a
maturity of one year or less.

As of December 31, 1997, the five year maturities for long-term debt are $0
(1998), $0 (1999), $60,400,000 (2000), $0 (2001) and $0 (2002).


                                      F-42
<PAGE>   83
6.      TRANSACTIONS WITH RELATED PARTIES

At December 31, 1997 and 1996, the due to affiliates balance relates primarily
to costs and expenses of the Partnership paid for by Gaming.

Initial funding to the Partnership was provided by loans from affiliates of the
Partnership. Such notes payable to affiliates accrued interest at 10% and were
due April 15, 2004. The notes had an outstanding balance of $5,605,000 as of
December 31, 1994. These notes payable to affiliates, and the related deferred
interest payable balance, were repaid in October 1995 with proceeds from the
intercompany loan from Gaming discussed in Note 5.

The Partnership conducts a portion of its marketing through an entity that is
owned by the wife of an officer of Gaming. Fees and expenses paid to this
company totaled $1,047,000, $736,000 and $606,000 for the years ended December
31, 1997, 1996 and 1995, respectively.

Payments to other parties affiliated with the Partnership totaled $366,000 for
the year ended December 31, 1995 which included payments for consulting fees and
various operating expenses.

7.      EMPLOYEE COMPENSATION AND BENEFITS

Employment Agreements

The Partnership has employment agreements with certain key employees that
provide certain benefits in the event such employees are terminated. These
employees also received ownership interests in the Partnership, which were
subsequently exchanged for membership interests in Gaming, and vest over terms
specified in the various employment agreements, which is generally five years.
These employment agreements include a put/call provision which, if exercised by
the employee, would require Gaming to repurchase these ownership interests in
the event of termination at the then fair market value based on an independent
appraisal. Accordingly, these compensation arrangements are accounted for as
variable stock purchase plans. Compensation expense is recorded each period
equal to the change in the fair market value of ownership interests issued
pursuant to these agreements. The Partnership reimburses Gaming for the expense
related to these ownership interests; therefore, there is no deferred
compensation reported in the accompanying balance sheet as of December 31, 1997
and 1996.

Prior to the roll-up transaction discussed in Note 1, the Partnership recorded
the compensation expense related to employee ownership interests in general and
administrative expenses. Included in general and administrative expenses in 1995
for the period prior to the roll-up transaction is $1,343,000 of compensation
expense from employee ownership interests. Subsequent to the roll-up
transaction, these amounts are included in corporate expenses. Corporate
expenses for the years ended December 31, 1997 and 1996 and for the three months
ended December 31, 1995 include compensation expense related to employee
ownership interests of $7,533,000, $2,620,000 and $1,113,000, respectively.


                                      F-43
<PAGE>   84
8.      COMMITMENTS AND CONTINGENCIES

401(k) Savings Plan

Effective January 1, 1995, a 401(k) savings plan was established by the
Partnership whereby eligible employees can contribute up to 15% of their salary.
RPG matches 50% of the employees' contributions up to a maximum of 6% of their
salary. Employees vest in the Partnership's matching contribution over six
years. Employees of the Partnership are eligible to participate in the plan on
the first day of the next calendar quarter following six months of service. The
Partnership's matching contributions were $333,000, $299,000 and $158,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.

Litigation

The Partnership, during the normal course of operating its business, becomes
engaged in various litigation. In the opinion of the Partnership's management,
the ultimate disposition of such litigation will not have a material impact on
the Partnership's operations.

Construction Commitments

The Partnership has substantially completed the expansion of its casino and
hotel facilities. The total estimated cost of the project is $109,195,000, of
which $98,841,000 has been incurred and placed in service as of December 31,
1997.

                                      F-44
<PAGE>   85
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Horseshoe Gaming, L.L.C.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Horseshoe Gaming, L.L.C. included in this
Form 10-K, and have issued our report thereon dated February 13, 1998. Our
audits were made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed under Item 14(a)2 is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements, and in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.



                                                             ARTHUR ANDERSEN LLP

Las Vegas, Nevada,
        February 13, 1998.

                                      S-1
<PAGE>   86
                                                                     SCHEDULE II

                            HORSESHOE GAMING, L.L.C.
                 CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                     (In thousands)
-----------------------------------------------------------------------------------------------------------
          Column A                          Column B         Column C           Column D          Column E
-----------------------------------------------------------------------------------------------------------
                                                              Additions
                                            Balance at        Charged to         Deductions        Balance at
                                            Beginning          Costs and            from            Close
        Description                         of Period          Expenses           Reserves        of Period
-----------------------------------------------------------------------------------------------------------
<S>                                         <C>               <C>               <C>               <C>
Year Ended December 31, 1997

        Allowance for Doubtful
           Accounts                           $  3,452          $  7,556         $ (2,043)(A)      $  8,965
                                              ========          ========         ========          ========

Year Ended December 31, 1996

        Allowance for Doubtful
           Accounts                           $  2,663          $  4,388         $ (3,599)(A)      $  3,452
                                              ========          ========         ========          ========

Year Ended December 31, 1995

        Allowance for Doubtful
           Accounts                          $     477          $  2,186         $   -              $  2,663
                                             =========          ========         ========           ========
</TABLE>

(A) Uncollectable accounts written off, net of amounts recovered.

                                       S-2